Robinhood is caught in the crosshairs of WallStreetBets, a sub-Reddit forum for speculative investing which has chosen to take on the largest Wall Street hedge funds in an effort to short squeeze them out of positions in companies like GameStop.
Here's what you need to know about what Robinhood and where it stands in its fight with amateur investors:
What is Robinhood?
Robinhood, founded in 2013 by Vladimir Tenev and Baiju Bhatt, is a financial services company whose mission is to "democratize finance for all" by offering commission-free trading on individual companies, options and ETFs. In addition, the company also offers cash management accounts and cryptocurrency trading.
The app can be downloaded through iOS or Android, and users who create an account will need to enter their Social Security number and address as well as connect a bank account. New members who sign up through a promotional page can also receive one free stock that they can either keep or sell.
Within the app, users can search for a stock and see prices and activity dating back as far as five years. In addition, users can see news stories and analyst ratings related to the companies they're interested in, as well as similar stocks to invest in. Every purchase can be made in shares or dollars, and users can add other instructions including price limits or recurring investments.
As of 2020, the platform had 13 million users, according to the New York TImes.
How does Robinhood make revenue?
According to its website, Robinhood makes revenue through rebates from market makers, such as Citadel Securities, and trading venues, its Gold membership program, stock loan income, income from uninvested cash and cash management.
When users buy and sell stocks, ETFs, and options through their brokerage account, the orders are sent to market makers for execution. Those market makers then offer rebates to brokerages that are typically better priced than exchanges. In addition, Robinhood Crypto receives volume rebates from trading venues.
The Gold program offers a suite of powerful investing tools, access to Morningstar research reports and NASDAQ Level II Market Data, larger instant deposits and margin investing. Members of the Gold Program pay a $5 service fee, and those who use more than $1,000 of margin will pay 2.5% in yearly interest on their settle margin amount.
Robinhood Securities also earns income from lending margin securities to counterparties as well as from uninvested cash. Robinhood deposits the uninvested cash in interest-bearing bank accounts.
In addition, Robinhood receives an interchange fee from Sutton Bank for issuing the Robinhood debit card, offered in connection with a brokerage account. Robinhood Securities and Robinhood Financial also receive fees from program banks for sweeping funds to them.
Why did Robinhood restrict trading?
On Thursday, Robinhood began restricting trades of GameStop, AMC Entertainment Holdings, American Airlines, BlackBerry Ltd., Bed Bath & Beyond Inc., Express Inc., Koss Corp., Naked Brand Group, Nokia Corp, Trivago, and Tootsie Roll Industries, Inc. due to "recent volatility", according to a blog post.
The move prevents traders from initiating new positions in shares of those companies and only allows them to sell existing holdings. In addition, the company raised its margin requirements for certain securities.
The decision came after members of a Reddit group called WallStreetBets, a speculative investing discussion forum, banded together to squeeze short-sellers out of their positions.
The first lawsuit filed in the Southern District Court of New York alleges that Robinhood "purposefully, willingly, and knowingly" restricted certain securities transactions, including GameStop. The other filed in the Northern District Court of Illinois alleges that the app manipulated its platform.
Late Thursday, Robinhood co-founder Vladimir Tenev said the company will allow limited buys of the restricted securities, noting it will "continue to monitor the situation and make adjustments as needed."
Tenev said that the investment app restricted the stocks because it has many financial requirements, including "SEC net capital obligations and clearing house deposits", which fluctuate based on market volatility.
"These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today," he added. "To be clear, this decision was not made on the direction of any market maker we route to or other market participants."
His comments came amid reports that major hedge funds with ties to Robinhood, including Sequoia Capital and Citadel Securities, were involved in the decision to halt trading. Both firms have denied involvement.
Has Robinhood gotten into trouble before?
Robinhood has previously run into trouble after Massachusetts regulators filed a complaint against the company in December for alleged violations of state law, including its "aggressive tactics to attract new, often inexperienced, investors" and its "use of strategies such as gamification to encourage and entice continuous and repetitive use of its trading application."
Robinhood was also fined $1.25 million by the Financial Industry Regulatory Authority for best execution violations related to its customers’ equity orders and related supervisory failures that spanned from October 2016 to November 2017. As part of the settlement, Robinhood agreed to retain an independent consultant to conduct a comprehensive review of the firm’s systems and procedures related to best execution.
In addition, the SEC launched its own investigation into Robinhood, charging the company with "misleading" investors on how it made money and for failing to get the best price for customer orders. Robinhood has not admitted or denied wrongdoing, but it agreed to pay a $65 million settlement.
What's next for Robinhood?
Looking ahead, Congress could potentially get involved in the restricted stock trade fiasco, after the suggestion for a House Financial Services Committee investigation into the matter was floated by Rep. Alexandria Ocasio-Cortez, D-N.Y.
"This is unacceptable. We now need to know more about@RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit," Ocasio-Cortez wrote. "As a member of the Financial Services Cmte, I’d support a hearing if necessary."
She also said that "inquiries into freezes should not be limited solely to Robinhood." Other competitors who restricted securities include TD Ameritrade, Charles Schwabb, WeBull, E*TRADE, and Interactive Brokers.
FOX Business' Charlie Gasparino also reported Thursday that the SEC is looking into a potential market manipulation case involving the surge of GameStop stock and the Reddit forum WallStreetBets, where retail investors discussed the massive short squeeze. In addition, New York Attorney General Leticia James said on Thursday that she would review the recent activity on Robinhood related to the restricted stock trades.