James Martin / CNET
When a Reddit community teamed up on Wall Street investors punished betting on GameStop shares, one app was a weapon of choice: Robinhood. Traders from the r / WallStreetBets forum used the fee-free stock trading app and others like it to push shares of the beaten game trader. 14.300% higher over the past few months, which has hurt the short-selling hedge funds.
The popularity of the app became clear on Wednesday, when Robinhood jumped to first place in Apple’s App Store and achieved a record of 2.6 million daily active users, according to data from tracking firm Apptopia.
A day later, however, Robinhood fell out of favor with the group because it was so. restrict some activities like GameStop trading, along with some other active stocks, which restrict users to positions rather than opening new positions. It shouted at traders dirty. Even before the deal closed Thursday, a lawsuit was filed against Robinhood in New York. In a second blog post published Thursday afternoon, Robinhood said he would reopen limited trading of the shares on Friday. But on Friday, without naming Robinhood by name, the Securities and Exchange Commission said it would “unnecessarily impede actions taken by regulated entities that harm investors or otherwise hamper their ability to trade certain securities.”
Here’s what you need to know about Robinhood, the past and recent controversies, and how it works.
Read more: GameStop stock spike: this is what the vocabulary of Reddit’s WallStreetBets means
What is Robinhood?
Robinhood is a financial services company founded in 2013 with the aim of democratizing the financial system, which gives people the opportunity to make free investments. Its main product is an app designed to make buying and selling shares easy without a financial broker or commission. Robinhood also offers cash management accounts and cryptocurrency trading.
Some state regulators and academics have accused Robinhood of “gamifying” investments by doing things like rewarding you for making trades with a confetti animation. With the app, you can also scroll through the 100 most-owned stocks to determine what you want to buy next. The company says that these app elements are meant to attract 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 appointed by a promotion page will get one free stock at their account to hold or sell. The app requires you to enter your social security number and address. You also need to link a bank account.
Within the app, you can search for a stock and see how the price and activity spans five years. You will also see news reports and analyst ratings about the companies, as well as similar stocks in which other people are investing. If you click on Buy, you 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 restrictions. Press Review, clear and your stock has been purchased.
You may be asking yourself: If Robinhood allows me to buy and sell shares without a fee, how does the company make money? Here things get complicated.
When you buy or sell shares through Robinhood, the company does not execute those trading requests. Instead, it guides the orders through a ‘market maker’ (such as Citadel Securities or Virtu) which in turn offers a discount on Robinhood. This is also called ‘order flow payment’. The use is common, although it is often criticized for not being transparent. Among other things, this is a matter of concern: who pays the broker and whether there are other benefits that the broker gets to direct orders to marketers. For example, a broker may direct orders to a specific market maker to make a larger cut, even if it is not in the interest of the investor.
Bottom line? In exchange for a fee-free buying and selling experience for you, Robinhood sells your order to another firm and earns both money from it.
Robinhood offers commission-free trading.
James Martin / CNET
Why did Robinhood stop trading in GameStop and AMC?
On Thursday, Robinhood (along with TD Ameritrade) started restrict some GameStop transactions and other companies that Redditors began to focus on due to ‘recent volatility’, according to a blog post. (The other companies affected included AMC, Nokia and BlackBerry.)
After that happened, GameStop and AMC shares dropped dramatically. In the Southern District of New York, a class action lawsuit has been filed against Robinhood for restricting trade. The complaint states that the company “intentionally, knowingly” removed GameStop during its extraordinary start-up 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 displeasure and flooded the Google Play Store with tens of thousands of bad reviews for the app. Google has removed many of the intentional slams, temporarily dropping the overall rating of the app to one star.
Congressmen also weighed. Democratic representatives. Alexandria Ocasio-Cortez and Rashida Tlaib along with the Republican Sen. Ted Cruz to tweet support for a trial on Robinhood’s decision to restrict trade.
In a second blog post published Thursday afternoon, Robinhood said it would allow limited purchases in the affected securities on Friday. The company will continue to monitor the situation and adjust if necessary.
“To be clear, it was a risk management decision, and it was not taken in the direction of the market makers we are heading to,” the report said.
I heard Robinhood got into trouble. What is it about?
On December 16, 2020, Massachusetts security regulators filed a lawsuit against Robinhood for violating state law, including the “aggressive tactics to attract new, often inexperienced, investors” and the “use of strategies such as gamification to encourage and encourage and to attract “repeated use of its commercial application.”
The next day, the SEC sued Robinhood for alleged ‘repeated misrepresentations that did not disclose the receipt of payments from trading companies to send customer orders to them, and for failing to fulfill its duty to seek the best reasonable terms and conditions to to execute customer orders. . “This refers to the diversion of order flow to market makers.
According to the SEC, between 2015 and 2018, Robinhood did not disclose that it made money from payments for its order flow and that it executed orders at higher rates than its competitors, despite offering prices that match or beat its competitors. The SEC said the activity robbed customers of $ 34.1 million, even after adjusting for commission-free transactions.
Robinhood agreed to pay $ 65 million to cover the costs.
On Friday, the SEC said it would take a closer look this week at what happened during the GameStop stock drama, saying: ‘We will act to protect retail investors when facts show offensive or manipulative trading activities prohibited by federal security laws. . “The organization does not mention Robinhood by name.
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Are there alternatives to Robinhood?
Several other programs provide a similar service to Robinhood, which trades commission-free shares. These include:
TD Ameritrade: TD Ameritrade is the best stock trading platform by both NerdWallet and StockBrokers and offers tools for beginners as well as active traders. Like Robinhood, it contains commission-free stocks, ETFs and options. It also has restricts the trading of GameStop and AMC.
WeBull: WeBull also offers commission-free trading of stocks, ETFs and options. While this app temporarily trades in GameStop and AMC on Thursday, these restrictions have since been lifted.
Cash program: With Cash App you can send, receive money, similar to Venmo. But it also has an investment option, which trades commission-free shares, 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 partial shares, which many other platforms do not. The app is owned by Square and CEO Jack Dorsey.
Fidelity: Fidelity is a more traditional online broker offering commission-free trading, research and strong trading tools, according to StockBrokers, which calls it the best trading platform for everyday investors.
E * Trade: One of the first online brokers in the US, E * Trade, also offers commission-free trades, and a strong range of trading tools. StockBrokers calls it the best web trading platform and the best trader app.
You can also visit CNETs tips for getting started with investing, en the best robo advisors.