Robinhood.com, which was founded in 2013, is a brokerage firm that provides commission-free trades in stocks, bond options, and ETFs (Exchange Traded Funds). The company has over 13 million accounts, with over 3 million new accounts added during the COVID-19 pandemic. Robinhood is primarily used by millennials, many of whom are inexperienced investors. Based on nudges and push notifications, these new traders have been enticed into purchasing some of the riskiest investments with 'fractional,' or smaller percentages of a stock at more affordable prices. A daily newsletter, Robinhood Snacks, provides constant information to encourage trading. Robinhood's users traded nine times as many shares as E-Trade customers and bought and sold 88 times as many risky option contracts as Charles Schwab customers relative to the average account size. The average Robinhood account is only $4,800.
Some Robinhood employees claim that the firm fails to provide adequate technology to support its customers. A college student committed suicide after his account dropped to a negative $730,000 while trading options with some technological issues (incomplete trades). The firm has installed bulletproof glass at the front entrance of their headquarters to protect employees from being confronted by disgruntled customers who have experienced major losses. The more customers trade, the more money Robinhood makes. The firm sells the stock for a profit, over the current stock price (increasing the margin between 'bid and ask' pricing). With this pricing strategy, the company makes 15 times more money than Schwab for each share traded. Now, Robinhood is under investigation by the Securities and Exchange Commission (SEC) for failure to disclose that it was selling client orders to high-speed trading firms, potentially impacting the customers’ returns.
Robinhood now faces a civil fraud investigation over the failure to disclose the practice of selling client orders to high-speed trading firms. The settlement being currently discussed is around $10 million, if Robinhood maintains agreement.