The rise of Robinhood means that the ability to buy stocks, on a whim, is now at everyone’s fingertips. Robinhood has opened investing up to the masses.
Gone are the days when sophisticated trading strategies such as options trading and leverage are left to the rich guys on Wall Street. Free trading, coupled with Reddit’s message boards, have leveled the playing field — for better or worse.
“There’s a large group of people that think investing is this serious thing for only if you’re wearing a suit in front of your terminal,” said Tenev, who was born in Soviet-era Bulgaria. “That’s kind of been the legacy school of thought.”
‘The access is the biggest part’
The Redditors have targeted companies that are popular among short-sellers, who bet that a stock will fall by borrowing the shares and selling them — with the hope of buying them back at a lower price and pocketing the difference. Short-selling is extremely risky because, in theory, the losses are infinite.
None of this would be possible without free trading and the availability of cheap borrowed money, which amplifies the bets.
Tenev said that the old-school thinking that you need a suit to invest is “correlated with thinking that investing is mainly for wealthy people.”
“Our approach is a little bit different, which is that you don’t have to be wealthy to do it,” the Robinhood co-founder said. “You don’t have to have a Ph.D in finance. You don’t have to pore through fundamental analysis, or technical analysis in particular and look at moving averages.”
Indeed, the Wall Street Bets movement shows the impact that retail investors can have when they team up. Although some Reddit users are placing their bets based on fundamental analysis, many are motivated by a populist desire to punish hedge funds and other elite investors.
Outlawing GameStop purchases
Some see the episode as proof of how free trading, and rock-bottom interest rates, can backfire. In essence, the normal functioning of capital markets has been disrupted by an online mob.
At the same time, Robinhood has angered the WallStreetBets community and others by restricting trades on highly volatile stocks this week.
Margin accounts allow investors to buy stocks and other securities with borrowed money. To guard against sharp selloffs, investors must maintain a minimum amount of equity as long as they hold onto the stock.
“So much for being on the side of the little guys like Robinhood,” one user wrote. “Just another shill brokerage paid off by the big players. I’ll be switching to another brokerage once this is over and I hope everyone here does too.”
Barstool Sports founder Dave Portnoy slammed the decision in a series of tweets.
Hours after implementing the restrictions Thursday, Robinhood appeared to backtrack, saying it would resume limited buys on those securities starting Friday.
“This was a risk-management decision, and was not made on the direction of the market makers we route to,” Robinhood said in a blog post. “We’re beginning to open up trading for some of these securities in a responsible manner.”
Outages and tragedy
The Reddit drama is just the latest in a string of controversies surrounding Robinhood.
With its user growth skyrocketing, the app emerged as a pandemic winner. People stuck at home, some of them with stimulus checks to spend, discovered how easy it was to bet on stocks.
Robinhood’s co-founders said they were “personally devastated by this tragedy” and in response announced a series of changes to its options offering and user interface.
‘Tough but extremely rewarding’
“It was tough,” Tenev said of 2020, “but extremely rewarding to work through these challenges and make it through the other side. We’re much stronger as a company than we were at the beginning of 2020.”
That’s good, because the past few weeks suggest 2021 won’t be a walk in the park either.