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Robinhood: What you need to know about the app at the center of the GameStop drama

Robinhood stock trading

James Martin / CNET

When a Reddit community tied together to Punish Wall Street investors who had bet against GameStop stocks, one app stood out as a weapon of choice: Robinhood. Traders from the r / WallStreetBets forum used the free stock trading app and others love to push shares from the defeated game retailer 1

4,300% higher in recent months, making short-selling hedge funds cry in pain.

The popularity of the app was evident on Wednesday, as Robinhood jumped to the top spot on Apple’s App Store, reaching a record 2.6 million daily active users, according to data from the tracking company Apptopia.

A day later, however, Robinhood had fallen out of favor with the group because it was limited some activities, such as trading in GameStop, along with some other active stocks, restricting users from closing positions instead of opening new ones. That was what traders shouted meanly. Even before the trade closed on Thursday, a lawsuit had been filed in New York seeking class action status against Robinhood. In a second blog post published Thursday afternoon, Robinhood said it would reopen limited stock trading on Friday. But on Friday, without mentioning Robinhood by name, the Securities and Exchange Commission said it would “keep a close eye on measures taken by regulated entities that could harm investors or otherwise unduly prevent their ability to trade certain securities.”

Here’s what you need to know about Robinhood, its past and recent controversies, and how it works.

Read more: GameStop stock spike lingo: This is what Reddit’s WallStreetBets vocabulary means

What is Robinhood?

Robinhood is a financial services company founded in 2013 with the aim of democratizing the financial system and offering people the opportunity to invest for free. The main product is an app designed to make buying and selling stocks easy without a financial broker or commissions. Robinhood also offers cash management accounts and cryptocurrency trading.

Some government agencies and academics have accused Robinhood of gamifying investing by doing things like rewarding you for making transactions with a confetti animation. The app also lets you browse the top 100 stocks to determine what to buy next. The company says those app elements are designed to attract young investors from a variety of backgrounds.

How Robinhood works

First you need to download the Robinhood app for iOS or Android and create an account. New members who sign up through a promotion page get a free stock added to their account to keep or sell. The app requires you to enter your social security number and address. You also need to link a bank account.

In the app, you can search for a stock and see its price and activity dating back five years. You will also see news stories and analyst reviews about the companies, as well as similar stocks that other people invest in. If you click Buy, you have the option of paying for your purchase in stocks or dollars. You can also set up recurring investments and other instructions, such as price limits. Hit Review, swipe up and your stock is bought.

You may be wondering, if Robinhood lets me buy and sell stock for no fee, how does the company make money? This is where it gets a bit complicated.

When you buy or sell stock through Robinhood, the company doesn’t actually fulfill those trading requests. Instead, it routes the orders through a “market maker” (such as Citadel Securities or Virtu) who in turn offers Robinhood a discount. This is also referred to as “payment for order flow”. The practice is common, but often criticized for its lack of transparency. One of the concerns: who pays the broker and whether there are any other benefits the broker gets for sending orders to market makers. For example, a broker may be able to direct orders to a specific market maker to make a larger discount, even if it is not in the investor’s best interest.

Briefly? In exchange for a free buying and selling experience for you, Robinhood sells your order to another company, and both of them make money from it.

Robinhood stock trading

Robinhood offers commission-free trading.

James Martin / CNET

Why has Robinhood discontinued trading GameStop and AMC?

Thursday started Robinhood (together with TD Ameritrade) restricting some of GameStop’s transactions and other companies Redditors started targeting because of “recent volatility,” according to a blog post. (The other companies affected included AMC, Nokia and BlackBerry.)

After this happened, GameStop and AMC shares dropped dramatically. In the Southern District of New York, a class action lawsuit was filed against Robinhood for restricting transactions. The complaint says the company “purposefully, deliberately and knowingly” removed GameStop during its extraordinary run-up and “thereby deprived private investors of the opportunity to invest in the open market.”

Robinhood did not immediately respond to a request for comment. But users quickly voiced their displeasure and flooded the Google Play Store with tens of thousands of bad reviews for the app. Google erased much of the intentional slams, temporarily dropping the app’s overall rating to one star.

Members of Congress have also weighed in. Democratic representatives. Alexandria Ocasio-Cortez and Rashida Tlaib joined Republican Senator Ted Cruz to tweet support for a hearing on Robinhood’s decision to restrict trade.

In a second blog post published Thursday afternoon, Robinhood said it would allow a limited purchase of the affected securities on Friday. The company will continue to monitor the situation and adjust as needed, the post said.

“To be clear, this was a risk management decision and was not taken in the direction of the market makers we are heading to,” the post said.

I heard Robinhood was in trouble. What is that about?

On December 16, 2020, Massachusetts security regulators filed a complaint against Robinhood for violations of state law, including the “ aggressive tactic to attract new, often inexperienced investors ” and the “ use of strategies such as gamification to prevent continuous and repeated use of its trading application. ”

The following day, the SEC charged Robinhood for alleged “ repeated inaccuracies that did not disclose the receipt of payments from trading firms to trading firms for forwarding client orders to them, and a breach of its duty to seek the best reasonably available terms to fulfill client orders. to feed . “That refers to the routing of the order flow to market makers.

According to the SEC, between 2015 and 2018, Robinhood did not disclose that it was making money from payments for its order flow and that it was executing orders at higher rates than its competitors, despite claiming to be offering prices that match or beat its competitors. The SEC said the activity stripped 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 close look” at what happened this week during the GameStop stock drama, stating, “We will act to protect retail investors when the facts show that there has been any abuse or manipulative trading activity that is prohibited. by federal securities laws. ”The organization did not mention Robinhood by name.

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Are there any alternatives to Robinhood?

Several other apps provide a similar service to Robinhood and offer commission-free stock trading. These include:

TD Ameritrade: TD Ameritrade has been named the best stock trading platform by both NerdWallet and StockBrokers, offering tools for beginners and active traders alike. Like Robinhood, it offers no-commission stocks, ETFs, and options trading. It too limited trading in GameStop and AMC.

WeBull: WeBull also offers commission-free trading of stocks, ETFs and options. While this app temporarily restricted transactions in GameStop and AMC on Thursday, those restrictions have since been lifted.

Cash app: The Cash app allows you to send and receive money, similar to Venmo. But it also has an investment option, allowing commission-free stock trades, similar to Robinhood. It’s a bit more of a beginner’s platform, with fewer features than Robinhood. It also gives you the option to buy fractional shares, which many other platforms don’t. The app is owned by Square and CEO Jack Dorsey.

Faithful: Fidelity is a more traditional online broker that offers commission-free trades, research, and strong trading tools, according to StockBrokers, who called it the best trading platform for everyday investors.

E * Trade: E * Trade, one of the first online brokerages in the US, also offers commission-free trades and a strong selection of trading tools. StockBrokers called it the best web trading platform and best trader app.

You can also check out CNETs tips to get started with investing, and the best robo advisers.

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