Taking Stock

Ed Zitron 4 min read
Taking Stock

So yesterday was a big day for people who love saying that we live in a society. Today’s somewhat of an anti-climax - the big rush to make money off of Dogecoin seems to have stumbled, but as a result of it spiking like it did I was able to spend my profits on an iPad Pro, so really it’s hard to say if it’s bad or not. Robinhood is letting people buy Gamestop stock again - including options! - but it seems like the wind may fall out of its sails. Or maybe it won’t - maybe it’ll all go back to being crazy, and we’ll all be looking back at this post and saying “Ed - you’re so crazy!”

I got quoted in The Daily Telegraph talking about it:

The truth is that even letting people trade it again today didn’t stop people losing money. By switching it to sell only, you’re sending a direct signal to the market - you’re saying this stock is done for, we’re not going to let people buy it, so why keep it? In some ways, I honestly think that adding it back in a day later is more harmful - if it could come back so quickly, why did you remove it in the first place, other than to cut its rally?

The answer, as usual, is more to do with how things actually work in finance. In short, when you buy a stock on Robinhood, they actually have to pay for it. They need to use their lines of credit to buy the stock and it takes two days to “settle.” Basically, Robinhood ran out of money to actually buy these stocks at the rate its users wanted to, and they were left with the decision to either stop people buying it so that they didn’t run out of money, or let people keep buying it and run out of money. Brokers are legally required to have a certain amount of money on hand at any given time, varying on the actual activity they have on their platform, and Robinhood legally didn’t have enough money.

Now, I ain’t no “communications guru” - oh wait, I just got called that - but this is a moment where Robinhood clearly knew they were up shit creek, and could have educated the market. Now, of course, I imagine that they may not have wanted to say this publicly because it may have made them look bad, but I’d say they look far worse shutting off trading with a vague explanation. So, they could’ve said:

“The way that brokerages work - and staying in compliance with the SEC guidance - is extremely complex, but to simplify it, you have to keep a certain amount of money on hand at all times to comply - this is how all brokerages, not just Robinhood, operate. With the massive spike in orders, we were put in a position where we had to increase our access to capital to make sure that we could actually run things legally, and fulfill the orders from our customers. We couldn’t, so we had to halt trading. We are so sorry - we did all we could to avoid it.”

Now, the argument might be that they don’t want to reveal this information (it was revealed anyway) or that this would show weakness (they look weak already). But this is a great point at which a company can take a bad situation and make themselves the torchbearers - the guides through a complex and confusing situation.

Webull’s CEO went on Yahoo! Finance and gave a succinct explanation - he broke down exactly how the market worked, and why they had to halt trading. They came out of this looking great - transparent, honest and blunt.

Vlad Tenev, CEO of Robinhood, did come out with a similar statement. But he also appears to have, well, lied:

"Robinhood is a brokerage firm, we have lots of financial requirements. We have SEC net capital requirements and clearing house deposits. So that's money that we have to deposit at various clearing houses. Some of these requirements fluctuate quite a bit based on volatility in the market and they can be substantial in the current environment where there's a lot of volatility and a lot of concentrated activity in these names that have been going viral on social media," said Tenev.

Tenev denied there was any existing liquidity issue at the firm and said Robinhood had tapped credit lines as a proactive measure.

To start with, he gave an extremely mealy-mouthed explanation of what was going on, and then proceeded to suggest that this wasn’t a liquidity issue and, in fact, it was all about the volatility, and they definitely had enough money. This makes no fucking sense considering they raised $1bn the same day.

He also, in a classic “kept talking when he could’ve been quiet.”

"We have seen unprecedented interest due to the fact that finance has been culturally relevant in a way that hasn't been before," said Tenev. "Of course Robinhood stands for everyday investors. From the very beginning we have stood for investors opening up access. It pains us to have had to impose these restrictions and we're going to do what we can to enable trading in these stocks as soon as we can."

Seems innocent, right? Well, having to start a sentence with “of COURSE we care about our customers” is not a great thing to have to do - in fact, I’d argue that if you’re having to say it, you messed up in a categorical way.

Either way, they’re allowing people to trade Gamestop and AMC and such again. And because they weren’t quite sure whether they wanted to actually tell the truth, they have torpedoed their brand in the process. Is it that they had liquidity issues? Is it that they had some sort of legal thing that was going on with clearing houses? Who knows. They sure don’t wanna tell anyone, and I don’t think many people are going to trust them.

Great work everyone.

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