In every transaction involving a seller and buyer, there is a middleman known as a clearinghouse. The role of this middleman is very simple: ensure the timely and accurate execution of each transaction.
The existence of a clearinghouse is essential to help markets work efficiently and to establish trust between consumers and financial institutions. These clearinghouses validate and finalize the transaction and hold both the seller and the buyer accountable to their contractual obligations.
In short, yes. But it’s complicated. As is the industry standard, Robinhood directs all transactions that occur on its platform through a clearinghouse. It just so happens that this clearinghouse has been created as part of the Robinhood ecosystem.
This is called Clearing by Robinhood and it is a brokerage firm that exists solely for the purpose of supporting Robinhood customers.
Clearing by Robinhood allows Robinhood to have complete control over the verification and execution of trades within their platform. This allows Robinhood to reduce fees previously charged by outside clearinghouses, as well as improve efficiency and reduce delays.
Robinhood states that because of the creation of Clearing by Robinhood, it was able to reduce seven different fees. These fees are normally applied to typical transactions and charged by the clearinghouse to the customer. They are usually very minimal and unnoticeable to the average consumer. Fees from clearinghouses are charged for the following tasks and responsibilities:
This is the act of ensuring the price and number of shares is accurate. While this process is mostly automated and happens in the background, there are situations where a human is necessary. Clearing is an essential step in a typical transaction, which now Robinhood controls.
Another step which flies below the radar is the actual settlement of the transaction. This is where the clearinghouse and the customer have their feet held to the fire so to speak. This is where both parties are held to their contractual obligations to ensure both fulfill their side of the bargain. This step also happens without any interaction on the customer side because the clearinghouse works to represent you, the client.
Keeping detailed record of the cash settled from transactions is an important part of the process. The clearinghouse keeps track of the cash and has strict guidelines that it follows to ensure it is void of any fraudulent moves.
A clearinghouse is an essential player in the stock market and ensures efficiency and transparency. Knowing that, it's no wonder that consumers are a little concerned about Clearing by Robinhood. While this may be unsettling for many, know that Robinhood’s clearinghouse is under strict regulatory oversight just like any clearinghouse. Each step in the process comes with very specific and detailed instructions and regulations to make sure that the consumer is protected.
If this still does not sit well with you, Robinhood provides instructions on how to transfer your assets out of their platform. Whatever you choose to do, it is important that you understand the risks and rewards of each platform and find which one works the best for you!