My $0.02 Investment in Robinhood
(Originally published several weeks ago but modified to reflect the anonymity of my friend.) Not that Robin Hood.
But let me set the stage. My friend is a conservative financial analyst. We have heated debates about all kinds of things almost all the time. 2020 had a lot of big headlines, so last year felt particularly debated.
And it continued to January, which some people are calling the 13th month of 2020. GameStop happened.
All. Over. The. News. I called her and asked her if she heard about it. "Yeah, but I haven't been following it closely. What's going on?" Well, at this point and before the phone call, I had gone down a Tyler Cowen recommended Twitter rabbit hole that explained why Robinhood had to limit their users from trading AMC and GME stocks without warning. It laid the reason down at the door of the DTCC.
I'll break it down as I understand it.
Robinhood is a brokerage firm. Their user hook is "democratizing investment." This is important, and I will return to it in a few paragraphs. Robinhood must work with a third-party clearinghouse to handle the financial exchanges. It takes two days for financial transactions to clear between Robinhood clients and their buyers or sellers. The DTCC (Depository Trust and Clearing Corporation, regulated by the SEC) holds a money percentage of the daily transactions that Robinhood must cough up to cover their clients' trading. Usually, it is around 30%, but in the middle of the night, after the hedge funders lost billions of dollars earlier that day, the DTCC jacked it up to 100%. Robinhood had to provide the DTCC with a 100% valuation of the transfers. They had to raise capital and quickly. In the meantime, they limited their client transactions on AMC and GME to prevent further escalation of capital requirements on those specific and volatile stocks.
The DTCC gets to do this. I don't really know why. I suppose it's in the name of market regulation and making sure what the WallStreetBets Redditors are doing to the poor billionaires is not market manipulation (which is illegal.) Still, in my left-wing conspiracy brain, I imagine many instances depend on who is doing the manipulating that triggers that function (my trigger to shout out "tax the rich!" and my friend's trigger for calling what I think is left-wing batshit.) My argument for why there should possibly be a hearing. It doesn't help the scene that one of Robinhood's larger investors, Sequoia Capital, also works with the hedge funds who lost all that money. Robinhood was quick to denounce that connection as a conspiracy theory, for what that's worth.
Well. Today my friend called me to talk again about Robinhood and the DTCC because we had left it that the DTCC might have been shady and because she read some things about the Reddit "WallStreetBets." This is where my friend's conservative finance expertise comes into play. She's spent decades studying finance, working in finance, managing portfolios, and being paid to advise pretty big-money individual investors at a very traditional institution. She is a smart lady. But this is also where our generational differences come into play and where my content design training kicks into karate mode.
My friend didn't like a platform for people who "have information but not knowledge" about the stock market to do self-informed, zero-commission trading. It doesn't help she read somewhere that one of the Reddit users who was also a Robinhood client wrote on a plane some expletive about Robinhood and flew it around after being denied the ability to trade on those stocks. She said something like, "If he has that much money, why doesn't he hire someone to do his trading for him? It's because these people don't know the rules why they're creating such a scene. You can't democratize everything, Lizzie. Sometimes you need to have barriers in place." She believes "to democratize" is a loaded term that decries liberalism, which she generally loathes as well.
She also used that term because I have used it more than once about more than one institutional change I believe our society requires, so she was poking me.
Back to Robinhood and its platform. I told my friend, "I am pretty sure it's not a crime to use a free service over a paid service if it's available, and I also don't think it's illegal to criticize your service provider if they make you mad, even if it's crude." Our conversation ended there pretty abruptly.
But I kept thinking about it. I don't really understand why you would want barriers for regular people to invest and make capital gains income. That, to me, is elitism. I understood perhaps the unspoken fear that it threatened the value behind my mother's career and her hard-earned institutional knowledge. She kept saying, "Nothing is free. You don't get something for nothing." But I didn't think that was what these small-time investors believed. But also, I wasn't ready to stand up for Robinhood, either. They effed up.
What does it mean to democratize something? What did Robinhood mean when they offered their platform to a new segment of newbie investors, that they were "democratizing investments?" And were they?
I would argue no. My friend touched on some truth, even though my knee-jerk reaction is to say "nuh-huh" to almost everything she tells me 😂 .
"These people don't know the rules." - Friend
Democratizing industries requires education. My friend didn't like that these WallStreetBets players created a giant mess and stink, and in part, because they didn't know the rules, they weren't behaving properly. Why didn't Robinhood's users know the rules linked to the DTCC? Why couldn't Robinhood articulate the issue immediately to their users to allay fear and the subsequent thousands of negative reviews on the Apple App Store? Why was their platform easy to use but the consequences of the easy platform actions so difficult to understand?
Why was content = communication = knowledge sidelined?
It's also worth noting that this January fervor was after Robinhood pledged to address their platform issues, specifically regarding options trading, after the tragic suicide of Alexander E. Kearns last summer. When will they get it right?
The content designer's role is to help users understand the interfaces they choose to engage with. How ethical is it to boil down complicated concepts with a swipe and a confetti spray? How much onboarding should Robinhood-style platforms be responsible for, so their users can act ethically within the platform's parameters? How much content should users have access to so that their app experience is easy, and they also have easy access to information about what their experience means? Did they consider edge cases when designing their easy app that my friend said offers immediate margin to all their users (apparently that is not common and somewhat horrifying to folks in the biz)? Are these users even considered edge cases? My friend got it right a second time, too. Most importantly, how do interfaces help their users go from information to knowledge?
Most importantly, how do interfaces help their users go from information to knowledge?
<Shout out to Nick Anderson with General Assembly for his 5 Step Rule for Leaving Unethical Companies. You can find those steps here.>
My friend was right a third time, as well, but in a different way than I think she intended. “Sometimes you need barriers.” Behavioral design touts “friction“ as a necessary tool to help users make good choices. Maybe Robinhood should consider how they can use stock market finance theory as an educational component as friction that delays their users from making poor choices, or at a minimum, uninformed ones.
Robinhood and platforms like it create an exciting opportunity that encourages laypeople to WANT to participate in the stock market. How amazing is that for financial education and betterment for a group of people who probably have not had exposure? Robinhood should be helping its users abide by the rules and teaching them why the rules are in place--that is the problem, not that it is a free fee platform that attracts amateur investors. No matter how suspicious I am about the DTCC's decision last week.
My friend never answered my text when I asked her, "Why wouldn’t we want more people to make money that way? What is the downside of that?" So I will keep you tuned with a post-update if she does. I'm hoping she has another truth that I haven't thought to think yet. That's the whole point of having discussions with people who generally believe things on the opposite side of the fence, right?