Over the past couple of weeks, everyone seems to have become more aware of the stock market and certain brokers as well. Probably the most well-known after the last week is Robinhood.
Robinhood - for those who may still be unaware - is a stock trading app that makes it much easier for the average Joe to invest in the stock market.
The stock trading app which is ironically called Robinhood (supposed to take from the rich to give to the poor) is reversely being a Trojan horse being used by hedge funds to get back at retail investors who are really the target market of Robinhood.
In effect, Robinhood is facing a class lawsuit from these retail investors for allegedly halting them from investing in Gamestop, an up and coming stock (and other companies) in collusion with Wall Street hedge funds and the US government.
It's a David versus Goliath scenario wherein a huge group of small retail investors through an online forum called WallstreetBets, unilaterally agreed to purchase specific stocks to add to the value of their portfolio and also to get back at the institutional financiers.
One such impact this David move of these small investors resulted in is when hedge fund Goliath Melvin Capital Management lost more than 50 percent of its $12.5 billion portfolio value in January.
Robinhood, on the other hand, has made around $700 million but not from any of this stock battle going on. They've actually been selling user data to these hedge funds and have really been sticking it to their users.
“One reason why allegations against Robinhood have persisted may have to do with the company’s controversial revenue model, which has led to a surge in earnings over the last two years, according to CNBC.
Robinhood has long branded itself as an accessible platform that provides free financial services for its users. Its mission statement includes a pledge to “democratize finance for all.” But the company makes money by selling its order flow — information about user transactions — to third party clients who actually enact trades with access to user data.”
Order flow has accounted for the vast majority of Robinhood’s quarterly earnings. The company earned roughly $675 million in revenue from payments for order flow, according to quarterly revenue data compiled by The Box.
Trades may be commission free for Robinhood users but they are actually sold to “market makers” that often used their position as the middle man to generate profit, according to the Financial Times. Most of these “market makers” are hedge funds or other institutional investors that financially benefit from more trade and market volatility.
Robinhood was fined $65 million by the Securities and Exchange Commission (SEC) in December for “misleading statements and omissions” regarding its payment for order flow process. The SEC concluded that Robinhood “deprived” users of $34.1 million after providing their order flow to clients that prioritized higher revenue over providing the best price for customers.
Robinhood’s largest clients for order flow are all hedge funds and other institutional investors according to an SEC filing from 2020. More than half of the company’s market orders were purchased by Citadel Securities — an affiliate of the hedge fund Citadel LLC.”
Robinhood is supposed to have an IPO coming sometime in the near future, but the way things are looking for the broker, it doesn't look like it's going to be very high, if they even make it to the IPO at all. I wouldn't be surprised if they go bankrupt at some point.
100% Fed Up