What happened

Shares of Robinhood Markets (HOOD 3.58%) gained 26.1% last month, according to data provided by S&P Global Market Intelligence. Investors have high growth expectations for this IPO stock, and Robinhood's second-quarter earnings results didn't disappoint. 

Robinhood ended the quarter with 21.3 million monthly active users, and the numbers are clear that these customers are very enthused to participate in the financial markets. Revenue more than doubled year over year to $565 million. The growth was driven mostly by trading in options and cryptocurrencies, which comprise 88% of transaction-based revenues in the quarter. 

For now, the company gets a pass for reporting a net loss of $502 million. Robinhood clearly has a long runway of growth by winning over more first-time investors to its platform, and it continues to invest in customer support and educational features to further that objective.

Bitcoin symbols displayed on a digital screen.

Image source: Getty Images.

So what

While Robinhood continues to grow very rapidly, there is the lingering threat of a potential ban on the payment-for-order-flow (PFOF) business model that allows Robinhood to offer free trades to its customers. Basically, payment for order flow means that Robinhood receives payment (reported as transaction-based revenue) in exchange for directing retail trade orders to market makers. This practice has received increasing scrutiny lately due to the rapid growth of Robinhood's platform, although PFOF is a common practice used by other brokerage firms

But the alarm bells started to ring a little louder toward the end of August, when Securities and Exchange Commission Chairman Gary Gensler told Barron's that banning PFOF was "on the table."

Now what

Transaction-based revenue made up 80% of Robinhood's total revenue last quarter, but management is looking to diversify to other revenue sources over the long term. Still, the threat of regulation of PFOF in the U.S. is a risk that investors need to be aware of for the time being.

In the second quarter, payment for order flow from stocks and options declined to 38% as a percentage of total revenue, down from 64% in the year-ago quarter. While management said that percentage could increase again, it shows Robinhood is making progress to diminish this risk.