Let us count the ways...
Robinhood (NASDAQ: HOOD) has gained a bad reputation for several reasons. One of the main criticisms is that the company has been accused of promoting risky behavior by encouraging inexperienced investors to trade frequently and make speculative investments. Additionally, the company has been criticized for its business practices, such as its use of high-pressure sales tactics and its lack of transparency around how it generates revenue. Finally, the company has been involved in some controversies, such as the GameStop short squeeze that happened in Jan 2021 where the company halted buying of certain stocks that were heavily traded by retail traders, which triggered a lot of negative press.
What Is the Catch With Robinhood?
Robinhood was primarily designed for new investors with a simple user interface and commission-free trades. Robinhood disrupted the financial technology industry by charging commission-free trades. It launched in December 2014, and Robinhood's revenue mainly comes from payment for order flow (PFOF). All trades executed on Robinhood are routed (sold for pennies or factions of pennies) based on payment for order flow, primarily to large hedge funds.
Robinhood generates revenue through a practice known as “payment for order flow.” This means that when a Robinhood user places a trade, the details of that trade are sent to other firms, known as market makers, which then execute the trade on behalf of the user. In exchange for this service, the market makers pay Robinhood a fee, known as payment for order flow.
Some of the companies that purchase the orders are Citadel Securities, Two Sigma Securities, Hudson River Trading, IMC Financial Markets, Jump Trading, Jane Street Financial, Optiver US, Susquehanna International Group, DRW Trading, Hudson River Trading and Flow Traders. These firms are considered to be among the largest and most active high-frequency trading firms in the industry.
Indeed, Robinhood’s relationship with these large trading firms has been the reason it has been criticized for not being transparent about its revenue sources, and for not disclosing how much it receives from market makers for order flow.
Robinhood has also experienced service interruptions, and outages during large influxes of orders made by multiple users at the same time, which was frequently found with trades of highly volatile stock tickers. Not only did this lead to customer complaints, but it also resulted with Robinhood having to pay a $70 million settlement in June 2021, to cover customer losses experienced due to these outages, the largest such FINRA penalty. FINRA also fined Robinhood an additional $1.25 million in 2019 for trade execution violations.
Brokerage Robinhood Scandals
There have been several controversies involving Robinhood. One of the most notable controversies occurred in December 2020, when the company faced widespread criticism for halting trading in certain popular stocks, such as GameStop, during a period of high market volatility. This caused a lot of negative press, and some people accused the company of blatant market manipulation.
Robinhood also faced criticism in June 2020, when it was revealed that the company had sold its users' order flow to high-frequency trading firms. This means that when a Robinhood user placed a trade, the details of that trade were sent to these firms, which could then use that information to trade ahead of the user (front running), and making profits at their expense.
Another controversy that Robinhood faced was in December 2020 when the company was fined by FINRA (Financial Industry Regulatory Authority) for failing to properly supervise its options trading, which led to customers losing $34.1 million.
Finally, the company has been criticized for its lack of transparency around its revenue sources and business practices. Some have accused the company of profiting from the losses of its customers.
Additionally, there have been several lawsuits filed against Robinhood. In January 2021, a group of Robinhood customers filed a class-action lawsuit against the company, alleging that it had manipulated the market during the GameStop short squeeze and caused them to lose money. This lawsuit is still ongoing.
In February 2021, the family of Alexander Kearns, a 20-year-old Robinhood customer who died by suicide in June 2020, filed a wrongful death lawsuit against the company, alleging that its platform was designed to encourage risky behavior and that it had failed to provide adequate warnings or customer support.
In March 2021, a group of investors filed a proposed class-action lawsuit against Robinhood, alleging that the company had engaged in insider trading and market manipulation, and that it had failed to disclose key information about its revenue sources and business practices.
In April 2021, FINRA (Financial Industry Regulatory Authority) fined Robinhood $65 million for failing to properly supervise its options trading, which led to customers losing $34.1 million.
In addition to these lawsuits, there have been several other legal actions taken against the company, including regulatory investigations and customer complaints.
Feds seized nearly $700M in shares of Robinhood from FTX founder Sam Bankman-Fried
Federal authorities have seized almost $700 million in shares of Robinhood from FTX founder Sam Bankman-Fried, which he owned.
A court filing from Friday shows that the federal government seized more than 55 million shares of Robinhood stock along with tens of millions of dollars in cash from each of several bank accounts.
Bankman-Fried was arrested last month in the Bahamas and extradited to the United States to face charges including wire fraud, money laundering and conspiracy to commit fraud as part of an alleged scheme to defraud investors.
Prosecutors have alleged that Bankman-Fried used funds from investors for his own purposes to fund investments from his hedge fund, Alameda Research, buy real estate and to make political donations.
He pleaded not guilty to all charges earlier this month. He has said he has not stolen any money, and FTX’s customers should be able to get their money back despite the cryptocurrency exchange’s bankruptcy declaration in November.
Robinhood stock popped as much as 22%, following a Bloomberg report that Sam Bankman-Fried's FTX was exploring a buyout of the brokerage firm. Federal authorities have said Bankman-Fried used the money that investors intended to put into FTX to buy the Robinhood shares. Citing people with knowledge of the matter, Bloomberg reported that FTX is deliberating internally on how to buy Robinhood.
Leave a Reply