....more
Payment for order flow
Bloomberg News reported in October 2018 that Robinhood had received almost half of its revenue from
payment for order flow.
[56] The company later confirmed this on its corporate website when asked by
CNBC.
[57] The Wall Street Journal found that Robinhood "appears to be taking more cash for orders than rivals," by up to a 60-to-1 ratio, according to its regulatory filings.
[58]
The
Financial Industry Regulatory Authority fined Robinhood $1.25 million in December 2019 for failing to ensure that its customers received the best price for orders. All of Robinhood's trades between October 2016 and November 2017 were routed to companies that paid for order flow, and the company did not consider the price improvement which may have been obtained through other market makers.
[59] Robinhood was sued in a
class-action law suit in December 2020 for failing to disclose that a large portion of its revenue relied on payment for order flow.
[60]
Security breach
In July 2019, Robinhood admitted to storing customer passwords in cleartext and in readable form across their internal systems, according to emails it sent to the affected customers. Robinhood declined to say how many customers were affected by the error and claims that it did not find any evidence of abuse.
[61] However, in 2020, the firm acknowledged that almost 2,000 Robinhood Markets accounts were compromised in the hacking spree, and that hackers siphoned off customer funds, a sign that the attacks were more widespread than was previously known, and not forthcoming originally by Robinhood.
[62]
Infinite leverage
In November 2019, a user on the
WallStreetBets subreddit shared a glitch that allowed Robinhood Gold users to borrow unlimited funds via selling
covered calls where the shares had been bought using
leverage, and the
premium from the call was used to access additional leverage to buy more shares in order to sell more calls and so on. The loophole was closed shortly thereafter and the accounts that exploited it were suspended, but not before some accounts recorded six figure losses by using what WallStreetBets users dubbed the "infinite money cheat code."
[63][64][65]
Outages
On Monday, March 2, 2020, Robinhood suffered a systemwide, all-day outage during the largest daily point gain in the Dow Jones' history, preventing users from performing most actions on the platform, including opening and closing positions.
[66] During this outage the S&P 500 climbed more than 4.6 percent.
[67] Robinhood users postulated that the outage was the result of a
coding error regarding leap year handling for Saturday, February 29, 2020. Robinhood denied these claims.
[68] Robinhood said that they will offer compensation on a case-by-case basis.
[69] Robinhood experienced another major systemwide outage on March 9.
[70] Robinhood is currently facing three lawsuits due to outages in March 2020.
[71]
Suicide of Alexander E. Kearns
Robinhood faced controversy in June 2020 after
University of Nebraska student Alexander E. Kearns committed suicide after seeing a negative cash balance of U.S. $730,000 in his Robinhood margin trading account. It was later discovered that this was a temporary negative balance due to unsettled trading activity.
[72][73] In his suicide note, Kearns, who was 20 years old at the time of his death, accused Robinhood of allowing him to pile on too much risk.
[74] In a press release, Robinhood promised considering additional criteria and education for customers seeking level 3 options authorization.
[75][76][77]
2020 SEC probe
On September 2, 2020, the
Wall Street Journal reported that Robinhood was under SEC investigation for failing to fully disclose selling clients' orders to high-speed trading firms, with a potential $10 million-plus fine.
[6] Robinhood paid $65 million to settle the SEC investigation on December 17, 2020.
[78]
Gamification in Massachusetts
On December 16, 2020, the Massachusetts Securities Division filed an administrative complaint alleging violation of state securities laws by "marketing itself to Massachussetts investors without regard for the best interests of its customers and failing to maintain the infrastructures and procedures necessary to meet the demands of its rapidly growing customer base."
[79] As a result of their
gamified interface allowing new investors to participate in
advanced derivatives trading,
short sales, and
call options, the
Massachusetts Securities Division contended that Robinhood exploits novice investors, since these types of trade are usually considered "out of bounds" for new investors due to the high risk involved in them.
[80]
2021 short squeeze
Main article:
GameStop short squeeze
On January 28, 2021, Robinhood restricted the trading of certain stocks following
an effort by users of
r/wallstreetbets subreddit to drive up their price. This decision attracted condemnation from internet users on the subreddit and on Twitter.
[81][82] United States House Representative
Rashida Tlaib called for a hearing by the
House Committee on Financial Services, tweeting that Robinhood's action was "market manipulation" to protect hedge funds.
[82] Democratic representative
Alexandria Ocasio-Cortez tweeted the restriction was “unacceptable,” saying Congress needed to know more about the company's decision “to block retail investors from purchasing stock while
hedge funds are freely able to trade the stock as they see fit”, with Republican
Ted Cruz and business magnate
Elon Musk backing the sentiment.
[83][84][85][86]
Following the controversy, the app suffered an influx of
one-star reviews on the Google app store.
[87] Google deleted at least 100,000 such reviews, calling them "coordinated or inorganic".
[88][89][90] Protesters also showed up outside Robinhood headquarters in
Menlo Park, California, at the
Securities and Exchange Commission headquarters in
Washington, D.C., and the
New York Stock Exchange.
[91] On January 28, a
class-action lawsuit against Robinhood for alleged
market manipulation was filed in the
Southern District of New York. The lawsuit alleges that the app “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise [...] deprived retail investors of the ability to invest in the open-market and manipulating the open-market.”
[92][93][94][92] Later that day, the company announced that it would reallow limited buys of the stocks on January 29.
[95]