Robinhood: What it is, and why is it facing a class-action lawsuit?

Robinhood restricted users from buying several stocks, including GameStop Corp (NYSE: GME), on Thursday citing extreme volatility fuelled by a Reddit group called WallStreetBets. GameStop has so far rallied more than 2000% in 2021.

The move infuriated Robinhood’s users, one of whom filed a lawsuit against the trading platform in the Southern District of New York. The class-action lawsuit claims that Robinhood’s restrictions protected Wall Street’s interests at the expense of its own customers.

“Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.”

On Thursday, Robinhood restricted its users from covering their positions in GameStop, AMC Entertainment, Nokia, and Bed Bath & Beyond. As per the lawsuit, the unfair constraint disabled an army of retail investors from earning significant returns as they couldn’t close their positions near the peak per-share price of £342.

Following immense criticism, however, the brokerage said late on Thursday that it will resume limited buying on Friday.

An insight into Robinhood

Robinhood was co-founded by a Stanford duo, Vladimir Tenev and Baiju Bhatt in April 2013. Bhatt held the role of the financial services company’s co-CEO until last year. In November 2020, he relinquished the role, making Tenev the sole Chief Executive of Robinhood. As the co-founder, however, Bhatt still leads strategic business initiatives at the Menlo Park-based firm.

As of 2020, Business of Apps valued Robinhood at £7.44 billion. The FINRA regulated broker-dealer’s latest filing with the SEC boasted 13 million users in total. According to Robinhood’s website:

“Robinhood helps users invest in more than five thousand stocks, including most U.S. equities and exchange-traded funds (ETFs) listed on U.S. exchanges. Robinhood also supports options contracts for U.S. Exchange-listed stocks, ETFs, and ADRs for more than 650 globally-listed companies.”

Robinhood offers commission-free trading as part of its mission to “democratise finance for all”. It also offers cryptocurrency trading and cash management accounts. The trading app is available for users on Android and iOS platforms.

Robinhood’s website also says that the company makes revenue through rebates from market makers and trading venues, its Gold membership programme, stock loan income, and income from uninvested cash and cash management.