- Stock market mania forced changes for many trading platforms, but startup Robinhood took the most heat.
- Politicians, regulators, and the internet masses turned on Robinhood as it tried to mitigate the trading chaos.
- The GameStop saga is causing employees to quit. One former software engineer cited the recent screw-up with GME as one of the reasons he turned in his resignation.
- Visit the Business section of Insider for more stories.
Robinhood CEO Vlad Tenev said he was still asleep at 3:30 a.m. Pacific time when Gretchen Howard, his chief operating officer, received an important call.
It was Thursday, January 28, the morning after a message board on Reddit sparked a trading flurry in GameStop and other so-called meme stocks. The group on the other end of the line was none other than the clearinghouse commonly known as NSCC, asking to clear a $3 billion deposit.
“Just to give context, Robinhood, up until that point, has raised around $2 billion in total venture capital,” Tenev later said in an interview on the social audio app Clubhouse with Tesla CEO Elon Musk. “So it’s a big number.”
For the next couple of hours, Tenev, Howard, and other members of the Robinhood operation team went back and forth to negotiate with the clearinghouse to lower the bill.
“This was obviously nerve-wracking. Our chief operating officer said ‘Look, let’s call up the higher-ups at NSCC to see what’s going on. Maybe there’s a way we can work with them,'” Tenev recalled.
After another phone call, the bill was lowered to $1.4 billion, but the team worked the phones until finally, at 5 a.m., just over an hour before the start of trading, the clearinghouse agreed to lower the bill to $700 million.
As part of the negotiation, Robinhood officials promised a plan to manage the risk in GameStop and other volatile stocks. And the middle-of-the-night phone calls are the reason why, hours later, Robinhood decided to temporarily restrict transactions for a handful of the Internet masses’ favorite stocks, including GameStop.
As the world now knows, GameStop, a struggling videogame retailer, saw its stock skyrocket from a recent August low of less than $5 all the way to nearly $350 at market close on January 27, right before the NSCC called Robinhood in the early morning hours. No new company announcements catalyzed the surge; instead, a profanity-filled page on Reddit dedicated to playing the stock market called WallStreetBets had been egging on GameStop and other companies for months.
Robinhood, the no-fee stock-trading app that Tenev founded in 2013 with a Stanford University classmate, was the source of much of the buying frenzy thanks to the hordes of millennial retail traders on the platform. And as regulators scrambled to control the market chaos and ascertain whether the financial system had suffered a novel flaw, Robinhood — the buzzy, Silicon Valley startup that promises to “democratize finance for all” — was swept into the center of the storm.
The timing couldn’t have been worse for Robinhood, which is trying to move past several high-profile missteps of recent years as it prepares for an initial public offering later this year that Reuters reported could value the company at more than $20 billion. In the span of one week, from Friday January 22 to Friday January 29, Robinhood’s carefully plotted IPO trajectory hit a speed bump that jolted the fundamental premise of its business and forced its private investors to pump billions of dollars into the company.
This account of Robinhood’s wild week, which turned Wall Street upside down and may lead to regulatory changes across the industry, is based on Insider’s own reporting, as well as reporting from The Wall Street Journal, The New York Times, Bloomberg News, The Information, and other news outlets. Robinhood declined to comment.
“Suckers at this poker game”
The warning lights for Robinhood’s crisis started flashing in late 2020 and early January, though the signs were visible mainly to denizens of the WallStreetBets chat forum and to the hedge funds with short positions in GameStop shares. Heated conversations between the two sides took place on the subreddit and other online venues — short seller Citron Research called people buying GameStop shares “suckers at this poker game” — as GameStop’s stock swung up and down.
The situation exploded on January 22 as GameStop’s share price shot up by more than 50%, causing the New York Stock Exchange to halt trading of the stock several times throughout the day.
Over the next several days, amateur traders piled into GameStop, often using Robinhood’s commission-free app to buy shares or call options, and triggered an epic short squeeze that drove the stock ever higher as hedge funds scrambled to cover their shorts by buying shares.
Trading activity on Robinhood exploded, with a surge of buy orders and call options transactions that was “magnitudes higher than the norm,” according to Robinhood Securities President Jim Swartwout. “To say the overnight increases in volume Robinhood experienced last week were extraordinarily high would be a vast understatement,” Swartwout wrote in a blog post on Wednesday, with an accompanying chart to show the spike.
During the time of the stock frenzy, however, Robinhood kept a conspicuously low public profile. The company’s blog page and social media feeds went dormant, even as much of the public conversation centered on the role of Robinhood and its users. A cheery tweet that proclaimed “We are all investors. Our time is now” remained pinned to the top of Robinhood’s Twitter page throughout the period, then disappeared on Thursday, January 28, when the company broke its silence to announce trading restrictions on certain stocks.
“Yo this is a f–king crime”
When the trading restrictions took effect on Thursday, GameStop sank 27%. The tense atmosphere inside Robinhood, and outside the company, kicked up several notches.
The WallStreetBets crowd directed their online ire toward Robinhood, even though other trading platforms had made similar decisions to restrict volatile stock purchases.
For Robinhood staff working late hours and feeling the heat from all corners of the Internet, there was lots of stress and not enough leadership. On the anonymous employee reviews site Blind, which requires an employer-issued email in order to post comments about a company, several Robinhood insiders complained of “poor communication handling for the recent events” and “unclear decision making.”
On Thursday evening, Robinhood provided its roughly 1,000 employees a $40 credit to restaurant delivery app DoorDash, according to The Information. At least one software engineer resigned because of the GameStop saga, writing on Blind that “senior management is completely inept,” and citing a series of crises at the company culminating with the GameStop incident.
Rumors were swirling about what drove Robinhood to stop day traders from buying GameStop, AMC Entertainment, and other Wall Street Bets favorites. An unverified Reddit post, circulated by tweeters with tens of thousands of followers, accused the VC firm Sequoia Capital — one of Robinhood’s biggest backers — and the White House of strong-arming Robinhood into the decision. The post went so viral that the famous VC firm was compelled to set the record straight with a tweet, “Sequoia did not pressure Robinhood to halt the trading of any stocks.”
Google deleted 100,000 bad reviews of Robinhood, bumping the app back to a four-star rating. Politicians from New York Rep. Alexandria Ocasio-Cortez to Texas Senator Ted Cruz piled on. New York’s attorney general said she would review trading activity on Robinhood. Even Ja Rule, the Grammy-nominated rapper, weighed in, calling Robinhood’s actions “a fucking crime” in a tweet.
Tenev embarked on a damage control tour, trying to dispel the rumors and explain the controversial decision in a string of television interviews.
“There is a lot of misinformation out there. In particular, there are people who said we were forced to do this by market makers or other market participant. I want to say that is categorically false,” Tenev said in an interview on Bloomberg TV.
In a separate TV interview, Tenev also said, “it pains us to have had to impose these restrictions.” He also insisted the company did not have liquidity issues despite a report from Bloomberg saying Robinhood had borrowed “at least several hundred million dollars” from banks amid the trading chaos.
As if the day wasn’t dramatic enough, shortly after dinnertime, a New York Times alert went out saying Robinhood was raising an emergency infusion of more than $1 billion from its existing investors.
January 29: Damage control and an apology tour
By the start of trading on January 29, shares of GameStop were back up and surged as much as 114% during the trading day after Robinhood reversed course and loosened restrictions on buying the stock on its platform. In retrospect, the restrictions lasted merely a few hours, but the fallout will continue for weeks, if not months. Tenev is expected to testify before the House Financial Services Committee on February 18 to discuss Robinhood’s response to the GameStop rally. A separate Senate Banking Committee hearing is also in the works, according to The Hill. And the SEC has pledged to examine the recent volatility.
Snacks Daily, a stock market podcast that Robinhood acquired in 2019, highlighted the problem on Friday, even as it apologized to any listeners who “went through pain” as a result of its parent company’s trading restrictions:
“Just like the rules of the road never imagined self-driving cars, the rules of stock markets seem unprepared for social media meets finance,” opined one of the podcast hosts.
In a sign of the new reality, Robinhood put out a job alert for a new federal affairs manager. The job posting, which first appeared in Daybook, seeks a Washington, D.C.-based “senior professional” with at least eight years of Capitol Hill policy experience to focus on regulatory and legislative affairs, with a particular eye towards Congress.
GameStop ended the chaotic trading week by closing at the end of trading Friday at $325, 12,545% higher than its 52-week low of $2.57. Robinhood, on the other hand, is now living through a branding and reputation nightmare.
The company continued its apology tour, with Tenev appearing on Yahoo TV mid-morning Friday with an optimistic tone, saying Robinhood will continue to be a good entry point for new investors.
“We want people to have access to the markets, and Robinhood stands for that,” Tenev said.
In a Sunday op-ed published in USA Today, Tenev reflected on “a week that Wall Street and Main Street won’t soon forget,” while promising that Robinhood would take steps to “improve ourselves” without providing much in the way of specifics.
Robinhood investors, led by Ribbit Capital as well as VC firms including Andreessen Horowitz and Sequoia, injected another $2.4 billion into the company over the weekend, shoring up the startup’s balance sheet and providing a high profile vote of confidence in the company. Reuters reported that Robinhood is also in talks with banks about raising $1 billion of debt.
If there’s a bright side for Robinhood, it’s that the controversy was also publicity. On Friday alone, Robinhood’s app was downloaded more than 600,000 times, per analysts at JMP Securities. By comparison, the Robinhood app was downloaded around 140,000 times during its most active day in March 2020, when coronavirus fears sent stocks down sharply.
The new users and the funding should provide crucial fuel for Robinhood to continue its drive to go public.
The fundraising activity is especially significant because it’s more than what the company had previously raised in its eight-year history. And for Robinhood founder Tenev, it’s a nice cushion to rest on the next time he gets a phone call in the middle of the night.
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