The Robinhood Crypto Con

Robinhood Crypto is hiding fees in unexpected places, while promising that they aren’t in their documentation

(Disclaimer: I am not lawyer and this is not legal advice. I have about $61 in a Robinhood account, currently sitting as cash. I have no significant investment interest for or against Robinhood.)

There have been a lot of articles examining how devious (or not) Robinhood is being in their quest to make a profit while not charging their users commission. Most of the discussion has hinged on whether it’s ethical for the company to share its customers’ stock order flow by high frequency traders in exchange for payment.

But there’s been relatively little examination of their Crypto product and whether they monetize it. Spoiler: they do, and they’re fairly duplicitous about it. If you read the TechCrunch launch article for Robinhood Crypto, you’d come away believing that the product is fee-free compared to existing player Coinbase and that they’re taking a hit by forgoing any fees to attract new users to their platform.

However this isn’t, strictly speaking, true. The product does have a direct end-user payment when you trade, and the assurances that Robinhood are making in their accompanying material hinge on an exceptionally obtuse definition of the term “commission fee”.

The Spread

The key is that Robinhood, without making it explicit anywhere in the product or help center material, is treating crypto as a foreign-exchange market. And in the context of a foreign exchange market, there are two ways that the broker makes money directly from their customer: fixed commission fees or what’s called a spread.

The concept of manspreading, while also troubling, is not covered here

If you parse Robinhood’s support articles the way they’re obviously hoping the SEC would, they only promise that they’re not going to charge an explicit commission fee. But if your previous experience is from trading on the stock market, as most of Robinhood’s customers likely are, this spread fee is going to be surprising.

At its most basic, there are two prices for a security (e.g. a stock, option, or currency): the bid price, which is what somebody’s willing to buy it for, and the ask price, which is what somebody’s willing to sell it for. In a market, the ask price is typically higher than the bid price, because otherwise, the seller with the lowest ask price should go ahead and sell their security to the bidder with the highest bid price. The difference between the two prices is the spread.

For a security with an active market, the spread should be relatively low, since there should be many sellers and many buyers, and there’s no particular reason the sellers should have a vastly different opinion of the value of the security than the buyers. And that’s what the screenshot below, taken from Coinbase Pro’s BTC-USD market, shows. There’s 1.0025 BTC worth of offers to sell at 3432.02 BTC/USD and 0.6848 offers to buy at 3432.01 BTC/USD, yielding a one cent spread. There are also many more offers to buy or sell further away from the mid-market price.

So that’s a spread.

What’s A Spread Fee?

What’s a spread fee and why is it surprising for traders coming from the U.S. stock market?

A spread fee is when a broker quotes their customer a bid price that’s lower than the underlying market or an ask price that’s higher than the underlying market. You’re probably used to seeing it look like this:

In the case of a currency exchange booth in a foreign country, the 0% commission means that the trader is making their profit by lowering the buy price and inflating the sell price. But Robinhood is going a step further than even a tourist-fleecing exchange booth, and is displaying a single price, like a stock. And so traders coming from the U.S. stock market have no idea there is a fee hidden in the spread since SEC rules prohibit that.

Why Aren’t Spread Fees More Popular?

The rules from the SEC are generally referred to as Regulation NMS, which establishes a set of bid and ask prices for nationally traded stocks known as the National Best Bid and Offer and forces brokers to offer their customers prices that are at least as good as the NBBO. Despite the fact that there are a lot of exchanges that your broker can execute your trade on, brokers can’t charge you more than the NBBO ask price for buying stock or less than NBBO bid price for selling stock.

At the end of the day it means that if the NBBO ask price for a stock is $9.90, your broker can’t say “best I can do for you is $10” and then pocket the extra ten cents they’d make by buying at $9.90 and selling to you at $10. That’s making money on the spread and it’s not allowed by Regulation NMS.

But Bitcoin isn’t part of the national market system covered by Regulation NMS, so making money on the spread is allowed. And it turns out Robinhood is doing exactly that.

Robinhood Crypto’s Hidden Fees

If you look at Coinbase Pro or Gemini Exchange, both of which are licensed to do business in much of the U.S., a typical Bitcoin/U.S. dollar bid-ask spread is around $0.01. The Robinhood UI doesn’t call out the spread, but in their UI the quoted price (on the left in the screenshot) is the mid-market price, and the “Estimated Price” (on the right) is the ask price since we’re buying BTC.

See if you can spot the spread fee

If we compute ($3451.16-$3444.27)/$3444.27 we get 0.2%, and in fact, every time I’ve run this calculation there’s a flat 0.2% difference between the mid-market price and the ask/bid prices. I verified that this difference is real by placing a buy limit order at the midpoint between the mid-market price and the ask price and verifying that it didn’t execute.

The level of the fee itself isn’t that outrageous — it’s similar to Coinbase Pro’s “taker” fee of 0.2% for small accounts, although I’m guessing that Robinhood is in one of the higher transaction volume brackets that corresponds to lower fees and Robinhood doesn’t pass along the savings of the 0% “maker” fee on limit orders that don’t execute immediately.

But Robinhood goes to significant lengths to hide this fee. The effort starts with their UI. While I included a screenshot of their website to show the two prices, most of their users interact with the platform on mobile. There, the estimated bid/ask prices are on entirely different screen then the mid-market price, making it extremely hard to compare the two or even notice that they’re different.

Besides the Techcrunch interview, their own support articles strongly suggest that the fees are just a result of market movement. The article linked when you click on “Estimated Price” answers the question “Why is the estimated buy price different than the estimated sell price?” with an explanation of market liquidity, but no mention of Robinhood’s own role in setting the spread.

Similarly, another article answers the question “Why is the price displayed on the Crypto Detail pages different from the final buy and sell price on the order page?” with “Robinhood doesn’t charge commission fees. Any price difference you may see between the estimated buy/sell price and the execution price is due to market movement.” In this they’re clearly hoping that unsavvy customers won’t realize that:

  1. Robinhood isn’t actually treating Bitcoin like a US stock, despite the familiar language about market fluctuations that resembles a typical stock broker disclosure.
  2. They’ve mentioned no “commission fees” but failed to mention the cost built into the spread at all.
  3. The original question asks about the difference between the detail price and final order price, but the answer only refers to the difference between the estimated price and the final order price. The detail price from the original question is a mid-market price. Both estimated and final order prices are either ask or bid prices. So the answer to the original question clearly should include the spread fee.

Other exchanges include their percentage-based fee schedule upfront, but the only mention I could find anywhere of this practice is buried in the Crypto User Agreement where section 1(c) gives Robinhood Crypto the ability to pass on fees while retaining rebates. My guess is that behind the scenes, they’ve structured this so that they’re passing on a 0.2% fee on all transactions from whichever crypto markets they’re connecting to, while keeping significant volume-based rebates.

In Conclusion

(Don’t blink either, or you’ll miss the fees)

Regardless of how much profit the Crypto product is netting Robinhood, their “Don’t Sleep” marketing campaign around the feature is clearly meant to attract users who are unfamiliar with the fee structures of foreign exchange markets (which also generally have the extended hours Robinhood is touting), and their supporting articles are actively misleading.

(Photo credits: https://www.flickr.com/photos/dunnock_d/32302225131/ and https://www.flickr.com/photos/wnyc/20549953806/ )