Buffett's "Robin Hood" to be listed, with an annual income of more than 6 billion yuan, "asset management giants" behind the scenes, Dogecoin is a "supporting role"

Recently, Robin Hood, the American "retail base camp" who has just been criticized by Buffett and Munger as a "gambling hall in disguise", has entered the countdown to the IPO!

Robinhood (Chinese often referred to as "Robin Hood"), an Internet brokerage with a "commission-free" signboard, recently submitted a prospectus to the U.S. Securities and Exchange Commission for trading on the NASDAQ market.

Over the past five years, Robin Hood has set off a trading frenzy in the U.S. stock market: vigorously "sticking" millennials, "sending stocks" to new customers, and half of the new accounts opened in the United States originated from Robin Hood.

At the beginning of this year, Robin Hood can be described as "the pinnacle" - the retail army of its users, in the gamestop long-short war, successfully forced back the Wall Street hedge fund bears.

However, Robin Hood's profit model has also been criticized, and it has attracted penalties from regulators for his misleading publicity.

Just as Robin Hood disclosed the prospectus, the U.S. Financial Industry Regulatory Authority fined him up to $70 million, the largest fine in the regulator's history.

A closer look at Robin Hood's prospectus shows a number of details that cannot be overlooked.

<h2>A lucrative retail business? </h2>

According to the prospectus, Robin Hood lists revenue and user profiles for two calendar years:

Total revenue increased from US$278 million at the end of 2019 to US$959 million at the end of 2020 (approximately RMB6.19 billion at RMB exchange rate)

In FY2020, it recorded a net profit of US$7 million and a net loss of US$107 million in FY2019

The number of monthly active users increased from 4.3 million at the end of 2019 to 12.5 million at the end of 2020

The online broker also claimed that from January 1, 2015 to March 31, 2021, more than half of the client funding accounts on the Robin Hood platform said they had opened their first trading account on the platform. Just look at the new individual investor accounts opened across the United States in the past five years, and nearly half of them are from the Robin Hood platform.

It can be seen that Robin Hood focuses on "retail business", that is, for individual investors.

In the chart above, Robin Hood's income is overwhelmingly made from transaction-based revenues. In fiscal 2020, for example, the above revenue was US$720 million, accounting for 75% of the total.

<h2>What is the profit model</h2>

Since it is trading income, Robin Hood "handles" asset classes such as secondary market stocks, options and cryptocurrencies.

The prospectus is described as follows: Most of our revenue is generated based on trading, as we send trading orders for users' stocks, options and cryptocurrencies to market makers for execution, thereby obtaining consideration. For stock and options trading, such fees are called order flow payments. Regarding cryptocurrency trading, we receive a "Transaction Rebate".

Robin Hood has further explanations:

In the case of stocks, the transaction fees we charge are usually based on the size of the bid-ask spread of the publicly quoted security being traded. In other words, we receive a fixed percentage difference between the bid and ask prices of the public quotes at the time the trade is executed.

For options, our trading income is calculated on a per-contract basis based on the underlying securities.

For cryptocurrencies, our rebate is a fixed percentage of the notional order value.

In fact, In order to obtain the above trading income, Robin Hood needs to cooperate with market makers. As of the first quarter of this year, 59% of Robin Hood's total revenue came from the "collaboration" of the four market makers.

Over the past two years, Robin Hood's model has been criticized for having "secret plans" in operations, working with a number of Wall Street high-frequency trading giants to send customer orders to these giants and profit from them.

<h2>"Hold the field" for Dogecoin</h2>

As the "home base" of US retail investors, Robin Hood is not only involved in stocks, but cryptocurrencies are also the focus.

As of the end of the first quarter of this year, Robin Hood supported trading in seven different cryptocurrencies: Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic and Litecoin, the prospectus said.

The prospectus also discloses the following hot data:

As of the first quarter of 2021, 17% of total revenue came from cryptocurrency trading, with more than 9.5 million customers trading approximately $88 billion in cryptocurrencies at Robin Hood, and as of March 31, 2021, Robin Hood held approximately $12 billion in escrow cryptocurrency assets, a 23-fold increase over the same period in 2020.

Robin Hood also singled out the key role of Dogecoin:

"A large part of the increase in our recent net income from cryptocurrency trading is due to the dogecoin transaction. If demand for Dogecoin trading declines and is not replaced by new demand for other cryptocurrencies, our business, financial condition and results of operations may be adversely affected. ”

In fact, as of the end of the first quarter of this year, 35% of Robin Hood's cryptocurrency trading revenue came from Dogecoin.

<h2>Work with the "Invisible Giants"</h2>

In fact, there is a key partner in the Robin Hood revenue model – market makers.

To put it more colloquially, Robin Hood took the trading price list of retail investors, not to the stock exchange to find the best price in the market, but to "hand it over" to the market maker.

Most of these market makers are high-frequency trading institutions. The so-called order flow payment means that Robin Hood can receive a "compensation", that is, a "rebate" from the market maker who "takes the order".

However, the market maker that takes the order is equivalent to having the underlying data of the market transaction, and this type of market maker is itself a subsidiary of a large quantitative agency.

In the prospectus, Robin Hood disclosed three important market makers, the first of which is Citadel, a well-known quantitative hedge fund on Wall Street, handling one-third of Robin Hood's business.

In second place is Susquehanna International Group, an all-round trading firm covering equities, fixed income, energy, commodities, stock index futures and financial derivatives, private equity and venture capital, and proprietary investments.

It is worth noting that as of the end of the first quarter of this year, a "hidden giant" emerged from the list of market makers: Tai Mo Shan Limited.

The Firm found that Tai Mo Shan Limited belongs to Jump Trading Group, which is known as an extremely low-key and mysterious high-frequency trading company.

It was reported that in 2008, when the financial crisis broke out, Jump Trading's profits were as high as $316 million. The giant, which has almost no exposure to the media, works in a remote part of Chicago but is one of the few high-frequency trading firms with settlement membership on the Chicago Mercantile Exchange, founded by futures traders Bill DiSomma and Paul Gurinas.

According to media reports, the giant has about 300 employees and has bases in Chicago, New York, London and Singapore, mainly trading its own funds.

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