Is Robinhood Safe?

Robinhood has emerged as a game-changer in online trading. Thanks to its commission-free trading model, sleek design and accessibility, the platform attracts millions of users eager to invest in stocks, options, ETFs, and cryptocurrencies. These include seasoned active traders, inexperienced investors, and those with self-directed portfolios looking to take investing into their own hands.

Robinhood is the top choice among beginner investors seeking a low-cost investment app with a user-friendly interface and a wide range of investment options. It is free, easy to use, and phone-friendly.

However, as with all online brokerage firms, the question of safety looms large. In an era where cyber threats are ever-present, investors want to ensure the security of their funds and personal data. Benzinga spotlights Robinhood, examining its security measures, potential risks, and what you must know to protect your investments on this great platform.

Company Background and Reputation

Robinhood was founded in April 2013 by Vlad Tenev and Baiju Bhatt, two Stanford University alumni. The duo aimed to democratize finance by making stock trading accessible to all. They envisioned a financial market without traditional entry barriers like high fees, account minimums and complex trade processing. 

This was a mission even the most woke, capitalism-weary millennial could get behind. Robinhood’s revolutionary commission-less trading model resonates with a growing generation of tech-savvy, cost-conscious investors. 

The App was officially launched in April 2015, about four months after the beta version was released on the App Store. It quickly gained popularity, amassing over one million users by 2016, a testament to its appeal among diverse traders. The number of users peaked in 2021 at up to 17.3 million from just half a million in 2014. The active monthly users now rest at under 11 million. 

Robinhood’s fast growth reflected a growing interest in accessible, easy-to-use investment platforms, especially during the 2021 meme stock frenzy. Its journey from a disruptive startup to a publicly traded company has been marked by rapid growth and significant milestones. Here’s a breakdown of some of its notable achievements.

Introduction of Cryptocurrencies trading

After amassing a waitlist of over two million customers, Robinhood launched zero-fee crypto trading across multiple U.S. states in January 2018. This move capitalized on the burgeoning interest in cryptocurrencies, attracting a new segment of investors. Users could buy and sell popular digital currencies like Bitcoin and Ethereum. 

By 2021, the company had expanded its offerings to include Bitcoin Cash, Dogecoin, Ethereum Classic, and Litecoin trading across all states except Nevada and Hawaii. The company started issuing its crypto wallet in early 2022, with support for trading Shiba Inu, Solana, Chainlink, and Polygon. Within the same period, the platform implemented the Bitcoin Lightning Network to facilitate faster crypto transactions. By the end of 2023, Robinhood had expanded its crypto trading to the EU.

More Extensive Investment Product

Besides cryptocurrency, Robinhood has added numerous investment options to its product lineup. This is an impressive milestone for a company that started with stocks and exchange-traded funds (ETFs). Options trading was added toward the end of 2017, and by mid-2018, investors could access and trade American Depositary Receipts (ADRs) — a bank-issued certificate representing equities in foreign firms. 

The platform greenlights fractional share investing and a dividend reinvestment plan toward the end of 2019, followed by access to IPO shares investing in 2021, securities lending in 2022 and individual retirement accounts (IRAs) in early 2023. Also, in 2019, Robinhood launched a transaction account and an FDIC-insured savings account. Its debit card — Robinhood Cash Card, was introduced in early 2022. This zero-fee card is issued by its partner, Sutton Bank, which is FDIC-insured. The card lets you round up purchases, automatically investing the extra amount in crypto or stock. 

Premium Subscription Service 

In 2016, Robinhood introduced Robinhood Gold, a premium subscription service targeting more experienced investors seeking advanced features. Robinhood Gold grants subscribers extended trading hours, margin trading, higher instant deposits, and enhanced research and analytical tools. Having access to professional research from Morningstar and Level 2 data from Nasdaq can be a game changer in your trade analysis and performance. 

In addition, subscribers enjoy 5% on uninvested brokerage cash, an interest-free margin on the first $1,000 borrowed and a 1% boost on new eligible deposits. Robinhood also recently added a credit card — the Robinhood Gold Credit Card, as part of its premium membership benefits. The credit card offers 3% cash back on all purchases and 5% on all travel booked via Robinhood’s portal. This compelling offering reflects the platform’s broader ambition to become a one-stop shop for financial services.

Initial Public Offering

One of the most significant milestones in Robinhood’s history was its initial public offering (IPO) on July 29, 2021. The company went public on the Nasdaq under the ticker “HOOD.” The IPO valued Robinhood at around $32 billion, underscoring its rapid growth and substantial user base, reaching over 22 million by mid-2021.

Robinhood’s fast-paced growth has been fraught with controversies that have challenged user trust and the company’s reputation. Here are some of the platform’s top controversies: 

The GameStop Saga

Robinhood’s most high-profile controversy is the January 2021 GameStop trading frenzy. Retail investors, many of whom were using Robinhood, drove up the price of GameStop stock, leading to massive volatility and a subsequent short squeeze. Amid this chaos, Robinhood restricted trading on specific stocks, including GameStop, citing liquidity concerns. This move sparked outrage among users and accusations of market manipulation. The incident led to multiple lawsuits, congressional hearings, and a significant blow to Robinhood’s reputation.

Outages and Technical Issues: Robinhood has experienced several high-profile outages, particularly during periods of high market volatility. Notably, in March 2020, the platform suffered a series of outages that prevented users from accessing their accounts and executing trades. The systemwide, all-day outage on March 2 was especially heartbreaking for most traders because, on that day, the Dow Jones Industrial Average made its most significant daily point gain since 2009. The S&P 500 also climbed over 4.6%. 

Another similar outage occurred on March 9. In late June 2021, the Financial Industry Regulatory Authority (FINRA) fined Robinhood $57 million and ordered it to pay nearly $13 million in compensation to investors affected by the March 2020 outage. In March 2023, the platform agreed to pay another $9.9 million to settle a class-action lawsuit regarding trading losses resulting from the blackout. These technical issues indicate negligence, which undermines user trust. 

Data Security Breaches

In October 2020, Robinhood disclosed a data security breach that exposed the personal information of approximately 2,000 users. Before that, the company had admitted to storing user passwords in an unencrypted cleartext format in 2019. This incident raised concerns about the platform’s ability to safeguard user data, further impacting its credibility. 

A voice phishing scheme involving the company’s employee in November 2021 led to five million stolen emails, two million users' full names exposed, and 300 users' date of birth disclosed. This breach was believed to have been executed by Brian Fitzpatrick, who was also connected to an FBI email hack in the same year.

Payment for Order Flow: Robinhood’s primary revenue model is payment for order flow (PFOF). In PFOF, retail brokers route customers' orders to wholesale brokers instead of exchanges since the former execute orders at better pricing than most exchanges. Most retail brokers accept payment from wholesalers in return for their customers' orders. 

Critics argue that receiving compensation for directing orders to market makers creates a conflict of interest and may not result in the best execution price for users. In 2019, FINRA fined Robinhood $1.25 million for routing orders based on the compensation it receives from market makers and failing to ensure its clients receive the best price for orders. In December 2020, Robinhood was also involved in class action suit for failing to disclose to clients that it received compensation for order flows.

The same month, Robinhood paid $65 million to settle claims by the Securities and Exchange Commission (SEC) that it failed to disclose these kickbacks, that customers’ orders were executed at inferior prices compared to other brokers and that the platform made false and misleading statements about it. However, despite its overwhelming regulatory scrutiny, Robinhood has maintained that PFOF enables it to offer commission-free trading.

Financial Safety

As one of the most popular online trading platforms, Robinhood adheres to strict financial safety to safeguard customers’ funds in line with its regulatory and compliance requirements mandated by various U.S. financial regulators. These include:

A. Securities Investor Protection Corporation (SIPC) Coverage

Robinhood is a member of the Securities Investor Protection Corporation (SIPC). The SIPC is a federally mandated, private nonprofit organization established as part of the 1970 Securities Investor Protection Act (SIPA). The act aims to protect investors from brokers becoming insolvent or brokerage failures. The SIPC insurance covers traders or investors for up to $500,000 in cash and securities (e.g., stocks and ETFs) held in member brokerage. 

This coverage amount includes up to $250,000 in uninvested cash. So, if Robinhood fails, goes out of business, or cannot meet its financial obligations to investors, SIPC will request a court to appoint trustees to supervise the firm's liquidation and process investors' claims. For clarity, the total amount of SIPC’s coverage is $500,000. So, if you have $500,000 in securities and $250,000 in cash, SIPC won’t cover the entire amount. 

SIPC can only cover you for over $500,000 if you have multiple investment accounts of different types in the member brokerage, such as traditional individual retirement accounts (IRAs) and Roth IRAs. SIPC does not also protect your investments from losses resulting from market fluctuations. Thankfully, Robinhood provides extra insurance coverage, which becomes available to investors once the SIPC limit gets exhausted. This policy covers securities and cash up to $1 billion, limited to a combined return to any investor of $50 million in securities, including $1.9 million in cash.

B. Bank Account Protections

Robinhood is a member of the Federal Deposit Insurance Corporation (FDIC). This independent federal agency insures deposits in U.S. banks and thrifts in case of bank failure. Established in 1933, the FDIC promotes stability and maintains public confidence in the U.S. financial system by fostering sound banking policies. The insurance covers deposits up to $250,000 per depositor per insured bank for each account ownership category for all FDIC-member banks. 

The cash in your Robinhood spending account is insured up to this legal limit. Suppose you opt into Robinhood’s brokerage cash sweep program. In that case, you become eligible for FDIC insurance up to a maximum of $2.5 million. That’s up to $250,000 per bank, including any deposits you already have there under the same account type, subject to FDIC insurance limits and any bank capacity restrictions. Robinhood’s cash sweep program sweeps your uninvested cash to partner banks, where interest accrues daily based on your end-of-day balance.

 While each bank’s FDIC insurance coverage limit is $250,000, $2,000 is reserved for accrued interest. FDIC does not cover securities, annuities and life insurance policies. It covers diverse savings deposit options, including standard and high-yield savings accounts, certificates of deposits (CDs) and money market accounts. Additionally, it covers checking accounts, IRAs, revocable and irrevocable trusts and employee benefit plans.

C. Capital and Financial Health

Despite declining active users in recent quarters, Robinhood has consistently grown revenue per user. The company reported a solid quarterly profit in mid-February and said it aims to deliver ‘profitable growth’ in 2024. Assets under custody (AUC) increased 65% year-over-year to $102.6 billion — the highest since the 2021 meme stock frenzy. Consistent net deposits and higher equity valuation drove the increase. 

The net deposits were $4.6 billion, translating to a 21% annualized growth rate relative to the 2023 ending. Also, average revenue per user increased by 23% year-over-year to $81. 

The platform benefits from increased retail trading activities as Bitcoin soars and the S&P 500 hits all-time highs. Robinhood has robust financial muscle and an overall positive outlook when considering its advantages, especially regarding crypto trading, where its zero-fee offers a significant competitive edge over traditional crypto exchanges like Coinbase. Its excellent financial health means more security, stability, and trust for its users, ensuring their investments are well-protected. It also facilitates innovation and service improvements. 

Data Security

Robinhood leverages various industry-standard measures to protect your account and ensure the safety and security of your data.

A. Encryption and Data Protection

Before storage, Robinhood encrypts your Personally Identifiable Information (PII), including sensitive data like your SSN. The platform employs the Transport Layer Security (TLS) protocol with up-to-date configurations and ciphers to ensure secure communication between the App and server. Any data sent to the company servers or traveling across its network remains private.

This includes your personal and account information, such as your password and bank account. The platform uses reputable third-party integration to facilitate seamless and secure access to your bank information, including your account number and available balance. Upon verification of your credentials, the platform will not reaccess them.

B. Two-Factor Authentication (2FA)

All Robinhood accounts for new devices are protected with Two-factor authentication (2FA). 2FA, or multifactor authentication, necessitates two verification sources for account sign-in. Typically, this includes something you know (your password) and something you have (a one-time code or device approval). 

This extra security layer ensures you’re accessing your account, not some third-party actors. Whenever you sign in or implement changes to your Robinhood account, you must verify your identity before completing the action. This secures your Robinhood account, even if someone guesses or knows your password.

C. Data Breaches and Response

Cyber actors have become more sophisticated as technology advances at breakneck speed. So, regardless of the best attempts by online brokerages to ensure funds and data security, sometimes the most efficient and skilled hackers can exploit unforeseen vulnerabilities in these platforms. That has been the case with Robinhood in some instances. 

In October 2020 and November 2021, Robinhood experienced data breaches that exposed user information and affected account security. In response, Robinhood immediately secured affected accounts and worked with law enforcement. 

They emphasized using two-factor authentication and implemented more robust monitoring systems to detect suspicious activities. Additionally, Robinhood improved its encryption methods and conducted regular security audits. By enhancing security measures and educating users, Robinhood aims to prevent future breaches and protect user data.

Regulatory Compliance

Brokers must maintain strict regulatory and compliance guidelines vital for investor protection to operate in the U.S., and Robinhood is no exception. 

A. Registration and Licenses

Two reputable regulatory bodies in the U.S. regulate Robinhood — FINRA and the SEC. FINRA is a self-regulatory organization that enforces rules for broker-dealers. It handles licenses and regulations of broker-dealers, enforcing ethical investment practices. The SEC is a federal agency tasked with protecting investors and maintaining the integrity of the U.S. financial markets. The SEC oversees FINRA, acting as the first level of appeal for actions brought by FINRA. 

Being regulated by these agencies ensures Robinhood operates under strict financial and ethical standards regarding transparency, fairness, and accountability in the financial markets. Compliance with these agencies helps prevent fraud and misconduct, giving users greater confidence in the platform. Additionally, it means Robinhood must adhere to rigorous reporting and operational requirements, enhancing its services’ overall safety and reliability.

B. Compliance with Financial Regulations

Robinhood complies with key financial regulations from the SEC, FINRA, the Federal Reserve, and the FDIC. These regulations include reporting requirements, anti-fraud rules, broker-dealer standards, capital requirements, and data security guidelines like PCI DSS. 

Adherence to these rules ensures transparency and accountability, which builds user trust. Fraud prevention measures protect users from deceptive practices. Capital requirements and asset protection rules ensure financial stability and safeguard user funds. Data security regulations reduce the risk of breaches and protect user information.

C. Audits and Oversight

Regular audits and oversight ensure services like Robinhood adhere to regulatory requirements and maintain user safety by identifying compliance issues and potential risks. In 2020, the SEC and FINRA investigated Robinhood’s failure to disclose revenue from payment for order flow, leading to a $65 million settlement with the SEC. 

In June 2021, FINRA fined Robinhood $70 million for various violations, including misleading customers and system outages. These investigations led Robinhood to enhance disclosures, upgrade systems, and improve compliance measures, creating a safer and more transparent platform for users.

Operational Security

Robinhood maintains robust operational security, which is vital for a seamless trading experience.

A. Platform Stability and Reliability

Robinhood has faced various major challenges regarding platform outages during high trading activity, such as in March 2020 and January 2021. These disruptions typically left users unable to access their accounts or execute trades promptly. This can be frustrating and may even have a financial impact. Operational stability is crucial for safety, ensuring investors can effectively manage their funds without interruptions. 

When Robinhood’s platform is stable, you can make informed decisions and execute trades securely, enhancing your overall experience and trust. Ongoing efforts to improve infrastructure and manage high-volume trading periods are essential to minimizing disruptions and maintaining user confidence.

B. Trade Execution and Transparency

When you place trade orders on Robinhood, they’re routed to wholesale brokers instead of exchanges (market makers). This practice is called payment for order flow (PFOF). Robinhood typically receives payment for directing orders to market makers. This has raised concerns about potential conflicts of interest. 

Critics argue that this arrangement may not prioritize getting the best execution price for users. Transparency in how Robinhood benefits from PFOF and the potential impact on trade execution quality have been scrutinized. While Robinhood discloses its PFOF practices, ongoing regulatory scrutiny ensures that users know how their trades are executed and that best execution practices are upheld.

C. Customer Support and User Assistance

You may require assistance with technical problems, account management, and understanding complex trading concepts when using online brokerage. Adequate support helps you resolve issues quickly, instilling trust and confidence and making you feel secure in managing your investment. Furthermore, it facilitates informed decision-making, essential for protecting your investment portfolio. Good customer support can differentiate a brokerage from its competitors, attracting and retaining customers. The reason is that it translates to a smooth and reliable trading experience. 

You can talk to Robinhood’s live support agent by phone or chat to get answers on everything from how to transfer your assets into Robinhood to questions about crypto trades and debit card transactions. You can access support 24/7 via chat and phone from 7 a.m. — 9 p.m. ET. For complaints about your Robinhood crypto and spending account, call 888-275-8523. For all other inquiries or information, you can speak with an agent at 650-761-7789. 

You can also readily access any information on its comprehensive help center. The platform also provides highly insightful educational resources to facilitate customer learning. Robinhood’s reviews on Trustpilot indicate poor customer support and unreliable responses. This means the platform potentially needs to do more to improve its customer service. 

Comparisons with Other Platforms

Robinhood is the undisputed pioneer of commission-free trade on stocks, ETFs, options and cryptocurrencies. It also leads the way in ease of usage with its user-friendly mobile App. However, while it’s still relatively better than most online retail brokers, some platforms have caught up with its best features while delivering more. For instance, industry leaders Charles Schwab, E*TRADE and Fidelity all now offer commission-free trading with an intuitive platform to optimize user experience. 

Unlike these platforms, Robinhood does not offer mutual funds and bonds. In addition, these more established brokers provide research and analytical tools like Morningstar research reports and Level 2 data for free, unlike Robinhood, which requires a paid subscription for access. Moreover, they provide a more efficient customer experience and robust user security without controversies. 

Robinhood’s learning center offers compelling and insightful content, but compared to its competitors, the content seems slightly unorganized, possibly due to poor indexing. But regardless of these shortcomings, Robinhood will always get the job done if you’re seeking a simple, easy-to-use, low-cost stock and crypto trading app. Its clean design focuses on the basics and always appeals to beginner investors. 

Frequently Asked Questions