The securities lending business is soaring: Global securities lenders generated $828 million in April 2022 revenue, that’s up 20% from April 2021, according to research firm DataLend. Robinhood hopes to grab a chunk of that away from larger institutions like BlackRock and State Street.

Quirk described the program as a way for customers to “put their investments to work while keeping it simple,” and “add a potential source of passive recurring income to their portfolio.”

What could go wrong?

But some argue that there’s traditionally a high barrier for entry into stock lending for a reason.

Stock lending is an important element of short-selling, where investors borrow securities and then sell them immediately with the assumption that they’ll soon go down in price. The investor then hopes to buy the stock back at a specified date in the future, ideally for much less money, and return it to the original stock owner along with a small fee.

Stock lending is risky for short-sellers, but it’s risky for lenders, too. There’s no guarantee Robinhood customers who lend stocks will be repaid if a massive short-squeeze proves too large for the company to handle.

“There is a risk that Robinhood Securities could default on its obligations to you under the Stock Lending Program and fail to return the securities it has borrowed,” the brokerage warned. “If Robinhood Securities defaults and is unable to return loaned securities, you will not be able to trade such securities as usual.”

Lenders of securities also may lose the right to vote in shareholder meetings and the right to collect dividends. Borrowers typically send cash payments equal to the dividends to the lender, but those payments are taxed at a much higher rate.

Robinhood vs. the market

Early in April, Goldman Sachs downgraded the company to a sell from neutral, citing headwinds as investors disengage due to falling markets. Robinhood had also benefited from the sugar rush of last year’s stimulus checks, which have since been spent. Customers with small balances are increasingly cashing out and spending their money on everyday expenses, Goldman said.

“We face a challenging macro environment,” Tenev said on a call with investors last month, “one most of our customers have never experienced in their lifetimes.”

Berkshire Hathaway vice chairman Charlie Munger slammed Robinhood during the investing giant’s annual meeting last month, calling the platform “disgusting” due to its “short-term gambling and big commissions and hidden kickbacks and so on.” Now Robinhood is “unraveling,” he said, adding, “God is getting just.”