Robinhood Screwed Its Users But Is More Popular Than Ever

Despite facing criticism from users and lawmakers as well as being hit with a class action lawsuit after it imposed trading restrictions  on GameStop, AMC, and other stocks targeted by the r/WallStreetBets community, Robinhood has seen a flood of new capital and users. 

The popular fee-free investment app, which bills itself as "democratizing" investing while selling its users' trading data to hedge funds, was a nexus of the amateur trading activity that buoyed dark horse stocks and walloped short-sellers like Melvin Capital. After it restricted trading on popular stocks to sell-only as prices fell last Thursday, though, Robinhood became something of a villain as users felt it had turned heel and lawmakers demanded hearings. 

Now, just like the massive investment funds that had the value of their ownership stakes in GameStop inflated astronomically thanks to all this activity by amateur investors, it's starting to seem like Robinhood will make it out OK after all. 

For one, Robinhood is seemingly still very popular. According to The New York Times, Thursday—the day of Robinhood's strictest trading restrictions—was also its best ever: it saw over 177,000 downloads (twice the previous week's daily rate) and had 2.7 million daily users.

Robinhood also announced on Monday that it raised another $2.4 billion in a new funding round led by Ribbit Capital and including existing investors such as ICONIQ Capital, Andreessen Horowitz, Sequoia Capital, Index Ventures, and NEA. Bloomberg reported that the investment would convert into equity at a $30 billion valuation or a 30 percent discount on its initial public offering (IPO), and then would be followed by another $1 billion infusion converting to equity at either a $33 billion or a 30 percent IPO discount. Robinhood has been planning to go public in May since late last year, either through an initial public listing, a direct listing, or a merger with a SPAC.

Robinhood was also given a platform from which it could explain itself to a reasonably friendly audience. In a conversation with SpaceX and Tesla CEO Elon Musk on the social media app Clubhouse on January 31, Robinhood chief executive Vlad Tenev said that the National Securities Cleaning Corporation asked for $3 billion in collateral to back up trades of increasingly volatile stocks on its platform. 

This ask was "an order of magnitude" larger than usual, Tenev said, adding that  "Robinhood up until that point has raised around $2 billion in total venture capital." This is what led to Robinhood restricting trades and tapping credit lines at six banks as well as seeking emergency cash infusions. 

Musk was there to speak directly to his biggest fans about crowd-favorite topics like Mars colonization and artificial intelligence. It was undoubtedly a friendly audience for Musk full of acolytes, and he threw seemingly "tough" questions at Tenev only for them to be calmly explained. Clubhouse, where the conversation took place, is a hangout for Silicon Valley and Valley-adjacent types primarily backed by VC firm Andreessen Horowitz, which was an investor in Robinhood's latest funding round.

Still, Robinhood isn't in for smooth sailing, exactly. The company now faces increased regulatory scrutiny and saw a class-action lawsuit shortly after it began restricting trades. This recent spectacle will likely refocus attention on accusations from Massachusetts securities regulators in late December that the company takes advantage of inexperienced customers. In a 50 page response released late Friday, Robinhood insisted that it has actually gone out of its way to democratize finance and dismissed claims that it gamifies investing, lets customers engage in risky trades, and that any of its techniques could be considered illegal.

The truth is that Robinhood has momentum, a hooked user base, and a business model that seems empowering for users but rather exploits them. In an interview with The Wall Street Journal, Robinhood's senior director of product management Madhu Muthukumar said that the app's gambling-adjacent interface is intentional and designed to “make it feel like something that’s familiar to populations that historically have not been served.” And for all the rhetoric around "democratizing" finance, Robinhood sells all its users' trades to huge firms such as Citadel Securities which sees them before they are even executed on the market. Indeed, the SEC fined Robinhood $65 million recently for losing investors tens of millions of dollars due to its business dealings with market makers. 

Robinhood is reminiscent of another company here: Facebook. The tech giant skates through every controversy no matter how outrageous and becomes more powerful while directly exploiting its users' privacy and at the same time claiming to "give people the power to build community." 

As Jacob Silverman writes in The New Republic, the troubles it's facing now are unlikely to halt Robinhood's advance. In a time of rampant poverty, precarity, and also absurd wealth, we are heading towards becoming a nation of gamblers hoping to strike it rich. That Robinhood’s siren call is more popular than ever should be read as a omen—the app is simply bringing more people to a casino when they have less to gamble with. And in a casino, the house always wins.