Meme Stocks Were Too Good to Robinhood

Robinhood Markets Inc. is in the business of getting people to trade stock (and options, and cryptocurrencies) on their phones. The more people who sign up for accounts, and the more they trade, the happier Robinhood is. The way it makes money is that each time its customers trade stocks (or options, or cryptocurrencies), Robinhood sends their order to a market maker, and the market maker pays Robinhood a tiny fee for the right to execute the order. Unlike many other retail brokers, Robinhood charges these market makers a variable fee that is, roughly speaking, higher for very volatile stocks. So the more people who sign up for Robinhood’s service, and the more they trade, and the more volatile the stocks that they trade are, the more money Robinhood makes.

By this standard, the last week of January 2021 was incredibly, incredibly good for Robinhood, an amazingly perfect week. That was the height of the GameStop Corp. meme-stock mania: The whole world’s attention was focused on the soaring price of GameStop stock, which was leading a lot of people to sign up for Robinhood and trade GameStop, and GameStop was very volatile and so Robinhood got paid a lot for trading it. Robinhood both increased its future value by signing up a lot of customers, and increased its present profits by extracting a lot of money from them each day.