Why people love to hate Robinhood
Never has a company been so popular, and also so hated.
Why it matters: We're now at a key inflection point in the Robinhood saga that's likely to determine whether having a snazzy app with name recognition is all you really need to overcome internal weaknesses.
- Robinhood is loved not only by the trading newbies who are downloading the app at a record pace, but also by Wall Street investors who have recently sunk $3.4 billion into the company.
- The online brokerage has also been relentlessly attacked, however, by everybody from Alexandria Ocasio-Cortez to Ted Cruz and Mark Cuban.
The big picture: Robinhood has lurched from crisis to crisis for most of its existence — while also quickly growing.
- In 2018, it announced a checking account and was then forced to ignominiously unannounce it. That year, it raised over $350 million at a $5 billion valuation, per PitchBook.
- In 2019, users found a glitch that gave them "infinite leverage," the company was fined $1.25 million for not giving its users the best prices on stocks, and the entire stock-trading platform went down for well over a day. Robinhood raised another $370 million at a $7.5 billion valuation.
- In 2020, Robinhood paid $65 million to settle SEC charges that it lied about its trades being free. It was also hit with a suit from the state of Massachusetts alleging that it was in dereliction of its duty of care to its customers.
- Worst of all, one of those customers, Alex Kearns, committed suicide after thinking he lost $730,000 on the app. The company raised $1.25 billion at a valuation of as much as $11 billion.
Driving the news: In 2021 to date, Robinhood has infuriated Redditors, politicians, and regulators for the way in which it curtailed trading in meme stocks, removing a key source of demand for those stocks and seemingly giving the upper hand to the short-sellers that its customers were betting against. It then stumbled trying to explain why it took the actions it did, precipitating dozens of lawsuits.
- Still, Robinh0od then raised another $3.4 billion, at a valuation of as much as $33 billion, depending on where it eventually trades when it goes public.
How it works: The slogan is well known. "If you're not paying for it, you're not the customer, you're the product." Robinhood makes its money by directing its customers' trades to high-frequency traders on Wall Street.
- The overwhelming majority of Robinhood's revenue comes from options trades in particular — an ultra-risky kind of trading where individual investors almost never make money. That means Robinhood's interests are not aligned with those of its customers.
- By the numbers: In December alone, according to an SEC filing, Robinhood received $57.2 million in payment for its options flow. That’s more than 33 times the $1.7 million it received in payment for its customers' trades in S&P 500 stocks.
- Zero-fee trading exacerbates volatility, reduces market efficiency, and even hurts market liquidity. A recent paper found that whenever Robinhood suffered an outage, market quality went up while bid-offer spreads went down.
Between the lines: Robinhood is fully reliant on Wall Street, which provides its business model and its investor base. That naturally creates opposition to Robinhood from people who are suspicious of big finance.
- Robinhoood also has a brash "move fast and break things" culture typical of Silicon Valley. That doesn't sit well with anybody who thinks that companies charged with looking after your money should move cautiously and only when they're certain they can deliver on their promises.
The bottom line: Expect Robinhood's CEO to face some tough and pointed questioning when he appears on Capitol Hill for hearings into stock market volatility later this month. But don't expect Robinhood's investors to care.
- So far none of Robinhood's scandals have curtailed its growth.