"Internet celebrity broker" Robinhood's revenue structure has undergone a significant change: predicted market revenue has surpassed stock trading

Author: Long Yue, Wallstreet News

This brokerage, which started with zero commissions, is turning betting on sports and elections into a big business.

Robinhood released its second-quarter financial report last week, predicting that market revenue will surge more than tenfold year-on-year to $156 million, accounting for 20% of total trading revenue, surpassing stocks and cryptocurrencies for the first time to become the second-largest trading business after options. This change comes less than two years after Robinhood officially entered the prediction market.

What does this figure mean? Based on second-quarter data, Robinhood's prediction market business has an annualized revenue exceeding $600 million.

Mizuho Securities stock research analyst Dan Dolev bluntly stated: "Users on Robinhood just love to gamble, and the prediction market is right up their alley. It is the perfect alternative to cryptocurrencies because it provides a quicker sense of reward to the brain—you don't have to wait."

From Stock Trading to Betting on the World Cup: What Users Are Chasing

The logic of the prediction market is simple: users bet on the outcomes of real-world events in a "yes/no" format, including World Cup matches, elections, and even the weather. This instant and straightforward gameplay aligns perfectly with Robinhood's retail user base.

On the timeline, Robinhood's trading revenue structure has shifted with market trends. During the meme stock frenzy in 2021, stock and options revenue surged; then cryptocurrencies took over, with meme coins like Dogecoin driving a spike in crypto trading revenue; by the end of 2024, cryptocurrencies will still be Robinhood's largest source of trading revenue.

The turning point occurred around the 2024 U.S. elections. The popularity of prediction markets surged, with a large influx of funds betting on election outcomes. Kalshi was approved to operate legally in the U.S. that year, paving the way for other platforms to follow. Robinhood subsequently launched its first event contract at the end of 2024, allowing users to bet on the outcome of the U.S. presidential election, followed by categories like sports events.

The revenue peak in the second quarter was largely due to the World Cup. Compass Point stock research analyst Ed Engel pointed out in a research report that this made trading volumes in June and July "exceptionally strong." However, he also mentioned that the U.S. football season will kick off this fall, which is expected to bring a new round of boosts.

Building Its Own Exchange, Separating from Kalshi

Initially, Robinhood did not have its own prediction market exchange but directed user orders to Kalshi, with both parties splitting the fee of two cents per contract.

This arrangement is changing. In June of this year, Robinhood and Susquehanna International Group jointly established the prediction market exchange Rothera and began transferring some orders (including World Cup-related bets) to this platform for execution.

The fee structure has also been adjusted. Robinhood currently charges users a maximum of one cent per contract, plus an additional fee that varies depending on the executing exchange—if the order still goes to Kalshi, Kalshi charges an additional one cent per contract.

As a result, the interdependence between the two companies has significantly decreased. According to Artemis data, the proportion of Robinhood orders in Kalshi's trading volume has dropped from nearly 50% in the same period last year to 17.5% in the second quarter of this year.

Dan Dolev believes that using Rothera will give Robinhood "more control over the prediction market business." However, he also pointed out that since Robinhood needs to provide incentives to users, the profit margin difference between the two models will not be too large.

Industry Landscape: Kalshi Remains the Leader, Competitors Flood In

Despite Robinhood's strong momentum, Kalshi's dominant position in the prediction market remains unchallenged. According to Artemis data, Kalshi's nominal monthly trading volume in June this year was approximately $33 billion, Polymarket was $14 billion, while Rothera (executing trades for both Robinhood and some market makers) was $2.1 billion.

In terms of revenue, Kalshi's annualized revenue in June this year has surpassed $2 billion, nearly tripling since last November. In contrast, Polymarket's growth rate has recently slowed significantly.

Robinhood is not the only new entrant. Coinbase also entered the prediction market this year, with its business generating an annualized revenue exceeding $100 million in the second quarter, but specific quarterly figures have not been disclosed, and it remains a relatively small player.

The prosperity of the prediction market comes with regulatory uncertainties. Several states have filed lawsuits against prediction market platforms, claiming they operate as unregistered gambling applications.

Meanwhile, the federal regulatory agency, the Commodity Futures Trading Commission (CFTC), asserts its regulatory authority over prediction markets, classifying them as financial derivatives rather than gambling. The legal tension between these two classifications has yet to be clarified.