Yesterday Robinhood released its preliminary revenue numbers for Q2 when it published its Form 606 and 607 disclosure for April through June. While the data covers payment for orderflow (PFOF), this remains the biggest component of the recently IPOed company’s top-line (dogecoin revenues notwithstanding), so it serves as a good proxy for what to expect when the company publishes its first earnings release as a public company.
The numbers were quite disappointing, and a stark reminder of just how fickle retail trading can be.
After a blistering Q1 which saw a record surge in retail trading, and which translated into record payment for orderflow to Robinhood to the tune of $331 million, the bulk of which was for option orderflow at $198 million and was paid by Citadel which accounted for roughly 43% ($142 million) of Robinhood’s total Q1 revenues, things slowed down substantially in Q2.
As the chart below shows, the retail trading frenzy ended with a bang in April when Robinhood’s payment for orderflow was just $65.9 million, and then dropped further in May, sliding to just $57.4 million – the lowest since October. The good news: there was a modest rebound in June when as we discussed previously, retail investors shifted their gamma-ramping attention to tech giants such as Amazon and Apple, resulting in PFOF revenue of $93.6 million.
What we also found notable is that Robinhood’s revenue from orderflow from S&P and non S&P500 stocks was down 25% Y/Y, with the only value that Robinhood providers to internalizers such as Citadel is selling it option traffic which rose 48% from $111.1 million a year ago to $164.8 million in Q2 2021. How soon until some dedicated option market-maker decides to steal Robinhood’s market share and aggressively starts dumping option traffic data to the Citadels of the world; alternatively what happens when the “gamma” trade is no longer a moneymaking cash cow, and retail traders get fed up with selling weekly calls and puts when their premiums gets wiped out after a major market shakeout?
Question aside, the fade of retail trading mania in Q2 was especially acute on a quarterly basis, as PFOF revenue tumbled 34.4% sequentially and were up just 20.4% from the year ago quarter when retail trading mania was still in its infancy.
And yes, for those wondering, Citadel still remains Robinhood’s top customer, accounting for $81.6 million, or 27.6% of the company’s total Q2 PFOF. That said, clearly Citadel’s contribution to Robinhood’s top line is declining and in June it accounted for just 35.3% of total PFOF, the lowest on record.
To be sure, it wasn’t just Robinhood: as the following chart from Bloomberg shows all brokers saw a substantial drop in PFOF revenue in Q2, amounting to roughly 27% across the major players, but nobody suffered as much as Robinhood.
Which prompts several questions: is Citadel – whose historically generous payments for RH orderflow is what enabled the company’s multi-billion valuation – gradually shifting away from its top supplier of bulk retail trading data, and if so, how will Robinhood replace the lost revenue? And perhaps more importantly: with retail trading patterns clearly reflecting inflows of stimulus payments, peaking just after bulk “stimmy” checks clear, i.e., in June 2020, and in Q1 2021, is a long Robinhood thesis just a bet on continued stimulus checks from the generous Biden administration? And linked to that, what happens to Robinhood’s bread and butter – retail option trades – when retail traders no longer expect free money from the government?
An amusing aside is whether Robinhood will pocket revenues from selling the client order data to Citadel from retail traders who are currently ramping Robinhood’s own stock in an attempted gamma squeeze. In other words, has Robinhood created a perpetual motion device where it generates revenue when it itself becomes the target of outsized client trades, as the case clearly is today?
Alternatively, one can argue that the simplest trade to bet on an end of generous fiscal stimulus is not shorting the market or betting on an economic slowdown, as these also benefit from the Fed’s generous monetary stimulus, but rather just shorting Robinhood stock – once it is permitted – and waiting.
