• The funding marked the third major investment in Robinhood in only five months
  • The company now has at least 13 million users.
  • In June, Robinhood said it saw 4.3 million daily average revenue trades

Robinhood brokerage firm said on Monday that it had closed funding of $200 million from investment firm D1 Capital Partners, raising its overall valuation to $11.2 billion.

The funding marked the third major investment in Robinhood in five months. Through its mobile app, Robinhood allows users to invest in stocks, exchange-traded funds, and options free of commissions. The company now has at least 13 million users.

“With this funding, we’ll continue to invest in improving our core product and customer experience,” the company said.

The app has been very popular with aggressive younger investors because it allows mostly free trades but there have been some hiccups. Finance Magnates reported that the trading app has suffered several systemwide outages, including one in March during the peak of market volatility and another one in June.

Robinhood has also been partly criticized for helping to create some unusual trading patterns. For example, when the price of oil sank into negative territory in April, users on Robinhood actually doubled their stake in United States Oil Fund, the biggest oil-related exchange-traded fund.

Robinhood also was implicated in some unusual activity involving shares of auto rental agency Hertz. A few days after the company filed for bankruptcy in late May, its shares suddenly spiked, surging almost 900% from $0.56 per share to $5.53 between May 26 and June 8.

Coincidentally, the number of Robinhood accounts that owned Hertz shares jumped from 43,000 just before the bankruptcy to almost 171,000 by mid-June.

But Robinhood has been flourishing. CNBC reported that venture capital investors have been pouring money into the California-based company in 2020 on hopes that more people, especially younger Americans stuck at home, will increasingly invest in the stock market.

Robinhood’s other high-profile investors include Sequoia Capital, Kleiner Perkins and Google’s venture capital arm, Google Ventures.

Due to the unprecedented gyrations in the stock market this year – a bear market followed by a huge rally – brokerage firms like Robinhood, TD Ameritrade (AMTD), Charles Schwab (SCHW) and E-Trade (ETFC), have seen record growth in customer accounts.

In the month of June, Robinhood said it saw 4.3 million daily average revenue trades, or DARTs, outperforming all of its publicly traded peers. In the second quarter, Robinhood’s DARTs more than doubled compared to the prior quarter.

In November 2018, the Wall Street Journal noted that while trading is generally free, Robinhood makes money by "sending customer orders to high-frequency traders in exchange for cash … a controversial but legal practice in the brokerage industry called 'payment for order flow.'"

“The revenue we receive from these rebates helps us cover the costs of operating our business and allows us to offer commission-free trading,” Robinhood co-founder Vlad Tenev said in a blog.

Robinhood also applies a monthly fee for its margin-lending service, Robinhood Gold.

Chris Nagy, managing principal of KOR Group, a company that studies trade executions, told the Journal that investors trading a high volume of shares are better off at the fee brokerages because they’d likely receive a better price than at Robinhood.

For smaller investors frequently trading a few shares at a time, Robinhood is adequate, Nagy said.

“At the end of the day, there’s no such thing as a free lunch,” Nagy added.

In June of this year, Robinhood received some bad press when a young trader who used the app committed suicide.

Alex Kearns, 20, of Naperville, Illinois, killed himself after he mistakenly thought he had amassed a negative cash balance of $730,165 on Robinhood after trading options.

“[Alex] thought he was exposed, he thought that ending his life would protect his family from the exposure,” Bill Brewster, an analyst at Sullimar Capital, told CNBC. “He got on his bike and never came home. This is investing, this isn’t a game. It’s people’s lives.”

In his suicide note, Kearns blamed Robinhood for permitting him to incur too much risk and debt.

“How was a 20-year-old with no income able to get assigned almost a million dollars’ worth of leverage?” the suicide note read. “I only thought that I was risking the money that I actually owned.”

Robinhood is required by its regulator, Financial Industry Regulatory Authority, or FINRA, to approve each client who wants to trade options.

Luke Lloyd, investment strategist at Strategic Wealth Partners, in Cleveland, told International Business Times that young people trading the stock market through the Robinhood app can both be a danger as well as a positive development.

“It depends on how somebody is using the platform,” he said. “Robinhood was revolutionary in the fact that it brought an easy-to-use platform that was easily accessible to the public that was commission-free. It revolutionized commission free trading.”

But problems arose when they gave away high-risk investment tools known as options to the general public who do not know how to use them.

“In most places, the legal age to gamble is 21,” Lloyd added. “Teenagers and young adults are discovering the stock market through Robinhood and using it as their way to gamble. This is absolutely not a good strategy, but this could teach them lessons about finance for the future. So long as they learn from their mistakes. If you use Robinhood correctly, as a way to learn the financial markets and gain knowledge, then I think it is a positive development… The stock market is not a get-rich-quick scheme, it takes time to generate wealth. If younger investors are consistent with their contributions and buy good-quality companies, they should not have a problem becoming wealthy in the long-term.”