Mar 3, 2020 - Economy & Business

Another fiasco for Robinhood

Illustration: Sarah Grillo/Axios

Millions of stock and options traders were effectively shut out of the market for all of Monday as well as two hours of early trade on Tuesday.

Driving the news: The culprit was Robinhood, a fast-growing stock-trading platform that inexplicably face-planted on a day when trading volume surged and the stock market rose by 4%.

Why it matters: Robinhood was valued during its last fundraising round in July at $7.6 billion, based on the thesis that bringing Silicon Valley's disruptive norms to Wall Street would help the company capture an audience of fast-twitch millennials. This week's news is a reminder of why old-fashioned trustworthiness has its merits.

The big picture: Robinhood's unbeatable price of $0 for stock trades ultimately prompted all its major competitors to follow suit. That, in turn, begat mega-mergers: Morgan Stanley is buying E-Trade, while Charles Schwab is buying TD Ameritrade.

Be smart: Now that giants like Fidelity and Vanguard Group have massive scale and $0 trades, it's hard to see where Robinhood's comparative advantage lies. The 7-year-old startup risks finding itself racing to the bottom, signing up mainly options traders who don't qualify for margin accounts anywhere else.

Flashback: Robinhood is known for overreaching. At the end of 2018, it announced a checking account and was then forced to ignominiously unannounce it. In 2019, users found a glitch that gave them "infinite leverage," and Robinhood was also fined $1.25 million for not giving its users the best prices on stocks.

  • The outage this week is Robinhood's worst blunder yet, and only serves to reinforce the impression that the brokerage is not robust enough to stand up to the giants in the space.

What they're saying: Robinhood is blaming "instability in a part of our infrastructure that allows our systems to communicate with each other" for the outages on both Monday and Tuesday. The company is saying that service is now "fully restored."

The bottom line: Wall Street is built on trust. It's hard to see why any of Robinhood's customers should trust it at this point.

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Expect lawyers to take aim at Robinhood

Photo: Rafael Henrique/SOPA Images/LightRocket via Getty Images

After Morgan Stanley last month agreed to pay $13 billion for E*Trade, deal-makers began buzzing that Robinhood could be the next discount domino to fall. Particularly on the heels of Charles Schwab agreeing to buy TD Ameritrade for $26 billion.

What's new: Robinhood does now have a target on its back, but the archers are more likely to be lawyers than potential acquirers.

Lawmakers come under scrutiny for stock sales

Sens. Diane Feinstein, Ron Johnson and Kelly Loeffler. Photos: Getty Images

Several U.S. senators have come under fire for making large stock trades while President Trump and other federal officials publicly downplayed the novel coronavirus threat, but after the lawmakers received a private briefing on the potential seriousness of COVID-19.

The state of play: The trades have sparked insider trading accusations, but it's impossible to know for sure without an investigation by the Justice Department or the Securities and Exchange Commission.

Investment professionals are selling while mom and pop buy the coronavirus dip

Illustration: Aïda Amer/Axios

As traders around the globe have frantically unloaded positions in recent weeks, so-called mom and pop retail investors have kept level heads and not sold out of stocks.

What they're saying: In fact, "the typical trader is buying equities on the dips," passive investment firm Vanguard notes in a research paper, adding that "older, wealthier traders are moving modestly to fixed income."