Flash Heard: Why Prediction Markets are so Lucrative for Robinhood

Dow Jones
14小时前

People playing the predictions market don't win with every contract. But their broker does.

Since the fourth quarter of last year, Robinhood Markets has earned more transaction-based revenue from event contracts than stock trading. Event-contract revenue was $173 million in the third quarter, versus $121 million in equities.

Still, it takes some figuring to understand how much more lucrative it is for Robinhood when customers put their money to work in contracts on sports, financial or political outcomes, versus putting it to work in the stock market.

Say a customer were to spend $1,000 buying shares of Nvidia. Robinhood's revenue take-rate on stock trading was 0.0122% in the third quarter. Robinhood, on average, would generate about 12 cents of revenue on that trade.

But what if a person were to take that $1,000 and instead buy event contracts? If those were even-money contracts, costing 50 cents each, the person could buy 2,000 contracts, not including the fees on top of that. Robinhood generated roughly 1.05 cents in revenue per contract in the quarter. So on that trade, Robinhood's take would be about $21-a whopping 175 times as much as the stock buy.

Of course, these markets are very different. Stocks are one of the most liquid and mature trading markets, and there are many, many competing venues and exchanges. They also trade in enormous volumes, and customers might trade the same stock many times in a week.

Event contracts are new, with a different structure and far fewer players. How people use them is also still evolving. Robinhood also now has its own market, Rothera, which the company said this quarter has helped it to make a more dynamic pricing model for contracts.

It remains to be seen how much customers might shift between predictions and stock investments. Robinhood told analysts on its quarterly call that customers don't necessarily swap one activity for another.

"What you see is a customer comes for something, it doesn't matter whether it's an equity, an option, a crypto, an event contract," Chief Financial Officer Shiv Verma told analysts. "They then use more products, they then deposit more, they engage more, they trade more."

Based on the economics so far, the more people use their next dollar for predictions, rather than stocks, Robinhood could come out ahead.

 

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