Investors waiting for the chance to buy shares in Robinhood, the online trading app that helped democratize stock investment by eliminating transaction fees, may have viewed the recent GameStop drama with apprehension.
Many traders blame Robinhood for the collapse of the video game retailer’s stock after it shot up about 1,700% in a matter of days, only to lose 90% of its value the following week. The fact that the online brokerage banned or restricted the purchase of GameStop and other actions called a meme served to fuel suspicions that it was working closely with hedge funds that were losing billions of dollars in their short positions.
Robinhood expects to go public this year through an IPO or some other direct listing (it hired Goldman Sachs for that purpose). Has the trading app damaged your reputation to the point that a public offering is not well received?
A volatile mixture
Robinhood offered a very plausible explanation for his actions that have nothing to do with rescuing short sellers.
When an investor buys or sells a stock, it takes time for the trade to settle. Although it seems virtually instantaneous in your brokerage account, the T + 2 requirement, as it is called, means that the real deal is not settled in two days (it used to be even longer in previous years). As Robinhood Securities’ separate division of the trading application is required to make deposits at clearing houses to cover trades, the extreme activity of massive short-term trading forced Robinhood to limit the purchase of certain shares until it could raise sufficient capital .
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Robinhood says it was just a handful of stocks that were driving virtually the entire turnover – a situation that CEO Vlad Tenev described as an unprecedented event.
With such a concentration on just a few stocks, Robinhood had to find ways to mitigate the risk. Although clearing houses were originally looking for billions of dollars in deposits, the result was the imposition of restrictions on trade and the deposit of around $ 700 million.
Collusion to protect the rich
But putting the rumor’s toothpaste back in the tube is not easy. Market maker Citadel Securities is Robinhood’s largest customer, generating about $ 12.4 million in market orders in December alone, while the separate Citadel hedge fund was helping to save the hedge fund Melvin Capital from sinking under the weight of your GameStop short bet. Therefore, many remain convinced that the trading application has been pressured to block trades to give hedge funds time to hedge their short positions.
While there are regulatory barriers erected between the hedge fund and its securities business (and between Robinhood’s trading platform and its securities side), many still believe that these barriers were easily escalated when billions of dollars were at stake.
For an app called Robinhood that was launched with the statement “Let them change!” it was a little ironic that his actions saved billionaire hedge fund operators from ruin, while closing the door on the profitability of small retail investors.
There is no greener grass
Many traders abandoned the app after it limited the purchase of GameStop shares. According to one analyst, about 40% of Robinhood’s merchants who left the app went to Square’s Cash App, while Fidelity, Stash and TD Ameritrade also saw an influx of new customers.
Superficially, it suggests potential problems with an eventual IPO. Robinhood suffered some other failures last year that caused dissatisfaction among users, but suppressing this supposed uprising by investors with what appeared to be an iron glove may be the most damaging.
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However, Robinhood should not be concerned. Even with the flight of some investors, many said they would return. As PT Barnum would have said, there is no negative publicity. Even at the height of the controversy, the app was downloaded 600,000 times in just one day, suggesting that the confusion simply gave Robinhood millions of dollars in free advertising.
The app data agency Apptopia says Robinhood remains the most popular commercial app in the world in terms of downloads, far surpassing second place in the Webull app.
Short-term memory loss
Traders are already moving towards their next inventory targets. Marijuana growers like Tilray and Aurora Cannabis fired 50% and 21%, respectively, in one day, which a portfolio manager said was caused by the “Reddit army and friends”.
It is not known if they used Robinhood to increase shares, but the popularity of the trading app remains practically immaculate and its IPO will undoubtedly still be a success.
Rich Duprey has no position in any of the shares mentioned. Motley Fool owns shares and recommends Square. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner that offers financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently from USA TODAY.
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Investors waiting for the chance to buy shares in Robinhood, the online trading app that helped democratize stock investment by eliminating transaction fees, may have viewed the recent GameStop drama with apprehension.
Many traders blame Robinhood for the collapse of the video game retailer’s stock after it shot up about 1,700% in a matter of days, only to lose 90% of its value the following week. The fact that the online brokerage banned or restricted the purchase of GameStop and other actions called a meme served to fuel suspicions that it was working closely with hedge funds that were losing billions of dollars in their short positions.
Robinhood expects to go public this year through an IPO or some other direct listing (it hired Goldman Sachs for that purpose). Has the trading app damaged your reputation to the point that a public offering is not well received?
A volatile mixture
Robinhood offered a very plausible explanation for his actions that have nothing to do with rescuing short sellers.