So here we are: about to hear about GameStonk. Robin Ten chief executive Vlad Tenev will have to explain himself tomorrow. What happens next for Robinhood?
Maybe you remember last month, when the GameStop share soared by as much as 500 percent, peaking at $ 483 on January 28, largely thanks to memes and a sub-edit of finances. (I’m sure whole academic books will be written on r / WallStreetBets. There’s already a paper.) Many of the retailers involved in the GameStop frenzy use Robinhood, and the company has become part of the meme – although it had to limit trading on GameStop. The run-up had a populist theme: the little guys would go Show the hedge funds; they would make those dang short sellers pay. The GameStop meme was a bunch of free publicity for Robinhood, though the public outrage over limited operations means the House of Representatives is now inquiring.
The House Financial Services Committee is going to trial! It will be a fun political theater, but it is unlikely to have any serious effects. That’s probably why Robinhood is still planning to go public this year. Robinhood has been at the top of Apple’s mobile app store for days, and more than half a million people have downloaded it, reports CNBC.
“They currently have an incredible opportunity for new users,” said Catherine Lamberton, a professor of marketing at the University of Pennsylvania, Wharton. The GameStonk saga is proof that Robinhood has changed the power dynamics in the market, she said. “They have the opportunity to keep growing with this.”
Sure, Robinhood restricted GameStop’s trade near the peak, angering some of its customers. But in March 2020, during the pandemic-related market crash, you may recall that Robinhood had three major outages in a little over a week. In some ways it makes sense: Robinhood is a startup and has experienced a painful growth moment. At the time, Tenev and his co-CEO, Baiju Bhatt, challenged the failure to ‘strain our infrastructure’. They did not predict such an event – nor did they plan for it.
Of course, the more well-known service interruption only occurred in January 2021, but the basic contours are the same. Robinhood did not intend to plan such an event, and when the cleaning houses increased their cash requirements, oops! If it was Twitter, there would have been a failed whale. People go crazy enough when social media networks go down – but it is money. Nevertheless, what happened in March last year and again around GameStop fits into a larger pattern of technical startup behavior.
“It’s a normal startup thing,” says Lana Swartz, an assistant professor of media studies at the University of Virginia and author of New money: how payment became social media. In essence, the step is to bring a platform to market, scale it, and later worry about everything else.
A lack of customer service is expected in social media businesses, Swartz said. ‘But as companies in Silicon Valley try to take over more and more parts of our lives, the modus operandi is:’ Sorry, we are not working now and you have signed the terms of service, so it’s up to you! You have agreed to this! “The way of doing things is not going to cut it,” Swartz said. Therefore, the most interesting questions during the trial will probably be about the terms of the service agreement, not hedge funds, short sellers or payment for order flow.
The question here is what small investors believe and what really happened, said Anat Admati, a professor of finance and economics at the Stanford School of Business. Robinhood does say in its terms of service that it can refuse trade – but how many of its users read the terms of service? “The broader issue is that we agree to all sorts of things online,” Admati said in a telephone interview.
What’s more, with complicated financial transactions it is difficult to ‘we will work out the details later’, Lamberton said. “This is not an area where one can tamper,” she said. Lamberton wants to know how Robinhood can handle a similar mass retail event in the future: is it his goal to never let the GameStop situation happen again? Or would it rather figure out how to make big retail events happen without overturning its own internal system? “That decision will change their platform and also how it fits in with Wall Street,” she says.
There are a lot of free things online, and the question is always how it makes money, Admati said. In the case of Robinhood, this is one of the topics domestic politicians are likely to dive into – a controversial practice called ‘order flow payment’. It enables market makers to bundle trades and make money through arbitrage. It could also allow banks to theoretically sue retail investors, which is illegal. Also, as BloombergMatt Levine says: ‘The wholesaler usually fills your order at a price that is better than which is available in the public market, so ‘front-running’ – going out and buying on the stock exchange and then turning around and selling profitably to you – does not work. ‘
The guest list suggests that this is where we will focus. There is, first and foremost, Citadel Securities, which pays for the order flow for brokers that include Robinhood. There’s Melvin Capital, a hedge fund that was hugely successful last year and had to get a lifeline this year, in part because of its GameStop short positions. Citadel, a hedge fund, bought a stake. To make matters more confusing, Citadel and Citadel Securities are not the same, although they were founded by the same man, Ken Griffin.
The thing about paying for order flow is that Robinhood makes money when people trade more. The company sends push notifications about positions you hold, and you can set personal pricing goals if you want to receive more. This is only a problem for Robinhood users; in general, day traders do not usually make money.
This is especially true for Robinhood! During ‘herding events’ such as GameStonk, when Robinhood traders congregate in a stock, ‘large increases in Robinhood users are often accompanied by large price increases and are followed by reliable negative returns’, write the authors of a study on Robinhood- users. Another article views Robinhood traders as a noise.
The focus on a hedge fund conspiracy is missing the point. Robinhood and Citadel Securities make money when people trade. It’s reasonable to ask if you should limit push notifications that can encourage people to trade impulses.
We will also hear from Reddit representatives Steve Huffman, CEO, and Keith “DeepFuckingValue” Gill, also known as Roaring Kitty on YouTube, from r / WallStreetBets. I imagine it’s about day trading, and someone will have to explain r / WallStreetBets, what: strength! I hope Gill wears his formal band.
It is possible that Tenev will deliver a disastrous performance and prepare Robinhood for a world of hurt. But the questions that focus on paying for order flows, hedge funds and whether short sellers are evil (it is not!), Will miss the Silicon Valley thing. Part of the problem was the terms of service themselves – no one reads it. Robinhood has absolutely the right to restrict trade, and on top of that, Robinhood is not liable for service failures, regardless of the cause, including those caused by software errors. There is also an arbitration clause.
What I come across here is that Robinhood does not need to change anything. It scales quickly. Users have agreed that there can be lust whenever they want. Robinhood earns money regardless of whether the users do it. Disputes go to arbitration, not court. Investors pile up. If Tenev can dismiss this trial (and perhaps a similar one from the Senate), he is in an excellent position for a scholarship. All he has to do is make the politicians sound and say nothing awful, and he wins.
Robinhood hosted a Super Bowl ad to celebrate its customers. If it’s not trust, I do not know what it is.