Menlo Park, Calif., Discount Broker Must Put Clients’ Interests First While Making Them Look Like He Is Troubling Authority
Robinhood Markets Inc. saw its shares fall for the seventh day in a row and is now trading around 26% below its IPO price of $ 38 as the pressure to choose a path increases and the decision to do so increases. has not yet been taken.
Observers say Robinhood suffers from a bigger problem in the mirror – not knowing how much to put clients’ interests first.
“The regulatory verdicts have been clear suggesting that Robinhood’s practices are not always in the best interests of their clients,” Anthony Di Pizio of The Motley Fool wrote in a column today.
“Yet if the platform is forced to change to accommodate new rules, it may no longer appeal to its much-coveted younger audience,” he added.
Robinhood CEO Vlad Tenev offered a comprehensive response to such criticism on September 16, in a scathing chronicle of Wall Street Journa.
“People who were left behind by Wall Street started investing and building wealth like never before,” he wrote of his site.
“But now market gadgets, academics and disconnected investors are preying on commission-free, no-minimum brokerage firms, potentially limiting access to capital markets.”
Investors apparently don’t see it that way.
The shares of the company Menlo Park, California (HOOD), now at $ 27.65, is caught in a major downward trend affecting the broader equity sector that Robinhood investors are often credited with having created.
So-called memes stocks are created when a company’s stock catches fire with individual investors on social media platforms like Reddit and skyrockets quickly.
Robinhood hit a 52-week high of $ 85 on August 4 and closed that day at $ 70.39.
The company was forced to clean up a regulatory mess on the eve of its July IPO. He paid FINRA a fine of $ 57 million – the largest in its history – in addition to ordering refunds of $ 12.6 million to aggrieved clients for “systemic oversight failures. “See: Checking pre-IPO boxes, Robinhood is doing a quick job with FINRA with a $ 70 million settlement, but a minefield of less sympathetic investigators and litigants awaits us
The trading platform has repeatedly clashed with regulators largely because of its Silicon Valley mentality of ‘breaking things’ now and ‘fixing them later’. Jessica hopper, head of FINRA’s enforcement department, said at the time.
Di Pizio identifies at least four regulatory issues for Robinhood, starting with its reliance on payment order flow for revenue and electronic gamification of investments to deliver the endorphins experience some investors are looking for.
The federal Securities and Exchange Commission (SEC) and state regulators are openly voicing concerns about both.
Robinhood is not an RIA, but even as a broker it is held to a standard of due diligence which may not always seem apparent.
Along with the legal tangles, federal regulators are also looking at Robinhood’s core business model.
Robinhood has been a favored trading platform for inexperienced young investors due to its commission-free transactions through a phone app that has been likened to a video game. He was singularly credited for the big swings in Gamestop (GME) and AMC Entertainment (AMC) earlier this year.
GameStop hit a 52-week high of $ 483 from a low of $ 12.14 and is today down $ 33.65 or 13.59% to $ 213.90. AMC also saw a strong swing from a 52-week low of $ 1.91 to a high of $ 72.62 before losing some ground. It closed today down $ 2.08, or 5.04%, at $ 39.16.
Investors pushed the price when they kibbutized stocks on social media discussion boards, then focused on stocks due to an indefinable “it” factor. See: Robinhood tilts its business model towards ‘social media capital’ with the purchase of Say Technologies, which has a Reddit-style chat function and proxy software to run rebellions
Tenev disputed the “gamification” claims in his WSJ column.
“We’ve designed these features, many of which are common in our industry, to make it easier and more enjoyable for users to stay informed.” he wrote. “Investing isn’t a game, but does it have to be dark and hard to understand? “
Robinhood shares closed at $ 41.95 that day, then climbed to $ 46.88, before falling.
Robinhood may have an answer for its others black beast– order flow issues – too.
He would be prepared to “internalize” the market making rather than outsource it to Citadel, Virtu and others and do all the dissemination internally. See: Robinhood’s response to SEC threat to ban bribes from order flow is to outsource the trading transaction and take more of the long spread- seller
In his WSJ column, Tenev also says he feels a political rat in pushing the SEC to remove payment from order flow, which allows his company to make trading free for all investors.
SEC Chairman Gary Gensler June 9 moved to probe payment order flow to determine if it conflicts with “best execution” for retail traders. It is also under intense scrutiny on Capitol Hill.
Tenev was called to testify before the House financial services committee in February, and lawmakers have focused on paying for the flow of orders.
“The democratization of markets threatens the existing order,” he says in his column.
“New investors are trying to build a stable financial future and reverse the inequalities that plague our society. One wonders if the push to ban payment of the order flow and over-regulate modern design is about investor protection or really control. . “
Threat of hacking
Robinhood also made around 40% of the revenue from trading Dogecoin – a currency that started out as a joke. And then there’s the issue of what Robinhood can deliver if all goes to hell.
Robinhood makes it clear that in the event of a hack, they might not be able to insure against the losses of their clients’ cryptocurrency assets, now $ 22.2 billion, which the company holds for them. “, writes Di Pizio.
Investors may be less worried about the threat of a hack if a hack had not taken place.
Robinhood recently informed its investors of its blog November 16, claiming that the hack affected about five million email addresses, the full names of a different group of about two million people, and several thousand phone numbers.
Charles Schwab & Co. also earns significant income from order flow payments, but its shares (SCHW) remain near record highs. See: Shares of Charles Schwab Corp. finally surpass $ 80, showcasing the RIA conservation unit’s record $ 81 billion in new net assets
The stock is trading near its 52-week high of $ 84.49 on October 26. It closed today at $ 82.94, up $ 1.02, or 1.25%. It hit a low of $ 48.51 in November a year ago.