Robinhood – A Brief Follow-Up

Robinhood has put forth a statement regarding the choices they made that limited trading. Before I offer my own opinion, I will reproduce that message here for the curious.

A note from Robinhood
Hi [SDWeasel],

We wanted to reach out to you after a transformative week in the markets to answer a question we know many of you are asking: “Why did Robinhood limit certain stocks?” 

We understand that the temporary limits we placed on certain stocks this past week were frustrating for many, especially since we built Robinhood to expand access to investing. We have always sought to put our customers first and we want you to be able to invest on your own terms. 

To help explain what happened and why we had to take action, we wrote a letter to our customers and captured the key understandings for you below:

* For Robinhood to operate, we must meet clearinghouse deposit requirements to support customer trades.
* Deposit requirements are determined in part by how much stock a firm’s customers hold. If a firm’s customers’ holdings are volatile, a broker (in this instance Robinhood) is obligated to meet higher deposit requirements.
* Last week, in part due to volatility in some popular stocks, Robinhood’s deposit requirements rose tenfold. The combination of the deposit increase and the extraordinary increase in volume on these particular symbols led us to put temporary buying restrictions in place on a small number of those stocks.
* We had to take steps to limit buying in those volatile stocks to ensure we could comfortably meet our deposit obligations. We didn’t want to stop people from buying stocks and we certainly weren’t trying to help hedge funds.

We hope you take away this: at Robinhood, we stand with everyday investors participating in the markets.Standing by our Robinhood community means being there for our customers through any trading environment. We’ll continue to improve as we break down barriers in the financial system to open it for all.

Thank you for being a part of the Robinhood community.

Sincerely,
The Robinhood Team

Now, this is quite a decent reasoning for why they made the choice they did. They’ve already had their fair of run-ins with the SEC over their monetization model so doing whatever it takes for compliance reasons is, well, probably a little fair. Banking and investment regulations like reserve requirements tend not to care much about circumstance.

Still, they would have been way better off explaining that when they did it, rather than after the fact. I would be far more sympathetic if the timing didn’t suggest damage control. As the old saying goes, it’s easier to ask forgiveness than permission.

Regardless, their choice has an obvious chilling effect on events that worked directly to the benefit of one side more than the other(s). Saying that you “didn’t want to” does little to change the fact that you did, knowing full well what it would do.

It seems a bit misleading, in a letter about why you had to shut down your target market of everyday investors, to continue on and say you “stand with everyday investors participating in the markets.” I mean, do you really though? When push came to shove, seems like you weren’t.

Of course, this is a no-win situation for Robinhood. Even if they manage not to alienate a good portion of their user base, there’s always a chance that the SEC will decide what they did was improper and fine them anyway. Again.

Does any of this affect my decision to find a different way to invest my money? Maybe. To be honest I went straight from reading their statement to writing this post, so this is more of a knee-jerk reaction than a well thought out response.

Anyway, I think I’ll simply leave it there for now. Y’all take care.

3 thoughts on “Robinhood – A Brief Follow-Up

  1. Agree. That is a legitimate reason given. They should have said upfront exactly that. Kind of a we are selling Virtual Blizzcon tickets. We expect based on historic trends to sell 40,000, requiring a certain amount of bandwidth. Then we find out say the musical act will be an all day event featuring several top bands. 100,000 now want to buy tickets, and they need to come up with more bandwidth at a steep price, so they limit sales.

    Liked by 1 person

  2. I have no knowledge or understanding of the processes and practices involved in this kind of trading. My sole and only interest this past week or so has been in the way the topic has permeated the gaming media I follow.

    It’s perhaps interesting, then, that I read an explanation of the self-protective and regulatory reasons for Robinhood’s decision *before* I read your previous post on the matter – and i read it on a gaming website or blog, although I can’t now remember which it was. I almost commented last time, when you were explaining why you wouldn’t be using Robinhood in future, to say that as I understood it they were basically pushed into making the decision in fear of what would happen to them if they didn’t, pretty much as now explained in the letter. I didn’t comment in the end because i really wasn’t clear that I’d understood it well enough to make a meaningful point.

    I wonder now, if the explanation I read didn’t originate in explanatory statements from Robinhood, where it did come from. Or whether, perhaps, Robinhood did explain their reasons, but in some forum or platform that wasn’t widely seen by their customers. Either way, they probably would have been better to make the statement much more publicly at the time all the bad publicity was flying around.

    Liked by 1 person

    1. It’s certainly possible I simply missed it along the way.

      At the end of the day, finance and investing is just statistics with money. The “system” rewards patience and persistence, and Robinhood allows people such as myself to participate without the larger starting capital that most brokers require.

      While I harbor some concerns, the most financially sound option is to stay put.

      It seems kind of silly for them to have addressed their reasoning anywhere but in the app itself, but it’s quite likely that people more knowledgeable than myself were aware of these things without Robinhood addressing them directly.

      Either way, it looks like it’s old news now. Whatever momentum the protestors had is gone and things are returning to normal. Last I checked Gamestop was under $100 and still slowly falling, and it will be some time before there’s enough drive and cash reserves to pull this off again.

      Like

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