TL;DR: “Some have visited Robinhood’s headquarters in Menlo Park, Calif., in recent years to confront the staff about their losses,” Nathaniel Popper revealed recently. “This year, they said, the start-up installed bulletproof glass at the front entrance.” Robinhood is learning about the grave tradeoff of luring noob investors.
Robinhood App Installed Bulletproof Glass at Front Entrance
Vox Media’s Curbed is a hipster site dedicated to “celebrating, chronicling, and explaining everything you need to know about homes, neighborhoods, and cities.” Its San Francisco franchise, which recently announced closure, profiled investing app start-up Robinhood’s headquarters in Menlo Park, California roughly this time last year.
The small incorporated city is a literal tech sweet spot, tucked-in Silicon Valley, housing an uber-educated population of talent where the likes of Google was founded and where Facebook domiciles. 85 Willow Road is owned by Embarcadero Capital Partners, and only its second lease is a mobile application company revolutionizing stock trading.
The 7 acres property is characterized by Curbed as “refreshing when a startup takes the posturing down a notch, like Robinhood did in Menlo Park, choosing the north-side expansion to the circa-1951 Cliff May office space as its new headquarters.” The classic ranch-style home lookalike has landscaped gardens, early Spanish craftsmanship. It also now, according to Popper, has bulletproof glass.
Flattening Access to Finance
It’s a Devil’s bargain. Most market evangelists have dreamed about flattening access to finance. Retail trading not too long ago was the plaything of moneyed persons, the arena of vaunted accredited investors. Unless you were already relatively wealthy, equity markets were by-and-large unavailable.
For sure, US stocks have had fractional share buying for decades. But it was a bit of a secret society, hard to understand, difficult to find, opaque. The advent of various shareholder revolts and movements throughout the years led to a greater opening of the financial system, for better and worse. Better, because Average Joe could muscle up some savings and hedge against manufactured government inflationary policy. And with Joe’s entrance into securities, popular investment advice came in droves, itself a veritable new publishing market.
If central bank inflation lingered at about 3% a year, Joe needed to beat that at least. Combined with his house appreciating in value, Joe could slog through value investing tomes from the likes of Benjamin Graham or follow John Bogle’s advice to plunk cash into index funds, and come away with a tidy profit. Patience, time, compound interest would do the rest. And while stories about boiler rooms and cold calling suckers out of their nest eggs became the subject of movie and lore, it wasn’t really until the online retail investing revolution of the late 1990s and early 2000s that the sector really began taking off in popularity and risk.
Graham and Bogle Were Replaced
The smart mobile phone and accompanying application surge only heightened the lure of retail investing ease and utility. It wasn’t just Joe who could now invest in stocks, it was Everyman. Literally anyone could download an app, link it to a bank account, and instantly begin trading. By early last decade, Graham and Bogle were replaced. Vladimir Tenev and Baiju Bhatt created Robinhood, a loss-leader “free” trading app aimed at the younger Everyman set.
That has come with a cost, tradeoffs. As Popper notes, “Its users buy and sell the riskiest financial products and do so more frequently than customers at other retail brokerage firms, but their inexperience can lead to staggering losses.” Recent stories abound about Robinhood easing Everyman into leveraging credit card advances and home equity loans in the tens of thousands to try and catch unicorns. In one anecdote, Everyman’s “account value shot above $1 million this year,” Popper documented, “but almost all of that recently disappeared. This week, his balance was $6,956.”
Robinhood is a phenomenon and a symptom. It sits on an over $8 billion valuation for a reason: it works. The company uses empirical gold mined from years of social media experience to keep users glued via “behavioral nudges and push notifications,” Popper mused. “More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times,” he claimed.
Such vignettes turned deadly last month when 20-year old Alexander Kearns apparently committed suicide in connection with a negative Robinhood app balance of $730,000 somehow linked to his name. Kearns was reportedly using options trading, and when confronted with losses he threw himself in front of a train in despair.
“The emotional stress from the exposure caused him to take his own life,” his cousin tweeted (see embed, below). “I don’t feel right sharing this, but I also don’t feel right keeping it from the world. Why? Because recently I’ve been joking about how much I love DDTG. I’ve laughed at the Robinhood memes.” Exact details are hard to come by, and of course the media has whipped itself into usual hysterics, but the lesson appears fairly clear: bringing-in noob investors comes with giant pitfalls.
My cousin in law was interested in investing. He opened a Robinhood account. And, he seemed to be enjoying the markets. As many of us do, or have done, he got interested in options. He believed he had “no margin” selected on his account.
— Bill Brewster (@BillBrewsterSCG) June 13, 2020
Robinhood responded with promises to amend certain practices, to post warnings, etc. But in a sense, they’re stuck. It’s a great business model, pleasing a lot of people, and is ushering in a whole new generation of financial literacy. Politicians, however, are prone to pounce and limit investing apps as a result, taking advantage of death to score political points. And it would be a shame for Robinhood-like apps to feel a regulatory chill, in my opinion.
Outside of polite society, but not far from controversies such as ensnaring neophyte investors, is the cryptocurrency ecosystem. Stories from its losses and costly lessons are now legend and worth periodic revue, from regular hacks, exchange vulnerabilities, to DeFi nonsense and just straight scams, perhaps crypto’s only difference in this regard is not ignoring the obvious. In my experience, there are tons of resources for crypto noobs to interact with and nearly all are filled with sober warnings. But it never hurts to install bulletproof glass.
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