A few weeks ago, he sold stock in a medical company claiming it was working on a cure for the coronavirus and lost out on a potential $1,000 profit. “I graduated from college last year, so I am just starting. I was looking for a way to invest and get a little familiar with the market,” said Gregory, an accountant in Kentucky.
On March 2, the novice investor faced his biggest challenge yet: Gregory had been betting U.S. stock prices would continue to fall from record highs. But markets surged, rebounding from Wall Street’s worst week since the 2008 financial crisis — when Gregory was still in middle school.
Gregory rushed to sell his positions as the markets opened, but the Robinhood app froze, and Gregory and millions of other users received error messages.
“I was stuck watching my money disappear,” said Gregory, who estimates the glitch cost him $600.
Robinhood, a free stock trading app claiming 10 million users, suffered three outages during the past few weeks of historic market turbulence. For mom and pop investors, the app’s repeated failures exacerbated the challenge of navigating the economic impact of covid-19, which has led to widespread closures of schools and businesses, disrupted the daily lives of many Americans and increased the chance the country could soon be in a recession.
U.S. markets have shown no signs of stabilizing after weeks of volatile trading in which stocks nose-dived, wiping out trillions in market value. The Dow Jones industrial average, which is composed of 30 well-known stocks, is more than 20 percent off from its historic high in February.
Retail investors are not shying away. JPMorgan Chase’s 18-month-old online trading platform, You Invest, saw a 340 percent increase in account openings last week and more than 200 percent increase in trading volume.
Amid the market volatility, customers’ anger at Robinhood’s recent outages spilled out on Twitter, in Facebook groups and on Reddit.
One user filed a lawsuit, and a Twitter handle, @ClassRobinhood, claiming to be building a case against the company, has nearly 8,000 followers. The company’s main regulator, the Financial Industry Regulatory Authority or FINRA, says it has been in contact with Robinhood and is “monitoring” the situation.
“The Silicon Valley attitude of move fast and break things is good as far as it goes. But when it comes to people’s money, they don’t want to see things break,” said Jim Angel, an associate professor at Georgetown University Law School, who focuses on regulation of global financial markets.
Robinhood said the partial outages this month — on March 2, 3 and 9 — were the result of system overloads, and it blamed historic market conditions. “We now understand the cause of the outage was stress on our infrastructure — which struggled with unprecedented load,” its founders, Baiju Bhatt and Vladimir Tenev, who met at Stanford University and earlier launched a high frequency trading firm together, said in a blog post.
In an email to customers, Robinhood said it would work with customers directly to address their concerns but did not say how or whether it would compensate them for their estimated losses. As a first step, it said, members of its premium program, Robinhood Gold, would get a three-month subscription free, a perk valued at $15.
Robinhood is not alone in having technical problems. Chime, part of a fast-growing class of technology start-ups offering debit cards, checking accounts and other financial services, experienced outages last year that rendered its website and debit cards inoperable for several days. Last year, customers of Wells Fargo, a massive San Francisco-based bank, had trouble accessing their mobile and online banking accounts after the bank said smoke was detected at one of its data centers.
Since launching in 2013, Robinhood, valued at about $7.6 billion, built a following among young, novice investors with its slick marketing and promise of free stock trading. The strategy helped lead to a revolution among discount brokerages that has made stock trading more affordable and accessible to the masses.
The Menlo Park, Calif.-based company is part of Silicon Valley’s push into the banking world and transforming Wall Street as digitally-savvy investors break from their parents’ brokers and navigate the markets on their mobile phones. Founders Bhatt and Tenev have described Robinhood’s mission as providing everyone “access to the financial markets, not just the wealthy.”
“What they [Bhatt and Tenev] have managed to do is use technology to provide a service that serves a group of people who weren’t served before,” Angel said.
When David J. Geaney of Hawaii dove into the investing world three years ago, Robinhood Financial’s app offered a user-friendly introduction. The logistics expert eventually graduated to more complicated trades as U.S. stocks marched to record highs and then tumbled as coronavirus rattled investors.
When the company’s problems began March 2 at 9:33 a.m., minutes after markets opened, Geaney had opened his Robinhood app and placed a sell order. As markets plunged, the app froze, and Geaney estimates the glitch cost him about $5,000, which he planned to use to transition into a new profession.
“It wasn’t like I made a bad call or made a bad decision; I made the right decision,” Geaney said. “I tried to sell when I had 2.8 times the profit, but the technology failed.”
Robinhood’s service was not restored until 7:30 that evening. By then, major U.S. stock indexes had rallied sharply — the Dow Jones industrial average surged nearly 1,300 points, closing up 5.1 percent, its largest percentage gain since March 2009.
Adam Donatto estimates he lost a small amount — no more than $100 — during the outage but still wants to move some of his money out of Robinhood. “It was annoying. I was sitting there watching dollar by dollar going away,” he said.
One thing keeps Donatto from transferring long-term investments out of Robinhood: The company charges customers $75 to move their money to outside accounts. “I asked them to waive the fee,” citing the outage, he said. So far Robinhood has not responded, he said.
The next day, March 3, stocks plunged again, and the app suffered another outage at 9:55 a.m. lasting more than an hour. On March 9, the Dow shed 7.8 percent, then its largest decline since the 2008 financial crisis. Robinhood’s app was not fully operational that day until 3:30 p.m., half an hour before markets closed.
These types of glitches could undermine “the public’s confidence in the markets,” said Tyler Gellasch, executive director of Healthy Markets, an investor trade group and former counsel at the Securities and Exchange Commission. “Given the average age of Robinhood users, there’s a risk that these types of events may deter them from engaging in the markets in the future.”
This is not the first stumble for Robinhood. In December, FINRA, the regulator, fined the firm $1.25 million for not ensuring its customers were getting the best price possible in their trades.
“Best execution of customer orders is a key investor protection requirement,” Jessica Hopper, a senior director of FINRA’s Department of Enforcement, said at the time. Robinhood did not admit or deny the charges.
The start-up also stumbled as it pushed further into the banking world.
In December 2018, Robinhood announced it would offer checking and savings accounts paying 3 percent interest, a direct challenge to traditional banks. The accounts would be backed by the Securities Investor Protection Corporation, a nonprofit that helps investors recover money from troubled brokerage firms, the company said. But a few days later, SIPC denied it had agreed to that arrangement, and Robinhood dropped that claim.
In the wake of Robinhood’s failed effort, a bipartisan group of lawmakers, including Sen. John Neely Kennedy (R-La.), asked regulators to “carefully monitor fintechs who, intentionally or not, blur financial products for competitive advantage.”
Robinhood wanted to offer “a service that looked, smelled, tasted like a bank without being a bank,” said Angel, the Georgetown professor. “But they made the classic fintech mistake of not understanding how they are regulated. They think it is better to ask for forgiveness than ask for permission.”
The company shifted its attention to a new bank-like product, a “cash management account” that it says includes a debit card. (On Monday, Robinhood announced it was lowering the interest rate on the account to .30 percent from 1.3 percent after the Fed took emergency steps to cut rates to near zero.)
It soon had one million people on the waiting list, including Emily Babaian of Florida. Babaian put $60 into an Robinhood trading account last year but moved about 80 percent of her savings there as she became a daily user of the app, signing up for its $5 a month premium service, Robinhood Gold.
After the outages, Babaian says she is considering moving to a new trading platform and is no longer interested in the Robinhood debit card.
“Seeing what has happened, I would never trust them,” Babaian said. “That is more serious to me than trading. That’s my money. … Any kind of debit situation, I think I would leave that to a bank."