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I'm Not Selling...Because Robinhood Won't Let Me

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The markets are bouncing today following the biggest one-week drop off since the financial crisis in 2008. The Dow Jones Industrial plummeted over 3500 points last week, representing the largest one-week point drop in the history of the index. Today the markets are beginning to recover, and investors are buying the dip. At the height of trading excitement, millennials’ favorite trading platform, Robinhood, is suffering a system-wide outage.

The over 10 million users on Robinhood’s free-trading platform have seen their current holdings frozen with no way to buy or sell any asset. I purchased Microsoft calls on Friday through Robinhood’s mobile applications, which I planned on selling today (Monday, March 2nd) for a quick turnaround but am unable to get out of my positions. This is a horrible sign for the mobile trading start-up. Robinhood is best known for its industry-disrupting offering of commission-free trading.

The markets are hitting record high volumes today, and Robinhood’s server infrastructure is not developed enough to handle its 10+ million users. Highly volatile markets with massive volume have never tested the company, and the fact that it has frozen everyone’s assets during the market biggest one day rally of the year is not only beyond frustrating but a massive red flag. This inability to service customers when they need it the most makes me question the firm’s ability to be recognized as a legitimate trading platform.

Robinhood’s platform demonstrated a flaw last fall when individuals were able to gain “infinite leverage” through a loophole that the company has since fixed. This shows the firm’s platform is still at an earlier stage in development than its competitors and has bugs. 

Robinhood has lost the faith of many of its users, and the platform will undoubtedly lose a significant number of investors if they do not appropriately handle this shutdown. The platform’s nonexistent liquidity today is going to cost the company a lot. If Robinhood doesn’t have the cash to compensate those that lost money from this freeze appropriately, they risk not only losing clients but potential lawsuits.

Millennial investors are going to turn to more mature trading platforms that can handle any level of traffic like Charles Schwab (SCHW - Free Report) and TD Ameritrade (AMTD - Free Report) , with SCHW recently announced a $26 billion acquisition of AMTD. E-Trade also stands to gain, with Morgan Stanley (MS - Free Report) , who just announced it would be buying the company for $13 billion.

The consolidation of these “more legitimate” online brokerages will allow the companies to leverage competitive scale advantages that Robinhood’s young platform is unable to do. There have been discussions of the business taking its shares public. This outage will likely put this pending IPO on hold.

Take Away

The system-wide outage on one of the highest volume trading days could mark the end of Robinhood if it is not corrected and investors aren’t made whole. Robinhood’s 10+ million clients represents a massive potential market for competing trading platforms if these investors decide their money would be safer with one of the more mature brokerages.

As of 2 pm Eastern Standard time, the platform is still down, and there is no news or timeline about when to expect it back up.

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