So here we are: about to hear about GameStonk. Robinhood CEO Vlad Tenev will have to explain himself tomorrow. What happens next for Robinhood?
You may remember last month, when GameStop’s stock skyrocketed by up to 500%, peaking at $ 483 on Jan. 28, thanks in large part to memes and a damn financial subreddit. (I’m sure there will be entire academic books written on r / WallStreetBets. There is already an article.) Many of the retailers involved in the GameStop shopping frenzy were using Robinhood, and the company became part of the meme – although it had to limit the GameStop negotiations. The race had a populist theme: the little ones went Show hedge funds; they were going to do those damn short-sellers pay. The GameStop meme was a ton of free publicity for Robinhood, although the public outcry about limited commerce means that the House of Representatives is now investigating.
The Chamber’s Financial Services Committee will have a hearing! This will be a fun political theater, but it is unlikely to have any serious results. That’s probably why Robinhood is still planning to go public this year. Robinhood led the Apple mobile app store for days, and more than half a million people downloaded it, reports CNBC.
“In fact, they have an incredible opportunity with new users now,” said Catherine Lamberton, professor of marketing at the University of Pennsylvania business school, Wharton. The GameStonk saga is actually evidence that Robinhood has changed the power dynamics in the market, she said. “They have an opportunity to continue growing with this.”
Of course, Robinhood limited GameStop’s negotiations near the peak, infuriating some of its customers. But in March 2020, during the market crash related to the pandemic, you should remember that Robinhood had three major interruptions in just over a week. In a way, it makes sense: Robinhood is a startup and was going through a painful growth moment. At the time, Tenev and his co-CEO Baiju Bhatt attributed this flaw to “stress on our infrastructure”. They did not foresee an event of this scale – and did not plan for it.
Of course, the most famous service interruption did not happen until January 2021, but the basic outlines are the same. Robinhood had not planned an event of this scale and, when the clearinghouses increased their cash requirements, opsias! If it were Twitter, there would be a failed whale. People get crazy enough when social media goes down – but that’s cash. Still, what happened last March, and again around GameStop, fits into a larger pattern of technology startup behavior.
“This is a normal startup,” said Lana Swartz, assistant professor of media studies at the University of Virginia and author of New Money: how payment became social media. Basically, the change is to bring a platform to the market, put it on a scale and worry about everything else afterwards.
The lack of customer service is expected at social media companies, said Swartz. “But as Silicon Valley companies are trying to take on more and more of our lives, this modus operandi – ‘Sorry, we don’t work now and you signed the terms of service, so it’s up to you! You consented to it! ‘- this way of doing things is not going to solve, ”said Swartz. That is why the most interesting questions in the audience are likely to be about the terms of the service contract, not hedge funds, short sales or order flow payments.
The question here is what small investors were led to believe and what really happened, said Anat Admati, professor of finance and economics at the Stanford School of Business. Robinhood says in its terms of service that it can refuse negotiations – but how many of its users read the terms of service? “The broader issue is that we agree with all kinds of things online,” said Admati in a telephone interview.
What’s more, with complex financial transactions, “we will resolve the details later” is difficult to do, said Lamberton. “This is not an area where you can play,” 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, instead, would you discover how to allow mass retail events to happen without your own internal system overturning? “This decision will change their platform and also how they fit into Wall Street,” she says.
There are a lot of free things online, and the question is always how they make money, Admati said. In the case of Robinhood, this will be one of the issues that House politicians are likely to get involved in – a controversial practice called “payment by order flow”. This allows market makers to group businesses and make money through arbitration. It could also theoretically allow banks to lead retail investors, an illegal practice. Also as BloombergMatt Levine notes: “The wholesaler is usually fulfilling your order at a price that is better than what’s available on the public market, so ‘front-running’ – going out and buying on the stock exchange and then selling to you at a profit – doesn’t work. “
The guest list suggests that this is where we will focus. First, there is Citadel Securities, which pays order flows to brokers that include Robinhood. There is Melvin Capital, a hedge fund that was fabulously successful last year and had to be redeemed this year due in part to its short positions on GameStop. Citadel, a hedge fund, bought a stake. To make things more confusing, Citadel and Citadel Securities are not the same, although they were founded by the same guy, Ken Griffin.
The problem with payment for order flow is that Robinhood makes money when people do more business. The company sends push notifications about the positions you own, and you can set custom price targets if you want to receive more. This is a problem only for Robinhood users; in general, day traders do not make money.
This is particularly true for Robinhood, in fact! During “grazing events” like GameStonk, when Robinhood traders flock to a stock, “big increases in Robinhood users are often accompanied by big price spikes and are followed by reliable negative returns,” write the authors of a study about Robinhood users. Another newspaper sees Robinhood’s traders as essentially noise.
Focusing on a hedge fund conspiracy is missing the point. Robinhood and Citadel Securities make money when people trade. It is reasonable to ask whether we should limit push notifications that can cause people to trade on impulse.
We will also hear from Reddit representatives, CEO Steve Huffman and r / WallStreetBets user Keith “DeepFuckingValue” Gill, also known as Roaring Kitty on YouTube. I imagine it is day trading and someone will have to explain r / WallStreetBets, that: good luck! I hope Gill uses his formal headband.
It is possible that Tenev had a disastrous performance, preparing Robinhood for a world of pain. But the issues focused on payment for order flow, hedge funds and whether short sellers are bad (they are not!) Will miss the Silicon Valley case. Part of the problem was the terms of the service contract themselves – no one reads them. Robinhood has absolutely the right to restrict negotiations and, in addition, Robinhood is not responsible for service failures, regardless of the cause, including those caused by software malfunction. There is also an arbitration clause.
What I mean is that Robinhood doesn’t have to change nothing. It is increasing rapidly. Users agreed that he can have screams whenever he wants. Robinhood makes money regardless of what its users do. Disputes go to arbitration, not to court. Investors are piling up. If Tenev succeeds in overcoming that audience (and perhaps a similar one from the Senate), he is in an excellent position for an IPO. All he needs to do is let the politicians hear his catchphrases and say nothing horrible, and he wins.
Robinhood ran an ad in the Super Bowl celebrating his customers. If that’s not trust, I’m not sure what it is.