Robinhood Taking Fire from Every Direction
- Author: Chris Remington
- Posted: 2024-06-11
As recently as a few weeks ago, the app Robinhood was the darling of Wall Street, social media, and the so-called retail stock market. It held this status thanks to its post as a change agent. It promised users a commission-free experience when it came to accessing the stock market and a variety of financial transactions, such as cryptocurrency. Though not without its controversy, the app was beloved, well-liked, and well-used.
Then came /r/WallStreetBets. And everything changed.
Robinhood & the GME Short-Squeeze
As has been widely reported, a revolution of sorts sprung into full view last week. A group of retail investors - largely organized on the subreddit /r/WallStreetBets - began to buy stock in GameStop, a retail brick and mortar chain that was thought to be circling the drain as a result of a failure to expand its business model away from retail game sales. However, some positive actions - combined with the addition of activist investors to their board - spurred some to come to the conclusion that the chain may be making a comeback.
Investors began to buy the stock, putting pressure on hedge funds that were shorting it. This spiraled the stock upwards, increasing as much as 45,00% at one point. This turned the event into one of the most famous short-squeezes ever.
Much of the activity occurred on Robinhood, and the app stepped in. In late January, it limited the number of shares that users could buy of GameStop and other selected stocks, citing liquidity and volatility concerns. Those restrictions have been eased up, but not completely removed. Shortly afterward, GameStop's stock began to back off of its peak.
The Backlash
The action was met with massive criticism on all sides of the political spectrum. Ideological foes - who agreed on almost nothing - came together to attack Robinhood for what were perceived to be anti-free-market actions. This included Congresswoman Alexandria Ocasio-Cortez (D-NY) and Senator Ted Cruz (R-TX). Threats of hearings were immediately leveraged, and political elites demanded investigations into the anti-competitive actions.
Robinhood took to social media to explain their actions and was promptly met with a spate of negative criticism. A tweet that linked to a longer explanation of their actions was "ratioed" heavily, meaning met with more negative replies than likes. Thousands of reviews on the app were removed, with Google deleting nearly 100,000 reviews from users who hadn't even downloaded the app and were simply furious over the situation.
Mean and negative comments are one thing, but real actions are something else. Within eight hours of the original stock limitation, a class action lawsuit had been filed against Robinhood, with attorneys alleging that Robinhood's actions amounted to unfair trade manipulation. Additionally, upcoming Congressional hearings will further explore the issue. Robinhood's CEO, Vlad Tenev, has agreed to testify at the hearing.
Of course, from Robinhood's perspective, there is one question that matters more than any others: How will this impact their userbase? That is to be determined, but the available evidence thus far is conflicting. On one hand, a survey taken in the immediate aftermath of the debacle showed that 3/4 of users said they would leave the app thanks to Robinhood's actions. Indeed, a slew of articles has appeared which list Robinhood alternatives. However, the data points to the opposite conclusion, with the app posting record downloads on February 3.
But Wait, There's More!
Just when you think it can't get worse for Robinhood...it did. On February 4, a CNN Money story broke that noted that Tenev is not licensed by FIRNA. FIRNA, short for Financial Industry Regulatory Authority, licenses anyone involved in the sale of stocks or other equities. Tenev's lack of a license raises real questions about what he can and cannot do in his role as CEO. This is problematic, as CEOs are typically required to be registered with FIRNA.
What comes next - and what additional actions Robinhood may face as a result of this lack of a license - remains to be seen. It is possible that Robinhood's organizational structure may allow Tenev to not need to be licensed. Regardless, this is another headache that the organization simply did not need.
Robinhood's rise has been astonishing, and it has been an integral part of one of the most fascinating events to hit the stock market in the past few decades. However, it then interjected itself into the story, limiting trade, and potentially exposing itself to all sorts of liability and negative publicity. Robinhood's future will now unfold in a very different light but in a very public arena.
