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1 1 (October 08, 2020)

handle is hein.crs/govdccl0001 and id is 1 raw text is: FF.$ October 8, 2020 Robinhood, the Fintech Discount Broker: Recent Developments and Concerns Founded in 2013, Robinhood is an online and phone app- based discount broker-dealer for retail customers with an interest in trading stocks, stock options, exchange traded funds (ETFs), and cryptocurrencies. It is part of a new breed offintech firms-innovative, technology-focused firms offering financial products. The firm is seen by some as democratizing access to retail securities trading; has been accompanied by industry consolidation; and has raised various public policy and congressional concerns. The firm recently burst into the public eye for three major reasons: (1) it pioneered the now-widespread industry practice of charging zero trading fees or commissions for certain trades when the most inexpensive online brokers were charging $5 to $8 per trade; (2) in March 2020, its trading services shut down for more than a trading day in a period of market turmoil; and (3) in June 2020, a 20-year- old college student, Alex Kearns, committed suicide after his Robinhood app indicated that he had a negative balance of $750,000 for sophisticated stock options trades, an amount that now appears to have been grossly overstated. Broker-dealers act as brokers when they execute securities trades for their clients and as dealers when they trade their own securities for their own benefits. Most broker-dealers must register with the Securities and Exchange Commission (SEC) and generally must be members of and comply with the rules and guidance of a self-regulatory organization (SRO), the Financial Industry Regulatory Authority (FINRA, an SEC-regulated nonprofit). In addition, broker- dealer sales personnel (also called registered representatives) register with their state. SEC-registered broker-dealers are largely regulated under the Securities Exchange Act of 1934 (P.L. 73-291). Broker- dealers, or simply brokers, have significant range in the kinds of services they provide and generally divide into two groups: full-service (who provide research and advice, retirement planning, tax advice, etc.) and discount online brokerage firms. Historically, discount online brokers, such as TD Ameritrade, E*TRADE, and Merrill Edge, have charged lower trading fees than the full-service firms, but they have not provided individual investment advisory services. Thanks in part to ads highlighting its zero trade commissions, seemingly pitched largely at millennials, by May 2020, Robinhood had reportedly attracted some 13 million clients with a median age of 31. Of that total, 3 million were reportedly added during the first four months of the year. As part of the firm's appeal to its generally youthful traders, observers cite that Robinhood's phone app's trading interface has design elements similarly to video games, including an explosion of screen confetti when a trader makes a trade. As reported in the Financial Times, one user, a Harvard University Ph.D. economics student observed that the gamified interface makes trading so simple that it can be easy to make impulsive decisions. The view is shared by various behaviorists, but is rejected by firm officials. Like its online competitors (e.g., Schwab, TD Ameritrade, E*TRADE), Robinhood witnessed an unprecedented surge in retail trading during early 2020. Alphacution, a research firm, found that compared with other retail brokers, Robinhood's customers trade the riskiest products at the greatest frequencies. This is said to be especially true for stock options contracts that give investors the right to buy or sell shares at a specific price in the future. Robinhood reports options are traded by 12% of its active traders. In the aftermath of the Kearns suicide, stock option trading at the firm has become a central focus. Mr. Kearns had been trading an advanced form of stock option. Analysts say that various advanced stock options can have substantial financial liability. A US News & World Report profile of stock option trading observed, The statistics and the horror stories of huge losses demonstrate how dangerous option buying can be, especially for inexperienced traders. FINRA's generic broker rule, Rule 2090, the know your customer rule, requires option traders to get a broker's permission to move to more advanced options trading tiers based on broker-determined criteria. Depending on the broker, the criteria may include client characteristics such as options-trading experience, net worth, and age. Robinhood, a member of FINRA, provides for increasingly advanced and potentially more profitable but riskier levels of options trading. According to the Wall Street Journal, Robinhood has imposed less rigorous hurdles to options trading than do its various rivals. New clients reportedly take a questionnaire- based self-assessment, must acknowledge the trading risks involved, and promise to read the broker's materials on options trading. If clients say that they lack an options investing background, they cannot initially open an options trading account. According to the New York Times, the Robinhood app then subsequently tutors them to change the answer to 'not much' experience, which opens the door for them to trade. In June 2020, on the heels of the suicide, Robinhood's owners said that they had been plagued by shortfalls in K~:> p\w gnom ggmm mppm qq\ a , q 'S I 11LIANJILiN,

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