We recently found out that the stock trading app Robinhood is facing more than 30 lawsuits because of the restrictions set on several stocks. More than 30 parties across 10 states have filed a lawsuit against the company. They allege that users lost millions of dollars because of the restrictions of shares like GameStop and AMC Theatres.
During the freeze, the Robinhood users were not able to trade on several stocks. Here are a few examples: GameStop ($GME) as well as AMC ($AMC), BlackBerry ($BB), Bed Bath & Beyond ($BBBY), and Nokia ($NOK). Later, the company published an article to justify the actions. They called it a “risk-management decision” undertaken in the face of “extraordinary circumstances”. Also, the company said the restrictions were necessary to meet requirements.
Most of the app users didn’t accept the explanation, so they decided to take them to court. One user by the name of Brendon Nelson filed the first lawsuit in New York state. He accused Robinhood of negligence and breaching of contract and its fiduciary duty. Then other suits followed. New Jersey, California, Texas, Florida, and other states.
One demand was that courts have to force Robinhood to reinstate full access to the trading GameStop stock. Also, the company has to pay financial damages for any users who were not able to trade GameStop stocks during the freeze.
However, the users are not the only ones unhappy with Robinhood’s decision. Rep. Alexandria Ocasio-Cortez and others are calling to investigate the company.
This is unacceptable.— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
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.
As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
As a result, on February 18th, the CEO of the company, Vladimir Tenev is expected to testify in front of the House Financial Services Committee.
Who is Vladimir Tenev
Vlad Tenev, 35, is the co-founder and co-CEO of Robinhood. He is married to Celina Tenev, who went to Stanford University for four years at the School of Medicine.
Born in Bulgaria, Vlad migrated to America with his parents when he was 5 years old. He grew up in Washington D.C. and studied mathematics at Stanford University. He went on to UCLA to earn a Ph.D. in mathematics but later dropped out.
Although both of Tenev’s parents worked for the World Bank, the young enterprising mathematician opted instead for entrepreneurship.
So in 2013, together with his friend Baiju Bhatt, they founded Robinhood. The company had two key goals: no commissions and no minimum balances.
How does Robinhood make money?
Robinhood provides commission-free access to the stock markets via their mobile app and website. That means that anyone can invest anywhere, anytime, and with any amount. You can easily trade stocks, options, ETFs, and cryptocurrency for free.
If everything is free, how does the company make a profit?
Robinhood generates significant income from payments for order flow (PFOF) just like any other retail brokerage firm. This is a controversial practice where a brokerage firm gets compensation and benefits for directing orders to third parties or market makers (like knight capital & Citidel) for execution.
The market makers make their profit on spreads. For example, stock A is quoted $20(bid):$20.1(ask). The market maker will try to buy at $20, and sell at $20.1, and they will send part of the $0.1 profit back to the discount brokers for sending the orders their way. This is called payment for order flow.