Robinhood: What to know about the app at the heart of GameStop’s drama

When a Reddit community United for punish Wall Street investors who bet against GameStop shares, an app stood out as the weapon of his choice: Robinhood. Traders on the r / WallStreetBets forum used the free stock trading app and others like it to push the stock of the defeated game retailer 14,300% higher in recent months, causing short selling hedge funds to howl in pain.

The app’s popularity was evident on Wednesday, when Robinhood jumped to number one on the Apple App Store and hit a record 2.6 million daily active users, according to data from tracking company Apptopia.

A day later, however, Robinhood fell out of favor with the group because he had restricted some activity, such as GameStop trading, along with some other active actions, limiting users to close positions instead of opening new ones. This made traders scream. Even before negotiations closed on Thursday, a lawsuit seeking the status of class action against Robinhood was filed in New York. In a second blog post published on Thursday afternoon, Robinhood said he would reopen limited stock trading on Friday. But on Friday, not to mention Robinhood’s name, the Securities and Exchange Commission said it would “closely review actions taken by regulated entities that may harm investors or unduly inhibit their ability to trade certain securities.”

Here’s what you need to know about Robinhood, his past and recent controversies and how he works.

Read More: GameStop stock-up language: this is what Reddit’s WallStreetBets vocabulary means

What is Robinhood?

Robinhood is a financial services company founded in 2013 with the aim of democratizing the financial system, giving people the opportunity to make investments without fees. Its main product is an application developed to facilitate the purchase and sale of shares without financial broker or commissions. Robinhood also offers cash management accounts and cryptocurrency trading.

Some state and academic regulators have accused Robinhood of “gamifying” investments, doing things like rewarding him for doing business with a confetti animation. The app also allows you to browse the 100 best-selling stocks to determine what you want to buy next. The company claims that these elements of the application are aimed at attracting young investors from different 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 a promotional page you will have free stock added to your account to maintain or sell. The application requires you to enter your social security number and address. You will also need to connect a bank account.

Within the app, you can search for a stock and see the price and activity from five years ago. You’ll also see news and analyst reviews about companies, as well as similar stocks in which other people invest. When you click Buy, you will have the option to pay for the purchase in shares or in dollars. You can also set up recurring investments and other instructions, such as price limits. Click Review, swipe up and your stock has been purchased.

You may be asking yourself: if Robinhood is allowing me to buy and sell shares without a fee, how does the company make money? This is where things get a little complicated.

When you buy or sell shares through Robinhood, the company does not execute these trading requests. Instead, he routes orders through a “market maker” (such as Citadel Securities or Virtu), which in turn offers Robinhood a discount. This is also called “order flow payment”. The practice is common, though often criticized for lack of transparency. Among the concerns: who pays the broker and whether there are other benefits that the broker gets from directing orders to market makers. For example, a broker could potentially direct orders to a specific market maker to make a bigger cut, even if it is not in the investor’s interest.

Result? In exchange for an experience of buying and selling without fees for you, Robinhood is selling his order to another company and both make money from it.

Why did Robinhood end the GameStop and AMC negotiations?

On Thursday, Robinhood (along with TD Ameritrade) started restricting some GameStop transactions and other companies that Redditors started targeting because of “recent volatility”, according to a blog post. (The other affected companies include AMC, Nokia and BlackBerry.)

After that happened, GameStop and AMC stock fell dramatically. A class action lawsuit was filed in the Southern District of New York against Robinhood for restricting trade. The complaint says that the company “purposely, intentionally and knowingly” removed GameStop during its extraordinary run and “thereby deprived retail investors of the ability to invest in the open market”.

Robinhood did not immediately respond to a request for comment. But users quickly expressed their discontent, flooding the Google Play Store with tens of thousands of negative reviews about the app. Google eliminated many of the deliberate attacks, which temporarily lowered the app’s overall rating to a star.

Congress members also participated. Democratic representatives. Alexandria Ocasio-Cortez and Rashida Tlaib joined the republican senator Ted Cruz Tweet support for a hearing on Robinhood’s decision to restrict trading.

In a second blog post published on Thursday afternoon, Robinhood said he would allow limited purchase of the affected titles 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 it was not made according to the market makers we target,” said the post.

I heard that Robinhood had problems. What is this about?

On December 16, 2020, Massachusetts security regulators filed a complaint against Robinhood for violations of state law, including his “aggressive tactics to attract new, often inexperienced investors,” and his “use of strategies such as gamification to encourage and attract repetitive use of your trading app. ”

The next day, the SEC accused Robinhood for alleged “repeated distortions that did not reveal the payment company’s receipt from trade firms for routing customer orders to them and for failing to fulfill its duty to seek the best reasonably available terms for executing orders of customers. “This refers to routing the order flow to market makers.

According to the SEC, between 2015 and 2018, Robinhood did not disclose that it made money from its order flow payments and that it executed orders at higher rates than its competitors, despite claiming it was offering prices that equaled or exceeded your competitors. The SEC said the activity had earned customers $ 34.1 million, even after adjusting for commission-free negotiations.

Robinhood agreed to pay $ 65 million to settle the charges.

On Friday, the SEC said it would “closely review” what happened during GameStop’s stock drama this week, stating: “We will act to protect retail investors when the facts demonstrate abusive or manipulative commercial activity prohibited by law federal bonds. “The organization did not mention Robinhood by name.

Are there alternatives to Robinhood?

Several other applications run a service similar to Robinhood, offering stock trading without a commission. These include:

TD Ameritrade: Voted the best stock trading platform by NerdWallet and StockBrokers, TD Ameritrade offers tools for beginners and active traders. Like Robinhood, he offers stock, ETF and options trading without commissions. This too restricted some GameStop and AMC negotiations.

WeBull: WeBull also offers stock trading, ETFs and options without fees. Although this app temporarily restricted trading on GameStop and AMC on Thursday, those restrictions have been lifted.

Cash App: Cash App allows you to send and receive money, similar to Venmo. But it also has an investment option, allowing stock trading without commissions similar to Robinhood. It is a little more platform for beginners, with less resources than Robinhood. It also offers the ability to buy fractional shares, which many other platforms lack. The app is owned by Square and CEO Jack Dorsey.

Loyalty: Fidelity is a more traditional online brokerage that offers commission-free trading, research and strong trading tools, according to StockBrokers, which considered it the best trading platform for ordinary investors.

E * Trade: One of the first online brokers in the United States, E * Trade also offers commission-free trading and a large selection of trading tools. StockBrokers considered it the best trading platform on the web and the best trader app.

You can also check CNET’s tips to start investingand the best robot advisors.