Robinhood renamed ‘the next Shylock’

Even the Robin Hood of legend had to steal from the rich to give to the poor. Upstart online broker Robinhood Markets and its users may have allowed themselves to think that a mission to “democratize finance” made trading completely free. They were wrong.

Robinhood became the platform of choice for social media-savvy punters stoking stocks like GameStop and AMC Entertainment, causing GameStop’s shares, for example, to rise 10-fold this year even after a downturn on Thursday. The glee over trashing the short positions of hedge funds like Melvin Capital Management, buttressed earlier this week by capital injections from Steven Cohen’s Point72 Asset Management and Ken Griffin’s Citadel, is palpable.

Now Robinhood has had to grab more than $1 billion of new capital from existing investors – a group including Sequoia Capital and Ribbit Capital – and draw $500 million of credit lines. Trading by its users squeezed its own resources. There are limits on what brokers can do with client money until trades settle, sometimes days later, and in the meantime they have to maintain their own capital, keep deposits with clearing firms, and so on.

That, rather than a Wall Street conspiracy to steal from Robinhood’s customers, is the best explanation for restrictions placed on GameStop and other trading on Thursday by Robinhood and rival brokers, tanking the affected shares. After the platform scaled down stock-trading limits, GameStop opened up nearly another 100% on Friday.

It’s not free for clients, either. If markets move against people trading with money borrowed from a broker, they have to stump up cash to maintain their margin. While prices surge upward, there’s no such demand and the bets – and gains – seem costless, but they aren’t, even though commission-free trading has become widespread.

Robinhood touts the democratization line most loudly, and a Massachusetts regulator has accused the firm of gamifying trading. Its website reckons to show users how it makes its money in other ways, including rebates from market makers, income from lending out shares – including to short sellers – and interest on client deposits.

Short-selling hedge funds don’t make for sympathetic losers. Few will shed tears, for instance, over prominent short seller Citron Research’s decision, revealed on Friday, to stop short research after 20 years.

Yet online mobs aren’t edifying, either. The endgame could yet also involve regulators. The original Robin Hood, after all, was an outlaw who had constant run-ins with the sheriff.