For a long time, people have associated the words “trader” and “investor” with men in suits staring at multiple monitors’ worth of numbers, working feverishly to calculate the next big move. In a similar vein, much of the population has shied away from the stock market as a means to build wealth, often because they view it as too risky, difficult, or boring. The popularization of smartphones during the 2010’s has turned this paradigm, along with many others, on its head. With an internet traffic growth of 222% from 2013 to 2019, designers and developers are now able to reach wider audiences with ease. In the wake of Angry Birds and Snapchat came Robinhood, an unassuming mobile trading platform with only one goal in mind -- to make trading so easy as to be instinctual. The idea was that if you know how to operate a smartphone, you know how to trade.
Interface
This idea is reflected in Robinhood’s wholly minimalistic interface. Starting from the home screen, the user’s account value is displayed at the top, which is a useful and oftentimes addicting number to track throughout the day. The account summary is followed by a default stock watchlist, from where one can immediately tap on an entry to go to another screen. Here, we see the company name, the share price, and a minimalistic chart that shows the general movement of the price over a selection of timeframes. Statistical information about individual stocks/ETFs does not go very far beyond what is required to get approval from the SEC. Surprisingly, the news section provides a satisfactory consolidation of recent stories and analyst reports which are useful for quick research. At the bottom lies a large button labeled “Trade.” When users tap on it, they are taken to the trade confirmation screen, where they enter their desired number of shares and entry method before swiping up to submit.
Going Commission-free
Besides its user interface, the most attractive feature Robinhood has to offer is its commission-free trading. For most of stock market history, traders had to pay a flat commission fee, either to a stock broker directly or to a traditional online brokerage to place an order. Not only is this a hassle for novice traders, but many people do not have the capital to mitigate the larger upfront cost. The smaller the trade amount, the greater the percentage of the total cost this commission takes up, and the less sense it makes to enter a trade.
With the introduction of commission-free trading, Robinhood changed the business model of online brokerages. It turns out that brokerages don’t rely solely on commissions to make money, but have other means as well - such as interest on margin loans. By sacrificing revenue per trade for pure trade volume, Robinhood invited new and experienced traders alike to migrate to a platform where they can buy and sell to their heart’s content. Being a first mover in this space gave Robinhood an advantage compared to other online brokers. Even in 2019, when major brokerages like TD Ameritrade and Charles Schwab followed suit to a commission-free model, Robinhood continued to hold on to its 10 million strong user base.
A caveat about Robinhood orders is that their execution prices are almost always higher than those of competing platforms. This means that the user will pay a little more per order than if they made the same order at the same time on a competing platform. Sometimes, Robinhood receives payments from market maker firms in exchange for routing orders to them even if it means little price improvement for the customer. This concept is called “payment for order flow” and was a subject for controversy when Robinhood was sued in December of 2020. This calls into question the true cost of commission-free trading as envisioned by Robinhood.
Technical Problems
Many users have lodged complaints about the app over its lifetime, but even early on, many saw through Robinhood’s novel user interface and pointed out some major operational limitations of the app. The first obvious issue stemmed directly from the UI design: interface is too simple at times and therefore does not provide enough information for many users to make informed trades. Consequently, users often resort to PC applications or other mobile apps in order to gather the information they need, which partially defeats the purpose of having a streamlined UI flow.
Performance has been described as inconsistent at best. Stock prices and charts periodically fail to update in real time. Trading services that are supposed to be running promptly at 9:30 EST are often bogged down by overloaded servers during the first few minutes after the opening bell, putting users at a disadvantage for time-sensitive trading. To make matters worse, there have been several noteworthy systemwide outages during times of peak volatility at the beginning of the COVID-19 pandemic. Both short term traders and long term investors were impacted, sometimes losing thousands of dollars from their accounts because they were unable to close out of their stock positions.
Popularization of Options Trading
Robinhood’s options trading platform is popular among eager young traders due to its almost nonexistent requirements for proof of experience. While this gives options traders a sense of newfound freedom, such freedom is often undermined by Robinhood’s subpar services. The general performance issues mentioned before apply here and then some: Robinhood’s option pricing data updates at irregular intervals, and the order process is slow to execute. However, these issues pale in comparison to Robinhood’s more egregious violations of their commitment to customers. In the summer of 2020, twenty year old Alex Kearns committed suicide not long after entering an options trade. In short, he saw a large negative balance in excess of $700k on his account and immediately believed it before doing research on the theoretical maximum loss of his trade. In reality, this negative balance was an intermediate value that did not reflect the would-be final state of his account. While there was no technical error on Robinhood’s part, there is an ethical imperative to immediately reassure users through the app interface, especially when much of Robinhood’s target audience is inexperienced. For example, during weekends, some brokerages explicitly disclose that options transactions are pending and may hide the outcome of options trades until everything is settled. Others provide phone support.
Customer Support
On the topic of support, Robinhood is unique in that it is the only major broker that does not offer live phone support. They have a phone number, but calling it simply returns an automated response redirecting users to their online support center, which has a dedicated user flow for submitting support tickets. The response time is usually within a day, which is acceptable, but having a human to talk to would resolve urgent issues much faster and at the very least give customers a sense of security. Regardless, this is the model that Robinhood has created, likely because of their reliance on technology to pursue lower costs. Their reinvention of customer service reflects their product design philosophy of simplicity and automation.
Recent Events
At the beginning of 2021, an online Reddit forum by the name of WallStreetBets started a widespread initiative targeting large hedge funds by mass-purchasing a few stocks that were heavily shorted. Their goal was to force the funds to close out of their positions at a large loss by squeezing them out of their short positions. The funds borrowed shares to sell them at present market value, hoping that the price would go down in the future so they could make a profit. However, if the price increases, the funds will have to close their positions by buying back the borrowed shares in order to avoid the risk of losing all their assets, thus further increasing the price. As a result, one affected company, Gamestop (GME), has seen its stock rise to over ten times its previous baseline value. Many WallStreetBets users posted thousands of dollars in gains. The whole event made national headlines for a week, but this incredible movement was dampened by Robinhood taking matters into their own hands. On January 28th, 2021, Robinhood restricted users from buying GME. Because the users who frequent WallStreetBets are young, many of them use Robinhood to trade stocks and options, so this restriction impacted over half of its community. This allowed the hedge funds to recover and limit their losses, and the price of GME subsequently decreased in the coming days.
Robinhood argued that they did this to preserve stability in the financial markets, but many people, including notable congressional members and CEOs, called out the hypocrisy of protecting Wall Street firms over retail traders. If the firms can coordinate with one another and move massive amounts of capital through the stock market, it would set a double standard to prevent retail traders from doing the same. The Gamestop debacle drew additional scrutiny upon Robinhood’s product positioning. If the goal of their app was to make the stock market accessible to everyone, then they should not use their popularity as a means to gain control over their customers. This goes against the idea of a free platform that Robinhood was often praised for having.
Verdict
To be devil’s advocate, Robinhood was most likely not maliciously conspiring against its own user base. Due to lack of planning, Robinhood (and a few other brokers) were caught off guard by the GME movement and did not have the funds to cover the settlement for those trades.
This brings our attention to the real problem that many people have with Robinhood. It has repeatedly failed to recognize the significance of customer relationship management (CRM). During the outages, during the suicide of Kearns, and during the GME short squeeze, little care was taken to forge a constructive relationship with users. People felt that their voices were not heard and that Robinhood did not give a sufficient response during times of confusion. The app feels very impersonal, and so does its customer service. Even if a company has a great product, it still needs to provide adequate customer support to address the needs of a large user base. As it stands today, Robinhood’s platform is inviting but at the same time unforgiving to aspiring traders who may have needed additional support.
Either because of personal experiences or recent controversies, some users are turning to other trading platforms. Most online brokers now offer commission-free trades, and platforms like Webull and M1 Finance are bringing their own innovative ideas to the world of FinTech. These alternatives offer more complete market data, better customer support, and features that enable users to build their own community within the apps themselves. That is not to say that they are without their own limitations, though, and none of them are going to dislodge Robinhood from its top spot any time soon.
Robinhood is here to stay purely by virtue of being the first company to break ground in an otherwise incremental industry. To every new trader out there, don’t be afraid to try the app. Just do your research, limit your risk, and prepare for the unexpected.
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