Ripple Enters a Market Dominated by Banks: How It Makes Money From Stock Trades
Ripple earns fee revenue by enabling institutions to trade in leveraged equity financing, a market traditionally dominated by banks.
According to CoinDesk, the company’s activity currently carries an annualized financing rate of approximately 8% under prevailing market conditions. The rate is calculated based on the size of positions taken through swap contracts and is charged separately from the fund management fee.
How Does Ripple Earn Revenue From Stock Trades?
Launched in August, Ripple’s Delta One business offers total return swaps tied to U.S. stocks, market indexes, and digital assets. These contracts allow institutions to track the returns of an asset without buying it directly; in return, the financing provider collects a fee.
Leveraged exchange-traded funds (ETFs) use these kinds of instruments to multiply the daily movements of the assets they track. The rate of approximately 8% represents the cost of this financing; it is not Ripple’s net profit margin or a return offered to XRP investors.
According to Morningstar Direct data, 593 leveraged ETFs in the U.S. hold a total of more than $256 billion in assets. Of these funds, 426 track individual stocks. Tighter capital and risk rules are creating room in this market not only for banks but also for non-bank firms such as Ripple Prime, Jane Street, and Clear Street.
The Growing Business’s Connection to XRP Remains Unclear
When Ripple launched its Delta One unit, it said the business had more than $1 billion in net capital under regulatory calculations. The company had also completed a $275 million senior debt issuance to fund growth. The expanded Brevan Howard agreement announced Tuesday also covers Ripple Prime’s brokerage, clearing, and financing services across various asset classes.
Leveraged funds adjust their positions every day. If stocks make sharp moves and fund assets are insufficient to cover losses, the financing providers can also incur losses.
Ripple has not yet disclosed the amount of revenue it earns from leveraged ETF financing or the extent to which XRP and the XRP Ledger are used in these transactions.