Until the WallStreetBets group orchestrated a short squeeze on Melvin Capital, leading to a staggering loss of $7 billion, Robinhood seemed to be thriving. However, the stress of such monumental losses can be overwhelming, and it’s only natural for their customers to voice concerns when things go awry.
One of the more celebrated features of Robinhood’s investment app is the shower of digital confetti that erupts to celebrate stock, options, and cryptocurrency purchases. These festive bursts of confetti, along with spinning prices and scratch-off rewards, provide an entertaining experience that captivates users, especially when prices for bitcoin flash in neon pink—a clear signal to buy!
Trading on Robinhood aims to be both enjoyable and exhilarating, with free alerts that add an element of surprise. It’s akin to playing Candy Crush, where the stakes are measured in dollars and cents, and with a bit of skill, one can potentially strike it rich.
However, the backlash against Robinhood’s CEO, Vlad Tenev, began on January 28 at 3:30 AM Pacific Time when the National Securities Clearing Corporation (NSCC) informed the firm that it needed to deposit $3 billion. According to Tenev, this demand was significantly higher than usual.
Fortunately, Tenev and the NSCC managed the situation with professionalism. After several early morning discussions, they reached an agreement whereby Robinhood would provide $700 million, while limiting purchases—and the jubilant bursts of digital confetti—of stocks like GameStop and AMC, heavily favored by WallStreetBets.
The Ultimate Catch
The allure of free offerings is a time-tested marketing tactic. Years ago, customers receiving a complimentary toaster for opening a bank account was a common practice. Robinhood has modernized this concept for the digital era.
For instance, when you create a Robinhood trading account, you are guaranteed a free stock. Linking your bank account and meeting specific criteria also qualifies you for additional free stocks, enhanced by inviting friends.
The free stocks are awarded randomly, and if fortune smiles on you, you might end up with shares from prominent companies like Apple or Visa.
While these promotions are engaging and mostly innocuous, they draw in new customers effectively. If Robinhood wishes to distribute free stock like digital confetti, more power to them.
Nonetheless, the most significant “freebie” that Robinhood offers is commission-free trades, which contrasts sharply with the traditional brokerage model. However, this aspect comes with a major caveat.
On January 28, after consultation with the NSCC and concurrent with WallStreetBets putting pressure on Melvin Capital, Robinhood’s trade limitations raised eyebrows. By prioritizing hedge funds over its users, the implications became incredibly clear.
The underlying truth? The hedge funds are Robinhood’s clients while its users serve as the product.
By midday, members of Congress, including Alexandria Ocasio-Cortez and Ted Cruz, were expressing their outrage.
Rigged Markets
As we approach the later stages of a booming market, it becomes evident that deceit and nefarious dealings permeate the atmosphere.
Citadel and Point72 Asset Management, which stand behind Melvin Capital, stepped in with a $2.75 billion lifeline during its short squeeze. Was this simply a generous gesture? Perhaps.
However, shortly thereafter, Robinhood prevented users from buying GameStop, the very stock that had caused Melvin Capital’s distress. Coincidence or not, Citadel happens to be Robinhood’s largest customer.
Essentially, Robinhood generates revenue by selling users’ trades to major institutions, such as Citadel Securities, before final execution. This allows these firms to anticipate retail investors’ actions and respond accordingly. As noted by the Financial Times:
“Citadel Securities pays tens of millions of dollars for this order flow but makes money by automatically taking the other side of the order, then returning to the market to flip the trade. It pockets the difference between the price to buy and sell, known as the spread.”
If this practice sounds like a rigged system, that’s because it is, and it results in substantial gains for select insiders.
Did You Make Janet Yellen Rich?
Janet Yellen, the incoming Treasury Secretary and former Chair of the Federal Reserve, epitomizes insider influence. During her brief time outside of public service, Yellen embarked on an impressive speaking tour with prominent Wall Street firms.
She amassed $7.2 million in speaking fees from institutions such as Citi, Goldman Sachs, Google, and others. Quite an achievement, by any standard.
However, one wonders what wisdom she imparted to warrant such fees. Did she uncover groundbreaking scientific principles?
For insiders like Yellen, speeches are symbolic gestures, with the real value lying in the access they facilitate. It was hardly a gamble to predict her eventual role as Treasury Secretary under a Biden administration.
One notable engagement included Citadel, Robinhood’s largest customer, where Yellen earned $810,000 for a couple of speeches and webinars.
It’s worth pondering the source of Citadel’s generous compensation for Yellen. Some of it likely stemmed from profits derived through order flow skimmed from Robinhood users; a practice common among other online brokers, such as Schwab and TD Ameritrade.
Therefore, if you’ve executed trades over the past three years via an online broker, you may have unwittingly contributed to making Janet Yellen wealthy.
Members of Congress have vowed to investigate the unfolding situation, yet it appears the blame will rest on WallStreetBets, while the insiders escape accountability yet again.
Sincerely,
MN Gordon
for Economic Prism
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