situation is murkier, though, when it comes to
PFOF for options—contracts that give inves-
tors the right to buy or sell shares at a fixed
price in the future. Options offer alternative
ways to profit from share-price movements,
but their pricing can be fiendishly complicat-
ed, and trading them is usually the province
of professionals. Market makers offer con-
siderably higher PFOF payments for options
trades, in part because they generate higher
margins—and options-related fees account for
62% of Robinhood’s PFOF revenue, according
to Piper Sandler.
Not coincidentally, Robinhood’s app
frequently reminds users that options are an
option. During my test-drives (albeit after
I selected “I know what I’m doing” during
sign-up), hitting “trade” on any stock called up
a large “Trade Options” button that appeared
above the more pedestrian “Buy” or “Sell”
choices. Selecting “Trade Options” leads to
invitations to select puts and calls—the most
basic contracts—but also to try exotic “multi-
leg” strategies involving multiple contracts,
with names like “straddle,” “strangle,” and
“Iron Condor,” tactics that wouldn’t sound out
of place at a pro-wrestling match.
These nudges irk critics, who say the op-
tions game is one novices shouldn’t play,
not least because pros can take advantage of
newbies’ inexperience. Ranjan Roy, a former
Bank of America options trader, wrote a
widely shared essay explaining why veterans
refer to amateurs as “the gravy.” “If you trade
options all day, you’re going to lose money,”
Roy tells Fortune. Benn Eifert, founder of an
investment fund that uses options to ride out
market volatility, says that successful options
trading requires sophisticated software and
substantial math proficiency. He expresses
dismay over Robinhood’s tempting interface.
“It’s totally shocking to me that it’s not a major
legal issue for them,” he says.
Robinhood has, in fact, been fined by bothaccounts, the way savers do with IRAs and 401(k)s. That will keep
them in the fold as they grow wealthier, offering Robinhood an op-
portunity to sell them profitable products and services.
Robinhood executives are tight-lipped about what those prod-
ucts and services will be or when they’ll arrive. But Tenev tells
Fortune that Robinhood could eventually take a more active role
managing customers’ assets, and a 2019 deck about the company’s
future describes plans to offer IRAs, mortgage lending, and prop-
erty and life insurance. “When you see the products roll out, it will
fit into a coherent long-term narrative,” says Tenev.T
HOSE WHO KNEW TENEV and Bhatt at Stanford
say the pair were more bookish than boorish. Tenev
says personal wealth has never been their primary
motivation—notwithstanding that they will likely
become billionaires if Robinhood goes public. “We
both wanted to be physics or math professors,” says
Tenev. “You don’t do that because you want money.” (Bhatt was on
paternity leave and unavailable for interviews during the reporting
of this story.) When they launched Robinhood, the duo said they
were inspired by the ideals of Occupy Wall Street; their corporate
namesake, of course, is a folk hero who stole from the rich.
Still, like many of their tech-startup forebears, the founders
have been criticized for forsaking populist principles in the pursuit
of hyper-growth. For Robinhood, that criticism has revolved
around both its gamified, casino-like design and its business
model. And in the arena of options trading, the combination of
those factors has put the startup on the defensive.
Robinhood earns more than 70% of its revenue through a
process called “payment for order flow” or PFOF, which generated
$453 million for the startup in the first three quarters of 2020, ac-
cording to securities filings. (The remainder of Robinhood’s revenue
comes primarily from lending securities and from Gold, a $5-a-
month premium service whose features include margin trading
and more-detailed market data.) PFOF involves routing customer
trades through market-making firms, in return for a fee; the mar-
ket makers benefit by earning money on the spread between bid and
ask prices when they execute the trades. Routing orders through
market makers can also help customers get more favorable prices on
their trades, but it’s usually an either/or proposition; if the broker-
age gets a PFOF fee, the customers won’t get price improvement.
While controversial, PFOF is commonplace: Larry Tabb, a
markets analyst at Bloomberg Intelligence, notes that PFOF fees
are what allow brokerages to offer free trades in the first place. TheMost people aren’t yearning for a call to customer
support. They don’t want to talk to an agent. They
just want the quickest solution to their problem.”
VLA D TENEV • CEO, ROBINHOODINVESTOR’S GUIDE • ROBINHOOD