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Robinhood Made Nearly $700 Million By Selling User Data To Hedge Funds

Robinhood is facing backlash for appearing to aid institutional investors over individual traders after the popular investing app blocked users from purchasing shares in GameStop and other companies that experienced a price explosion in January.

GameStop’s share price rose to nearly $500 last week as retail investors drove up the price against hedge funds and other institutional investors. These investors had previously shorted 140% of GameStop’s existing shares on the assumption that the security would decrease in value.

Institutional investors caught in the short squeeze faced considerable financial loss. The hedge fund Melvin Capital Management lost more than half of its $12.5 billion portfolio in January, according to The Wall Street Journal.

The logo of trading application Robinhood seen on a mobile phone (Olivier Douliery/AFP via Getty Images)

Many of the online retail investors were using Robinhood and slammed the company for blocking users from purchasing shares of GameStop and other companies. Robinhood said in a Jan. 28 statement that it restricted transactions for certain securities due to “significant market volatility.” (RELATED: Everyone’s Laughing About GameStop, And Perhaps Justifiably So. But There’s A Flip Side To The Story)

Robinhood later stated in an open letter to users Monday that the company had to halt trading to meet clearinghouse deposit requirements that support customer trades. In an earlier statement released Friday, the company said its deposit requirements for equities had increased tenfold due to the market’s considerable volatility.

Robinhood staunchly rejected allegations that it wanted to stop users from trading or that its actions were designed to help hedge funds.

A class action lawsuit was filed against Robinhood last week alleging that the company’s “actions were done purposely and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood users.”

CNN host Chris Cuomo also grilled Robinhood chief executive Vlad Tenev over his company’s decision to restrict trading during a Friday appearance. He noted that the decision occurred after Robinhood’s clients began to lose money from the short squeeze.

“This looks like a move by an outfit called Robinhood, which is supposed to be taking from the rich and giving to the poor, and doing exactly the opposite,” Cuomo said.

One reason why allegations against Robinhood have persisted may have to do with the company’s controversial revenue model, which has led to a surge in earnings over the last two years, according to CNBC.

Robinhood has long branded itself as an accessible platform that provides free financial services for its users. Its mission statement includes a pledge to “democratize finance for all.” But the company makes money by selling its order flow — information about user transactions — to third party clients who actually enact trades with access to user data.

Order flow has accounted for the vast majority of Robinhood’s quarterly earnings. The company earned roughly $675 million in revenue from payments for order flow, according to quarterly revenue data compiled by The Box.

Trades may be commission free for Robinhood users but they are actually sold to “market makers” that often used their position as the middle man to generate profit, according to the Financial Times. Most of these “market makers” are hedge funds or other institutional investors that financially benefit from more trade and market volatility.

Robinhood was fined $65 million by the Securities and Exchange Commission (SEC) in December for “misleading statements and omissions” regarding its payment for order flow process. The SEC concluded that Robinhood “deprived” users of $34.1 million after providing their order flow to clients that prioritized higher revenue over providing the best price for customers.

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