The Influence of Robin Hood and Social Media
Author: Dominic Byrne | Editor: Shayna Leng | Updated September 26th, 2020
What is Robinhood?
Robinhood is a financial technology company founded in April 2013 by Vladimir Tenev and Baiju Bhatt. Robinhood, famous amongst the younger generation, allows consumers to trade Stocks, Exchange Traded Funded (ETF’s), Cryptocurrency and Stock Options. In 2015, 80% of the users on Robinhood were millennials, with an average age of 26. The company has grown to over 10 million users since 2016 as a result of its handsome trading fees. The company charges a U.S Securities and Exchange Commission (SEC) regulatory transaction fee of $22.10 per $1,000,000 of principal and $0.000119 per share and $0.002 per Stock Option.
However, despite its enticing fees, the company has had some controversy in recent years, particularly becoming one of the largest brokers for a notorious Reddit thread, Wallstreetbets. Users of the thread and Robinhood had uncovered various controversies such as an ultimate money glitch and ease of application to margin.
Wallstreetbets is a group on Reddit, an online social media platform, that utilizes Robinhood to trade stock options. The thread boasts over 1.5 million members, commonly referred to as ‘degenerates’ or people with “autism”. These traders have become increasingly relevant in the eyes of big Wall Street Institutions as their influence has moved markets. Jim Cramer, a former American Hedge-Fund manager and TV personality on CNBC’s “Mad Money”, said the subreddit was “millennials” looking for an “exciting experience”. During an interview at the New York Stock Exchange, Cramer partially attributed a massive market increase that occurred during a week of ‘red days’, days in which the overall market decreases, on Wallstreetbets. In just five months, WallStreetbets has gained over 500,000 members as people who are losing their jobs or working from home, as a result of COVID-19, have more time to try to hit it big with stocks and derivative investments. The WallStreetbets community has become so large that it can significantly move the price of any stock it collectively decides to; many of which have been dubbed ‘meme stocks’. A meme stock is a stock that is often overpriced and experiences rapid growth in a short period as value is based on potential, rather than business fundamentals. For example, Virgin Galactic Holdings Inc. (SPCE) became a ‘meme stock’ on the subreddit. In February, at the height of the company’s hype, the stock rose from $11 to $37 in less than a month. The optimistic investing of r/Wallstreetbets members had a significant impact on this price movement, and indeed the prices of many other ‘meme stocks’. Yet in spite of their growth from 1 million users in 2016 to over 10 million in 2020, the company has been the centre of controversy in recent years.
Wallstreetbets in the News:
In November 2019, members from the subreddit ‘Wallstreetbets’ discovered a glitch that allowed unlimited leverage trades. Leverage is the cash equivalent multiple of an option position relative to the actual cash price of the underlying asset. This loophole - albeit soon patched by Robinhood - was dubbed the “infinite money cheat code” and allowed traders to essentially credit large sums of money that they did not own to win big, or lose far more than they started with. This meant that traders who used this loophole were able to trade with funds they did not own, creating massive gains or detrimental losses.
In June 2020, the company faced controversy after a University of Nebraska student took his own life, having discovered a negative cash balance in his Robinhood account to the sum of US$730,000. The balance in his margin trading account was later found to be only temporary due to unsettled trading activity. The student, prior to his death, had accused Robinhood of allowing him to use too much leverage to take too many risks, prompting the development of the “level 3 options authorization”. Robinhood’s level 3 authorization is an application-based barrier that prohibits people from trading risky derivatives until they have gained enough experience. The original problem was the issue of a product that was too easy to use with little known consequences. The prior ease of use of a margin account caused various controversies regarding traders not understanding the potentially high-risk nature of options. Hence, Robinhood responsibly resolved this issue by developing the level 3 authorization.
Thus, Robinhood - and its users - despite the various controversies, have had an instrumental impact on the stock market in recent years. As the user base of both r/Wallstreetbets and Robinhood continues to grow due to increased layoffs in light of the coronavirus-caused recession, and also as a result of greater publicity efforts only have more influence in the market. As a result, the stock market is undergoing radical and volatile changes sparked by the increased participation of retail investors and communities such as Wallstreetbets. While the company has faced multiple controversies and has shaped a new form of retail investing, it remains to be seen whether or not the company -and Wallstreetbets - is a boon or bane to the overall stock market. Only time will tell.