While some of the backlash against Robin Hood, the trading application, seems to be well deserved given what appears to be misrepresentations made by the founders on other media outlets around why they were stopping the trading of GameStop (GME), the truth is the general public even those trading did not appreciate the value chain and what the real issue was and that it was only the “buying” that was being restricted and not the “Selling”.
Earlier today Revolut sent out an email to its customers apologising for the inability to help with buying GME on the NYSE.
Like Robin Hood, Revolut has also faced increased capital requirements set by their broker-dealers and the Depository Trust Company (DTC) in the United States. Robin Hood met this requirement by raising a reported $3 bn from early backers including ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA. But the action came a little too late in the eyes of many disgruntled customers.
One way of thinking about the role of the DTC is to think of them, and this is a grossly simplified view, as the people responsible for tracking the changes in ownership of securities (such as equities) and acting as custodians for the process as ownership changes hands between the many market participants. The DTC is a part of the New York regulatory setup and linked to the SEC.
Robin Hood and a few other tech-enabled trading apps were allowing customers to open a “margin account”, which in essence allows a customer to buy equities quickly (through money that is ‘lent’ to the margin account for trading), about 2 days before their money actually hits the Robin Hood account. Way back in the day, retail customers could have traded on margin, but that is something that would have had to be requested. While this was an innovation that helped customers trade quickly, imagine an experience where they would have to wait two days to trade before money actually hit the account, there were limits to how much Robin Hood could advance on behalf of customers (driven by regulatory limits as well as creditor risk appetite; think about someone making risk decisions looking at a bunch of unsophisticated retail trades looking to go long on an equity, like GME that was likely going to drop in value (once the dust settled) and balked at the idea of extending more credit). When the order volume due to “Meme traders” went through the roof so did the capital requirements and hence the need for the business to raise additional money to facilitate the growth in business.
For now, a number of Fintech trading platforms such as Revolut and Robin Hood are allowing for the Sale of GME but restricting purchases, which is continuing to cause frustration for customers.
Chamath also managed to rub some salt in Robin Hood’s wounds by commenting on the integrity of the team (another reference to the founder not being clear on an NBC interview around the real reasons why people were stopped from purchasing GME through their trading accounts). The words “Integrity compounds” are probably ringing in the founder’s ears. Chamath did himself have the integrity to clearly flag alternatives (one of which SoFi, that he himself is about to take public through a SPAC – see tweet below).
There is a lot of chatter on social media about ways to move portfolios out of Robin Hood and despite an impassioned post by the Robin Hood team reminding customers, and we are paraphrasing, “It’s not us, it’s them” there appears to be some serious damage done to brand equity. Competitive propositions like eTrade and eToro seem to have benefitted from the brand damage, though it does seem that even eToro is exercising caution when it comes to GME trading by automatically applying a stop loss to GME trades (a Stop loss essentially allows a customer to set a limit e.g. if the stock drops 10% of its price, then execute an automated sell to prevent further losses). Some market commentators found it strange that this action was taken without the consent of the customer. While the idea was to prevent customers from hemorrhaging losses, it is still bizarre to see a platform take steps in an autonomous manner.
Its been a strange week for Wall Street, and one that is likely to lead to greater mistrust of Fintechs and the establishment alike. Customer complaints are likely to go through the roof and the coming regulatory response will be interesting to observe and understand.
Note: The above is not financial advice. This article is an observation of what happened related to Robin Hood and other trading applications when it came to GME trading.