Robinhood's Free Crypto Trades Powered by Chicago's Jump Trading

(Bloomberg) -- Robinhood Markets Inc.’s move to add cryptocurrencies trading last year was certainly a popular one, helping the maker of the free trading app double its customer base. But it needed help to pull it off.

With many of the major trading houses wary of crypto, the question remained how the fintech firm was going to buy and sell Bitcoin, Ether and other digital assets on behalf of customers. For that, it’s turned to Jump Trading LLC, a little-known but profitable Chicago trading firm that’s also benefited from being an early mover on cryptocurrencies, according to two people familiar with the matter who asked not to be identified discussing private matters.

Jump’s role, which hasn’t been previously reported, shows that some traditional financial players are diving into the world of crypto trading, even as the offering is so new that Robinhood doesn’t provide it in every state. Meanwhile, major retail brokerages like Bank of America Corp.’s Merrill Lynch don’t offer crypto purchases, and big banks like Goldman Sachs Group Inc. have stayed away from trading digital currencies amid concerns about the risks brought by both their volatility and anonymity.

Still, well-known names like Fidelity Investments, JPMorgan Chase & Co. and the owner of the New York Stock Exchange are among the companies engaged in serious efforts to understand how digital currencies can change business and finance. Jump has traded Bitcoin since at least November 2017, people familiar with the matter said at the time.

For Robinhood, the crypto offering helped its efforts to court younger investors and pushed it above $100 billion in transaction volume, which helped lead to a valuation of $5.6 billion last year. The venture capital-backed startup makes no secret about sending crypto orders to trading venues for execution, just as it does when a user buys or sells a stock on a smartphone. But unlike stock trading, in the less-regulated world of digital assets it isn’t required to say where it sends orders.

According to Robinhood’s website, the app company receives “revenue from these trading venues in the form of volume rebates. These rebates help us cover the costs of operating our business and offer you commission-free trading.”

Nora Chan, a spokeswoman for Robinhood, declined to say whether her firm uses Jump to execute its trades. She said the company sends its orders to more than one trading venue, which can include exchanges, brokers, market-makers or over-the-counter trading desks. A Jump representative declined to comment.

Menlo Park, California-based Robinhood saves money by outsourcing costly execution services. For Jump, handling retail orders offers revenue with less risk that other professional traders armed with high-speed systems will sting it with losses.

Robinhood, founded in 2013, became a Silicon Valley darling for its ability to attract millennials with the prospect of paying nothing to trade. By the time it offered crypto trading in several states in February 2018, its user tally reached 4 million, doubling from April 2017. This January, the New York State Department of Financial Services granted a virtual currency license to the company, which allows it to offer services in the state for buying, selling and storing seven virtual currencies.

Jump was founded in 1999 by traders Bill DiSomma and Paul Gurinas, veterans of the Chicago futures pits. The firm is closely held and trades with its own money, generating profit of several hundred million dollars in many years. In recent years, Jump has engaged in a race to be the fastest-of-the-fast for bonds and futures trading, where shaving off millionths of a second can lead to big profit.

--With assistance from Julie Verhage.

To contact the reporters on this story: Matthew Leising in Los Angeles at mleising@bloomberg.net;Ben Bain in Washington at bbain2@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;Jesse Westbrook at jwestbrook1@bloomberg.net, Josh Friedman, Dan Reichl

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