Robinhood’s Massive Outages Spell “Disaster,” Could Face Class Action Lawsuit

The massive outages on stock trading app Robinhood that started yesterday and continued today wasn’t because of a hack or a coding blip but stress on their infrastructure which “struggled with unprecedented load” leading to a “‘thundering herd’ effect — triggering a failure of our DNS system,” said co-founders Vlad Tenev and Baiju Bhatt in a statement.

Our co-founders shared an update regarding the outages Robinhood experienced this week, and the steps we’re taking to help ensure the stability of our systems.https://t.co/qOOG6lPheP

— Robinhood (@RobinhoodApp) March 4, 2020

This “unprecedented” load was the result of numerous factors, “highly volatile and historic market conditions, record volume, and record account sign-ups.”

The $912 million fintech giant was offline from Monday at 6:30 am Pacific to 11 pm Pacific. Then another outage was reported this morning from 6:30 am Pacific until just before 9 am Pacific.

Robinhood under regulatory scrutiny

Because of this, the $7.6 billion valued startup is now facing regulatory scrutiny. According to Dan Primack, a business editor at Axios, it spells “disaster” for Robinhood which has to go for serious third party audits now.

Primack appeared on CNBC’s “Squawk Box” on Wednesday where he said that though it’s a systematic issue that affected only the Robinhood users and not the market as a whole,

“regulators are gonna have to take a look at this and there is going to have to be a serious tech audit as what Robinhood has said so far just doesn't cut it.”

There could be a litigation risk. The Robinhood users didn’t get to play the biggest game ever for the Dow which could see a class action lawsuit coming to them.

A millennial-focused fast-growing company

On Monday, the Robinhood users were left out from 4.6% gain in the S&P 500, the third-best day since the financial crisis and another jump in US stock prices on Tuesday after the Fed announced 50 basis points cut that soon resulted in stocks dropping 2.8% lower.

Robinhood says it will provide compensation to all of its customers in the form of three months of Robinhood Gold premium subscription for borrowing money to trade plus access to bigger instant deposits, Nasdaq data, and Morningstar research reports. The company is calling it a “first step.”

The compensation could be a significant cost to the startup if they address many of its 10 million users affected.

The outages came at a time when Robinhood is already facing tough competition from the established retail brokers like TD Ameritrade, Charles Schwab, and E*Trade that mimicked the company's model by eliminating trading commissions last year.

Despite this, Robinhood’s user base grew faster in quarter 4 than in quarter third, and more in January and February this year, said Primack. It is a millennial-focused company which also offers crypto trading.