When a Reddit communityto who had bet against GameStop shares, one app stood out as a weapon of choice: . Traders from the r/WallStreetBets forum used the fee-free stock-trading app and others like it to push shares of the beaten-down game retailer higher over the past few months, making short-selling hedge funds howl in pain.
The popularity of the app was evident on Wednesday, when Robinhood jumped to the top spot in Apple’s App Store and notched a record 2.6 million daily active users, according to data from tracking firm Apptopia.
A day later, however, Robinhood had fallen from favor with the group because it had a lawsuit seeking class-action status against Robinhood had been filed in New York. In a second blog post published Thursday afternoon, Robinhood said it would reopen limited trading of the stocks on Friday. But on Friday, without mentioning Robinhood by name, the it would “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”, along with some other active stocks, limiting users to closing out positions rather than opening new ones. That had traders screaming foul. Even before trading had closed on Thursday,
Here’s what you need to know about Robinhood, its past and recent controversies, and how it works.
Read more: GameStop stock spike lingo: This is what Reddit’s WallStreetBets vocabulary means
What is Robinhood?
Robinhood is a financial services company founded in 2013 for the purpose of democratizing the financial system, giving people the opportunity to make fee-free investments. Its main product is an app designed to make it easy buy and sell stocks without a financial broker or commissions. Robinhood also offers cash management accounts and cryptocurrency trading.
Some state regulators and academics have accused Robinhood of “gamifying” investing by doing things like rewarding you for making trades with a confetti animation. The app also lets you browse the 100 most-held stocks to determine what you might want to buy next. The company says those app elements are meant to draw in young investors from diverse backgrounds.
How does Robinhood work?
First, you need to download the Robinhood app for iOS or Android and create an account. New members who sign up through awill get one free stock added to their account to keep or sell. The app requires you to enter your social security number and address. You’ll also need to connect a bank account.
Inside the app, you can search for a stock and see price and activity stretching back five years. You’ll also see news stories and analyst ratings about the companies, as well as similar stocks that other people invest in. When you click Buy, you’ll have the option to pay for your purchase in shares or in dollars. You can also set up recurring investments and other instructions, such as price limits. Hit Review, swipe up and your stock has been purchased.
You might be wondering: If Robinhood is letting me buy and sell stocks without a fee, how does the company make money? Here’s where things get a bit complicated.
When you buy or sell stocks through Robinhood, the company doesn’t actually execute those trade requests. Instead, it routes the orders through a “market maker” (like Citadel Securities or Virtu) which in turn offers Robinhood a rebate. This is also called “payment for order flow.” The practice is common, though often criticized for lacking transparency. Among the concerns: who pays the broker and whether there are other benefits the broker gets for directing orders to market makers. For example, a broker could potentially direct orders to a specific market maker to make a larger cut, even if it isn’t in the investor’s best interest.
Bottom line? In exchange for a fee-free buying and selling experience for you, Robinhood is selling your order to another firm, and both make money off of it.
Why did Robinhood shut down trading in GameStop and AMC?
On Thursday, Robinhood (along with TD Ameritrade) began according to a blog post. (The other companies affected included AMC, Nokia and BlackBerry.)and other companies that Redditors had begun targeting because of “recent volatility,”
After this happened, GameStop and AMC stock class-action lawsuit was filed in the Southern District of New York against Robinhood for restricting trades. The complaint says the company “purposefully, willfully and knowingly” removed GameStop during its extraordinary run-up and “thereby deprived retail investors of the ability to invest in the open market.”. A
Robinhood didn’t immediately respond to a request for comment. But users quickly expressed their displeasure, flooding the Google Play Store with tens of thousands of bad reviews for the app. Google cleared out lots of the deliberate slams, which had temporarily brought the app’s overall rating down to one star.
In a second blog post published Thursday afternoon, Robinhood said it would allow limited buying in the affected securities on Friday. The company will continue to monitor the situation and adjust as needed, the post said.
“To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” the post said.
I heard that Robinhood got in trouble. What’s that about?
On Dec. 16, 2020, Massachusetts security regulators filed a complaint against Robinhood for 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.”
The next day, the SEC charged Robinhood for alleged “repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders.” That refers to the routing of order flow to market makers.
According to the SEC, between 2015 and 2018, Robinhood failed to disclose that it made money from payments for its order flow and that it executed orders at higher rates than its competitors, despite claiming it was offering prices that matched or beat its competitors. The SEC said the activity stripped customers of $34.1 million, even after adjusting for commission-free trades.
Robinhood agreed to pay $65 million to settle the charges.
On Friday, the SEC said it would “closely review” what happened during the GameStop stock drama this week, stating, “We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.” The organization did not mention Robinhood by name.
Are there any alternatives to Robinhood?
Several other apps perform a similar service to Robinhood, offering commission-free stock trading. These include:
TD Ameritrade: Named the best stock trading platform by both NerdWallet and StockBrokers, TD Ameritrade offers tools for both beginners and active traders. Like Robinhood, it features commission-free stock, ETF and options trades. It also .
WeBull: WeBull also offers commission-free trading of stocks, ETFs and options. While this app temporarily restricted trades in GameStop and AMC on Thursday, those restrictions have since been lifted.
Cash App: Cash App allows you to send and receive money, similar to Venmo. But it also has an investing option, allowing commission-free stock trades similar to Robinhood. It’s a bit more of a beginner’s platform, with fewer features than Robinhood. It also gives you the ability to buy fractional shares, which many other platforms don’t. The app is owned by Square and CEO Jack Dorsey.
Fidelity: Fidelity is a more traditional online broker that offers commission-free trades, research and strong trading tools, according to StockBrokers, which named it the best trading platform for everyday investors.
E*Trade: One of the first online brokerages in the US, E*Trade also offers commission-free trades, and a strong selection of trading tools. StockBrokers named it the top web trading platform and the best trader app.
You can also check out CNET’s, and .