Hiring Lobbyists
Moving quickly to tamp down the furor, Robinhood recently hired Dan Gallagher, a former Republican SEC commissioner steeped in the culture of federal regulation, as its top lawyer. The company is also opening an office in the nation’s capital and hiring lobbyists to aggressively make its case before Congress and federal agencies.
“Robinhood is empowering a whole new class of investors, and I think it is critical for us to have a voice in Washington to advocate for our customers and fairer markets,” Gallagher said in an interview.
Founded seven years ago, Menlo Park, California-based Robinhood bills itself as “investing for everyone.” It has sought to disrupt the often staid brokerage industry by making investing cheap, easy and, yes, fun. Trades can be placed with a quick swipe and may be heralded with a burst of virtual confetti. More than 13 million people have opened Robinhood accounts, which don’t have minimum balance requirements. The median age of the firm’s customers is 31, and nearly half say they’re first-time investors.
Even though its clients tend to be unsophisticated traders, the firm has expanded into options and cryptocurrencies, products that are riskier than stocks. It also offers a premium package that costs $5 a month and gives investors access to research as well as the ability to buy securities with borrowed money, which can amplify gains or losses.
Robinhood facilitates trades for investors but doesn’t offer stock recommendations, allowing it to escape some of the onerous regulation faced by competitors with a lot of human employees. The company makes the bulk of its money by selling customer orders to Wall Street trading firms, a common industry practice that existed long before Robinhood.
Trader’s Suicide
This summer, lawmakers’ anxieties about the company were heightened after the suicide of a 20-year-old college student who mistakenly thought he had lost more than $700,000 while using the firm’s app to bet on options. The tragedy stirred concerns that Robinhood was allowing customers to take risks they didn’t comprehend -- and incur losses they couldn’t afford.
Two senators and four House members sent a sharply worded July 13 letter demanding answers about the suicide, the trading snafus and the firm’s efforts to provide training and safeguards for clients.
“Robinhood has been very successful in marketing itself as an easy to use and low-cost brokerage service among first-time retail investors,” the Democratic lawmakers, led by California Representative Brad Sherman, wrote. “By seeking to cultivate a customer base of relatively inexperienced investors, you have also taken on an especially great responsibility to make sure your customers are protected.”
Robinhood believes it has a good story to tell on Capitol Hill, about how it has “democratized” investing and compelled the online brokerage industry to drive down commissions to zero -- a phenomenon some call “the Robinhood effect.” It’s a talking point that the firm’s two founders, Baiju Bhatt and Vladimir Tenev, regularly use, but few in Washington have heard. The company reinforced that message in an 11-page letter responding to the lawmakers.
“Our goal is to empower more Americans of all backgrounds to take greater ownership of their financial future, which we believe can help shrink the gap between the ‘haves’ and the ‘have-nots,’ and lead to a healthier, more robust economy,” wrote David Dusseault, president and chief operating officer of the subsidiary Robinhood Financial. “Our ethos is a commitment to building products that make the financial markets more accessible and approachable, while demystifying otherwise intimidating financial concepts.”
The letter added that after the death of student Alex Kearns, the broker was re-tooling its interface for options trading, putting more investor education materials on its app and considering new requirements for investors who want to make more complex bets. Robinhood also made a $250,000 donation for suicide-prevention efforts.