Robinhood, Reloaded
After spending a full day under fire from customers and high-profile politicians, Robinhood phoned some friends:
Robinhood raised $1 billion from existing investors just hours after it halted purchases of GameStop, suggesting the free-trading app faced a potential cash shortage.
The startup faced a bipartisan backlash Thursday for its decision to limit trading — a move that ran counter to its stated mission of democratizing investing.
“This is a strong sign of confidence from investors that will help us continue to serve our customers,” Robinhood said in a statement.
But the fact that Robinhood felt the need to raise so much money, just months after raising hundreds of millions of dollars, signals the financial pressure facing the company.GameStop (GME), AMC and other stocks have been skyrocketed in recent days, bid up by an army of traders on a Reddit message board called WallStreetBets.
Webull CEO Anthony Denier uh…denies the populist conspiracy theories with an explanation for the trading halts. Apparently it has to do with collateral requirements during the two-day settlement period that makes it prohibitively expensive to support these trades of extraordinarily volatile stocks. It’s video, but there’s a transcript.Report
I read that interview yesterday. His stammering, jumbled, circuitous explanations didn’t convince me that he was telling the truth, but now we know why he used the word “we” – followed by a correction – when referring to the clearing house’s need for more capital.Report
The Robinhood CEO said “we don’t have a liquidity crisis” then got on the phone and immediately got a billion dollars.
That is the very *DEFINITION* of “not having a liquidity crisis”.Report
Narrator: But they did have a liquidity crisis.
Eh… there’s still something off about this. I believe the technical explanation that they have to maintain a settlement balance to cover the various baseline + risk factors required by the clearing houses… no problem. What I don’t believe is the non-technical explanation that they were “embarrassed” to admit they had to borrow to cover the settlement float? The second part? That’s what we call a cover story.Report
Robinhood is s dangerous and disingenuous app. The language about making stock trading more democratic was always self-serving marketing that an astonishing number of people believed. But they always made money by selling information to hedge funds and this was always known. Now everyone is shocked, shocked at what Robinhood is doing but not that they turned day trading into a video game.
Does anyone else remember the kid who committed suicide in June because he was doing complicated trades and thought he was 700k in the red? Robinhood allowed that with its self-serving democratization language.Report
The problem is that the various stock markets are such that no app is going to be able to do what RH claims. The real question is, how many users were as naïve as you claim?
Or more specifically, how many of the users who are trading these stocks are that naïve?
I’m sure there are some, but I think the kind of people participating in WSBs are savvy to understand the game, and know exactly what they are doing, RH’s pretentions aside.Report
From some very casual observation of people I know in real life who got involved in day trading, most people lean towards the very naive. Nearly all of them seem excited as a way to strike it filthy rich rather than modestly increase their wealth.Report
This is the first time I’ve heard of Robin Hood.
Do you all mind if I ask, what promises and claims did they make that were different from any other broker? I don’t really understand the context here. My naive understanding is they made an app that let people buy and sell stocks. That seems straightforward enough.
I guess the upshot is that trading is too complicated to turn into an “app.” That makes sense. I use a traditional broker, mostly to manage my employee stock plan. I know that whenever I make a trade, the process is complicated and involves selecting options that I don’t fully understand. I few times I’ve had to call their help line. Anyway, is that the issue here? They’ve tried to simplify something that cannot really be simplified that way?Report
They don’t charge commissions but they sell the trade data to the big boys and use fancy language about democracticization like any other tech firm.
https://www.cnbc.com/2020/08/13/how-robinhood-makes-money-on-customer-trades-despite-making-it-free.htmlReport
Same… their hook is commission-free trades plus easier access to RH-Gold which allows Margin trading under all the usual conditions. Their app is “easy to use” but looking at it, it’s just modern design without the usual clutter of, say, TDAmeritrade or E*trade both of which I’ve used. There’s nothing in TDAmeritrade that makes it more-sophisticated when it comes time to click BUY.
But RH-Gold and Margin trading seem to be a new thing that Milennials think is a trap laid just for them.
I can get Margin trading at any brokerage… but most of us GenX’rs don’t… cause we grew up with people who were alive in 1929.
Milennials discovered Margin Trading and didn’t have the spectre of 1929 haunting their investing habits.
This is the pitch:
Our mission is to democratize finance for all. Earning revenue allows us to offer you a range of financial products and services at low cost, including commission-free trading. Here’s how we generate the majority of our revenue:
Rebates from market makers and trading venues
Robinhood Gold
Stock loan
Income generated from cash
Cash Management
Read on for more detail on how we make money:
The cautionary tale Saul keeps alluding to isn’t all that cautionary because the poor soul wasn’t in the red, hadn’t been loaned $1M, mis-read a settlement/balance statement and likely killed himself for reasons bigger than the trigger event (as is usually the case)… though a sad tale no matter what.Report
They way I understood it is that you are correct, the kid was not actually in the red for 700K but it would take until Monday morning for all of that to clear but the kid did not understand that.
He vey well could have had other factors that went into it but this trade could have been the straw that broke the camel’s back but I don’t consider it a radical or reactionary measure to put a limit on those kinds of trades except for people who understand what is going on.
Most people will not beat the market in the long run. Most times someone does beat the market, it will be erased by something else. The best thing people can do with their money is park it in some index funds with adjusted risk tolerances. But most people seem to resist this idea because it is oh so boring.Report
Boring is good. But I’ve often wondered what would happen if everyone who should invest this way did invest that way. What would the market indexes be indexes of? From whom would the index funds buy and to whom would they sell?Report
I’ve wondered that too. I’ve certainly benefited from having dumb guys decide to invest in part-ownership of a bar because it sounds more impressive as a chat up line.Report
That’s an interesting question. The safe investors in Index funds need the risky investors right now. If most people decided to invest via index funds, the finance people will find someway to make it work.Report
I’ve never seen the app but besides what Saul brings ups, they also apparently try to turn trading into a Candy Crush type video game with how it looks when you do a trade, etc. This makes the trading more addictive than see other trading apps or methods and those can get very addictive.Report
Sure, all that might be true but *none* of it is relevant to what the WallStreetBets folks have been doing.Report
They should add a “trade stocks” option to Genshin Impact 🙂Report
Yeah, well. Don’t google “Christine Chubbuck”.
We might be calling for the banning of live television next.Report
“Robinhood is s dangerous and disingenuous app.”
The Circle of Evil is growing. First it was the WallStreetBets guys. Now it’s expanded to include people who made the Robinhood app.Report
Like the hedge funds, these guys thought they were smarter at this game then “ordinary” people. They got caught not just with their pants down, but half way across the room. So they phoned a friend to get some underpants and hoped no one noticed.
Idiots.Report
“Like the hedge funds, these guys thought they were smarter at this game then “ordinary” people.”
DavidTC brought up a really good point last night in a comment: GME has been the most in demand stock on the market for a few weeks now. I don’t pretend to understand the mechanics of any of this, but supposing that’s right, then apps like Robinhood were getting financially crushed by the market *working* and not because they were stupid. Having to borrow money because trading volume was higher than anticipated is a *good* problem for trading app to have, right?Report
This kinda gives the game away, kinda.
Report
a little late on that horse.Report
Buying insurance when your house is on fire.Report
Ironically, or perhaps not, Elizabeth Warren just indicated that she wants the SEC to look at the market manipulation in GME price, but on the front end action of the Redditors. Not the actions taken by Robinhood and Webull and others. So they got that going for ’em.Report
Ah, Warren, always looking out for the little guy…Report
About those poor pension funds that might be at risk.
https://www.bloomberg.com/news/articles/2021-01-29/reddit-fever-ignites-mall-stock-and-fund-cashes-out-500-million
To be fair, the Ontario Teacher’s Fund has a well earned reputation of something you need protection from in the market, not something that needs to be protected.Report
Friday: GME price at $350 go brrr
Still no idea what exit strategy is… plus I find it ironic in the revealing sort of way that the $20B market valuation of GME raises no actual funds for GME to do anything with… because the SEC wouldn’t allow them to swap their stock with any other company in a buy-out. So other than possibly enriching some officers (and hopefully some employees) the disconnect between stock/company/ownership should be cast into relief.Report
From CNBC:
Report
“Still, short sellers mostly are holding onto their bearish positions or they are being replaced by new hedge funds willing to bet against the stock”
Sonuvabitch if we haven’t moved into the Barricade the streets portion of the revolt.
Problem is, Napoleon eventually shows up with Cannons. The “whiff of grapeshot” memes will be epic.Report
Help, new SEC regulations are putting my comments in mod.Report
Only semi related but the counter-attack continues in farcical form. From WaPo twitter:
Report
I see no problem in reporting on the crude sexist nature of -chan culture. Furthermore, the existence of an investment subculture that is an offshoot of -chan culture is certainly notable. Like, would you have predicted, “4chan, but for stocks”?
I would not have. Likewise, I would not have predicted anime Nazis or white nationalists into My Little Pony.
Anyway, the internet is a strange place. Reporting on its horrible aspects seems valid. Why wouldn’t journalists report on that?
When people complain about honest reporting, I often assume they’re really saying, “I don’t want this to be talked about”
But why? If that forum really is full of immature, sexist ninnies, shouldn’t we know that?Report
It’s a major publication linking to a poorly (possibly no) sourced series of unverifiable anecdotes and generalities from ‘experts’ who may or may not know anything.
Now I’m not an idiot. I know what reddit is and that crude language and juvenile humor is the norm. But I’m also not so foolish as to be unable to recognize corporate allies defending each other with fashionable nonsense about sexism or racism or some other ism. It’s sad and should be laughed at for how facile and transparently dumb it is.
The truth is that the Post isn’t doing this because it cares about the culture of some subreddit that 3 weeks ago no one working there had ever heard of. They’re doing it to help their friends on Wall Street and trying to tar anyone who shows sympathy for the day traders or just plain schadenfreude as deeply immoral.Report