Welcome to the stock market, Robinhood-style. Since February, as the global economy collapsed under the weight of the coronavirus pandemic, millions of novices, armed with $1,200 stimulus checks and nothing much to do, have begun trading via Silicon Valley upstart Robinhood—the phone-friendly discount brokerage founded in 2013 by Vladimir Tenev, 33, and Baiju Bhatt, 35.
The young entrepreneurs built their rocketship by applying the formula Facebook made famous: Their app was free, easy to use and addictive. And Robinhood—named for the legendary medieval outlaw who took from the rich and gave to the poor—had a mission even the most woke, capitalism-weary Millennial could get behind: to “democratize finance for all.”
The secret sauce of Robinhood’s success is something its founders are loath to publicize: From the beginning, Robinhood staked its profitability on something known as “payment for order flow,” or PFOF.
Instead of taking fees on the front end in the form of commissions, Tenev and Bhatt would make money behind the scenes, selling their trades to so-called market makers—large, sophisticated quantitative-trading firms like Citadel Securities, Two Sigma Securities, Susquehanna International Group and Virtu Financial. The big firms would feed Robinhood customer orders into their algorithms and seek to profit executing the trades by shaving small fractions off bid and offer prices.
Read the full profile on Forbes: https://www.forbes.com/sites/jeffkauflin/2020/08/19/the-inside-story-of-robinhoods-billionaire-founders-option-kid-cowboys-and-the-wall-street-sharks-that-feed-on-them/#1d4d8fda268d
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