Robinhood Markets has catapulted ahead of its online brokerage rivals with a smartphone app that has attracted an army of young investors. Yet with the company's rise has come a litany of problems: trading outages, angry customers and regulatory probes.
Over the first half of the year, U.S. consumer protection agencies received more than 400 complaints about Robinhood — roughly four times more than competitors like Charles Schwab Corp. and Fidelity Investments' brokerage unit.
The grievances, obtained via a public records request to the Federal Trade Commission, depict novice investors in over their heads, struggling to understand why they've lost money on stock options or had shares liquidated to pay off margin loans.
Among the setbacks highlighted in the documents is a pivotal breakdown in early March when Robinhood stopped working for more than a day, just as markets were swinging wildly on coronavirus fears. Some complainants reported losing thousands of dollars because they couldn't sell holdings. Others bemoaned the missed opportunity to profit.
Most disturbing to the investors was that as the chaos reigned, there was nobody at Robinhood to call for assistance. Many couldn't even find a listed phone number.
"It just says to submit an email," one investor in Atlanta fumed after spending a week trying to get help from the firm's customer service department. "This company's negligence cost me $6,000." Another, from North Dartmouth, Massachusetts, who estimated losing $20,000, couldn't reach a live person to close an account. "I can't make trades, can't take my own money and can't leave their service."
A company spokesman said Robinhood takes seriously its responsibilities to clients, especially when so many investors are making their initial forays into trading.
Though the firm doesn't disclose exact figures, it has doubled its customer service representatives this year, and is hiring hundreds more, he said. After the March trading glitch, the company's engineering team has strengthened its platform and improved reliability, the spokesman said, adding that affected customers were given compensation on a case-by-case basis.
Rapid Growth
Offering commission-free trades through technology that can seem more like a video game than a financial tool, Robinhood signed on more than 3 million clients in the first four months of 2020 and has become a symbol of U.S. investors' resilience during the pandemic.
The rapid growth, fueled by quarantined millennials, is also drawing attention in Washington where market watchdogs and politicians are suddenly getting an earful about the broker.
Some regulators have privately vented that they feel like they have become Robinhood's de facto customer-service line because so many of the firm's clients contact them after failing to reach anyone at the company, said people with direct knowledge of the discussions.
Robinhood's two main overseers, the Securities and Exchange Commission and the Financial Industry Regulatory Authority, are now investigating the company's handling of the March outage, according to people familiar with the probe who asked not to be identified because it isn't public. One focus is the lack of customer response.
The SEC and Finra declined to comment on any investigations, as did the Robinhood spokesman.
If the government scrutiny — which also includes inquiries from lawmakers — escalates, the risks to Robinhood are substantial. The company was recently valued at $11.2 billion after a round of venture capital funding. More trouble could endanger a potential initial public offering, something Wall Street has long expected, or a sale to a big bank or tech firm.
Hiring Lobbyists
Moving quickly to tamp down the furor, Robinhood recently hired Dan Gallagher, a former Republican SEC commissioner steeped in the culture of federal regulation, as its top lawyer. The company is also opening an office in the nation's capital and hiring lobbyists to aggressively make its case before Congress and federal agencies.
"Robinhood is empowering a whole new class of investors, and I think it is critical for us to have a voice in Washington to advocate for our customers and fairer markets," Gallagher said in an interview.
Founded seven years ago, Menlo Park, California-based Robinhood bills itself as "investing for everyone." It has sought to disrupt the often staid brokerage industry by making investing cheap, easy and, yes, fun. Trades can be placed with a quick swipe and may be heralded with a burst of virtual confetti.
More than 13 million people have opened Robinhood accounts, which don't have minimum balance requirements. The median age of the firm's customers is 31, and nearly half say they're first-time investors.
Even though its clients tend to be unsophisticated traders, the firm has expanded into options and cryptocurrencies, products that are riskier than stocks. It also offers a premium package that costs $5 a month and gives investors access to research as well as the ability to buy securities with borrowed money, which can amplify gains or losses.
Robinhood facilitates trades for investors but doesn't offer stock recommendations, allowing it to escape some of the onerous regulation faced by competitors with a lot of human employees. The company makes the bulk of its money by selling customer orders to Wall Street trading firms, a common industry practice that existed long before Robinhood.
Trader's Suicide
