Vlad Tenev
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Robinhood blames outage on record trades, offers $15 discount
It wasn’t the leap year, a coding blip, or a hack that caused Robinhood’s massive outages yesterday and today that left customers unable to trade stocks. Instead, the co-CEOs
write that “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 was offline from Monday at 6:30am Pacific to 11pm Pacific, then had another outage this morning from 6:30am Pacific until just before 9am Pacific.
The $912 million-funded fintech giant will provide compensation to all customers of its Robinhood Gold premium subscription for borrowing money to trade plus access to Morningstar research reports, Nasdaq data, and bigger instant deposits. It’s offering them three months of service.
A month of Robinhood Gold costs $5 plus 5% yearly interest on borrowing above $1,000, charged daily. Before a pricing change, the flat fee per month could range as high as $200. However, compensated users will only get the $5 off per month, for a total of $15. That could seem woefully insufficient if Robinhood users missed out on buying back into stocks like Apple that went up over 9% on Monday. Robinhood is calling it a “first step”.
Impacted Robinhood users can contact the company here to ask for compensation. Below you can see the email Robinhood sent to custoemrs late last night.
Robinhood’s email to customers late last night
Robinhood is also working to contact impacted customers on a individual basis, and it’s looking into other forms of compensation on a case by case basis, company spokesperson Jack Randall tells me. It’s unclear if that might include cash to offset what traders might have lost by having their money locked in inaccessible Robinhood accounts during the outage.
Compensation could become a significant cost if the startup assesses that many of its 10 million users were impacted. The markets gained a record $1.1 trillion yesterday, but some Robinhood traders may not have been able to buy back in as the rebound occurred following mass selloffs due to fears of coronavirus.
Now the startup, valued at $7.6 billion, will have to try to regain users’ trust. “When it comes to your money, we know how important it is for you to have answers. The outages you have experienced over the last two days are not acceptable and we want to share an update on the current situation . . . We worked as quickly as possible to restore service, but it took us a while. Too long” wrote co-founders and co-CEO Baiju Bhatt and Vlad Tenev [disclosure: who I know from college].
As for exactly what triggered the downtime, the founders write that “Multiple factors contributed to the unprecedented load that ultimately led to the outages. The factors included, among others, highly volatile and historic market conditions; record volume; and record account sign-ups.” There’s been a frenzy of retail trading activity in the wake of coronavirus. There’s also been sudden spikes in stocks like Tesla amidst mainstream media attention.
Going forward, Robinhood promises to “work to improve the resilience of our infrastructure to meet the heightened load we have been experiencing. We’re simultaneously working to reduce the interdependencies in our overall infrastructure. We’re also investing in additional redundancies in our infrastructure.” However, they warn that “we may experience additional brief outages, but we’re now better positioned to more quickly resolve them.”
The outage comes at a vulnerable time for Robinhood as oldschool brokerages like Charles Schwab, Ameritrade, and Etrade all recently moved to eliminate per-trade fees to match Robinhood’s pioneering zero-comission trades. Though some of those brokerages experienced infrastructure troubles recently, Robinhood massive outages could push users towards those incumbents that they might perceive as more stable.
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Robinhood blames record trade volume & itself for outages
It wasn’t the leap year, a coding blip, or a hack that caused Robinhood’s massive outages yesterday and today that left customers unable to trade stocks. Instead, the co-CEOs
write that “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 was offline from Monday at 6:30am Pacific to 11pm Pacific, then had another outage this morning from 6:30am Pacific until just before 9am Pacific.
The $912 million-funded fintech giant will provide compensation to all customers of its Robinhood Gold premium subscription for borrowing money to trade, offering them three months of service. A month of Robinhood Gold costs $5 plus 5% yearly interest on borrowing above $1,000, charged daily. However, users will only get the $5 off per month, for a total of $15.
Impacted Robinhood users can contact the company here to ask for compensation. Below you can see the email Robinhood sent to custoemrs late last night.
Robinhood’s email to customers late last night
Robinhood is also working to contact impacted customers on a individual basis, and it’s looking into other forms of compensation on a case by case basis, company spokesperson Jack Randall tells me. It’s unclear if that might include cash to offset what traders might have lost by having their money locked in inaccessible Robinhood accounts during the outage.
Compensation could become a significant cost if the startup assesses that many of its 10 million users were impacted. The markets gained a record $1.1 trillion yesterday, but some Robinhood traders may not have been able to buy back in as the rebound occurred following mass selloffs due to fears of coronavirus.
Now the startup, valued at $7.6 billion, will have to try to regain users’ trust. “When it comes to your money, we know how important it is for you to have answers. The outages you have experienced over the last two days are not acceptable and we want to share an update on the current situation . . . We worked as quickly as possible to restore service, but it took us a while. Too long” wrote co-founders and co-CEO Baiju Bhatt and Vlad Tenev [disclosure: who I know from college].
As for exactly what triggered the downtime, the founders write that “Multiple factors contributed to the unprecedented load that ultimately led to the outages. The factors included, among others, highly volatile and historic market conditions; record volume; and record account sign-ups.” There’s been a frenzy of retail trading activity in the wake of coronavirus. There’s also been sudden spikes in stocks like Tesla amidst mainstream media attention.
Going forward, Robinhood promises to “work to improve the resilience of our infrastructure to meet the heightened load we have been experiencing. We’re simultaneously working to reduce the interdependencies in our overall infrastructure. We’re also investing in additional redundancies in our infrastructure.” However, they warn that “we may experience additional brief outages, but we’re now better positioned to more quickly resolve them.”
The outage comes at a vulnerable time for Robinhood as oldschool brokerages like Charles Schwab, Ameritrade, and Etrade all recently moved to eliminate per-trade fees to match Robinhood’s pioneering zero-comission trades. Though some of those brokerages experienced infrastructure troubles recently, Robinhood massive outages could push users towards those incumbents that they might perceive as more stable.
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As Morgan Stanley buys E-Trade, Robinhood preps social trading
Before it was worth $7.6 billion, the original idea for Robinhood was a stock-trading social network. At my kitchen table in San Francisco in 2013, the founders envisioned an app for sharing hot tips to a feed complete with a leaderboard of whose predictions were most accurate. Once they had SEC approval, they pivoted toward the real money maker: letting people buy and sell stocks in the app, and pay to borrow cash to do so.
Now, seven years later, Robinhood is subtly taking the first steps back to its start. Today it’s launching Profiles. For now, they let users see analytics about their portfolio, like how concentrated they are in stocks versus options versus cryptocurrency, as well as across different business sectors. Complete with usernames and a photo, Profiles let you follow self-made or Robinhood-provided lists of stocks and other assets.
Profiles could give Robinhood’s customers the confidence to trade more, and create a sense of lock-in that stops them from straying to other brokerages that have dropped their per-trade fees to zero to match the startup, like Charles Schwab, Ameritrade and E-Trade, which was acquired for $13 billion today by Morgan Stanley, as reported by The Wall Street Journal.
The Profile features certainly sound helpful. They could reveal that your portfolio is too centered around tech, media and telecom stocks, or that you’re ignoring cryptocurrency or corporations from your home state. Lists also makes it easier to track specific business verticals, save stocks to buy when you have the cash or set aside some for deeper research. Robinhood pulls info from FactSet, Morningstar and other trusted sources to figure out which stocks and ETFs go into sector lists, or you can make and name your own. Profiles and lists begin to roll out to all users next week.
But what’s most interesting is how profiles lay the foundation for Robinhood as a social network. It’s easy to imagine letting users follow other accounts or lists they create. The original Robinhood app let users make predictions like “17% increase in Facebook share price over the next 11 weeks,” with comments to explain why. It showed users’ prediction accuracy, their average holding time for assets, a point score for smart foresight and community BUY or SELL ratings on stocks.
If Robinhood rebuilt some of these features, it might lessen the need for an expensive financial advisor or having enough cash to qualify for one with a different brokerage. Robinhood could let you crowdsource advice. “We understand the connotation of taking something from the rich and giving it to the poor. Robinhood is liberating information that’s locked up with professionals and giving it to the people,” Robinhood co-founder and co-CEO Vlad Tenev told me back in 2013.
Robinhood would certainly need to be careful about scammy tips going viral. Improper safeguards could lead to pump and dump schemes where those late to buy in get screwed when prices snap back to reality.
But embracing social could leverage some of its strongest assets: the youthfulness of its user base and the depth of connection to its users. The median age of a Robinhood customer is 30, and half say they’re first-time investors. Being able to turn to friends or experts within the app might convince them to pull the trigger on trades.
Most online brokerages are somewhat undifferentiated beyond differences in pricing, while their clunky, unstylized products don’t generate the same brand affinity as people have for Robinhood. Unsatisfied users could bail for a competitor at any time. Robinhood’s users are accustomed to social networking and the way it locks in users, because they don’t want to abandon their community.
When I asked Robinhood Profiles’ product manager Shanthi Shanmugam directly about whether this was the start of more social trading features, they suspiciously dodged the question, telling me, “When thinking about how to reflect who you are as an investor, we looked at how other apps represent you and it felt natural to leverage a design that felt more like a profile. When helping people group their investment ideas, it was easy to envision this as a playlist you might find on your favorite music app.”
That’s far from a denial. Offering social validation for trading could help Robinhood earn more from its customers despite their small total account balances. While Robinhood might have more than 10 million accounts versus E-Trade’s 5.2 million and Morgan Stanley’s 3 million, E-Trade’s average account size is $69,230 and Morgan Stanley’s is $900,000, while a survey found most of Robinhood’s held $1,000 to $5,000.
That all means that Robinhood earns less on interest sitting in users’ accounts than the old incumbents. But Robinhood earns the majority of its money on selling order flow and through its subscription Robinhood Gold feature that lets users pay monthly so they can borrow cash to trade with. Profiles and lists, and then eventually more social features, could get Robinhood’s users trading more so there’s more order flow to sell and more reason for them to buy subscriptions.
“Democratizing access is about lowering fees, minimums and other barriers people face — like confidence. Profiles and lists make finance easier to understand and more familiar for people,” says Shanmugam. More social features built safely, more reassurance, more trading, more revenue. Robinhood has raised $910 million. But to outgun larger competitors like the newly assembled Morgan Stanley/E-Trade that’s matched its zero-fee pricing, Robinhood will have to win with product.
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Robinhood cuts trading fees, grows profits with in-house clearing
As zero-commission stock trading app Robinhood starts preparing to IPO, an engineering investment two years in the making could accelerate its quest for profitability. Most stock broker services have to pay an external clearing house to reconcile trades between buyers and sellers. Now with 6 million accounts up from 4 million just 5 months ago, that added up to a huge cost for Robinhood since it doesn’t demand a trading fee like the $7 to $10 that incumbent competitors E*Trade and Scottrade charge. Relying on outside clearing also introduced bottlenecks around its innovation and user sign ups, limiting onboarding to business hours.
But today Robinhood will start migrating accounts to its new in-house clearing service over the next few months. That will save it from paying clearing fees on stock, option, ETF and cryptocurrency trades. In turn, Robinhood is eliminating or reducing some of its edge case fees: $10 broker assisted trades, $10 restricted accounts, $50 voluntary corporate actions and $30 worthless securities processing will all now be free. Robinhood is meanwhile cutting its margin on fees passed on by banks or FedEx, so ACH reversal fees will drop from $30 to $9, overnight check delivery from $35 to $20 and overnight mail from $35 to $20.
“What’s really interesting is that this is the only clearing system built from scratch on modern technology in at least the last decade,” Robinhood co-founder and co-CEO Vlad Tenev tells me. Most clearing services ran mainframes and terminal-based UIs that aren’t built for the pace of startup innovation. Going in-house “allows us to vertically integrate our business so we won’t have to depend on third-parties for foundational aspects. It’s a huge investment in the future of Robinhood that will massively impact our customers and their experience, but also help us out on building the kind of business we want to build.”
There’s a ton of pressure on Robinhood right now since it’s raised $539 million to date, including a $363 million Series D in May at a jaw-dropping $5.6 billion valuation just a year after raising at $1.3 billion. Currently Robinhood earns revenue from interest on money kept in Robinhood accounts, selling order flow to exchanges that want more liquidity, and its Robinhood Gold subscriptions, where users pay $10 to $200 per month to borrow $2,000 to $50,000 in credit to trade on margin. Last month at TechCrunch Disrupt, Robinhood’s other co-CEO Baiju Bhatt told me the startup is now actively working to hire a CFO to get its business ready to IPO.
Whoever that CFO is will have an easier job thanks to Christine Hall, Robinhood’s Product Lead for Clearing. After stints at Google and Udacity, she was hired two years to navigate the regulatory and engineering challenges of spinning up Robinhood Clearing. She explains that “Clearing is just a fancy word for making sure that when the user places a trade, the price and number of shares matches what the other side wants to give away. In the less than 1 percent chance of error, the clearing firm makes sure everyone is on the same page prior to settlement.
Robinhood Clearing Product Lead Christine Hall
Forming the Robinhood Securities entity, Hall scored the startup the green light from FINRA, the DTCC and the OCC. She also recruited Chuck Tennant, who’d previously run clearing firms and would grow a 70-person team for the project at Robinhood’s Orlando office. They allow Robinhood to clear, settle (exchanging the dollars and shares) and ensure custody (keeping records of asset movements) of trades.
“It gives us massive cost savings, but since we’re no longer depending on a third-party, we basically control our destiny,” Tenev says. No more waiting for clearing houses to adapt to its new products. And no more waiting the whole weekend for account approval as Robinhood can now approve accounts 24/7. These little improvements are critical to Robinhood staying ahead of the pack of big banks like Charles Schwab that are lowering their fees to compete, as well as other startups offering mobile trading. The launch could also blossom into a whole new business for Robinhood if it’s willing to take on clearing for other brokers, including fintech apps like Titan.
Clearing comes with additional risk. Regulatory scrutiny is high, and the more Robinhood brings in-house, the more security work it must do. A breach could break the brand of user trust it’s been building. Yet if successful, the launch equips Robinhood for an ambitious future beyond playing the markets. “The mission of the company has expanded a lot. It used to be all about stock trading. But if you look at Robinhood five years from now, it’s about being best-in-class for all of our customers’ financial needs,” Tenev concludes. “You should be able to get everything from Robinhood that you could get from walking into your local bank.” That’s a vision worthy of the startup’s epic valuation.
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Robinhood’s Vlad Tenev On Stock Market Turmoil And Eliminating Trading Fees
This might not seem like the best time to be running a startup focused on stock market trading, but Vlad Tenev, co-founder of Robinhood, still sees plenty of opportunities. “There’s always companies and products that are doing well, and there’s always comapnies and products that aren’t doing so well,” he said. “In addition to that, short-term fluctuations… Read More
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