Business Over Easy

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Bear with me; this is most likely as complex of a topic as this newsletter will ever get into. If anything isn’t clear, or any questions come up, hit reply and I’d literally be overjoyed to talk more about it. Happy reading!

When Robinhood launched its trading app in 2015, the sales pitch sounded almost ridiculous at the time: stock trades for $0. No commissions at all. Before that, the everyday investors like you and me were paying a flat commission on every single trade, no matter the size. Robinhood still makes money when you trade, but who’s really paying the price?

The newest “trendy” tech stock is absolutely taking off right now, and you want a little piece of the action. Before, you would have to log in to your brokerage account, search the stock, and put in a buy order while factoring in that $7 you instantly lose in commissions. Now that Robinhood is here, it’s as simple as opening an app on your phone, clicking a button, and you’ve officially got skin in the game. You feel like you officially beat the system; Wall Street doesn’t have its hands in your pockets anymore, skimming money off of your already pretty modest account balance.

The game’s completely changed; maybe there really is such a thing as a “free lunch”?

When you buy a stock, or an ownership share of a company, you aren’t buying it directly from the company or from some known seller on the other side. You place an order with your brokerage (Robinhood, Fidelity, etc.), and that brokerage has to get your order executed at a fair price. Historically, these firms charged you a commission for handling that process on your behalf, regardless of whether the trade made money.

It may help to think of a brokerage like a real estate agent. You don’t personally know who wants to sell you a house (or 3 shares of Apple) at this exact second, so you hire someone (your brokerage) to go find the seller and make the transaction happen.

Robinhood hit the scene and painted the picture that it was putting money and power back in the hands of regular people. $0 commissions on all stock trades. No more fee just for trading = more money in your pocket. It still gets your trades executed, but it doesn’t charge you a commission to do it. It almost feels like an act of charity instead of a legitimate business model.

That isn’t really sarcastic, either. Commission fees were a very real issue for investors and traders for decades, especially in the 2000s as brokerages such as E*Trade and Fidelity began expanding their online capabilities and gave everyday investors easy access to the stock market in a way that hadn’t existed before. As recently as 2017, some brokerages charged $8.95 per trade, no matter if the trade was for $10 of stock or $10,000. Those fees add up fast if you’re an active trader or a small account just testing the waters.

Zero-commission investing opened up doors for average people that previously just didn’t make sense to open.

Ultimately, Robinhood does still have to make money, and it found a way to make a lot of it. Instead of relying on a commission from you to make money on the trade, Robinhood relies heavily on something happening behind the scenes: it routes many orders to large trading firms known as “market makers.” These firms execute many of those orders. In return for providing the order flow, Robinhood collects a small fee for each order, a little something called PFOF.

Using payment for order flow, Robinhood has effectively shifted the visible commission away from the trader, but that doesn’t mean the trade is costless.

The simplest version we tend to picture is that you place a trade and your brokerage sends it to an exchange such as the New York Stock Exchange. In reality, brokers have several choices for where to route orders. In Robinhood’s case, it chose to route many of these orders to market makers instead.

Why do these firms pay Robinhood PFOF in return for the steady stream of orders? Because these firms aim to profit a tiny amount on each trade from the difference in price that they buy and sell at, known as the bid-ask spread. Small price differences multiplied across an enormous volume of trades can mean crazy profits for market maker firms, similar to our discussion a couple weeks ago about Mastercard taking a small fee on every card transaction.

Retail order flow is especially valuable because everyday investors are generally less likely than huge professional firms to be trading using information or strategies that put the market maker at an immediate disadvantage. That makes a steady stream of small retail trades attractive enough that market makers are willing to pay Robinhood for access to it.

Robinhood realized it could sell access to the order flow and keep everyday investors and traders happy at the same time.

Your trades are the product, and $0 commissions are how Robinhood keeps them coming.

Early Robinhood was overwhelmingly dependent on people trading. In 2021, transaction-based revenue accounted for roughly 77% of the company’s total net revenue. By 2025, that share had fallen to about 59%, even as transaction revenue itself grew dramatically.

This isn’t because PFOF disappeared. Robinhood has simply built other major ways to make money around the customer. In 2025, it generated another $1.51 billion in net interest revenue, along with $179 million from Robinhood Gold subscriptions. Interest earned on customer cash, margin loans, and other interest-earning assets now gives Robinhood another enormous leg to stand on.

Source: Robinhood 2025 Annual Report

It’s worth taking a step back and acknowledging that this same order-flow-driven, “keep them trading at all costs” business model has also landed Robinhood in regulatory trouble several times over its relatively short lifespan.

Since 2020, major regulatory fines, penalties, and restitution involving Robinhood have totaled more than $200 million.

Once everyday investors developed a taste for $0 trades, nothing else could satisfy them. The traditional brokerages tried to ignore it for as long as they could, but in 2019, giants including Schwab, TD Ameritrade, E*Trade, and Fidelity eliminated commissions on online stock trades in rapid succession.

Robinhood’s competitors didn’t all copy its business model exactly. Fidelity, for example, says it doesn’t accept PFOF from market makers for stock and ETF trades, but Robinhood helped force the industry’s hand. Charging customers just to press “buy” became much harder to justify.

Robinhood disrupted an industry that had been resistant to change. Being a pioneer comes with a pretty long list of risks.

When Robinhood works, it works really well. The business is built around totally changing the way that brokerages think about average, everyday investors.

Robinhood’s $0 commission trades changed the way that everyday investors like you and me buy and sell stocks. Owning stocks became more accessible and less expensive, and that’s a good thing.

But “free” never meant nobody was paying. Robinhood just figured out how to make sure we aren’t the ones handing over the $7.

Source: Robinhood 2025 Annual Report

Do you think regulatory violations and “GameStop issues” outweigh the benefits of $0 commission trades?

Got a business model that confuses you? Reply to this email! It might just be next week’s issue.

Until next time,

Brandon

Business Over Easy