Robinhood, the Application behind the Scandal of GameStop

Robinhood, the Application behind the Scandal of GameStop

Robinhood‘s free trading revolution helped pave the way for the recent scandal on Wall Street over GameStop stocks and others fueled by Reddit.

The rise of Robinhood means that the ability to buy stocks, on a whim, is now available to everyone. Robinhood has opened up investment to the masses.

Rival online brokerages were forced to emulate Robinhood’s zero-commission business model, with some joining forces just to survive.

Gone are the days when sophisticated trading strategies such as options trading and leverage were left to the wealthy on Wall Street. Free trading, along with Reddit message boards, has leveled the playing field, for better or for worse.

“There is a cultural shift taking place,” Vlad Tenev, Robinhood’s co-CEO and co-founder, told Globe Live Media in an interview before the Reddit mob came together to send GameStop, AMC and other stocks to the moon. (Robinhood declined follow-up questions about the Reddit phenomenon.)

“There is a large group of people who think that investing is a serious thing only for those who wear a suit in front of a terminal,” said Tenev, who was born in Soviet-era Bulgaria. “That has been the inherited school of thought.”

WallStreetBets has shattered that notion.

‘Access is the most important part’

The Reddit community has wowed the financial world by coming together to unleash epic short squeezes that are hitting hedge funds and other businesses. GameStop alone has shot up an unfathomable 1,500% this year.

Redditors have targeted companies that are popular with short sellers, who are betting that a stock will fall by borrowing the shares and selling them, hoping to buy them back at a lower price and pocket the difference. Short selling is extremely risky because, in theory, the losses are endless.

None of this would be possible without free trading and access to cheap borrowed money, which amplifies the stakes.

“Access is the most important part: easy, free and available,” Jaime Rogozinski, who founded WallStreetBets nine years ago, told Globe Live Media’s Samuel Edwards on Thursday. “They can instantly jump in and participate and start using these sophisticated leverage tools that are capable of exploiting the asymmetry of money. They are forcing the cards of the greats.

Tenev said that the old-school thinking that you need a suit to invest is “correlated with the thinking that investing is primarily for wealthy people.”

“Our approach is a little different, you don’t have to be rich to do it,” said Robinhood’s co-founder. “You don’t need a doctorate in finance. You don’t need to pore over fundamental analysis, or technical analysis in particular, and watch the moving averages. ‘

In fact, the Wall Street Bets move shows the impact retail investors can have when they join. Although some Reddit users are placing their bets based on fundamental analysis, many are motivated by a populist desire to punish hedge funds and other elite investors.

GameStop Shopping Ban

Robinhood has come under fire throughout the GameStop saga, from all sides.

Some see the episode as proof of how free trading and rock-bottom interest rates can backfire. In essence, the normal functioning of the capital markets has been disrupted by an online mob.

At the same time, Robinhood has enraged the WallStreetBets community and others by restricting the trading of highly volatile stocks this week.

First, Robinhood, like other brokers, increased the margin requirements at both GameStop and AMC to 100%, indicating deep concern about extreme stock volatility.

Margin accounts allow investors to buy stocks and other securities with borrowed money. To protect themselves from heavy sell-offs, investors must maintain a minimum amount of capital as long as they hold the shares.

Robinhood went one step further Thursday by banning users from buying shares in GameStop, AMC, Best Buy, Bed Bath & Beyond, Nokia, and other Reddit favorites. Other runners took similar action.

WallStreetBets focused its ire on Robinhood, arguing that it’s unfair that retail investors can’t buy these stocks, but Wall Street can.

“Imagine being on the side of the little ones like Robinhood,” wrote one user. Another cover-up brokerage paid by the big players. I’ll switch to another brokerage once this is over and I hope everyone here does too.

Barstool Sports founder Dave Portnoy criticized the decision in a series of tweets.

“Either Robinhood App allows free trading or it’s the end of Robinhood. Period,” Portnoy said.

Both Republican Ted Cruz and Democratic Rep. Alexandria Ocasio-Cortez immediately called for an investigation into Robinhood’s decision, an unlikely coincidence of ideas.

Hours after implementing the restrictions on Thursday, Robinhood appeared to back down and said it would resume limited purchases of those stocks starting Friday.

“This was a risk management decision and was not made in the direction of the market makers we are targeting,” Robinhood said in a blog post. “We are beginning to open the negotiation of some of these values ​​in a responsible way.”

The company said the move was taken to keep Robinhood in line with the requirements it must meet as a brokerage firm, such as the net capital obligations of the United States Securities and Exchange Commission (SEC) and deposits of the clearinghouse.

“Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment,” he said in the publication. “These requirements exist to protect investors and markets, and we take our responsibilities to meet them very seriously.”

During an interview Thursday night with CNBC, Tenev added that the company used lines of credit as a “proactive measure” because clearinghouse deposit requirements dictate how much the company could allow clients to buy certain shares.

“In line with our mission and what we want to do, we want to put ourselves in a position to allow our customers to be as unrestricted as possible in accordance with requirements and regulations,” he said. “We use these lines of credit to be able to maximize, within reason, the funds that we have to deposit with the clearing houses.”

Disruptions and tragedy

The Reddit drama is just the latest in a series of controversies surrounding Robinhood.

With its skyrocketing user growth, the app emerged as the winner of the pandemic. People stuck at home, some of them with stimulus checks to spend, discovered how easy it was to bet on stocks.

Robinhood received $ 8.6 billion in a funding round in July, only to raise another $ 200 million with an even higher valuation of $ 11.2 billion in August.

But Robinhood did not invest enough in the infrastructure necessary to manage all the users who flocked to the application. It suffered dozens of outages and outages in 2020, including one that prevented Robinhood users from participating in an epic rally in early March.

In the interview, Tenev said that Robinhood has made “huge improvements” to the flexibility and redundancy of the system to minimize the risk of similar outages. However, Robinhood suffered disruptions earlier this week during the trading volume boom, according to Downdetector.

Robinhood has also attracted scrutiny from lawmakers and regulators.

In June, the family of a 20-year-old college student said he died by suicide after confusion over a seemingly negative $ 730,000 balance in his Robinhood account. The student was using the app to trade options and his family believes that the Robinhood interface confused him.

The Robinhood co-founders said they were “personally devastated by this tragedy” and in response announced a series of changes to the options offering and the user interface.

‘Tough but extremely rewarding’

Last month, regulators accused Robinhood of luring inexperienced investors with game items like colored confetti and other aggressive marketing techniques. Robinhood disagreed with the allegations.

The Securities and Exchange Commission accused Robinhood of deception over the app’s disclosures about payment for order flow, the practice in which brokers are paid to route trades through market makers, such as market makers. high frequency commercial signatures. Without admitting guilt, Robinhood agreed to settle the SEC case with a $ 65 million fine.

To deal with its regulators, Robinhood has beefed up its management team, including hiring former Fidelity and Wells Fargo executives and appointing former SEC Commissioner Dan Gallagher as its chief legal officer.

“It was difficult,” Tenev said of 2020, “but extremely rewarding to overcome these challenges and cross over to the other side. We are much stronger as a company than we were in early 2020.

That’s good, because the last few weeks suggest that 2021 won’t be a walk in the park either.

Samuel Edwards
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