Robinhood is now the number one app in the App Store in the US after a stock buying frenzy sparked by social media
With its easy-to-use interface, lack of fees and promises of democratising finance, Robinhood has become the go-to stock trading app for millennials, amassing a valuation of more than $11bn (£8bn).
In recent days, the trading app has become the most-downloaded in the US. Reddit users have posted screenshots showing they have made tens of thousands on hyperactive stocks such as GameStop with its help.
But now politicians and retail investors are accusing the company of market manipulation after it stopped all its users from snapping up 13 stocks — including GameStop, BlackBerry, Nokia and AMC — for a full day’s trading, while hedge funds could freely buy and sell as they saw fit.
It was a fury that encompassed even the most unlikely of bedfellows: Republican senator Ted Cruz and Democratic congresswoman Alexandria Ocasio-Cortez.
“This is a serious matter," Cortez wrote on Twitter. "Committee investigators should examine any retail services freezing stock purchases in the course of potential investigations — especially those allowing sales, but freezing purchases."
It was a devastating reputational blow for the fast-growing app which has been eyeing its own stock market debut and has quickly picked up 13 million users.
Founded by Baiju Bhatt and Vladimir Tenev, who grew disillusioned with Wall Street, the company has always claimed to be focused on the "have nots" of the world. The pair, who met as students in Stanford University, have often said they took inspiration from the Occupy Wall Street protests of 2011.
As its name suggests, the app allows anyone with a bank account to buy a piece of a publicly traded company. That ease of trading combined with the popularity of forums where young, first-time traders can discuss where to hedge their bets, helped make it synonymous with amateur trading.
Trading may appear to be free, but it comes at a cost. When users buy or sell stocks on the app, the company directs the orders through third party market makers such as Citadel Securities — a company which tried to bail out Melvin Capital after its short position in GameStop.
Companies such as Citadel make money by getting information on what day traders in Robinhood plan to do with their stocks in a process known as "payment for order flow". That then informs their own trades, meaning both Robinhood and Citadel get paid for Robinhood trade data.
“They built a user interface that is very easy to use and very easy to trade,” says Sheel Mohnot, a venture capitalist who funds early stage companies. “Some people think it is too easy and some people wonder if that incentivises people to trade more”.
Mohnot is on the fence over whether that is a bad thing or not, but is certain that “it is a lot like gambling — and I think that certainly is a fraction of their audience”.
What is short selling?
Nestled among the simple design and cute emojis are risky options contracts and often volatile cryptocurrencies. A mission to open the markets to anybody has attracted plaudits, but critics have questioned if it is responsible.
Last year Alexander Kearns, a 20-year-old student in Nebraska, killed himself after mistakenly believing he owed $730,000 from seeing a negative balance in the app. After the incident, Tenev and Bhatt said they were “devastated” by Mr Kearns’ death, and pledged to improve the app’s educational resources related to options trading.
They also said they would clearly show users’ financial exposure when making options trades on the app.
"It is not lost upon us that our company and our service have become synonymous with retail investing in America, and that this has led to millions of new investors making their first investments through Robinhood," they said. "We recognise this profound responsibility, and we don’t take it lightly. Our aspiration is to innovate, lead, and go beyond the status quo."
Regulators have been circling ever since. Robinhood was fined $65m by the US securities regulator last year for allegedly misleading customers about its commission fees and its deals with high-speed trading companies.
It received payments from high speed traders for sending customer orders who may not have received the best deal because of the trading time. The lawsuit claimed that Robinhood placed these payments over securing the best trading price.
Robinhood said at the time that the fines were based on “historical practices”. It now claims to make its money from commissions from unspecified third parties who they send orders to, claiming they offer a better rate than exchanges.
It also generates interest from cash that is lying dormant in the app, on additional fees for transferring to a different broker, and for premium accounts. On its website, it states that it generates this revenue to help “everyday investors”.
But its decision to shut the GameStop party down seemed at odds with those interests. The stock hit all-time highs of $492.02 per share on Thursday up from lows of $3.30 in 2019, only to more than halve a minute later, when Robinhood limited new positions. GameStop has now risen as much as 143pc premarket, after some platforms lifted curbs on trading.
The app said it made the decision to protect investors from market volatility but the move caused investors to panic and sell off their stock — driving the prices lower. More brokers and clearing firms followed suit over concerns there may be larger repercussions if the watchdog stepped in.
Furious traders began spreading conspiracy theories that Robinhood’s hand had been forced. After all, it was supposed to be on the poor man’s side.
Reddit day traders send GameStop shares into the stratosphere
An anonymous Redditor claiming to be an employee for the company alleged that they overheard venture capital investor Sequoia call and ask Robinhood to halt trades. It sparked so much speculation that Reddit closed comments on the thread shortly after it was posted. Rumours also surrounding hedge fund Citadel, which had shorted GameStop, and was also accused of asking Robinhood to step in.
The claims were repeated by several verified accounts including Justin Kan, the co-founder of video games streaming site Twitch. Both Sequoia and Citadel denied making any such request to Robinhood and the company described them as “disinformation”.
It wasn’t until a day of trading had passed that Tenev, Robinhood’s chief executive, broke his silence and revealed the company had blocked trading because it was protecting investors from volatility, and was unable to fulfill its collateral requirements for the boom in trades.
Theoretically, a workaround may have been to say to traders that they would need a certain amount of cash in the app to trade, but it would mean a re-writing of its code which would have been impossible in a day.
Just got a tip that Citadel reloaded their shorts before they told Robinhood to stop trading $GME.
If this is true, Ken Griffin and the Robinhood founders should be in jail.
This is class warfare.
— Justin Kan (@justinkan) January 28, 2021
He later denied, when quizzed on CNBC on Thursday evening, that Robinhood was suffering from a liquidity issue. “This [restriction] was done preemptively and proactively,” he said. “Thousands of other securities remain tradeable on the platform and customers that held these positions were able to sell them.
Telev’s explanations may have come too late, publicity experts have warned. “If they were trying to protect people from volatility it should have warned people ahead of time that they were going to do this,” says Ed Zitron, a technology industry communications guru.
“They categorically, astronomically failed on a communication plan — and if one existed it was not half baked but was tenth baked,” Zitron says. “It was reckless and genuinely damaging, and I am not surprised that people are crying foul play.”
Zitron says the decision to cease trades was made at the top and went through multiple lawyers. In the end, it was one that gave the individual investor the least amount of warning. This path, whether intentional or not, was perceived as giving institutional investors the most amount of time to recoup their funds and the individuals the lowest.
Robinhood has since raised more than $1 billion in preparation to restore trading in popular companies such as GameStop. The app is believed to have tapped existing investors and drawn down at least several hundred million dollars from banks such as JPMorgan and Goldman Sachs.
It may have brought trading of hot stocks back online, but the damage to its reputation has already been done.
If Robinhood wants to continue to be the little guy playing with the big dogs, it is going to have to accept some of the responsibilities that come with opening up the markets to the masses.
Свежие комментарии