If Robinhood screws you guys again, don't come crying to me
- Retail traders are extra hyped about spending their stimulus checks in the stock market.
- If their risky bets force Robinhood to halt trading again, I don’t want to hear any crying about it.
- You’ve all been warned.
- This is an opinion column. The thoughts expressed are those of the author.
- See more stories on Insider’s business page.
I know it seems like a long time ago, but I remember the yowl of pain that exploded from the internet back in January when Robinhood was forced to halt the buying of meme stocks, particularly GameStop.
Reddit’s WallStreetBets community was aghast, that guy from Barstool Sports almost cried on CNN, and eventually Congress dragged Robinhood CEO Vlad Tenev to Washington and asked for his assurance that nothing like what happened would happen again — which he gave.
But the problem is, even after all that, nothing really changed. The behavior that pushed Robinhood into a liquidity crisis — like the risky bets its users were making with borrowed money — are still allowed on the platform.
And now we’re headed into what promises to be another wild moment on Wall Street as $1,400 stimulus checks hit people’s bank accounts. So I just want to make one thing clear: If something goes wrong and Robinhood is forced to halt trading again, I don’t want to see any tears. Not a one.
Fool me once…
In his testimony before Congress, Tenev denied that his platform is gamified in order to keep users drawn in, and he said that the company doesn’t use rewards to incentivize trading. But in the last week or so some users have been getting offers of free cash in exchange for new deposits on the platform — just in time for the arrival of stimulus checks.
A spokesperson for Robinhood told Insider that this is no more than a coincidence. “Like other brokerages and financial institutions, we regularly run promotions to reward and celebrate our customers. This promotion isn’t connected to the stimulus program,” they said.
But anyone with their ear to the ground of the internet knows that many retail traders are chomping at the bit to put their checks to work.
Here’s a TikTok about it set to the tune of Beyonce’s “Irreplaceable” — which you should only watch if you don’t have a problem with your eyes rolling into the back of your head. And here’s another one about spending your “stimmy” on crypto — again, not for anyone with a sensitive gag reflex. It’s hard to fathom that Robinhood is not aware of all of this excitement.
Robinhood is new to the level of risk and volatility we’ve seen on its platform, but that doesn’t mean it doesn’t have any control over it. The company recently filed its audited financial statement for 2020, and it shows that over the last year Robinhood exploded the amount money it lends to users so they can go trade. Back in 2019 the platform lent out $638 million, last year it lent out $3.3 billion.
Obviously lending money out to its customers increases the risk for Robinhood if their customers’ trades go bad. It means that customers don’t need a ton of cash to make big bets, and since Robinhood allows even novice traders to have margin accounts they may not be the best big bets in the world (to say the least).
On Wall Street it takes two days for a trade to “clear.” That means when you buy a stock on an app like Robinhood, you don’t immediately receive the share for your cash but rather the actual execution of the trade happens two days later — this is known as T+2. There’s a lot of technical reasons for this, but in essence it makes the plumbing of the market work better.
Over the two intervening days, Robinhood (like any other brokerage firm) is on the hook for its users’ trades and has to set some cash aside to make sure that they actually clear. When a lot of users are making big bets (because of the margin Robinhood gave them), the platform has to set aside a lot of money to make sure they all go through. Back in January, Robinhood didn’t have that cash ready to go, that’s why it had to halt trading.
In his testimony before Congress Tenev tried to argue that it would help Robinhood’s customers if that T+2 were reduced to T+0. In reality, that would just take risk off Robinhood, and speed up sometimes-complicated, high volume transactions that can already be messy at their current speed.
Trades come at you fast
Back in February Tenev assured members of Congress that there would be no more trading halts on the platform. He said that since the company had raised over $3 billion it wouldn’t face a cash crunch again. No harm, no foul.
But it’s hard to see how Tenev can guarantee that if the risky behavior allowed on his platform hasn’t been mitigated in some way. When Robinhood was forced to halt trading in meme stocks, the stock market was functioning exactly the way it’s supposed to. The company did not have the cash to cover the risks that its customers were taking at the time, so it had to stop. That’s how brokering stock trades works.
Now, armed with stimulus checks and catchy TikTok songs the hordes are prepared to enter the fray again. And maybe things will be totally normal, nothing will happen. Some people will make money, others will lose money but not in a weird way and the whole thing will be boring.
On the other hand, there’s also a chance that Robinhood’s customers will go wild again, load up on margin, and swing for the fences — there’s a chance that Tenev’s $3 billion could evaporate quickly.
If that happens, don’t come crying to me about how unfair it is that you can’t trade your favorite stocks. And I don’t want to hear any whining about any conflicts of interests embedded in Robinhood’s business model that hurt customers in favor of big Wall Street firms. You’ve all been warned. You all know what can happen when things get weird on Robinhood, so if that happens put on your big trader pants and suck it up. Good luck out there.
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