If you're a follower of news on the social media platform Twitter, you've probably read about GameStop and how a group of Redditors took on Wall Street hedge fund millionaires. It all started when a Reddit user discovered that a hedge fund company called Melvin Capital was shorting GameStop stocks. Let us look at an example if a person x wants to buy 5 bananas which are being sold in the market for 10 rupees, if another person has already bought 5 bananas. X can borrow y's bananas for a while and sell them in the hope that the price will fall below Rs 10. Then x will buy 5 bananas for less than 10 rupees and return the bananas to y and thereby make a profit. A group of Redditors noticed what the hedge funds were doing in the GameStop stock and decided to buy all the shares available in the market, which caused the stock value to skyrocket. Now imagine that banana is GameStop stock and x is hedge fund. Now the hedge funds had to return the borrowed shares, but since they had already sold them, they had to buy it at a much higher price than expected. This caused GameStop stock to short, causing hedge funds to lose more than $5 billion.

Robinhood is a trading startup that also offers zero commission investments. Since thousands of ordinary small investors wanted to buy GameStop stock, they did it through Robinhood. Wall Street wasn't happy with the way a bunch of Redditors lobbied hedge funds to delist their stocks.

Increased pressure from the government and Wall Street forced Robinhood to drop GameStop, AMC, and Nokia stocks from their trading roster, which led to a huge consumer response and hundreds of thousands of 1-star reviews on Apple and Android's app stores.

Background

Robinhood was founded in 2013 by Stanford University graduates Baiju Bhatt and Vlad Tenev. It aims to democratise finance and make it more accessible to young and affluent investors. This is due to the fact that trading is done on commission-based platforms such as ETrade and TD Ameritrade and by a very small group of people. The ease of use of the platform and its zero-commission slogan has made the app attractive to the general public. More importantly, Robinhood made business interesting and interactive for the common man and the working class. Investment applications usually charge a nominal fee or commission for executing any successful trade.

However, the app gained huge traction in 2019 when the COVID-19 pandemic hit the world. The stock market crashed and investors lost billions of dollars. However, this phase saw the rise of a new type of investor. Americans were given $1200 stimulus checks to protect them from the economic fallout of the COVID-19 pandemic. With these cheques, millions of trading beginners have started investing in the stock market through Robinhood.

The income model

How does a start-up that calls itself a zero-commission brokerage generate revenue and make it profitable? Robinhood is designed to make a profit by selling consumer trading data to a number of investment firms on Wall Street. This method is known as high volume order flow. In financial markets, payment for order flow refers to the compensation that a broker receives, not from its client, but from a third party who wants to influence how the broker leads the client orders to fulfillment. It's not illegal, but often using this tactic is also known as' kickback '. It also provides the lion's share of Robinhood's revenue.

The second is through revenue generator interests. Robinhood makes money from the interest earned by lending the investor's idle money. Robinhood lends out non-deposited money that sits idle in customer accounts.

The third revenue generator is the company's premium account, Robinhood Gold, which allows investors a margin of up to $1000, thereby allowing them to transact more than what is in the app's cash balance.

While Robinhood is caught in the middle of a nasty war between Wall Street and retail investors, there's no denying the fact that it has changed the way people invest in the stock market.