Citadel Investments is Robinhood's most valuable customer

Robinhood, the online trading app heralded by small investors for its popular fee-free model, receives 70% of their revenue from selling its customers' data to hedge funds like Citadel Securities.

Citadel Investments is Robinhood's most valuable customer

Robinhood, the online trading app heralded by small investors for its popular fee-free model, receives 70% of their revenue from selling its customers' data to hedge funds and high frequency trading companies like Citadel Securities.

Citadel LLC (formerly Citadel Investment Group, LLC) is a Chicago and New York-based hedge fund and financial services company founded in 1990 by American billionaire Kenneth Griffin. Citadel is one of the world's largest alternative asset managers with more than $35 billion in assets under management.

The Silicon Valley-based company champions a mission to “democratize finance for all,” however, in reality their business model actually helps preserve the status quo by keeping hedge funds rich. Since being founded in 2013, the company has spent considerable time nurturing a relationship with one of Wall Street’s biggest players, Citadel Investments. While Citadel isn't a direct investor in Robinhood, they are the biggest customer of Robinhood. Because Robinhood doesn't charge any trading fees, a key part of Robinhood’s business model relies on revenue from Citadel and similar hedge funds.

Robinhood’s filings show the company charges large investment firms “market makers” fees to access real-time information about which stocks its retail users are buying and selling, a practice that allows Citadel to make smarter bets. Many regulators have seen this relationship as a potential conflict of interest.

Robinhood generated $271 million from all order-flow payments in the first half of 2020, according to regulatory filings.

A popular subreddit w/WallStreetBets went viral last week, gaining more than 1.5 million users overnight last week and reaching 7.8 million users by Monday. On Twitter and the Reddit forums, investors speculate that Robinhood caved to pressure from Citadel last week by shutting off trading for GameStop (GME), which is worth more than $20 billion thanks to Reddit.

Source: Bloomberg and Yahoo Finance

Tweets by prominent billionaire investors shot up GME another 50% in after-hours trading. "Gamestonk," tweeted Elon Musk with a link to r/wallstreetbets. "Bought some YOLO calls on GME," tweeted Chamath Palihapitiya.

On Friday, Robinhood announced it would allow “limited buys” of GME and other heavily shorted stocks to resume, sending shares of GameStop soaring more than 70% in one day.

Hedge fund Melvin Capital Management lost 53% in January amid a record rally in GME, which the fund was betting strongly against. Shares of GME, their largest short position, finished last week 400% higher, bringing its total gain this year to a whopping 1,625% and forcing Melvin Capital to liquidate.

The Securities and Exchange Commission (SEC) announced that the agency was “closely monitoring” the situation, and warns that record volatility could have the potential to expose retail investors to rapid and severe losses.

In December, Robinhood paid $65 million to settle a charge by the SEC related to its order-flow agreements. The ruling found that Robinhood had misled its users by failing to disclose the nature of payments it received from Citadel Investments and other hedge funds.

Congress also plans to examine Citadel’s agreement to obtain trading data from Robinhood in exchange for millions of dollars, and the potential conflict of interest last week when Robinhood suddenly shut off GME trading. “Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business,” Citadel said in a statement.

Citadel, LLC claims that the Citadel hedge fund is a separate business from Citadel Securities, which is a market maker for Robinhood and many other financial platforms. “We absolutely did not do this at the direction of any market maker or hedge fund or anyone we route to, or other market participants,” Robinhood CEO Vlad Tenev said in a CNBC interview on Thursday.

Melvin Capital had to ask for a $2.75 billion emergency investment from parent investor Citadel and other partners, which came to the delight of the subreddit. One moderator said they wanted to see "loss porn" by the hedge funds.

Check out r/WallStreetBets for the latest or watch my latest IGTV video explaining the relationship between Robinhood and Citadel.