How does Robinhood make money – FUTU – Short Sellers

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How does Robinhood make money – FUTU – Short Sellers


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Hey this is Jeffrey with another edition of Stock Smart, the February 2nd, 2021 edition and happy Groundhog Day to Punxsutawney Phil wanted to go and start with the fundamental purposes of a short-seller. So there’s so many shorts going on. If you’re paying attention today you’re seeing GameStop do what it was supposed to do, it was going to fall and anybody who was in it, unfortunately if they’ve got in at 300 or 400, you know, I feel bad for you because you’ve lost a lot of money. It’s now down to 128, I would guess that stock is going to go down to 10 again. And one of the reasons right now is who knows if the Reddit, they made their money, maybe they’re not going to get involved in it again.

Maybe they feel like they got lucky they wanted to get out and now who knows if they’re going to take this on again, but GameStop is getting decimated today and going down, but I wanted to get into the fundamental purpose of a short-seller, the short sellers is there, and what a short seller really can do in the market is essentially if they’re really doing their work they’re researching companies and over the years you would rely on short sellers to say, hey this accounting doesn’t look correct. So I’ll give an example like Enron, when Enron was found out about,

If you look at the stock chart of Enron, it was just like, any technical analyst would have gotten out way before it hit the bottom, but Enron was essentially when that whole Enron thing happened and Enron was booking out future sales on their books years in advance and accounting that as income and there were people who noticed that and started building short positions and people were paying attention to it.

got on the short side of that trade and they were trying to get the information out that Enron’s accounting practices were improper and so the real fundamental purpose of a short seller is to look at these companies and to figure out which ones are fraudulent which ones are as the movie Wall Street would say, cooking the books, and you know which ones are real. There’s also there was a company called, it’s a great series if you’ve ever seen it on Netflix, called Dirty Money and there’s a there’s an episode on a company called Valiant.

There was a researcher was working for a short seller who essentially figured out that Valiant was only spending, they looked at the balance sheet and they were saying that Valiant only spent something like under 10% on research and development now Valiant was a biotech company. Biotech companies spend most of their expenses on research and development, in scientists, in projects and doing research studies. So research and development is a massive expense for a biotech firm, usually 35-40% if not more and what they noticed, the researcher for the short-seller noticed was that Valiant wasn’t spending any money or they were spending very little under 10% I believe on research and development and that stood out like a sore thumb for a company that was producing all these, you know, these biopharma drugs and in the

end Valiant fell mightily and the stock went down the tubes and if you watch the series and you should it was really interesting how dedicated the researcher was to the research on the project, really revealing stuff and doing digging like through garbage cans essentially to find any information she could get her hands on. There are firms though, you’re going to see and this is where it’s the wrong way to do it.

You’ll see firms where they take a position on a stock and maybe the stock is just gone a certain way, parabolic as  people get behind it, there becomes a momentum stock, sort of like Jumia was last year, and there was essentially a hit piece done on Jumia, which is spelled, the ticker symbol is JMIA there was a hit piece done on the stock which essentially freaked out investors and the stock went down. I think it was at 40 it went down to like 12. If you read the hit piece it was really just commoditized information. It was generalizations without anything really backing it.

It was things like the company Jumia if you know it, it’s trying to become the Amazon of Africa and the commoditized information was like, oh well, you know Africa still, you know that as a nation as a country is still developing, its currency and may not have ways to pay, people may not have addresses to deliver packages to, I mean, it was really simple kind of generalizations like that in the report but nonetheless, the person who put out the report.

Certainly had a short position in the stock and benefited greatly which is you know that’s stock manipulation if you will, so that’s really what goes on, you know with the short selling and there is a real purpose for it and it’s to try to find these companies that are doing fraud, but of course like anything else it’s being abused by other companies who are looking to make money off manipulating the market.


So let’s take a look at a stock that paying attention to these days and it’s called FUTU, it’s being going ballistic, it’s parabolic right now, up again $13 or 12% today at 118. FUTU if you have the stomach for it, is a Chinese company, so you’ll be buying an ADR, an American depository receipt, and essentially what they are is a broker and a wealth manager.

So they’ve had a growth of clients, they’re up about 137% year-over-year, their earnings also increased by 270% and what’s happened with this company is there has been a large boom of IPOs in China so, and FUTU as a broker has managed the IPOs. So they’re greatly benefiting from the surge in IPOs. There was something like 35 companies that went public in the last year in China and FUTU handled a good majority of them. There’s one other company called Tiger who handles IPOs in China, but FUTU is handling a large majority so they’re getting a lot of growth from that. So that’s one reason that their stock is really going up but another reason

It’s kind of interesting, the stock was held kind of in a channel if you will in the 35 to 40 range, or 30 to 40 range up until about January and then we see since January, it’s really taking off. One of the reasons is, Trump has been really aggressive with China, you know, delisting stocks, talking about things like that, that really scares these Chinese stocks. I mean when AliBaba was under attack from Trump and they were talking about Tencent, Alibaba and other Chinese companies potentially being delisted. Those sent those stock prices down massively, so now with the new administration, this stock has gained some, you know, maybe clarity or maybe we don’t know yet what the position of Biden’s presidency is going to look like in terms of China.

So you’ll see this stock has jumped massively, something like 300 percent since January. Right now it’s still in a parabolic, like technical read, you would be all in, because it’s just to the sky, hasn’t shown any kind of break mark at all, it is going to have a problem with support when it does fall because it’s got a long way to go down to get support. But right now with this administration change, very interesting to see what happens here. And that’s why the stock has really taken off I believe.


So I have a question here and thank you for sending the questions. We are growing in popularity.

The podcast is now on Spotify, Apple, Amazon, Google, on YouTube as well and I’m getting several questions, 25-30 questions a day and keep them coming. I’ll try to get to as many as I can. But this question is from Robert and it’s really interesting because I think I don’t know if people know this, but it’s how does Robinhood make money? It’s kind of like if you’ve seen that movie The Big Short there’s a scene where one trader is talking to another, to a broker, and he’s saying, Well, how are you going to F me? Meaning, How you going to screw me over? How do you make money and I think people go into Robinhood, and they’re like, hey, I don’t know, I mean it’s free to me and I’m making money.

Well Robinhood has to make money right, to stay in business, and 40-50% of their income comes from how they process or payment order flow. So what essentially happens is Robinhood, you make the trade on Robinhood, and then Robinhood passes that trade through to a broker. Now the broker has the stock usually in its inventory or they go out and get more of it and essentially the broker then charges a markup, a higher price to Robinhood to execute the trade and then Robinhood shares in what they call like a rebate, where Robinhood gets paid by the broker for executing the transaction and they get that money back and that’s 40% of their income.

So when you make a trade on Robinhood and you buy a stock say it’s a $1.00-$1.01, the broker may have had that sitting in its inventory at 98 Cents. Robinhood gets maybe a penny off every share or les, fractions of, or thereof but when you’re doing billions of transactions, you can see how that can add up but that’s essentially how they get paid. They’re getting paid from the payment of order flows, which is essentially how they process out their transactions to the broker-dealer and to the broker-dealer then benefits, now, it begs the question with Robinhood doing so many trades right now, there’s a company that processes a lot of their trades, it’s called Citadel. I’ve had I’ve heard conversations I’ve read reports about this.

It’s very beneficial for Citadel to be handling that amount of trades as you can see they’re seeing essentially in a private pool of transactions, what’s moving and they’re seeing it before other people. So Citadel essentially being a market-maker can influence or we’ll have information maybe potentially that other people don’t have, so I did see Kyle Bass and CNBC. Kyle Bass also runs his own fund, and he was talking about how you know, maybe the SEC needs to look at those transactions and how those processors or the ones who were handing the order flows, like the broker, how they maybe should be reviewed because of what information they have. Is a very interesting question. When you really think about the way this is processed. So I want to sign off for today.

Thank you for keeping the questions coming, really appreciate it, if you’re on YouTube. Likes, we love them. If you want to reach me, it’s Have a great day. Bye

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