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Robinhood Outages Leave Investors in the Dark

The popular fintech app Robinhood has experienced three outages in the first two weeks of March, leaving users unable to trade and raising serious questions about its ability to handle massive surges in trading. Half of Robinhood’s customers are first-time investors and Robinhood revolutionized the trading landscape by introducing commission-free trades (leaving large broker-dealers with no choice but to follow suit). But the Robinhood outages are not something to take lightly and are casting doubts on the app’s once-rosy future in the fintech space.

Robinhood outages

The stock market saw unprecedented gains on Monday, March 2, 2020 but Robinhood users were left out in the cold after the app malfunctioned, leaving investors unable to trade and profit from the market’s historic rally. Robinhood’s founders later admitted that they were unprepared for the deluge of trading activity that occurred on Monday as the stock market soared.

The outage began on Monday at 9:33 AM, just minutes after the start of the trading day—but Robinhood failed to notify investors by email until 3:09 PM, downplaying the situation by writing that the app and website were “experiencing downtime.” This “downtime” was “affecting functionality on Robinhood, including your ability to trade.” On Tuesday, March 3 at 2:53 AM, Robinhood finally notified investors that it had restored functionality—but later on Tuesday morning, the app was down again.

During this “downtime” on Monday, traders did not want to take a break; they wanted to get in on the action during what ended up being a fantastic trading day, as stocks made the most gains in 12 years. As it rebound from Friday’s decline, the Dow Jones Industrial Average gained 1,800 points, or around 5.1%. The S&P 500 jumped 4.6%. This was a welcome change from the disastrous losses of February 28, but one that Robinhood’s 10 million users could not take advantage of.

What if you bought something on Friday, watched it gained 10% on Monday, and then you couldn’t sell it before it went back down on Tuesday? Users were—and still are—rightly frustrated. Users complained that a Sunday night update to the app may have been a factor in the outage, which was acknowledged by Robinhood on social media two hours after it had begun.

In a March 3 update posted to the Robinhood blog, Robinhood’s founders, Baiju Bhatt and Vladimir Tenev, attempted to assuage investor concerns, writing:

We now understand 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.

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.

Our team is continuing 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.

Investors should not be satisfied with this response, however. Investors who had options expiring on Monday have a particular reason to be concerned. Robinhood wrote, “Because of the outage, we handled your expiring positions in a slightly different manner. If your contracts were at least $0.01 in the money, your long contracts were exercised and your short contracts were likely assigned.”

While it at first seemed like these two Robinhood outages were isolated incidents, a third outage has put pressure on the company to offer an explanation. On Monday, March 9, against the backdrop of plummeting stock prices driven by coronavirus fears and an oil crisis, the app went offline yet again, as reported by CNET. At 9:51 AM EST, an issue appeared, and Robinhood announced that they were working on a solution at 10:30 AM. At 1:25 PM, Robinhood announced that all trading, except for fractional equities, was functioning. By 6:30 PM, the app was back up and running.

Investors are rightly upset about this, and although Robinhood’s 44-page customer agreement form includes a disclaimer that states that “Robinhood will not be responsible for temporary interruptions in service due to maintenance, Website or App changes, or failures,” this doesn’t absolve Robinhood from responsibility in cases of gross negligence. This situation is especially problematic because Robinhood offers consumers no other option but to trade via the app. There is no provision in place for Robinhood to accept phone orders, and that means that the company is not fulfilling their core mission to its customers. Marc Fitapelli, partner at Fitapelli Kurta LLC, asserts that investors have rights under federal securities laws, and new technology does not trump these rights. “No one can waive their protections under federal securities laws. ”

If you were affected by the Robinhood outage, don’t hesitate to contact a securities attorney to learn more about your options for recovery. Call (877) 238-4175 or email info@fkesq.com for your free case consultation with the securities attorneys of Fitapelli Kurta.