Robinhood event contracts beat crypto revenue, but growth trails trading volume

Event contracts brought in $173 million against $120 million from crypto in the third quarter. Revenue rose far more slowly than volume while states and the CFTC fight over who regulates the product.

Robinhood's prediction market business now out-earns its crypto business, but it earns less on each contract. Assess it by multiplying contracts by earnings per contract, then allowing for court risk.

Revenue grew 11% in the quarter while contracts grew 21%. Volume is outrunning revenue, and part of the revenue now flows through a partner exchange that is itself caught in a legal fight.

Revenue and trading volume

The third quarter release put event contracts revenue at $173 million, up over 6x on a year earlier. Crypto brought $120 million, down 55%. Event contracts are bets on yes or no outcomes.

Customers traded a record 16.4 billion contracts, more than 7x a year earlier. Each contract trades in one cent steps up to $1 and is worth $1 at settlement if the outcome happens.

Event contracts first overtook crypto a quarter earlier. The second quarter release showed $156 million from event contracts against $100 million from crypto, on 13.6 billion contracts.

The earnings deck lists lower fees on event contracts as a perk of Robinhood Gold. Gold reached a record 5.2 million subscribers, up 34%, about 18% of funded customers.

The business is substantial, though its share of company revenue has stopped growing. Event contracts were about 20% of transaction revenue in both quarters, $867 million in the third and $776 million in the second. They were about 12% of the $1.42 billion in total net revenues, which rose 12% on the year.

Volume is uneven, so the quarterly average hides the shape. Monthly volume peaked in June at 6.4 billion contracts, then ran 6.1 billion in July, 4.7 billion in August and 5.6 billion in September. September is the exit rate, and it sits below June.

The quarter beat the second because April and May were low, at 3.2 billion and 3.9 billion contracts. The monthly average rose from 4.5 billion to 5.5 billion. September ran at 187 million contracts a day, 229% above a year earlier, against about 178 million for the quarter.

Crypto is not the right yardstick. It grew faster from the second quarter, up 20% to $120 million against 11% for events. The lead narrowed from $56 million to $53 million. Crypto is still down 55% on the year, so the comparison flatters events.

Rothera and the legal dispute

Part of the revenue now comes from a partner venture. Rothera is a CFTC licensed exchange and clearinghouse that Robinhood co-owns with Susquehanna International Group. It launched in June. The venture acquired the exchange MIAXdx in January.

The deck says event revenue "includes Rothera revenues of $28M", about 16% of the $173 million, or one dollar in six. Without it, event revenue was $145 million, still $25 million ahead of crypto.

Rothera is scaling fast. It traded 3.4 billion contracts in the quarter, up from 2.1 billion in the second. It passed $100 million in annualised revenue in its first full quarter. Its contracts come from Robinhood customers and other participants on the exchange.

Robinhood is also widening the exchange mix. On the 27 October call CFO Shiv Verma said Rothera stays the primary exchange. Crypto.com and OG.com become the main second exchange. He expects the vast majority of flow to go through both by the end of the year into early next year.

That structure exposes part of the revenue to a legal dispute. On 20 October Utah's attorney general sued Kalshi, its affiliates and two Susquehanna trading companies, seeking about $30 million to $60 million in profits, Cointelegraph reported. Robinhood is not a defendant. But the same trading house co-owns the exchange behind one dollar in six of its event revenue.

On 27 October the CFTC sued Utah to block state enforcement against CFTC registered markets. Chairman Selig said the commission "has the expertise and responsibility to defend its exclusive jurisdiction over commodity derivatives". The agency also has proceedings against nine other states.

A state ruling hits the contract count, so it hits revenue directly. Robinhood's earnings deck says litigation could "immediately or subsequently prevent us from offering, or continuing to offer, event contracts". It adds that Robinhood has in the past stopped offering certain new event contracts after actual or threatened state enforcement.

Institutional interest offers another sign of demand. Bloomberg reported on 27 October that Millennium Management is building tools for its portfolio managers. The $97 billion fund wants prices from venues such as Polymarket and Kalshi as a trading signal across traditional asset classes.

Millennium is not trading the contracts. It is examining what the prices say about other markets. Some portfolio managers have expressed interest in geopolitical, economic and commodities data, Bloomberg said. Susquehanna and Jump Trading are already in the space, and AQR sought to expand a prediction markets research team over the summer.

That demand is for the price, and a price needs liquid trading. Institutional interest lowers the dependence on retail betting only if somebody else supplies the flow. Bloomberg describes the venues' customer base as retail dominated. A ban on retail trading would thin the prices that institutions want to read.

What to watch in the next results

For Robinhood, the sensible model is contracts times what the firm earns on each, with a haircut for adverse rulings. A model built on June's peak would overstate the base by about 16%, since the quarter averaged 5.5 billion.

Third quarter revenue works out at about $58 million a month on 5.5 billion contracts a month. Rothera counts a matched Yes and No pair as one contract, so its volume is not directly comparable with Robinhood's own. Every 10% cut in what Robinhood earns on it takes about $17 million a quarter off a business worth 20% of transaction revenue.

October is the early indicator. On the call Verma said event contracts were up about 7x on a year earlier early in the fourth quarter, with more increase starting. Spreads were a little bit tighter.

Robinhood's October operating data should appear in the second week of November, on the pattern of its July and August releases. It will show whether monthly volume holds near the third quarter's 5.5 billion. A figure below that would confirm the line is peaking before the courts have ruled.

The fourth quarter results, due in February on last year's timing, will show whether revenue keeps pace with volume once Rothera is fully in the base.