Start Time: 15:22
End Time: 20:05
The Wall Street Journal digs into the financial plumbing that broke when Reddit day traders made an unprecedented move in the stock market. They discuss how Robinhood's reputation and ethos have been damaged, and ask whether a previous Robinhood user will ever trust the app again.
Upload Date: Feb 02, 2021
The Wall Street Journal digs into the financial plumbing that broke when Reddit day traders made an unprecedented move in the stock market. They discuss how Robinhood's reputation and ethos have been damaged, and ask whether a previous Robinhood user will ever trust the app again. They talk to a man who was using Robinhood at the time, who says that the losses he suffered as a result of Robinhood's decision will probably prevent him from using the app in the future.
When Robin Hood got the message Thursday morning that it have to put up a big deposit ahead of the day's trading, it was able to pay the bill. But the sticker shock was worrying. If these stocks kept surging for days or weeks, and if hundreds of thousands of new users kept signing up to trade them, the company would need a lot more money. So after Robin Hood gets the bill from its clearing house, it immediately starts working the phones among its base of venture capital investors and says, We want to raise additional money to head off any potential future problems we could have with these excess deposits were being asked to make. So in the span of a couple hours, Robin Hood's existing investors, more than a dozen of them, came together and committed a billion dollars. And they wire that money, a lot of it to Robin Hood. By close of business that day, That seems extraordinary. A billion dollars in a day. Yeah, I've been covering this industry for a while and deals like this for a while. I have never heard of a deal of this size $1 billion closing in just a few hours. Why did Robin Hood's investors why were they so willing to put up all this cash for Robin Hood? Well, I think it's not very often that Ah financial app goes viral in my time covering the speed, I think coin base went to number one and like the Bitcoin craze of 2017. But I can't think of another time. Ah, finance app hit number one until Robin Hood did it last week. So when you have kind of viral growth in a way that Robin Hood experienced, you don't wanna lose that. So I think investors viewed it as an opportunity and one that they didn't want to pass up. But even this huge injection of cash didn't completely solve Robin Hood's problem. So Friday morning, very early Friday morning, the company announces that thanks to this recent capital infusion, they are gonna be able to open up some of these restricted stocks that they had closed down on Thursday. So Gamestop and about 12 other names you were only limited to selling them on Thursday, and now you can buy them in limited amounts. So that brought a lot of people back to the platform, and Gamestop kind of surged. However, because the situation is so fast moving and kind of the risk requirements are so fast moving, Robinett had reintroduced new limits on them just on Friday afternoon. On Friday, the number of restricted stocks on Robin Hood grew to 51. That number has since fallen, and today Peter broke the news that Robin Hood had raised another $2.4 billion a staggering amount that could help them lift even more restrictions. For some users, though, it might be too late. Do you think you'll keep using the Robin Hood app? That's a hard question. Honestly, um, hi, don't. I honestly don't think so unless they come out with some damn good. I'm sorry for language. If they come up with some dog gone good damage control or spend to give me some type of, I guess clarity of what actually went on. I'm really not going to use it. I might see how my, uh, actually bought those point kind of as a name because of what was going on. So I'm going to see how my dose one plays out. But once this crypto Layvin, I'm honestly looking for other firms. Other online broker. Just They just hurt Peter. Do you see any lessons in a saga? I think, as is often the lesson when I write about financial companies, is that finances really complicated. There's this vast infrastructure behind APS like Robin Hood and Financial plumbing, and usually we don't care about financial plumbing, and we don't have to write. You don't really think about the pipes in your building unless your toilet's broken and you can't flush it right. And now you kind of have the equivalent in financial markets of you don't really need to know what clearing houses are, unless there's kind of a breaking point, and we kind of reach something close to that the past few weeks. And what about for Robin Hood? More complicated for them is how do they reckon with this ethos that they've tried toe put out there and trumpet about them democratizing access to finance and markets while at the same time now being associate ID with a very loud portion of users as trying to raise the barriers to entry. And I don't know how they kind of square that circle and do both