The End of Robinhood Is Nigh

Robinhood provokes fury of YOLO-ers as it hands a lifeline to hedge fund short sellers

For a year or two Robinhood has been, well, a Robin Hood — a no-fee savior to little guy investors everywhere, who got on the platform, yakked it up with fellow little guys in online chat rooms and Discord servers, and collectively, day after day, drove up the price of a palette of stocks. Last May and June, I joined in the fun when the Robinhood guys drove up the price of Avis. No one stepped in, Avis’ share price eventually plunged, and folks moved on to another stock. That was enough for me, but I admired the gumption and persistence of those who stuck with it.

Yet, nothing could have prepared the little guys for the most fun any of them — not to mention us voyeurs standing on the sideline — had probably experienced in their lives: the 17-fold inflation of shares of GameStop, the has-been video game retailer, over the last two weeks. On Tuesday, James Surowiecki explained the significance lurking behind this “meme stock” boom: “Even though GameStop’s current stock price is utterly irrational…the way Redditors and others have driven its price up has been quite smart.” With his earnings, one Reddit user who goes by the name “Longjumping” posted in the community WallStreetBets that he paid off more than $23,000 in student loans. In a ton of videos about the feat, TikTokers celebrated the suffering inflicted on self-impressed, over-inflated, fat-cat hedge fund traders who had shorted GameStop.

Alas, it seemed predictable that killjoys would step in, but the institution demanding the lights turned off stung: Robinhood, which summarily ordered a halt to the sale of GameStop options, in addition to those of a slew of other companies whose shares the little guys had been driving up over the past few days — Nokia (+75%), AMC (+four-fold), Tootsie Rolls (+44%), Dillard’s (+62%), Macy’s (+44%), and Koss (+26-fold). With the suspension of trading, the shares of all of them plunged. The life raft helped hedge fund traders claw back some of their losses.

And with that, Robinhood’s fairy-tale, seven-year ride to an IPO that was slated to happen as soon as this quarter seems in question. Not only that, but the company could simply be finished as a thriving business. Robinhood infuriated its users, many of whom vowed to abandon the app as soon as they could get their money out. Some of them filed a federal class-action suit against the startup on Thursday, alleging market manipulation and breach of fiduciary duty. Senate Banking Committee Chairman Sherrod Brown said he will hold a hearing. In the House, Rep. Alexandria Ocasio-Cortez asked for an investigation into Robinhood and other trading platforms that halted stock sales.

In an interview Thursday night with CNBC, Robinhood CEO Vlad Tenev said he decided to halt options trading in a total of 13 companies as a pre-emptive move “to protect the firm, and protect our customers.” According to Tenev, because of the scale of trading and market volatility, regulators could have required Robinhood to deposit large amounts of cash with clearing houses. “We’re really in unprecedented times,” he said.

But the indignation with Robinhood did not start this week. In 2018, Bloomberg disclosed that Robinhood was selling its order flow in advance to hedge funds like Citadel, which can profit from the practice in numerous ways. But the betrayal this week hit hard.

Before the ax fell, the main subject of inquiry in a frenzy of media was what was driving the mob of traders: Was it greed, boredom, or professional interest in investing? Much commentary settled on anger: In an age of profound unhappiness over what is widely regarded as a rigged system on every level, Robinhood and the other investment apps offered a vehicle to beat Wall Street at its own game. But today, when Robinhood saved the hedge fund guys and threw its users overboard, the fury boiled over.

The story has no absolute good guys: The hedge fund traders — paying little or no taxes, generally a waste of a good education — cried like babies when they were losing to whom they considered unworthy rivals. The investment apps betrayed their central ethos as soon as the heat was turned up. As for the little guys themselves, they were admittedly opportunistic and bloodthirsty. But of the three, the little guys deserve the only sympathy: Many of those GameStop traders on Robinhood were simply paying off their college loans.

Steve LeVine is an Editor at Large at Medium with interests in ferreting out the whys for the turbulence all around us. Ex-Axios, ex-Quartz, ex-WSJ, ex-NYT, ex-FT.