Robinhood: Beyond the Popularity

Richard Falvo, Staff Writer

In the early 2010s, stock and option trading was not only expensive, but also inaccessible for many investors. Brokerage houses charged considerable commission fees for each individual trade, and the trading platforms such brokers used were often complicated to navigate, creating a daunting experience for new investors. Altogether, these factors established a certain narrative which conveyed that only those who understood the inherent complexities of trading were worthy of taking an active role in the stock market. Then, along came Robinhood, an easy-to-use mobile platform that quickly became a hit among millennials and beginner traders alike. Its quick success was driven in large part by the new and unique features of Robinhood, such as allowing users to effortlessly trade stocks and options from their smartphone, as well as offering zero commissions on trades. Since its founding in 2013, Robinhood has increased exponentially in popularity and prominence. While impressive, in just a short period of time the company has experienced a plethora of problems that are worthy of further elaboration, especially considering its prominence among millennials and first-time investors. This article aims to do just that.

There is no doubting Robinhood’s rise to fame among the investing and trading community. According to data from BusinessofApps, there were 500,000 users of Robinhood in 2014. Six years later, Robinhood recorded a user base of 13 million people, an increase of 2,500%. In terms of revenue, Robinhood brought in $2.9 million in 2015. In the second quarter of 2020 alone, Robinhood generated $180 million of revenue, an increase of over 6,100% in just five years. The dollar value of transactions on Robinhood has also experienced incredible growth. In 2015, the company’s users traded $500 million worth of stocks and options, a per user value of $1,000. In 2019, Robinhood recorded an aggregate transaction value of $150 billion, or $15,000 per user. The monumental growth of Robinhood has resulted in a soaring valuation of its business. In August, Reuters reported that Robinhood’s latest valuation was priced at $11.2 billion. To put that figure into perspective, the company was valued at $1.3 billion just three years earlier.

Though Robinhood has experienced explosive growth — both in terms of revenue and popularity — there are (and always have been) dangerous flaws, some of which have repeated on numerous occasions, that are unique to the California-based fintech company. One such flaw pertains to security and customer service. In July 2019, Robinhood admitted that it had stored the passwords of its users in readable form across its internal servers, thus opening the possibility of breaches. Robinhood claimed that none of the accounts in question were compromised as a result of the flaw. However, in 2020, the company admitted that as many as 2,000 accounts were, in fact, hacked, which included funds being stolen from said accounts. Worse yet, Robinhood offered very little to no customer service on this matter, a complaint that users have voiced even before this attack took place. Over time, account holders have criticized Robinhood for offering no immediate outlet for customer service. Instead, Robinhood primarily uses email as its main method of communication, a method that carries extensive response times (if there happens to be a response at all).

System outages have also been a problem for Robinhood. During the peak stages of the coronavirus pandemic, trading volumes and volatility in financial markets were substantially higher than in previous months. On two separate occasions in March 2020, Robinhood experienced systemwide outages that affected all users’ accounts. On March 2 and March 9 users were unable to open, close or act in any capacity on positions within their portfolios for the entire trading day, resulting in outrage among investors. As a result, Robinhood is now facing three lawsuits pertaining to those outages. It is also worth noting that Robinhood is currently under investigation by the Securities and Exchange Commission (SEC) for failing to disclose that it was selling order information of its users to third-party trading firms. According to The Wall Street Journal, the investigation could yield a fine in excess of $10 million. This investigation comes after the Financial Industry Regulatory Authority (FINRA) fined Robinhood $1.25 million in December 2019 for failing to ensure that its users received the best possible prices for stock and option orders.

Since its founding, Robinhood has been a driving force behind many influential changes in the matrix of investing. For one, they have pioneered the notion of commission-free investing, a practice that was almost non-existent before 2013. Now, in an attempt to follow Robinhood’s footsteps, more and more brokerages are slashing commissions entirely, benefiting traders all around. Additionally, as mentioned earlier, Robinhood has enabled a new generation of investors: millennials. Before the advent of Robinhood, few young adults invested in the stock market. According to 33voices, “Robinhood’s average user is 27 years old, the demographic ranges to 35, and a quarter of them are first-time investors.” While there has been immense popularity surrounding Robinhood, this article outlined just a few of the serious flaws inculcated within the company and the service it provides. However, just like any decision in life, choosing to use Robinhood does carry a trade-off: acquiring simplicity and ease-of-use while forgoing account security, reliability and customer service. The choice is yours.