Robinhood’s Trading Arrows Turn Into Friendly Fire

Robinhood’s days of growing fat from offering free trading look numbered. The upstart brokerage app was valued at $7.6 billion in a funding round last summer, and by December had more than 10 million customers. But in recent months established rivals matched the firm’s biggest appeal by nixing their own fees. Severe outages this week have landed more blows. Companies can often weather glitches. But Robinhood’s customers have plenty of other places to go.

Commissions for retail investors had been falling for decades before Robinhood took it to its logical extreme seven years ago. Rather than charge for trading, it makes money by getting rebates from market makers, lending out stock and charging some users extra for investing tools. Customers sometimes got what they paid for – last year, Robinhood was fined almost $1.3 million by regulators for sending orders to brokers without ensuring customers received the best pricing.

The price war Robinhood set off has now engulfed it, too. Last fall most of the major retail brokerages ditched commissions for basic share trading. Soon after, Charles Schwab agreed to buy TD Ameritrade, followed last month by E*Trade Financial selling itself to Morgan Stanley.

This week’s problems may not be quickly forgotten. Robinhood’s service was out of action most of Monday and for a few hours on Tuesday during some frenetic stock-market gains and losses. Customers will forgive a firm if its service is superior, or there are no obvious alternatives. Twitter was notorious for its outages during its first several years of service. But users came back because services like Facebook aren’t exact analogues. Likewise Slack Technologies overcame its share of problems, but with Microsoft’s messaging platform catching up, competing on reliability is far more important.

That’s the situation Robinhood is now in. Sure, it’s not the only one in its industry to be hit of late. Fidelity Investments customers were hit by some snafus in February. But giant firms can afford bigger IT and marketing budgets than upstarts, which should give them more clout to build solid systems and attract customers. The plucky upstart’s trading arrows are turning into friendly fire.