Robinhood is a discount brokerage with a website and mobile app that provides commission-free trading. Payments for order flow, a common but contentious practice in which a broker is compensated and receives other benefits in exchange for directing orders to different parties for trade execution, bring in a lot of money for the company. This income is referred to as “rebates from market makers and trading venues” by Robinhood. While payments for small retail trades are negligible, a company that directs billions of dollars in transactions to market makers can earn a lot of money. In 2019, the RobinHood app surpassed E-TRADE to become the largest US-based online stockbroker (1).
E-TRADE was the largest broker-dealer in terms of customer numbers until this year. With over 6 million users, Robinhood is the most popular mobile trading app today. Robinhood is a commission-free broker-dealer app that allows users to trade stocks, options, and ETFs. On the Robinhood App, you can also purchase and sell cryptocurrencies. Users of Robinhood can exchange cryptocurrencies such as Bitcoin, Ethereum, and Litecoin. Because there are no trading commissions on Robinhood, it is much easier for new traders to learn how to make money. The other positive side is that there is no requirement for a minimum deposit to begin trading with the Robinhood App.
The disadvantage is that they do not provide tax-advantaged accounts such as IRAs or other types of retirement accounts. Another disadvantage of Robinhood is that it does not currently offer automated trading. RobinHood was the first brokerage account to provide trading with no commissions. A stockbroker will usually charge you between 5 dollars and 15 dollars to buy stocks when you first start trading stocks. (2) The stockbroker will charge you another fee if you want to take earnings and sell. With Robinhood, however, this is not the case. Through Robinhood Gold, their premium account tier, users can also do margin trading with the Robinhood App.
According to independent analysis, transactions for order flow contributed an estimated 69 million in profit for Robinhood in 2018, up 227 percent from a year earlier year and accounting for more than 40 percent of its total income. In the second quarter of 2020, Robinhood made nearly 180 million in payments for order flow. A five-dollar monthly fee for voluntary membership in Robinhood Gold gives clients access to margin loans and investment tools; interest on uninvested cash; lending stocks bought on margin; and prices on purchases made with its debit card are among the other sources of revenue. Your money on RobinHood is protected up to 500k dollars by the SIPC so that you can trade with confidence.
Robinhood is also overseen by the Financial Industry Regulatory Authority, making it a safer platform to use. As a result, the investor’s money is well-protected in terms of security. Because Robinhood is a securities broker, it must be overseen by the Securities and Exchange Commission, based in the United States. In addition to being controlled by the Securities and Exchange Commission, Robinhood has other safeguards in place to protect your hard-earned money and personal information. Even though opening an account with Robinhood is not the same as opening a traditional stock brokerage account, they are obliged by law to collect some information from their customers (3).
However, the app is not without its disadvantages. Being an amateur trader and trading while out and about can be a formula for catastrophe. This is the only threat posed by the RobinHood App. This is because it claims to be the most popular investing app among millennials. We also know that many Millenials lack the financial literacy required to be effective stock traders. The incredible thing is that the app is convenient and straightforward to use, even for inexperienced stock traders (4).
How does it work?
Robinhood’s dedication to offering commission-free stock, choice, ETF, and cryptocurrency trades is commendable, and the savings for frequent traders are essential. This is essential for those who trade options. Robinhood is one of the few brokers that does not charge a commission per contract. Even so, since many big-name brokers now offer free trades, it’s a good idea to compare other features when choosing a broker. Robinhood also appears to be dedicated to keeping all investment costs to a minimum. The Clearing by Robinhood service enables the company to run its clearing system, lowering its account fees.
Like some of the other brokers, such as Interactive Brokers and Charles Schwab, Robinhood has begun offering fractional shares. That means you can buy a part of a share or claim as little as one dollar, even though the full proposals hundreds of dollars. This feature makes it much easier to create a diversified portfolio because you can buy many more companies even though you don’t have much money. Robinhood’s newest feature, recurring investments, is a perfect match for fractional trading. All you want to do is set a schedule and a dollar amount. Robinhood will spend the amount you specify when you specify (5).select this is a common feature among brokers; using it in conjunction with fractional shares is a unique advantage. When you buy by-the-share (rather than a dollar amount) for recurring investments, you’ll eventually end up with uninvested cash, but Robinhood has solved this problem. Also, fractional shares have allowed the company to offer a dividend reinvestment program, which it previously did not. This, like recurring investments, is an instrumental approach for building wealth over time. Robinhood appears to be attempting to compete with the big brokers by offering fractional shares, recurring investments, and a DRIP package now that free trades are commonplace.
Many central banks have instant verification with Robinhood, saving users the trouble of reporting micro-deposits to verify the information. Bank transfers of up to 1,000 dollars and proceeds from stock sales of up to 1,000 dollars are immediately available for investments. Deposits of 1,000 dollars or more will be processed in four to five business days. However, it’s worth noting that Robinhood has been the subject of complaints alleging that signing up is too simple. While it’s true that you can get started investing with Robinhood in no time, users should make sure they’re aware of the risks before doing so (6).
Though its services are still limited compared to those of other brokers, Robinhood has made strides to improve the tools and research available to customers, including analyst ratings, lists of top movers, earnings calendars, and links to earnings calls. Candlestick charts, based on data from other Robinhood clients, have created their universe of information. For example, investors can sort the platform’s 100 most popular stocks by analyst ratings, what’s rising over time or what’s falling, market cap, and price. They’ll also have access to data from the Wall Street Journal Markets, Reuters, Barron’s, and CNBC Business, among others (7).
Privacy and Controversies
The Securities and Exchange Commission charged Robinhood in December 2020 with misleading clients. Even after accounting for savings from Robinhood’s commission-free trade proposition, the SEC found that “Robinhood customers’ orders were delivered at prices that have been inferior to other dealers’ prices,” and that” and aggregate, those low prices deprived consumers of 34.1 million dollars. To settle the allegations, Robinhood agreed to pay 65 million dollars. In December 2020, the Commonwealth of Massachusetts accused Robinhood of using gamification methods to manipulate consumers and recruit novice investors to its platform. According to the complaint, many Robinhood customers were also given access to advanced and risky options trading products, despite claiming to have none or limited investment experience. Robinhood announced plans to recruit hundreds of new customer service members in August 2020.
During the influx of new investors in 2020 and 2021, Robinhood, like other brokers, suffered outages and other technical problems that caused service disruptions. Class-action lawsuits were filed in response to both the outages and the January 2021 limitations.
The Gamestop controversy
After deciding to freeze trades for GameStop, popular investing app Robinhood became the center of the debate. The video game retailer’s stock soared after Reddit traders started buying its stock in a frenzy. Since then, GameStop’s stock has plummeted, only to rise again. When Reddit users saw a chance to make money while also making a dig at Wall Street and hedge funds, Robinhood was instrumental. However, Robinhood made the unexpected decision to limit GameStop purchases, citing concerns about volatile stock and regulatory requirements. Robinhood has been scrutinized by its users, regulators, and lawmakers due to its trade frenzy role (8).
Users of Robinhood left a slew of negative app reviews on Google Play and Apple’s App Store. But there were so many one-star reviews, Google interfered and removed hundreds of millions. A lawsuit alleging Robinhood of “purposefully, willfully, and unlawfully deleting the stock ‘GME’ from its stock trading in the middle of an enormous stock rise robbed retail investors of the ability to invest in the open-market” was filed on Jan. 28 in the Southern District of New York. Several congress members had called for a hearing on Robinhood’s activities, including Rep. Alexandria Ocasio-Cortez, Rep. Rashida Tlaib, and Sen. Ted Cruz (9).
Robinhood has filed a private registration statement to go public, according to Bloomberg and Axios. Robinhood is a well-funded fintech firm based in the United States that offers customers zero-cost trading services. In recent quarters, private IPO filings have become more widespread, so Robinhood’s decision to file behind closed doors before disclosing its numbers to the public is unsurprising. The fact that it has filed privately, on the other hand, suggests that the company is closer to going public than we would have thought. Robinhood has been rumored to be planning an IPO for 2021.
Despite recent controversies, there are many reasons why Robinhood may be interested in a public debut shortly. No amount of time in front of Congress, negative publicity from a user’s suicide, or SEC settlements will change the fact that today’s stock market favors growth, which the company has plenty of. Or that public investors have reacted positively to recent IPOs as a group; it’s a good time to look for public-market liquidity. According to the company, this revenue source accounted for most of its top line, implying that PFOF growth is a fair comparison for its overall growth (10).
Investor interest in Robinhood appears to have survived a tumultuous start to 2021, which included the apparent use of Robinhood by several investors who stampeded into GameStop shares, putting short-sellers under pressure. In a regular SEC filing on Feb. 26, Robinhood revealed some of the ramifications. “The United States Attorney general’s Office for the Northern District of California, the Securities & Exchange Commission’s Division of Examinations, FINRA, the New York Attorney General’s Office, other state attorneys general offices, and a majority of state regulatory authorities, as well as several investigations based on particular complaints from customers,” according to the filing (11).