The archive · Business Models · Financial decision · 2013–2021
Robinhood makes stock trades free in 2013; zero commissions become the industry standard
Robinhood launched free stock and ETF trades in 2013, earning from payment for order flow; by 2019 every major US broker had dropped commissions.
Robinhood Markets
What it had to solve
Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt, who had built trading systems for high-frequency firms. Established brokers charged a commission on every trade, which priced small, first-time investors out of the market.
How it works
Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt, two Stanford graduates who had built high-frequency trading systems for financial institutions. Their insight was simple: the per-trade commissions charged by established brokers priced ordinary, first-time investors out of the market, so the app launched with stock and ETF trades at zero commission and no account minimum.
The trick was that 'free' was a pricing choice, not an absence of revenue. Robinhood routed customer orders to market makers who paid rebates — about $0.0023 per equity share in the fourth quarter of 2020 — and it also earned interest on uninvested cash and later added premium tiers. The company published its own explanation of this payment-for-order-flow model in 2021, arguing that fractions of a cent per share replaced the commissions of $30 or more that brokers charged in the early 1990s.
The model spread across the industry: in October 2019, Charles Schwab, TD Ameritrade and E-Trade all eliminated commissions, and by mid-2020 analysts credited the shift with 'ushering millions of customers into the industry.' Major brokers then reported record trading revenue even at zero commissions, because order-flow payments and surging volumes replaced the old fee.
Why it lands
- Zero commission removed the visible price of trading, making the product feel dramatically cheaper than incumbents.
- Payment for order flow monetized each trade invisibly, letting revenue survive a $0 price tag.
- No account minimum and a mobile-first app met first-time investors where they actually were.
- Word-of-mouth growth made the pricing model itself the marketing campaign.
- By forcing incumbents to zero, the model reset what customers would ever pay for a trade again.
What it did
Free trading became the industry's default: Charles Schwab, TD Ameritrade and E-Trade eliminated commissions in October 2019, and analysts credited Robinhood with 'ushering millions of customers into the industry' while broker trading revenue stayed resilient. Robinhood reached 6 million users by 2018 and a $7.6 billion valuation.
What you can take
Give away the fee customers see and monetize the one they don't: removing a visible transaction price can beat undercutting it, as long as revenue moves to a channel users don't experience as a cost.
Since then
Robinhood grew to 6 million users by 2018 and was valued at $7.6 billion by its venture backers before its 2021 IPO. In October 2019 the largest US brokers — Charles Schwab, TD Ameritrade and E-Trade — dropped commissions to zero, and within a year most reported record trading revenue as order-flow payments and rising volumes replaced fees. Robinhood's own 2021 article describes the company as having 'pioneered the commission-free model — others then followed,' and zero-commission trading is now the industry standard.
Sources
- Demystifying payment for order flow
- Battle for zero trading fees threatens Robinhood's business model and next leg of growth
- E-brokers defy odds by recording record trading revenue while dropping commissions to zero
spotted an error? The archive wants to know.
Your turn
You just read one. Describe the brief you are staring at, and see who has been given the same problem.
Free account · 3 free questions · no card