Robin Hood, the legendary outlaw from English folklore, is said to have robbed from the rich and given to the poor. The timeless tale has been carried through centuries of history, leaving traces of its infamy in all corners of our society. It’s year 2021- and here we are referencing the story yet again.
The Robinhood website promises access for everyone to the financial markets, not just the wealthy (Robinhood). With that message at the forefront, the company has come under serious fire this month for shutting down trading of several stocks like $GME (GameStop) and $AMC (AMC) that were the target of Reddit users on the subpage “wallstreetbets”. Facing what seems to be a power struggle between large hedge funds and the average stock trader, Robinhood’s loyalties are being tested as there is talk of SEC investigations and class-action suits.
Robinhood Markets, Inc. is headquartered in Silicon Valley, California. The company was founded by Stanford graduates Vladimir Tenev and Baiju Bhatt, who previously worked with high-frequency trading platforms on Wall Street.
Robinhood generates revenue in these three main ways: lending margin securities, interest earned on customers’ cash balances, and selling order information to high-frequency traders. (Robinhood) Selling order information to high-frequency traders is also known as “payment for order flow.” Investopedia defines this as “the compensation and benefit a brokerage firm receives for directing orders to different parties for trade execution.” For example, Robinhood receives payments from firms like Citadel Securities for routing and executing its users’ orders.
In December 2019, the Financial Industry Regulatory Authority (FINRA) fined Robinhood $1.25 million for best execution violations. In using the payment for order flow model, Robinhood failed to ensure that their customers were the receiving the highest-quality executions on their orders.
The SEC found that Robinhood failed to fully disclose its main source of income on its website until 2018. Until 2018, their website only listed two revenue sources, not including payment for order flow. In addition to failing to disclose this information, they were also fined gain for best execution violations. This time- the SEC Enforcement Division asserted that customers lost tens of millions of dollars do to this. Robinhood agreed to pay $65 million to settle these charges.
Some of the more notable investors include:
D1 Capital Partners, a hedge Fund that lost around 20% this during this shake-up, making it one of the biggest victims yet.
DST Global – Yuri Milner, a Russian oligarch who has been reported to have had strong Kremlin backing for his investments in Facebook and Twitter.
Josh Kushner – Brother of Jared Kushner
Citadel Founder Ken Griffin, who bailed out Melvin Capital Management after the GameStop surge.
At the end of the story, is the Robinhood app really the “Robin Hood” of the stock market? Or will it favor its hedge fund investors in the end and leave the people it aimed to help high and dry?
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