Robinhood Markets (Nasdaq: HOOD) has been promoting “rock-bottom” or highly competitive fees for options trading. but then come the hidden costs, according to a report from the WSJ.
Clients using the Robinhood platform are reportedly dealing with considerably higher transaction costs than those of other brokers, a research study reveals.
Robinhood Markets has been promoting very low / rock-bottom fees for options trading.
However, a recent study claims that its clients deal with hidden costs that are a lot greater than those of other service providers.
The latest research findings, published in September 2024, provide a closer look into brokers’ transaction costs—as well as the spreads between the price customers can expect to pay when buying options and the price clients actually get when selling them as well.
Although brokers share just how much they charge in terms of fees, they provide little guidance on the costs that typically come with these types of spreads.
At Robinhood Markets, around 7% of the dollar value of options transactions is taken up by these kinds of costs, a lot more than at competing brokers. This, according to research study cited by the WSJ and carried out by finance professors at the University of California, Irvine, and Washington University in St. Louis.
The research study’s authors claim to have used their own funds to perform about 7,000 options trades at several different brokerage platforms from the months of March to June of this year.
After accounting for greater fees at competing brokers, Robinhood clients reportedly get a bad deal on the majority of options trades, the authors claimed.
Vanguard is said to have been the “best-performing” broker in the research study, and was followed up by Fidelity Investments.
While carrying out this particular research study, the professors claim to have regularly acquired and sold off options on 18 major stocks as well as exchange-traded funds (ETFs).
They carried out the trades at the same times at each broker and then proceeded to compare the prices they were quoted. The other three brokerage firms they reportedly used were E*Trade, Charles Schwab as well as TD Ameritrade.
It’s worth noting that options are good business for brokers like Robinhood. During H1 2024, the firm’s revenue from options stood at about $336 million, which is notably over one-quarter of its total, its financial filings revealed.
Robinhood makes money from its clients’ option orders by gathering rebates from digital trading companies that handle the orders (a process known as payment for order flow).
The research study further reveals that the more brokerage firms collected on these types of payments, the greater their “hidden” transaction costs.
Vanguard is said to have been the only broker in the research study that did not get paid for options orders.
