Robinhood is Robbing Who in 2021?

Robinhood has been in hot water for what has felt like all of 2021. Whether it be their controversial decision to freeze GameStop trades and only allow shares to be sold, restricting even more stocks such as NAKD, AMC, and NOK while competitors like TD Ameritrade or Fidelity did not restrict as many, and the Dogecoin boom breaking their app.

Such an exhaustive list is obviously going to leave to a leave bad taste in a lot of users' mouths. As someone who sat on the sidelines and witnessed the resentment of Robinhood spew, I wanted to explain the situation to those who would be confused.

Understandably, Robinhood users became frustrated as GameStop was soaring by upwards of 14,300% higher over the past few months, even reaching upwards of $483 per share. A lot of this frustration brew inside the finance-meme subreddit r/WallStreeBets, where a majority of its now 10 million subscriber base use Robinhood. The subreddit’s Twitter account stated, “Individual investors are being stripped of their ability to trade on [the Robinhood app]," the tweet said. "Meanwhile, hedge funds and institutional investors can continue to trade as normal." Robinhood users exhibited their frustration by inundating the Google Play Store and Apple’s App Store with negative reviews, to such an extent that Google had to directly intervene by removing ten of thousands of negative reviews. More significantly, a class-action lawsuit was filed in the Southern District of New York against Robinhood for restricting trades. The complaint details that the company "purposefully, willfully and knowingly" removed GameStop during its momentous run-up and "thereby deprived retail investors of the ability to invest in the open market." The situation got so out of hand that even members of Congress weighed in on the issue, both Republicans and Democrats united in support for a hearing on Robinhood’s decision to restrict trading. Not much else was brought out from the situation: a hearing did occur, but with little resolution. It seems that Robinhood only suffered from a short term hit in reputation, with no clear signs of how their user base will see the platform in the long run.

In the middle of April, once again Robinhood would upset a significant portion of its user base. On April 15^th, as Dogecoin rallied past 25 cents for the first time, excessive demand put pressure on Robinhood’s crypto trading systems. On a Friday blog post, the company explained that as orders were being processed, "one of our systems failed, which brought down our crypto order system." Everything was fixed within two hours, or so it would seem. Unfortunately, on Friday, as more investors wanted a slice of the Dogecoin pie, Robinhood experienced further, "sporadic crypto order failures and delayed notification for some customers." That day, Dogecoin had reached an all-time high of 40 cents, up more than 6000% since the start of the year, according to CoinMarketCap. On that Friday trading volume rose nearly 300%. Robinhood users were obviously frustrated that they couldn’t take advantage of such a lucrative opportunity. Despite the issue with Dogecoin being completely different with what occurred in January with stocks like GameStop, concerns over retail investors’ access to equity markets were reignited. Seemingly, in this situation there was no review bomb parade or a class-action lawsuit. This is possibly due to the fact that Robinhood was unprepared for the deluge of new crypto buyers, thus crashing their crypto trading systems. Unlike, in the GameStop situation where the company had a more active role in limiting trades due to the GameStop demand overstepping their current liquidity.

There are two main instances in which Robinhood angered their user-base. First,  and most well known, is the whole fiasco on January 28^th, where they restricted trades on numerous stocks, especially well-known stocks that were highly speculative at the time like GameStop and AMC. These stocks were specifically restricted because of high volatility. A blog post Robinhood explained that, “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK.” On January 29^th, Robinhood explained that it needed to maintain a substantial amount of cash on hand in order to process all the trades happening through its clearinghouse. A clearinghouse is a financial institution whose main role is to facilitate the exchange of payments, securities, or derivatives transactions. Its purpose is to reduce the risk of a member firm failing to honor its trade settlement obligations. Back to the topic at hand, Robinhood CEO, Vladimir Tenev went to further explain that the NSCC (National Securities Clearing Commission) gave them a file deposit asking for $3 billion in deposits to facilitate the trade, but Robinhood just raised $2 billion in capital. "We had no choice in this case," he said. "We had to conform to our regulatory capital requirements." In response to this, Robinhood has worked with the agency to decrease the amount of funds needed, also Robinhood has raised $1 billion in emergency capital to make sure customers' trades can happen. 

Despite the year still not even being half way over, Robinhood has sparked controversy on more than one occasion. Robinhood, as can be seen, has quite a lot to improve on in meeting their consumers’ expectations, and it remains to be seen if they can meet them.