This weekend saw the Wall Street saga around GameStop and other stocks ramp up a few notches, and then some.
US-based trading platform Robinhood halted trading in shares of the beleaguered bricks-and-mortar game store, along with AMC, Blackberry, and a number of other so-called ‘meme stocks’, leading to calls of conflict of interest and an exodus of customers.
According to Robinhood, it was a regulatory necessity. But, this startup’s whole value proposition is about democratising share trading.
It was conceived to allow everyday people — day traders just like those causing all the kerfuffle on Reddit — access to the tools the ultra-rich have always used to build on their wealth.
But, the fintech works closely with the very investment firms its users are seeking to disrupt.
Regulatory filings from Robinhood reportedly show it charges large investment firms fees to access information on which stocks its users are buying and selling.
More than half of its trades are routed to Citadel, which is one of its largest revenue sources.
Both businesses have disputed claims that Citadel put any pressure on Robinhood to cease trading of GameStop shares. But, the conflict of interest is clear.
Robinhood’s official line is that the reason for the pause was regulatory, and frankly uninteresting.
In a blog post, and in a string of tweets from chief executive Vlad Tenev, the business explained regulatory restrictions mean trading platforms must have access to enough capital to cover settlement periods. When a stock is highly volatile, that threshold increases.
As a brokerage firm, Robinhood has many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.
— VLAD (@vladtenev) January 28, 2021
The business claims it had to halt certain trades to maintain its capital obligations. But, that didn’t stop speculation from flying.
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By limiting its users’ ability to buy certain stocks, Robinhood played a large part in driving their prices down again, putting money back into the pockets of the hedge funds on the other side of the fence.
For a business that’s based its whole identity on a lovable rogue who steals from the rich to give to the poor, the irony is exquisite.
There have even been (albeit unverified) claims flying around that Robinhood allegedly closed out users’ positions in GameStop, without their permission.
All this follows a settlement in December 2020 that saw Robinhood shell out US$65 million to the SEC, over charges it was not in fact seeking the best price for customer orders.
Over the weekend, Robinhood customers have filed a class-action lawsuit against the tech company. And, if social media is to be believed, users are quickly jumping ship for alternative platforms including SoFi, Public.com and Chinese-owned Webull.
This is a highly regulated and complex sector, but even if Robinhood is indeed doing its level best to give customers what they want without falling foul of the SEC again, it hasn’t necessarily communicated this well.
The blog post and tweets came after customers were cut off, and for some just didn’t quite strike the right tone.
1) He should have taken a page from @stoolpresidente’s book and approached this with an “us vs. the suits” attitude, but toned down about 30%.
He should have live streamed constant updates to twitter & WSB, creating a sense that we’re in this together.
— Kevin Dahlstrom (@Camp4) January 31, 2021
All that just plays into the narrative that the tech company has switched sides.
Hitting a moral fork in the road, it could have doubled down on the values it was built on and do all it could to support its customers — that is, the Reddit army of day traders.
Or, it could seemingly bow to the pressure of the Wall Street hedge funds on the other side of the debate.
Speaking to SmartCompany, Broadband Solutions founder Sam Bashiry says he feels the startup took the wrong path this time.
Robinhood is not a fledgling startup anymore. As of November 2020, it had a valuation of more than US$10 billion.
At that stage, Bashiry says sticking to your core values becomes all the more important.
At the end of the day, Bashiry says doing what’s best for the customer is going to be what’s best for your business.
The reputation backlash Robinhood has set itself up for will likely cost the company more than if it had continued to allow trading, simply through damage to the brand.
“Your brand is what you stand for and your brand is the most important thing that you have in your business.”
Even if Robinhood truly had no choice in this matter, there’s the question of communication.
It’s about living and breathing by your core values, but also making sure your customers know you’re doing so.
If you use all the appropriate channels to keep customers in the loop, they will understand, he says. If you don’t, again, you’re just doing damage to your brand.
So, what can startups learn from Robinhood’s woes?
First and foremost, Bashiry says Aussie entrepreneurs should be watching closely, taking note of what the fintech does well and where it’s falling short.
“Never repeat the mistakes that other people make,” he says.
Every startup founder will find themselves at this kind of a crossroad at some point, he stresses.
So, when they do, he advises against making snap decisions under pressure. Bashiry is a staunch advocate for sleeping on it.
“It’s important to make a decision that’s going to be the right decision long term,” he advises.
“I think that’s where they’ve gone wrong.”