Alex Kearns started trading stocks on an app called Robinhood in 2018, two years before he threw himself in front of a moving train. The University of Nebraska sophomore and ROTC cadet was the only person in his family who used the app, but he had talked with his father, Dan, about it, who figured it seemed harmless enough. Alex was studying management and had gotten curious about investing as he learned more about financial markets. He’d even started chatting on the phone with a cousin, Bill Brewster, a professional investor and portfolio manager, about economics and central banking. But unbeknownst to anyone who knew him, Alex had begun trading high-risk financial instruments called options. He was at his family’s Naperville, Illinois, home when, a little before midnight, on June 11 of last year, he got a startling notification indicating he had lost $730,000. He had only about $16,000 in his account.
The alert sent Alex into a panic. Robinhood did not provide any obvious live customer service phone number. So he fired off three increasingly desperate emails to the company. Was it possible they’d made a mistake? He’d thought the losses on this trade were capped at $10,000. Could they please check? According to a lawsuit later filed by his family, the company sent back only unhelpful programmatic replies. One came in a little after 3 a.m., warning Alex he had just six days to deposit $178,612.73 to begin settling the trade. Alex sent his last note after 7:30 a.m., less than two hours before the markets were set to open on Friday morning—and a time when most professional brokers are already at work and answering calls.
He waited. The opening bell rang on Wall Street at 9:30, ushering in the trading day. Robinhood still had not sent anything to clear up the confusion. So Alex typed out a short note on his computer, saved a screenshot of his Robinhood balance, and got on his bike. He rode through his hometown, a leafy Chicago suburb where he’d been marooned after campus shut for the pandemic, eventually stopping at a secluded railroad crossing. Amid grassy sprawl and tidy houses, he ran onto the tracks. He was 20 years old.
His parents found his suicide note: “If you’re reading this then I am dead. See the image ‘Suicide 2’ for why.” He explained he never intended to take this much risk. He’d been looking forward to his future, he wrote, and he could not imagine the pain he’d caused his family. “Please understand that this decision was not made lightly. You could fill an ocean with the amount of tears I’ve shed typing this. Please, please take care of yourselves. The amount of my guilt I feel as I commit to this is unbearable—I did not want to die.”
That night, Bill was sitting around a campfire on vacation when Alex’s parents called and relayed fragments of what had happened. “He died thinking that he was saving his family from financial ruin,” Brewster says. “But that’s not even the beginning of the story.”
While Robinhood declined to comment on Alex’s death for this article, in the year since his suicide, the company has framed what happened as a horrific accident and issued public commitments to improve its interface, user education, and customer service. Over the same period, the company has been subject to unprecedented scrutiny, first as it attracted millions of new investors bored at home during the pandemic, and then again after a horde of traders, many of them using the app, drove the share price of GameStop, a brick-and-mortar video game store, up by more than 1,700 percent this past January. In response, Robinhood froze new purchases of the stock, giving hedge funds who’d bet on its decline valuable time to recover. Though Robinhood argued it was forced to do so by demands from its clearinghouse, the explanation did little to mollify the app’s users, some of whom sued claiming the company had sided with its own allies and wealthy investors at their expense.
The GameStop episode blanketed the press this past winter, prompting two federal agencies and a congressional committee to launch probes into Robinhood’s freeze. Meanwhile, Alex’s family quietly filed their wrongful death case against the company. In some ways, these were all complementary inquiries into who the app really serves. Founded by two children of immigrants, Robinhood climbed from startup to multibillion-dollar enterprise on the back of a promise to upend the financial sector’s fraternity of suits and, like the app’s namesake, share the spoils with the people. But that’s not exactly how things played out. Robinhood may allow users to trade commission-free—but, as many of them have discovered, those trades still come at a cost.
BAIJU BHATT AND Vlad Tenev came up with the idea for Robinhood in 2012, after witnessing Occupy Wall Street. The protests, they’ve said, represented a boiling over of grievances among their generation, directed at the big banks that set off the 2008 financial crisis. Bhatt and Tenev, then in their mid-20s and friends going back to meeting as Stanford physics majors, wanted to build something that might give their fellow millennials access to the wealth-growing power of the market. At the time brokerages charged $7 to $10 per trade. They would do them for free.
While the app was in development, Robinhood built up its anti-establishment identity and courted millennials with teaser videos that razzed traders on the stock exchange floor, and with a lineup of celebrity investors—eventually, everyone from Ashton Kutcher to Jay-Z—who were cultural touchstones to their target audience. Online, Robinhood created a minimalist launch page where interested people could drop their email addresses for advance access to the app—and gamified it by allowing people to move up the line by referring friends.
When Robinhood hit the Apple app store in 2014, the waitlist was nearly 1 million people long. As the app onboarded hundreds of thousands of new users in its first months, Bhatt and Tenev told their story—and faced an obvious question: If everyone else is charging per trade, how does Robinhood make money doing it for nothing? At a 2014 San Francisco startup conference, Tenev sidestepped the question, explaining that other brokerages that charged their users per-trade commissions were doing it not to cover trading costs— which were virtually free now that trades were electronic—but to fund the costs of bringing in more customers. Robinhood didn’t need to charge commissions because they didn’t need marketing—they’d built a “simple,” “beautiful” product that people couldn’t get enough of. “Other brokers… spend millions on Super Bowl ads. Robinhood doesn’t, and the savings are passed on to you,” the company trumpeted in an early promotional video.
“The fact that we’re a brokerage leads people to think that a service like Robinhood should exist to make money,” Tenev said at the conference. “But that’s really not the case. The purpose of Robinhood is to make buying and selling stocks as frictionless as possible. If we make money as a side effect of that, that’s great.”
But Robinhood’s profitability wasn’t a side effect of being frictionless. It was very much the point. From founding, its business model was dependent on customers trading frequently, allowing the company the chance to earn a different kind of commission—known as PFOF, or payment for order flow—from every transaction. The payments are essentially a finder’s fee given to Robinhood by so-called market makers, the Wall Street firms that make money executing individual investors’ trades. Since launch, Robinhood has enthusiastically embraced PFOF, arranging favorable rates that eclipsed those of other brokerages, making it, according to the Securities and Exchange Commission, the company’s largest source of revenue. The money flows evoke a key lesson of the digital age: If something is free, then you’re not the customer—you’re the product being sold.
The market makers who pay Robinhood a premium to execute the app users’ trades include multibillion-dollar firms, like Citadel Securities and Virtu Financial, that conduct automated high-frequency or so-called “flash,” trading. Before their Robinhood days, Bhatt and Tenev had gotten to know the inner workings of this business and the valuable information flows they use to make money. They’d founded Celeris, an algorithmic trading company, and then Chronos Research, which built backend software for automated traders.
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