“Move fast and break things” is synonymous with Silicon Valley’s freewheeling tech culture. But one finance startup is learning the hard way that customers don’t like it when things actually break.
As the coronavirus set off violent swings in global stocks, Robinhood Financial Inc.’s trading platform kept failing. A series of major outages left millions of clients in the dark. Some pulled their accounts and went to competitors. Many vented frustrations online as Robinhood worked on fixes.
It wasn’t merely bad PR. Amid the volatility, the Menlo Park, California-based broker drew one of its credit lines.
The tumult is the latest example of the pressures that Robinhood faces as an upstart in the hyper-competitive and tightly regulated brokerage business. Beyond short-term user anxiety stemming from the malfunctions, it faces broader, seismic shifts too. That includes finding ways to stand out against the likes of Charles Schwab Corp. in a rapidly consolidating industry, where the zero-fee commissions Robinhood helped pioneer went from selling point to market standard almost overnight.
Robinhood is learning from its mistakes, the company said in a statement.
“We understand the frustration many customers have experienced, and these recent outages are unacceptable,” Robinhood said. “Our customers’ trust is incredibly important to us, and we’re focused on continuing to improve the stability of our service and the overall customer experience.”
Two roommates at Stanford University, Vlad Tenev and Baiju Bhatt, started Robinhood in 2013. To “democratize finance” the platform offers unlimited commission-free trading in stocks, exchange-traded funds, options and cryptocurrency.
That mission resonated with millennial users and venture capital firms alike. With backing from Index Ventures, Andreessen Horowitz and Sequoia, Robinhood was valued at $7.6 billion. Its founders became billionaires. The company had more than 10 million customer accounts as of December.
But a series of glitches spooked some of those customers in recent weeks. As trading volatility surged in late February, Robinhood drew down a $200 million credit facility from Barclays Plc, Citigroup Inc. and JPMorgan Chase & Co. during the week of Feb. 24. The company says the capital was returned in full the next week.
On March 2, Robinhood’s platform went dark for the full trading day as U.S. stocks surged. The outage spurred some clients to abandon the platform. The number of account transfers from Robinhood to a major competitor rose almost 300% after that date, compared to the average number of users that switched a year earlier, according to data obtained by Bloomberg News.
Legal challenges followed. And rivals took notice. JPMorgan, for instance, began marketing its You Invest offering to bank customers who made deposits to rival firms like Robinhood in recent months, according to a person familiar with the matter.
Online trading is a high-risk industry for startups, said Brad Armstrong, a partner at Lovell Minnick, a private equity firm that specializes in financial companies.
“You’ve got to be really mindful investing in financial services companies,” he said. “They deal with sensitive issues that deal with life savings.”
Robinhood tackled a series of ambitious projects in recent months as it sought to woo clients and set itself apart in its field. In December, the firm started offering fractional shares, allowing customers to own part of a share of stock. In 2018, Robinhood began doing its own trade clearing — a crucial function that involves exchanging money for securities.
Those big undertakings reflected Robinhood’s attempts to establish itself against a field of larger competitors. Charles Schwab accelerated the shakeout in online brokerages when it started offering free trades, leading the entire industry to follow suit. The change triggered a merger frenzy, highlighting how difficult it is to operate a brokerage business as a solo act. Schwab agreed to buy TD Ameritrade Holding Corp., and E*Trade Financial Corp. agreed to be sold to Morgan Stanley shortly after.
Robinhood’s fast-moving startup ethos has also run up against regulators. Last year, the Financial Industry Regulatory Authority fined it $1.25 million for failing to ensure it got the best possible deals for client orders. The company neither admitted nor denied the charges.
When Robinhood announced checking and savings accounts in 2018, the company said customer deposits would be backed by the Securities Investor Protection Corp. The claim drew a rebuke from the SIPC’s chief executive and the firm quickly scrapped the initial plans.
In November, certain customers took advantage of a flaw that allowed them to make highly leveraged trades without putting down enough cash to back the transactions, prompting regulatory questions.
Finra has been “in touch with the firm” over its most recent outages and is “closely monitoring the situation,” according to a spokeswoman for the organization.
Although Vanguard Group and Fidelity Investments both had technical errors of their own during the recent market swings, Robinhood’s all-day lapse was unusually long.
Fahim Mortazavi, 35, a Miami-Dade County firefighter and Robinhood client since 2017, said he has a $56,000 account. He had set up a trade for call options on the SPDR S&P 500 ETF Trust before markets opened on March 2. He said they would have made him $28,000, but he was unable to execute the transaction. The next morning, he was locked out again as he tried to buy put options, an order he said would have netted $69,000.
Mortazavi imagined himself using the money for new windows and a bathroom in his house.
It was “the trade of my lifetime that never happened,” Mortazavi said. “I sat there swiping and swiping, having a nervous breakdown.”
— Annie Massa, John Gittelsohn and Jenny Surane (Bloomberg)