The online brokerage Robinhood attracted 13 million customers with one simple message: By eliminating commissions, “Investing for All”, as the slogan says, would be possible. Now the trading platform is facing complaints from users claiming to have betrayed this mission, while indignant Congressmen are calling for an investigation and Robinhood is facing increased financial pressure from Wall Street’s central eviction center.
Robinhood customers blew the company up for moving this weekvideo retailer GameStop, cinema chain AMC, and around a dozen other small public companies whose share prices have risen rapidly and spectacularly, according to members of Reddit orchestrated a campaign to secure the releases.
Robinhood explained the trading limits by saying that they meet the capital requirements of the US Securities and Exchange Commission for brokerage and act to protect investors. However, the decision sparked a backlash from investors, consumer advocates and lawmakers who claim Robinhood’s freeze harmed customers and helped the hedge funds they do business with.
At Wallstreetbets, some users vow to switch to other trading services and express their anger through the app and its administration.
“Main Street investors say to Wall Street investors, ‘enough is enough,'” said Dayton Young, product director at Fight for the Future, a not-for-profit advocacy group calling on lawmakers to investigate Robinhood and other online brokers. “The brokers have taken Wallstreetbets off the market – they have blocked trading with Gamestop – it has enabled hedge fund managers to cash out their positions and minimize their losses.”
He added, “The irony couldn’t be clearer: Robin Hood stole from the rich to give to the poor and they are doing the opposite.”
Robinhood did not immediately return a request for comment.
How Robinhood started: Stanford roommates
Robinhood was founded in 2014 by two former Stanford University flatmates, Baiju Bhatt and Vlad Tenev. Their idea was to involve millennials in online trading by eliminating commissions through an easy-to-use app whose fun and engaging features feel more like playing a video game than checking into an old school brokerage account. Customers flocked to the service and earned it praise as “Most Innovative Company” by Fast Company business magazine.
In recent years, Robinhood has expanded beyond stocks, adding cryptocurrencies and gold to the types of assets its clients can trade. It now has about 13 million customers.
“We want to offer the best selection of products and services,” Tenev told Yahoo Finance in 2018. “We want to be a full-service financial institution and offer everything you can put in your local bank – and even more because I don’t.” I don’t think you will be getting crypto from your local bank anytime soon. “
How does Robinhood make money?
While most brokers make money by charging client fees for everything from trading to financial advice, Robinhood touts its free services as a selling point.
However, according to Guy Gentile, founder of DayTraderPro and an expert in high frequency trading, this may not be as good a deal as it seems. That’s because Robinhood’s profits come from taking their clients’ stock orders and selling them to larger trading companies who execute the transaction.
“Your profits have to come from somewhere – that means they have to sell your orders to the higher bidder,” Gentile said. “They sell their order flow to companies like Citadel,” a hedge fund.
This business model, known as “paying for the flow of orders,” recently got Robinhood into hot water with the SEC. The agency fined Robinhood $ 65 million in December for failing to adequately communicate the sales agreement to clients. Between 2015 and 2018, Robinhood only partially explained how it makes money on its online FAQ page and left out details about its largest source of income – its customer trading data, according to the SEC.
Citadel and the other firms that execute the trades “make their money trading against you,” Gentile said. “They’re betting that Robinhood dealers as a whole are buying or selling at the wrong time, or being dragged out of their stocks.”
Why did Robinhood restrict trade?
Tenev defended Robinhood’s original decision to restrict trading in GameStop and other volatile stocks touted by Wallstreetbets.
“As a brokerage firm, Robinhood has many financial requirements, including the SEC’s net capital obligations and clearinghouse deposits. Some of these requirements fluctuate due to market volatility and can be significant in the current environment,” he said said Thursday on Twitter.
Tenev too said Robinhood was unable to control what he called “the lightning-fast spread of information and misinformation on social media”.
That didn’t reassure some Robinhood customers who say the company took care of itself, not its users. Fight for the Future’s Young said he tried to buy GameStop shares on Thursday but was blocked because of restrictions. He said his interest in buying stocks was based on a belief that the stock will go up, as well as a desire to be part of what he believed to be a social media-driven political movement resembling Occupy Wall Street.
“We have seen that hedge fund investors are ready to do whatever it takes to achieve their goals,” said Young. “It is disgusting to see that those in power will protect those in power and institutions in power when it matters.”
Robinhood raised $ 1 billion from the company’s private investors Thursday night after Wall Street’s central clearing hub, the Depository Trust and Clearing Corporation, requested more collateral from brokers to cover the increased volatility of stocks such as the New York Times, according to the New York Times To cover GameStop.
The DTCC has requested more than $ 35 billion from the brokerage industry, up from $ 26 billion previously, Bloomberg reported. Robinhood’s Tenev told the publication that his capital remains “strong”.
Meanwhile, Robinhood also faces a sudden series of legal challenges, including class action lawsuits from law firms on behalf of the trading firm’s clients.
Senator Elizabeth Warren, a Massachusetts Democrat who first proposed the Financial Watchdog Consumer Financial Protection Bureau after the 2008 financial crisis, called this week for an investigation by the SEC into “dramatic fluctuations in the market valuation of GameStop” and other companies that such activity could put retail investors at risk .
In a Friday letter to the agency, Warren wrote: “It is no longer time for the SEC to act.”