Robinhood: Building a Base, Ripping It Off

Robinhood, an app that recently clung to news headlines, moseyed its way into the competitive brokerage industry by opening up the market to the common user. Customarily, platforms that facilitate real-time stock trades charge their users a commission for every transaction. Robinhood, however, lets its users buy and sell without any fees. Its sub-minute signup time and clean graphics appeal to the new generation of casual investors, swinging the elite hobby of stock trading into a viable side-hustle. When it hit the market, its mission to democratize finance resonated with everyday people, and it saw more daily average trades than any incumbent firm in the world in 2020.

Robinhood seemed to revolutionize access to a door that had been locked for decades: the stock market. That was until they were forced to choose between the common people who gave the application life and the hedge funders who still clasped the most financial clout.

In mid-January, users on Reddit and TikTok made a push to drive up the price of stocks like GameStop and AMC. By funneling money into these select stocks, these efforts artificially squeezed the shares to unforeseen prices, even though the companies these shares belonged to did not do anything to prompt growth. For hedge funds that shorted stocks like GameStop, meaning they bet against the stocks, the brisk price spurts indicated losses of hundreds of millions of dollars. To cash in on the exploding prices, many first-timers turned toward Robinhood. In a move that defied their mission to democratize investment, Robinhood prohibited its users from executing purchases on the “hot stocks'' shortly after they took off. With hundreds of thousands of investors relying on Robinhood to get in on the bubble, the spontaneous switch-off slowed the rise of popular stocks, leaving many feeling slighted by the company.

I was one of those slighted investors. I joined the craze not expecting to strike gold, but more so wanting to be a part of the Reddit-orchestrated movement that united my generation over undermining Wall Street. When Robinhood disabled buying stocks, my temporary earnings dissolved back to their starting place. I watched the same stocks that had just conquered the market on the back of Robinhood users plummet because of the same company’s regulations. Though I did not lose money, countless others were stripped of their potential profits, and many found themselves in the negative, losing their play money and even their savings.

Robinhood, which ascended into the industry thanks to average investors, should not be let off the hook for conveniently forgetting its mission of equalizing the industry. Most of its funding comes from top-dog investors like Citadel and Melvin Capital that were poised to lose money if dark horse stocks like GameStop continued to climb. Instead of standing by its base, Robinhood chose to cover its financial allies. Whether the motive was to bail out affiliates, or as Robinhood CEO Vlad Tenev put it, to “meet deposit obligations,” the result remains unchanged: thousands of everyday people got the short end of the stick.

The malpractice of Robinhood and its business model is only grazed by this isolated incident. After all, an app that is ad-free, provides commission-free trading, and offers a complimentary stock to new users sounds too good to be true. And that’s because it is. Robinhood makes money by selling its users’ order information to larger companies and firms before trades are executed in the app. This sharing of data allows firms like Citadel-Citadel Securities to then plan key decisions and base their trades on legal insider information. In fact, selling order information accounted for 70 percent of the platform’s revenue in the first quarter of 2020. While investors might be willing to forego their information for Robinhood’s benefits, Robinhood hides its business model in its branding. The Securities and Exchange Commission (SEC) fined Robinhood $65 million in December 2020 for issuing misleading statements about its revenue sources and omitting important information from its customers. In the same investigation, the SEC found that the app deprived its users of $34.1 million by not giving them the best possible price at the time for their trades. Robinhood sent stock orders to firms that would deliver the most profit to their company, not the firms that would most benefit their users.

Another threat is how the app can motivate inexperienced users to pour their money into the app with a simple swipe and tap. Its festive and sleek design makes the interface seem eerily similar to a game, except real money is at stake. One of Robinhood’s most successful campaigns was a referral program that gave new users a complimentary stock of up to $500 and generated a million-user waitlist before the platform even launched. However, opening the app was unnervingly similar to opening a chest in a video game, as it was accompanied by an animation and reminder that more referrals would equate to more free stocks. These addictive techniques bring the prospect of gambling to a generation that is already struggling with technology addiction. During my bout with Robinhood, I reached a point where I would revisit the app upwards of 10 times an hour. Within a week, my brain remembered where the app was located on my phone, and I could open it without looking. Just like gambling is dangerously addictive, Robinhood—sitting right at your fingertips—presents its own perils.

Additionally, the Robinhood app, though exceptional in retrieving new users, lacks in its customer support. Generally, customer support does not make or break a platform, but when naïve investors have money on the line as Robinhood cuts off stock purchasing, having a reliable means of contact is essential. When my account was restricted from purchasing, I tried to reach out to the support team for help. Their lack of a phone number forced me to go through their online support page that promised a response in three days. Two months afterward, I still have not received a response. My story does not even compare to the severe calamity that Robinhood’s lack of customer service has caused. Twenty-year-old Alex Kearns committed suicide after being unable to contact Robinhood upon being told he owed $730 thousand to the platform, causing him to believe he would be indebted to the company for the rest of his life. His family later learned that the message saying he owed nearly a million dollars was merely a glitch that was in the process of being fixed. Had this error been communicated to him, he would still be alive.

Robinhood is not the pioneer of financial democracy that it preaches to be. Ultimately, as it often does in the free market, profit has taken precedence over goodwill. Though this issue has been one of the few to bring Republicans and Democrats together, its congressional hearings might very well let Robinhood off the hook. As the people that Robinhood targets, we need to warn others of its troubles and reject the app. The app will not make your pockets bigger; it will say it is while stuffing its own.