Does Robinhood owe too much to its rich backers?


Robinhood is the amateurs’ share trading platform at the heart of the attempt by an army of small investors to outsmart Wall Street by buying shares in companies such as GameStop, costing hedge funds billions in the process.

The company has upset the applecart of US stock investing by waiving the commission that traditional brokers charge customers to play the markets. That, plus its user-friendly app, has made trading much cheaper and easier for ordinary people, regardless of their experience, enticing more than 13 million users at the last count.

Its name is a nod to the idea of helping the “poor” gatecrash the glamorous domain of rich traders, and it likes to style itself as drawing on the ethos of the Occupy Wall Street movement. In the words of its official rubric, Robinhood is “democratizing finance for all”.

But this romanticised vision sits rather uncomfortably beside the reality of its origins and ownership.

The app was founded in 2013 by Stanford University graduates and financial technology whiz-kids Baiju Bhatt and Vladimir Tenev. In a few short years, they have become paper billionaires, building the business into a steamroller success worth $8.6bn (£6.9bn), according to a recent funding round.

Given that Robinhood doesn’t charge commission from its users, it has to make money some other way. It does that by charging fees to financial services companies, which pay for a steady stream of orders for trades made by the app’s users.

While Robinhood facilitates the trades, it goes to “market maker” firms – typically large banks and financial institutions – who actually execute the transactions that keep the stock market moving. They profit by pocketing the difference – the “spread” – between the price people are willing to pay for stock and the price at which they’re willing to sell.

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This funding model has raised questions about whether Robinhood is really worthy of the name. Is it looking out for its users, or for the same Wall Street investors it claims to help them bypass?

One of the market makers that pays Robinhood for this “deal flow” is Citadel Securities, whose automated exchanges process 39% of all US listed share trades by volume. It was founded by the Wall Street tycoon Ken Griffin, whose stable also includes the Rumours reached fever pitch when Citadel LLC helped bail out Melvin Capital, a fellow hedge fund that Robinhood users were trying to punish for shorting GameStop.

Citadel has denied that it put any pressure on Robinhood to suspend trading in GameStop and other firms, in response to a burgeoning belief that Wall Street had flexed its financial muscles to thwart a rebellion that was costing it money. That belief only gained strength when critics pointed out the hedge-fund contingent among Robinhood’s own backers. Sequoia Capital, a big beast of venture capital that led a $280m fundraising effort valuing Robinhood at $8.3bn in May 2020, has denied applying pressure.

There may be no evidence behind the rumours, but if anyone were under any illusion about Robinhood’s links to high finance, they need only look at the names that helped it raise $1bn last week to help shore up its finances. JP Morgan, Goldman Sachs, Morgan Stanley and Barclays are hardly what you’d think of as the prince of thieves’s merry men.

There are other reasons to be cautious about Robinhood’s model: making trading easier has exposed people with little knowledge of finance to information they often don’t understand.

On 12 June last year, a 20-year-old student, Alex Kearns, killed himself, believing that he had just lost $730,000 (£580,000) on Robinhood. The sum was actually a temporary position on an option – the kind of financial instrument that Robinhood users have been using to buy in to GameStop. When he died, he was actually $16,000 in the red.

In a statement, Tenev and Bhatt said they had been “personally devastated by this tragedy”, and Robinhood promised to review the products that users were able to trade, and give them more information about what they were doing. But it came under intense pressure from US politicians and eventually cancelled its UK launch, planned for last summer.



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