Could Robinhood Shut Down? Traders & Regulators Raise Questions & Criticism

The GameStop (NYSE:GME) saga that has gripped global markets for the past week is already having far-reaching implications for the financial industry. Regulators, analysts, and participants alike are reeling (and rejoicing) at what has been one of the largest grass-roots financial movements to “stick it to the man” in decades–or possibly longer. While hedge funds were the initial target of retail investors on the WallStreetBets (WSB) subreddit, it seems that the retail movement could also pose a threat to the stability of other institutions operating in the financial industry–namely, Robinhood.

We wanted to bankrupt Melvin and we ended up bankrupting Robinhood instead.

— BROTHER KIRBY (@bluekirbyfi) January 28, 2021

Indeed, Robinhood came under fire from its disgruntled user base and lawmakers alike last week after the platform made the decision to block its retail customers from trading some 50 assets. Most notable among these were GME, AMC, and a number of other “meme stocks” that WSB had latched onto.

On Sunday, Reuters reported that Robinhood still won’t resume trading of eight of the assets it blocked retail assets to last week, including GME.

Robinhood continues to claim that the decision to limit trades was made to protect retail traders from getting burned. However, as CBS news reported, “the decision is sparking a backlash by investors, consumer advocates and lawmakers who claim Robinhood’s freeze hurt customers while helping the hedge funds it does business with.”

Indeed, the Washington Post reported that People were particularly outraged by the trading limitations because of Robinhood’s close relationship with Citadel, a large-scale liquidity provider that works with many Wall Street institutions.

“After the trading halt, Reddit users accused Citadel and its billionaire founder, Ken Griffin, of pressuring Robinhood to limit trading of certain stocks, a move that may have prevented further losses for the short-sellers that lost billions betting against GameStop,” the publication reported.

NYT: Robinhood limited trading because of a lack of funding

However, it was later revealed that the reason for Robinhood’s retail limitations likely weren’t because of relationships with institutional clients. The New York Times reported that instead, the company may have instituted the ban because it literally couldn’t afford to pay transaction fees: after all, trades on the platform are free for users.

So it looks like Robinhood did not prohibit customers from buying GameStop or AMC as part of a conspiracy to protect short sellers. It did it because it literally couldn't afford to let them keep trading.

— James Surowiecki (@JamesSurowiecki) January 29, 2021

“Robinhood, one of the largest online brokerages, has grappled with an extraordinarily high volume of trading this week as individual investors have piled into stocks like GameStop,” the Times reported. “That activity has put a strain on Robinhood, which has to pay customers who are owed money from trades while posting additional cash to its clearing facility to insulate its trading partners from potential losses.”

Collateral requirements apply to buys – since your customers are going to have to fork over the money – not sells. So yes, it does line up with the rationale.

— James Surowiecki (@JamesSurowiecki) January 29, 2021

The company reported on Thursday that it had raised an injection of more than $1 billion from its existing investors to make up for the shortage in cash. Robinhood spokesman Josh Drobnyk said in an email that the fundraising was “a strong sign of confidence from investors that will help us continue to further serve our customers.”

Barred from buying on Robinhood, retail traders looked elsewhere

In any case, the combination of Robinhood’s trading limitations and the too-close-for-comfort relationship with Citadel has enraged its customer base. While Robinhood hasn’t released any official data, there seems to be a movement of retail traders away from Robinhood and onto other trading platforms–not just because of principle, but also because of the fact that retail traders are still hot to trot for more GME stock.

Similarly, lawmakers in the United States also took aim at Robinhood after it barred retail traders from GME and other stocks. Perhaps most notable was the odd couple formed by Representative Alexandria Ocasio Cortez (D-NY) and Senator Ted Cruz (R-TX), who both condemned Robinhood’s actions in an awkward series of tweets last week.

This is unacceptable.

We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.

As a member of the Financial Services Cmte, I’d support a hearing if necessary.

— Alexandria Ocasio-Cortez (@AOC) January 28, 2021

Additionally, over the weekend, a number of articles began appearing across the internet detailing possible alternatives to Robinhood. Simultaneously, google searches for “Robinhood” exploded along with search terms related to last week’s drama, including “GME” and “WallStreetBets.”

Will Robinhood shut down?

Therefore, it’s likely that Robinhood could suffer some long-term consequences for its decision to bar retail traders from certain stocks last week. But could the damage be so severe that it might endanger the very existence of the platform?

Most analysts seem to agree that it’s unlikely at this point: the possibilities of either bankruptcy or forced regulatory shutdown seem fairly slim. However, some naysayers are telling Robinhood users to prepare for the worst.

For example, Ross Gerber, president and chief executive of Gerber Kawasaki Wealth and Investment Management wrote on Twitter that “so if Robinhood goes under the SEC will freeze all the accounts.The SIPC protects up to $500k in accounts. It takes months to unwind and get your money back. Move the money now. This could become a nightmare.”

So if Robinhood goes under the SEC will freeze all the accounts. The SIPC protects up to $500k in accounts. It takes months to unwind and get your money back. Move the money now. This could become a nightmare.

— Ross Gerber (@GerberKawasaki) January 29, 2021

Similarly, the term “delete Robinhood” became more common on Twitter.

Robinhood was not immediately available for commentary. Comments will be added to this piece as they are received. 

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