File image: Robinhood app's loco on a smartphone. (Image: AP Photo/Patrick Sison)
Robinhood, a stock-trading application, is in the thick of the GameShop controversy after it abruptly blocked clients from purchasing shares of some companies whose stock prices had spiked dramatically and shaken up Wall Street.
This came a day after GameStop’s share price increased 135 percent. Some day traders had gotten together on social news aggregation website Reddit and bought shares and options in large numbers. The online day traders hoped to challenge Wall Street’s dominance. The subsequent rally in the struggling video game retailer's stock and others hit hedge funds, which had heavily shorted these shares, hard.
The new limits on trading introduced by Robinhood and other online platforms set off howls of protest among small traders, whose numbers have multiplied especially during lockdown. These investors complained that the platforms that "democratised" trading were now assisting Wall Street, which they blame for recession, excesses and getting bailed out through taxpayers' money.
Also read: Zerodha CEO Nithin Kamath on GameStop, short squeeze and why Indian investors have nothing to fear
What is Robinhood?
Robinhood is a trading platform operated by American financial services company Robinhood Markets Inc. Robinhood is a broker-dealer registered with the United States Securities and Exchange Commission. The company is headquartered in Menlo Park, California.
It was founded in April 2013 by Vladimir Tenev and Indian American Baiju Bhatt. Both of them are now co-chief executive officers of the company.
Robinhood’s revenue comes from interest earned on customers' cash balances, margin lending and selling order information to high-frequency traders. The platform is believed to have had 13 million users in 2020.
On its website, the company states its motto as: “financial system should be built to work for everyone”.
Read | GameStop saga: All that has happened so far
Who is Baiju Bhatt?
Born to Indian immigrants, Bhatt is a first-generation American who studied physics at Stanford University before earning a master's degree in mathematics in 2008. Bhatt and Tenev met at Stanford.
In his mid-30s, Bhatt is a billionaire, thanks to Robinhood’s valuation of $11.2 billion (August 2020).
Talking about Robinhood’s genesis, the company website says Bhatt and Tenev built two financial companies in New York sold their trading software to hedge funds. “There, they discovered that big Wall Street firms were paying next-to-nothing to trade stocks, while most Americans were charged commissions for every single trade,” the website adds.
Thus, they headed to California to build a financial product that would “enable everyone” to access financial markets.
Action and reaction
Robinhood's move to limit buying of some securities led to GameStop’s shares plummeting 75 percent in 90 minutes. It said that additional restrictions on trades of GameStop, among other companies, were necessary to ensure it did not run afoul of government regulations.
The clamp down has been heavily criticised. On January 28, billionaire Elon Musk joined the growing number of public figures supporting United States Representative Alexandria Ocasio-Cortez's call for inquiry against Robinhood.
Musk tweeted his approval after Ocasio-Cortez, often referred to as AOC, sought a US House of Representatives’ Financial Services Committee hearing on Robinhood’s decision to halt trading of the GameStop stock.
Read | Explained: Why GameStop’s stock surge is shaking Wall Street
“This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary (sic),” Ocasio-Cortez said in a tweet.
“Inquiries into freezes should not be limited solely to Robinhood. This is a serious matter. Committee investigators should examine any retail services freezing stock purchases in the course of potential investigations - especially those allowing sales, but freezing purchases,” AOC said in another tweet.Read: Trading curbs reverse GameStop rally, angering upstart traders