The online brokerage niche has never been the same again since Robinhood disrupted this space in 2013. Trading options and stocks was a privilege that only the elite in society and seasoned professionals had access to. This was due to the high commissions that brokerage platforms charged for every trade.
However, commission-free trading changed everything, and we saw many players venturing into this niche. One of the most notable ones is Webull, which recently joined this space and garnered many active users.
Many people wonder how Webull makes money off its commission-free model because the most obvious way would be to charge a commission for each trade one makes. However, this is not the case, as the brokerage platform has other avenues that generate enough income to sustain operations and make some profits.
An Overview of Webull
Webull is an online brokerage platform that lets users trade stocks and options, ETFs, metals, livestock, and cryptocurrency. There are no restrictions on the amount of money a user can hold as the minimum deposit.
Webull also offers a comprehensive analysis tool that gives users technical indicators and tips that helped them to make the best trading decisions. Anyone can trade from a brokerage or IRA account while enjoying extending trading hours both before and after regular market hours on this platform. In simple terms, Webull is suitable for traders who require the help of advanced trading tools and information to make decisions.
Users can access this platform on desktop and mobile devices.
History of Webull
This company is a relatively new entry into the brokerage niche as it was only formed in 2017. Its headquarters are in New York City. It was created out of a Chinese company, Fumi Technology, established in 2016 by Wang Anquan.
Wang is a seasoned financial expert and has gained a lot of experience throughout his career holding different functions. He notably worked with Alibaba Group from 2006, eventually becoming technology director at Ally Financial. He moved from this company in 2014 and joined HengFeng bank as Head of the Department of Online Financial Assets Transactions. He didn’t last long here and moved on a year later to become general manager of Xiaomi’s Finance department.
When Fumi Technology was formed, he helped finance it with a seed round of about $7.5 million while still working for Xiaomi. With many financiers looming in the background, the vision to gain a global presence was a realistic target from its early days. The breakthrough that helped this company achieve this vision was the launch of the Webull application in June 2017. Wang’s initial ambition was to solidify Webull in the North American market.
The company needed to gain legitimacy and started by establishing its headquarters in New York City and eventually hiring a wall street veteran, Anthony Denier, to lead US business operations as CEO. Before taking up this role, Anthony had amassed over 20 years of experience in multiple business functions at ING, Credit Suisse, and LXM group.
During the launch, Webull’s focus was to give customers comprehensive charting tools to facilitate better decision-making. At this time, Robinhood was gaining a lot of traction thanks to its commission-free trading model. Looking at how people were buying into the commission-free trading selling point, the team quickly changed it to become an investment platform.
Remember the part where we mentioned that Fumi Technology had many financiers in the background? This is where they came in handy.
Setting up an investment platform requires a lot of money, but Fumi Technology quickly raised approximately $85 million in three rounds, thanks to its financiers. This money facilitated the transition to a brokerage and investment platform. It also helped them market the platform, most notably through a few slots on CNBC that gave them many new customers.
Brokerage giants like E*trade and Charles Schwab we’re still charging commissions on deals. On the other hand, Robinhood appealed to traders who did not need complicated analysis features and charts. This way, Webull took advantage of the gap between these two sets of brokerage companies. Senior investors were skeptical of joining Robinhood since the platform lacked the complicated analysis needed to make big decisions. By cleverly positioning itself between these two sets of brokerage platforms, Webull became an attractive option for many traders who couldn’t choose between the two.
This rapid growth pushed the company to introduce more products. In 2020 it launched a Robo-advisor service to compete with established players like Wealthfront and Sofi. That year, The United States government handed out stimulus checks to support citizens affected by the COVID-19 pandemic, and this led to an increase of new small-scale investors, most of who joined Webull. In 2020 alone, the company increased its user base from 200,000 to over 2,000,000.
How Does Webull Make Money?
1. Paid Subscriptions
Webull offers level 2 advanced quotes or NASDAQ at 1.99 dollars per month. Level one data is available for free and includes information on equities, indices, ETFs, and forex futures for at least 100 stock exchanges.
Level 2 data takes things to another level by offering deeper insights, for instance, the thirty best bids and offers or snap or NASDAQ. This premium service allows professional traders to see the order flow of a trend before it’s executed. It also gives traders more than 90% of the information about a specific stock to facilitate better decision-making. This is one of the advantages that can make Webull the preferred option over other brokerage platforms like Robinhood. Paid subscriptions generate significant revenues for Webull while improving the user experience for traders who rely on this data.
This is essentially a freemium business model where customers have some level of access for the free tier but can decide to pay to get higher into the paid tier.
2. Order Flow Payment
This is what allows Webull and other brokerage platforms to offer commission-free trading. Webull earns a considerable percentage of its revenue from payment for order flows. In other terms, it gets money from receiving rebates from market makers. Doing this pushes the costs to another party, i.e., the market maker, and this allows it to let customers trade for free on its platform.
But how does it work?
Whenever a user places an order on the platform, it is not executed directly. There is a third party called a market maker who receives the order and executes it. They, in turn, pay the platform for giving them this deal. The market maker will try and make a profit on the bid-ask spread. This is the difference between the amount they received for the deal and what they will use to execute it. One would argue why involve these market makers when you can execute the deal yourself?
Market makers can mostly give a better offer which allows them to compete with stock exchanges. This is because they deal in high volumes, which improves their bargaining position. This way, if you execute a deal through a market maker, you’ll still get a reasonable rate, and they’ll be able to make some amount from the difference. The platform receives a percentage of the bid-ask spread for every transaction originating from its platform. Webull earns 0.01 dollars for every $100 worth of transactions as a rebate. This amount might seem small, but remember, the whole process is done through computers, and market makers can process thousands of transactions in an instant. With the high volumes of transactions done through Webull, the rebates add up to significant sums.
Webull works with Apex Clearing Corporation to help facilitate transactions placed by users on its platform. This explains why Webull and other commission-free trading platforms prioritize getting as many people as possible to trade, as this is where they earn revenue.
This model has a few flaws that have been highlighted in recent years. First, market makers control huge volumes of trading activity and can easily influence prices and create volatility which is undesirable to traders. In addition, the process makes it likely that traders might not have their trades executed at the price they chose due to the automated nature of the settlement process.
3. Lending Out Securities
Webull allows you to invest in securities and other investments where you leave money lying idle on their platform. They lend out some of this money to interested entities. This is done internally on its platform to traders who want to trade on margin or externally. Webull’s business model focuses on providing trading assistance to clients, which includes filling orders and lending shares when needed. When they lend out shares to traders interested in shorting stocks, they earn interest.
4. Short Selling Fees
Webull loans out shares to short-sellers. It then earns interest on the dollar equivalent of the amount loaned out. Short-sellers typically predict that the price of a stock will go down at a specific time, often referred to as the expiration date. A trader must have a margin account to open a short position. They will then pay interest on the volume of the borrowed shares while still holding that open position. To close a short position, they must buy back shares on the open market at a price lower than what they borrowed them for. They will then return the shares to the brokerage platform. Webull makes money by giving out stock loans and generating money from the interest paid. You should have a minimum balance of $2000 to open a short position on this platform. The interest paid depends on multiple factors, such as the type of stocks loaned, the number of stocks, and the market’s position on the day.
5. Margin Trading
This concept allows traders to borrow money from the brokerage platform for trading purposes. The platform then earns interest from the amount paid back. Webull charges between 3.99 and 6.99 percent interest on margin. The amount of margin a user is eligible for depends on how much they hold in the account. This acts as a down payment in case they default.
Frequently Asked Questions
Question: Do people make money on Webull?
Answer: Yes, making money on Webull is possible, but it goes down to your trading skills. Luckily, the platform offers a lot of information that anyone can use to learn the most about markets and stocks for better decision-making. Remember, the stock market is not a guaranteed place to make money, but you should reap good rewards like most long-term participants do with the right strategy and execution.
Question: Is Webull really free?
Answer: Webull ranks high on the list of cost-effective brokerage platforms. This is mainly due to its commission-free trading model, which delights a lot of traders. It does not require users to hold a certain minimum balance on their accounts as well.
Question: Is Webull owned by China?
Answer: Webull has its headquarters in New York but is owned by Chinese company Fumi Technology. This company received a lot of its backing from Xiaomi and Wang, who holds about 35% of the shares in the company.
Webull is a good option for anyone looking to trade commission-free and requires extensive analytics to help them make the right decisions. It was only launched a few years ago but has proved its credibility in this space by positioning its service to fill the gap left by other players. The various ways this brokerage platform makes money have been listed above, and these are what most commission-free brokerage companies do. You will find some negative sentiments about the whole market maker model, but it’s a trade-off issue. Most people would rather trade commission-free despite the possible downsides of having your trades executed by a market maker than pay between $7 and $10 for every trade. It is a win-win situation for both parties involved and is what drivers the high activity on commission-free trading platforms. Here anyone can trade, regardless of the amount they have, without incurring huge costs to do it.