The Wall Street Journal: How Robinhood Cashes In on the Options Boom

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High-speed trading firms are paying brokers billions of dollars a year to execute options orders, leading them to promote the risky trades whose popularity has boomed among small investors.

The practice, called payment for order flow, has made options a cash cow for brokerages such as Robinhood Markets Inc. HOOD +5.37% and TD Ameritrade. They can make twice as much or more from selling customers’ options orders as they do from selling order flow for stocks.

In the 12 months through June, the 11 largest U.S. retail brokerages collected $2.2 billion for selling customers’ options orders, according to Larry Tabb, head of market-structure research at Bloomberg Intelligence. That was about 60% higher than their take from selling equities orders.

During that period, major brokers were paid an average of about 16 cents for each 100 shares of their customers’ stock orders, compared with about 54 cents for equivalent-sized options orders, Mr. Tabb’s data show.

While the payments are legal and have existed for decades, they came under renewed scrutiny after the January trading frenzy in shares of GameStop Corp. GME -1.39% The Securities and Exchange Commission is reviewing payment for order flow, and its chairman, Gary Gensler, has said the agency is open to banning the practice.

Critics say payment for order flow has reshaped brokers’ business models to make them intent on juicing more trading activity from customers, sometimes through gamelike smartphone apps. Some warn that larger order-flow payments from options activity can effectively push inexperienced customers into risky trades they don’t understand, exposing them to large potential losses.

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