The Confusion and Anger Around the Robinhood Situation

I know — at this point, you’re probably already sick of reading about Robinhood. However, please indulge me while I share my two cents (which could be turned into a grand if I buy GameStop, amiright?) on the matter. As an observer and user of Robinhood over the past few years, what we saw happen yesterday was simultaneously shocking and not really all that surprising. This is to say that, while their decision to limit trades on certain stocks was staggering, the lack of savvy and inability for Robinhood to get out of its own way was certainly not without precedent.

For a quick refresher if you’ve been on a desert island sans WiFi this week, there is currently an Internet-fueled short squeeze occurring, where retailer investors are purchasing shares of such seemingly random companies as GameStop ($GME), AMC ($AMC), BlackBerry ($BB), and others as a means of not only making a profit but also screwing over Wall Street short-sellers. In fact, it seems to be working as reports show massive losses at hedge funds such as Melvin Capital occurring as prices for $GME and others soared to frankly ridiculous levels. Citing this volatility, Robinhood restricted trades of several ticker symbols on Thursday morning, making it so that traders could not buy shares of these stocks and, instead, only sell shares they already owned. Cue mass hysteria.

While “hysteria” might not be the right word, it’s safe to say the decision was not well received. Beyond upset customers, lawmakers as far-ranging as New York Congresswoman Alexandria Ocasio-Cortez and Texas Senator Ted Cruz found themselves in agreement as the former called for investigations into Robinhood’s decision (Ocasio-Cortez later rejected Cruz’s help on the matter, but that’s another story). By the end of the day, one of Robinhood’s CEOs took to television to explain their side of the story and the app sent a letter to users saying that it would once again allow some purchases of the impacted stocks — although certain limits and restrictions still apply.

So what happened? According to Robinhood co-CEO Vlad Tenev on Twitter, “As a brokerage firm, Robinhood has many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.” While I don’t doubt that, my initial feeling was that the app also likely halted trades in hopes of staving off blame they’d surely receive later on when customers lose money in these trades — especially those buying in at this stage amid major media coverage. After all, the firm has regularly been a target for criticism surrounding the ease in which “anyone” can open an account and start using the platform as a casino. Given that past rhetoric, you can see how such sentiments may have already been ringing in Team Robinhood’s ears when they were considering how to proceed. Unfortunately, as we now know, it probably would have been better to do nothing.

As I mentioned at the top, this isn’t the first time Robinhood has found itself in hot water. Take, for example, their “Checking & Savings” debacle that saw the firm backtracking on the concept after it was discovered that SIPC insurance doesn’t really work the way they apparently thought it did. It’s also worth noting that the app recently reached a settlement with the SEC over previous business practices that failed to explain to customers how the company made money. These PR nightmares show that, while Robinhood’s founders may have big ideas, they don’t always have the best instincts.

I’m far from the first to point out that Robinhood’s decision yesterday is at odds with their entire stated objective and mission statement. Thus, it’s not hard to imagine why customers were furious with the move. Yet, while I’ve stated that I think they were in the wrong, I’m slightly more sympathetic to their situation. In my mind, their bid to be proactive bit them badly — but, again, that’s nothing new.

Ultimately, it’s hard to say what becomes of Robinhood going forward. However, as much as people may be angry with them now, it’s impossible to deny the impact they’ve had on the current investing landscape. Sure, if not them, some other app may have come along and led the revolution — but, in this reality, it was Robinhood. As a result, when traders do want to leave the platform, they now have several options, whereas this wouldn’t have been the case just a few short years ago. So while this misstep may just be the one that eventually dooms them (although I wouldn’t necessarily bet on it), I’ll personally consider their overall impact to be a net gain.

Author

Kyle Burbank

Kyle is a freelance writer and author whose first book, "The E-Ticket Life" is now available on Amazon. In addition to his weekly "Money at 30" column on Dyer News, he is also the editorial director and a writer for the Disney fan site LaughingPlace.com and the founder of Money@30.com.

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