The “Robinhood Effect”

Rob Yellen
D&O and Fiduciary Liability Product Leader, FINEX, Willis Towers Watson

Rob is a recognized expert in directors and officers liability with a rare combination of Financial Lines experience that includes serving as a chief underwriting officer, global head of product development and a foreign general insurance chief legal counsel for a leading insurance carrier.  Today, Rob counsels clients and serves as a thought leader and technical expert, trouble shooter, and claims resource on Financial Lines issues with a focus on D&O and Fiduciary products.  He co-leads the Willis Towers Watson Strategic Solutions Group and chairs its North American and Global FINEX Advisory committees.

The legend of Robin Hood has been around 700 years or so–an enduring, popular fairy tale of an outlaw hero and his band of Merry Men who robbed the rich and gave to the poor.  By comparison, Robinhood Markets, Inc., formed in 2013, looks to “provide everyone with access to the financial markets, not just the wealthy.” What makes Robinhood particularly interesting is its growth, how it is different and its impact, this year, on financial markets.

If growth and trading volume are the measures, Robinhood is succeeding.  Bloomberg reports that 1.7 million people opened brokerage accounts with Charles Schwab in the second quarter of 2020 — a 328% increase from the same period a year ago.  The Robinhood app added 3 million accounts in the first four months of 2020 and its payment order flow revenue doubled from Q1 to Q2. In June, Robinhood saw 4.3 million daily average revenue trades (DARTS)—higher than all of the major incumbent brokerage firms and more than E-Trade and Charles Schwab combined. In May, Robinhood raised $280 million in venture funding suggesting a then pre-money valuation of $8.3 billion.   Then, on August 17th, Robinhood announced it had raised another $200 million suggesting a $11.2 billion valuation.  So, yes.  Successful.

Robinhood and its peers have made an impact.  The Wall Street Journal reported on August 24th that the S&P 500 hit a record close on the prior Friday—its first since February.  FactSet reported that price/earnings ratio on the S&P 500 @25.26—the highest since 2002—when the bubble burst and the Nasdaq Composite stock market index fell 78% from its peak. Meanwhile, unemployment is high and earnings remain under pressure from the COVID-19 pandemic.    One trend credited in part for fueling this market and upsetting long-standing norms in capital markets is the tsunami-sized wave of retail trading by newbie investors.  Many of them have begun investing with zero-fee trading apps such as Robinhood, Webull and Youinvest, but traditional brokers have seen massive growth, too.

But Robinhood seems different.

  • Tracking: Until recently, Robinhood’s investors’ trading data—available by API-was compiled and reported by  Robintrack would report how many Robinhood users hold a particular stock over time. It generates charts showing the relationship between price and popularity, and compiles some lists using the data. This data had become an obsession for investors and analysts looking to gauge the impact of retail investors on market behavior.
  • Fractional Shares: Also, Robinhood offers fractional shares.  So, users can trade stocks and ETFs in pieces of shares, in addition to trading in whole share increments.    Fractional shares on Robinhood can be as small as 1/1000000 of a share, and trading fractional shares is real-time and commission-free.  Want to by $25 of Tesla (trading at $2,170.02/share pre-market on August 24th)? No problem.  Bloomberg reports [here] that, “[s]tarting in late April, traffic to the site exploded, jumping from about 4,000 to anywhere between 20,000 and 50,000 unique users per day.”  Robinhood’s users trade the riskiest products and at the fastest pace, according to research firm Alphacution for The New York Times.  In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter.
  • Gamelike App: Trading on the Robinhood app is different, too.  In what has been described as from “easy to use” to “gamelike,” Robinhood’s app fills users’ screens with digital confetti and information on other stocks that its users are buying. A recent Wall Street Journal article [here] questioned whether the app made trading too easy—reporting that behavioral researchers say the app’s simplicity encourages novice investors to take bigger risks.  While Robinhood asserts it doesn’t make recommendations to buy and sell securities, the app does shows users related stocks that other Robinhood users also own.
  • Incentives: Free stock??  Really?  It’s true. According to Robinhood’s website [here], “for every new friend you invite to join Robinhood, you can both earn a free stock! As soon as the conditions in your promotion are satisfied, we’ll credit both of your accounts with a free stock. You’re eligible to receive up to $500 in reward stocks each calendar year—so feel free to tell all your friends.”
  • Day Trading: Others blame unlimited free trading rather than Robinhood’s app for encouraging day-trading—and Robinhood asserts, “[t]he vast majority of Robinhood customers are not day traders.”
  • Payment Order Flow Revenue Model: Robinhood derives its revenues from a controversial practice known as “payment for order flow” in which companies pay to be the other side of a trade or to at least get the first right refusal.  This process could mean that a Robinhood order isn’t happening on a public exchange. Some say the process helps market efficiencies, but others question whether the user is getting the best price for their trade.

The Robinhood Effect:  Why are Robinhood’s users and other newbie investors being blamed for the irrational market behavior?  Some had argued that and other information Robinhood provides its users drove a momentum play that could become a self-fulfilling prophecy.  Half of Robinhood’s 13 million users had never invested before signing up.  Do these newbie investors understand the financial risks?  Leon Cooperman, billionaire investor, doesn’t think so.  In a recent CNBC interview, he cautioned, “[t]hey are just doing stupid things, and in my opinion, this will end in tears.”    Where do those many of the newbie Robinhood users look for information?  From Tik Tok and other social platforms, naturally.  TikTok videos under #robinhoodstocks have more than 3.1 million views and #investing tag on TikTok has grown to 527.6 million views (both as of August 24th).  Cooperman may be right!

Will recent changes temper the Robinhood Effect?  Recently, Robinhood announced that it plans to curtail access to its API and certain data used by that provided hourly updates on retail stock demand, and that became hot fad on Wall Street. The data from the app showed broad trends among Robinhood users’ trading to display which stocks were popular with its clients. Robinhood will stop providing the feed on which the site’s information asserting the move is based out of concern that that data was often “misconstrued” and “misunderstood.”  If these changes mean is done (as seems to be the case), that may help Robinhood avoid some of the market attention it has received lately; however, it may not eliminate the momentum effect that some have attributed to Robinhood users and that may continue to be fueled by any information Robinhood continues to provide its users on the purchases of other users.

The Robinhood Effect, to me, is a D&O liability enigma.  How should we factor in the sometimes seemingly non-traditional behavior its impact on momentum investing? How should Robinhood users’ non-traditional information sources (like Tik Tok) impact how those users may factor into securities claims? I offer a few more specific questions that we may see answered sometime soon:

  • Should we look at stocks with high Robinhood/retail investor trading as having greater exposure to heightened severity? From a D&O liability perspective, inflated markets can signal the potential for increases in D&O losses with a significant potential for higher than normal severity.  If Robinhood investors exacerbate that inflation, they may also increase potential D&O claim severity. Does that inflation warrant recalibrating upward how much D&O coverage is needed?
  • How will, if at all, the seemingly different mix of information underlying trading by Robinhood users change how those users are factored into securities class actions?
  • Can a user with 1/1000 of a share be included in a class of shareholders? I suspect yes, but wonder how this fractional share ownership could impact securities class action in the future.
  • Can users who relied solely on the information Robinhood provides about its other users’ trading avail themselves of a presumption of Fraud-on-the-Market? Can defendants with significant Robinhood trading in their stocks rebut any such presumption if it does apply?  Would doing so be worth the effort?
  • Could the Robinhood Effect impact how class damages are calculated? Would documented Robinhood Effect inflation serve to support defense efforts to reduce and undermine plaintiff’s-style damages or the impact of inflationary disclosures?

Worth us keeping an eye on this Robinhood Effect.  No fee trading is likely here to stay.  Fractional trading is too.  While the investor information mix provided by any trading app can change with each revision, we may be revisiting Fraud-on-the-Market again sometimes soon.  Some of this phenomenon, at least, is more than a short-term fad.

Part II: Successful Underwriting and Deal Making in the Pandemic


Brittany Lannan
Senior Underwriter, Professional Liability, Everest Specialty Underwriters, Everest Insurance®

Brittany is a Senior Underwriter in the Professional Liability group within Everest Specialty Underwriters (ESU). Brittany joined Everest in April 2019 to help launch the Lawyers Professional Liability policy, which is designed to provide law firms with liability coverage for financial loss suffered by third parties arising from acts, errors, and omissions in providing legal services. At Everest, Brittany’s responsibilities include growing the lawyers professional liability business, developing and strengthening relationships with brokers, using her specialized industry knowledge to effectively address client needs and working with colleagues throughout the lawyers professional liability space to enhance the services they provide. Brittany maintains significant relationships with brokers across the country and has a solution driven underwriting approach, which has been vital to growing the book nationally.


John Humphreys
Vice President, Financial Institutions, Everest Specialty Underwriters, Everest Insurance®

John is a Vice President in the Financial Institutions group within Everest Specialty Underwriters (ESU). In this role, John assesses investment advisors, mutual funds, hedge funds, and related financial institutions for Directors & Officers (D&O) and Errors & Omissions (E&O) insurance. John manages a team of Financial Institutions underwriters whose responsibilities include analyzing and pricing risk, and strengthening and developing new broker relationships. John helps design and launch new insurance products, including the Everest Elevation® Investment Management Insurance Policy (“Elevation IMI”) that launched in March 2018, and he leads ESU’s evaluation of the opportunity to insure blockchain, Insurtech, Fintech and related emerging technologies.

John Humphreys and Brittany Lannan return in the following video to continue their discussion on new challenges in the underwriting market. John answers questions about how he and his colleagues have been navigating a constantly shifting legal landscape and addressing the uncertainty that the pandemic has brought about, continuing to make successful deals and underwrite in these uncertain circumstances. 

D&I Issues in the Insurance Industry

Deborah Egel-Fergus
Regional Underwriting Director, Lawyers Professional Liability, Argo Group US

Deborah Egel-Fergus recently joined Argo Group in August 2020 as Regional Underwriting Director handling Lawyers Professional Liability. She was previously at US Risk/ USI Insurance for over 2 years servicing as Managing General Agent for The Hanover Insurance Company handling Lawyers Professional Liability. She served as Senior Vice President at AP Specialty where she was responsible for building agency partnerships and expanding the company’s footprint in the region. She wrote D&O and E&O for various professional disciplines. Ms. Egel-Fergus joined the company August 2017 after over 15 years at Travelers Insurance Company, where she was an Account-Executive Officer and Professional Liability Team Leader with the Bond and Financial Products. At Travelers, Ms. Egel-Fergus managed a $7 million Lawyers Professional Liability book of business consisting of 2 states in the South Central Region, and she handled Excess Lawyers E&O for Northern California, Southern California, Midwest and Southwest Regions of the U.S.  Prior to joining Travelers, Ms. Egel-Fergus worked in Property & Casualty insurance since 1986 in various capacities for several major national companies, including TIG Specialty Insurance Company, Southern Risk Specialists Lexington, and Bertholon-Rowland Corporation.


As the United States continues to roil in the aftermath of events across the country
to protest systemic racism and to support Black Lives Matter, many companies and
employees struggle to find the right thing to say or do. It’s no surprise that in today’s current climate companies across the nation are attempting to modify their efforts regarding Diversity and Inclusion. Professional Liability Underwriting Society (PLUS) has been instrumental in acknowledging the importance of the value of Diversity and Inclusion within the insurance industry. A few years ago PLUS launched a variety of comprehensive ways to have important courageous conversations about complex topics across differences. PLUS, in conjunction with the PLUS Foundation launched the Women’s Leadership Networking Events as well as the Leadership and Mentoring Program (LAMP) and the Diversity and Inclusion committee to work with the LAMP cohort to continue to strengthen our efforts towards the belief that Diversity and Inclusion was a critical component that needed to be addressed within our current industry. We have been able to add panel discussions during our Annual International Conferences which has also led to contributions from key representatives from important major insurance corporations including our sponsors and collaborations with Gamma Iota Sigma (GIS) a professional network. GIS leads the sustainable growth and diversification of the insurance industry’s student talent pipeline across all functional areas. We have attempted to create relevant much needed dialogue on urgent topics of combating racial bias, ensuring equitable talent outcomes and intentionally advancing people of color and LGBTQ+ groups most of which continue to be underrepresented in our industry.

It is quite evident that we are very motivated to work harder and provide more options for our membership. We seem to be getting comfortable with being uncomfortable. We realize that many of our corporate sponsors have also been called to action and have developed Diversity and Inclusion initiatives like Diverse Business Networks (DBN’s), Employee Resource Groups (ERG’s) and other directives to ensure these initiatives gain traction within their organizations. Consequently, it appears that some of these Employee Resource Groups are used as in-house Diversity Equity and Inclusion consulting teams and, in some way, take the position of a Chief Diversity Officer but without the salary tag thereby exploiting companies. In fact, companies save millions while passionate employees from marginalized communities burn themselves out. However, there are some companies that have attempted to incorporate diversity, equity and inclusion strategies into their governance, programming and various other platforms. Because of these changes it appears there is more demand for racial equality. We want to see more progress within the realm of diversity, equity and inclusion within corporate America and particularly in the insurance industry. In order for inclusion, diversity, equity in advocacy to really take hold, we urgently need people in positions of influence who truly understand the power of these values to support these initiatives. To put it more bluntly: we can be it if we see it. We have seen some evidence of companies making changes either by adding a Chief Diversity Officer to their executive suite or promoting people of color into middle and more senior professional roles. Consequently, we also know that there are companies that have not hired or engaged in hiring a Chief Diversity Officer. The reality is that only 3.2% of the Fortune 500 companies in the USA show diversity numbers. Challenges continue to exist within these social trends. 1,200+ CEOs and Presidents are pledging to ACT ON supporting a more inclusive workplace for employees, communities and society at large.

I came across another great article in LinkedIn written by Dr. Leroy D. Nunery II , Founder & Principal, PlūsUltré LLC and Susan Johnson Chief Diversity & Inclusion Officer at The Hartford that really dives into the demands for racial equity over the past few months. They confirm that organizations across the globe have asserted their abhorrence against racism and have taken a call to action vowing to work harder and do more to demonstrate their commitment to equity. Lee Nunery and Susan Johnson, (July 23, 2020) LinkedIn, Part I of II: Why aren’t there more Blacks in leadership roles in the Insurance Industry?

How can we gain the interest of these underrepresented groups we are trying to attract as an association? Becoming a great influencer has become so popular during this digital era. So many of our young folks are involved in vocal platforms and supporting common causes or creating awareness whether it be social, political, or popular. We know that the millennials seek purpose and diversity in the workplace. We are on the right path to ensuring that we listen to these groups particularly those within our insurance industry as we continue to create opportunities within the industry. As we look at our membership across the nation and various participating countries we realize how diverse we have become over the years. Through the offering of the Registered Professional Liability Underwriter (RPLU) designation program, PLUS University, Future PLUS Professionals, and those participants in the grass roots via our 14 chapters including Canada and London, and the collaborative efforts of the PLUS Foundation, we continue to make an impact on diversity. Although we are a nonprofit volunteer organization a lot can be said about the value that PLUS has provided in this space through the years. PLUS has evolved with the leadership of our CEO, Robbie Thompson, at the helm along with the PLUS Executive Staff and its volunteers. However, we have a significant need to focus and develop tomorrow’s workforce and those professionals that face obstacles. As a result, we recently updated PLUS Foundation’s mission statement to make a greater impact to address the changes within our industry and become more transparent to our mission as well as our membership. In fact, we have refocused our mission to develop and re-train military vets and help advance the career levels of our diverse membership due to challenges they face within our industry. We are looking to ensure that we evolve both the PLUS Board and the Foundation Board creating clear focus between the two arms of PLUS. Additionally, we are looking to include advisory positions held by former/current LAMP participants on to both boards thereby creating further accountability responsibly throughout the organization. Doing this would encourage them to become leaders and help serve as a model for others. We will continue to be more transparent by including more people of color as our panel or keynote speakers, vendors, staff, and the membership who represent our diversity and make them more inclusive across the board thus making everyone feel more welcomed.

Our rationale is knowing and understanding that the principle behind diversity, inclusion and equity are all elements that are important to having a culture that values uniqueness: people of different backgrounds, cultures, genders, and races. It’s belonging that makes each individual feel accepted for who they are. We at PLUS and as Chair of the Diversity and Inclusion Committee are committed to exploring the solutions to help our membership grow and remain relevant as the country continues to evolve. We face many challenges in today’s world and particularly in our industry. We strive to deliver intentional solutions to strengthen our impact as a diverse association. This barely scratches the surface, but it’s a place to start. We know that while it’s a great time to listen carefully, it’s also a perfect time that demands action. By taking positive steps to use our passion we can avoid having members that have felt marginalized because we are not providing opportunities to create an inclusive, diverse and equitable platform within the insurance industry as we posture ourselves and pivot to be well positioned for success and influence change.