Mobile trading app Robinhood has long been a popular option for new investors and those who want to take advantage of commission-free trading. Robinhood’s impact as a pioneer of commission-free trading forced several major brokerages to follow suit and cut commissions.
However, while the app is generally considered to be a great resource for investors, Robinhood has recently experienced a number of troubling incidents. From outages to a credit line drawdown, recent events have started to make some investors grow concerned.
Robinhood Suffers Third Outage
Early in March, Robinhood tweeted that its trading platform was down and was investigating the issue. This marked the third time in recent weeks that Robinhood has experienced outages amidst the panic caused by the coronavirus outbreak.
Following up on its Tweet regarding the outage, Robinhood indicated that trading was partially restored but wasn’t able to say when it would be fully functional.
This, of course, presents many problems for traders — primarily those whose strategies depend on making frequent transactions throughout the day. Outages like this have caused many customers to lose confidence in the platform and start the search for a new brokerage.
Class Action Lawsuit
This most recent outage has driven Robinhood users to form a class action lawsuit against the company.
The plaintiff, Travie Taaffe, alleges that the Robinhood platform was not available to any of its users, thus customers weren’t able to buy, trade, or sell any securities.
This outage, Taaffe alleges, lasted for all but three minutes of the NYSE trading day on March 2 and that further outages occurred the following day.
The lawsuit states that “Customers and/or users of Robinhood in the United States who lost the ability to access their Robinhood brokerage accounts to effectuate any transaction therein on March 2, 2020” may be considered Class Members in this lawsuit.
According to the lawsuit, Robinhood breached its contractual obligations by not providing a functional and accessible platform for users to access their securities and funds.
In response to the outages, Robinhood published a blog post stating, “Our team has spent the last two days evaluating and addressing this issue. We worked as quickly as possible to restore service, but it took us a while. Too long. We now understand the cause of the outage was stress on our infrastructure—which struggled with unprecedented load. That in turn led to a “thundering herd” effect—triggering a failure of our DNS system.”
Robinhood Maxes Out Credit Line
In addition to the outages, Robinhood also recently maxed out its $200 million credit line from Barclays Plc, Citigroup, Inc. and JPMorgan Chase & Co. This comes as the coronavirus outbreak continues to throw world markets into disarray.
In response, Robinhood stated, “We determined it was prudent to draw on our credit line during the week of Feb. 24 in light of market volatility. That capital was returned in full last week.” The company also made sure to indicate that these types of measures are not unusual during volatile market conditions.
However, Bloomberg Intelligence analyst David Ritter stated, “Companies don’t tap their credit line unless they need to,” and that it is “perhaps not a good signal with regard to their cash burn, which could make creditors nervous.”
As these issues continue to compound, more and more investors and platform users are growing concerned with Robinhood’s reliability and financial stability. With a number of recent stumbles, Robinhood needs to right the ship fast in order to minimize potential long-term damage. On the other hand, for traditional brokerages, this could help drive growth in their customer bases.
Article By: Connor Beam