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Why Crypto Trading on Robinhood Isn’t Really Free

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Image Credit: Raimundas/DepositPhotos

In February 2018, Robinhood launched its crypto division. Initially, users could buy Bitcoin and Ethereum, and the service was only available in California, Massachusetts, Missouri, Montana, and New Hampshire.

Over the last 12 months, the rollout has gathered pace. Most U.S. states are now supported, and Robinhood has also announced plans to expand into the U.K. market.

The number of coins available has also increased. Today, you can buy seven different cryptocurrencies: Bitcoin (BTC), Bitcoin Cash (BCH), Bitcoin SV (BSV), Dogecoin (DOGE), Ethereum (ETH), Ethereum Classic (ETC), and Litecoin (LTC).

Commission-Free Crypto Purchases: Is Everything as It Seems?

Just like Robinhood’s stock-purchasing feature, the company says that crypto trading on its app is commission free.

It’s a big selling point, especially for people who do a lot of trading. For comparison, here’s a quote from Coinbase’s commission structure:

Coinbase charges a Spread of about 0.5 percent for digital currency purchases and digital currency sales […] We also charge a Coinbase Fee:

  • If the total transaction amount is less than or equal to $10, the fee is $0.99.
  • If the total transaction amount is more than $10 but less than or equal to $25, the fee is $1.49.
  • If the total transaction amount is more than $25 but less than or equal to $50, the fee is $1.99.
  • If the total transaction amount is more than $50 but less than or equal to $200, the fee is $2.99.

Coinbase also charges a Spread of one percent for digital currency conversions.

But while it’s true that Robinhood will not charge you an upfront fee to buy crypto assets, you are paying the price in other ways.

Payment for Order Flow

Here’s how the SEC explains payment for order flow on its website:

As a way to attract orders from brokers, some exchanges or market-makers will pay your broker’s firm for routing your order to them […] Payment for order flow is one of the ways your broker’s firm can make money from executing your trade.

What does this mean in practice? Simple—Robinhood is selling your trades to high-frequency trading (HFT) firms for a vast profit. As an end user, it will lead to higher prices if you place a market order. It is the firms, and not you, who are Robinhood’s true customers.

Image Credit: https://www.bloomberg.com/quicktake/payment-for-order-flow

But why do the firms want your trading data?

Well, the data is like gold dust. The firms are entering it into their trading algorithms so they can better understand the flow of retail money. By understanding the retail money, they can position their trading books to join along with large institutional orders. This is similar to (but technically not) the banned practice of front-running.

Intuitively, you don’t want someone to be able to see your trades, especially not if they are a counter-party to the move your making. For example, if a firm knows you want to buy 10 BTC, they can inch up their selling price to make an additional profit.

How Much Money Does Robinhood Make From Payment for Order Flow?

The short answer? A lot.

In September 2018, a writer on Seeking Alpha, Logan Kane, dug into Robinhood’s SEC filings.

He discovered that Robinhood was being intentionally misleading about the figures. Most brokerages report their HFT income as a price per share. Robinhood reports its income as a price per dollar of executed trade value.

On first glance, it means the income looks smaller than its competitors. However, Logan did the math. Here’s what he found:

E*TRADE makes $22 per $1,000,000 traded, which sounds like a small number until you realize they cleared $47,000,000 last quarter from this. But off an identical $1,000,000 in volume, Robinhood gets paid $260 from the same HFT firms. If Robinhood did as much trade volume as E*TRADE, they would theoretically be making close to $500 million per quarter in payments from HFT firms.

Stocks vs. Crypto

Of course, the above figure relates to stock trading. And if you think the practice seems murky, it is.

Under current law in the U.S., traders are not obliged to get the best price for clients; they’re only obliged to get the “best execution.”

The term “best execution” is very open to interpretation—price is only one part of the equation. The SEC says factors such as speed and reliability can also play a role.

But how does all this play into crypto trading on Robinhood? Because the crypto space is entirely unregulated, the SEC policy of “best execution” does not apply to crypto trades.

Furthermore, the lack of regulation means that if Robinhood had payment for order flow agreements with HFT crypto firms like Jump Trading and Cumberland Digital, it would not be obliged to disclose them.

Here’s how the company explains its crypto payment for order flow policy:

We receive revenue from trading venues in the form of volume rebates. These rebates help us cover the costs of operating our business and allow us to offer you commission-free trading. Robinhood Crypto may be routing orders to one or more trading venues. When deciding where to send an order, we look at which trading venue is currently offering the best price for your order.

The key term there is “look.” It’s intentionally vague. There are no guarantees from Robinhood that it will select the best price, only to look at it and take it under consideration.

The Other Elephant: Coin Withdrawals

Cryptocurrencies can conjure up many strong opinions and emotions. Some people believe it’s a fad; others think it’s the future of money.

No matter where you fall on the spectrum, we can all agree on one thing—if you own crypto, you need to keep it in a secure offline hardware wallet like the Ledger Nano X.

So, why does Robinhood not allow you to withdraw your crypto from its app? You are not in control of your own private keys. It’s a massive security risk.

We don’t know for sure, but we suspect that the company is using your coins to generate interest for itself, in much the same way as it uses your unused cash if you have a Robinhood brokerage account.

In Robinhood’s defense, it does say withdrawals might be implemented in the future.

Does Any of This Matter?

We write this article not to criticize Robinhood or dissuade you from using its services, but to highlight the trade-off into which you’re entering.

The bottom line is that, just like any other “free” tech service, you’re not getting a free lunch. It’s vital to understand the way Robinhood works before you sign up for an account.

If you would like to learn more about crypto trading, check out our article on the best crypto exchanges and our list of the best apps for tracking your crypto portfolio.

Dan Price
Dan has a background in both finance and technology. Previously, he worked for more than five years as a private financial consultant, advising clients on single investments, fund portfolios, long-term savings, and more. Dan holds professional qualifications from the UK's Chartered Insurance Institute, including a Certificate in Discretionary Investment Management and a Diploma in Financial Planning. Dan also writes for Blocks Decoded's sister publication, MakeUseOf. He started at the company in 2014 and has gone on to hold several key positions in the organization. In mid-2017, Dan finally started to invest in crypto. He is a firm advocate of index tracking funds and automated portfolio balancing. He's currently using the Crypto20 token and Hodlbot for exposure to the top 50 coins.
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