Anyone who gambles on the stock exchange has to be

     
In eliminating barriers to investing in the stock market, is the ứng dụng democratizing finance or encouraging risky behavior?
The app gives new investors an easy way khổng lồ buy and sell stocks. Its founders say that it could help reduce inequality, but critics fear that it will only reinforce the wealth gap.Illustration by Shira Inbar

Early on the morning of January 19th, Cody Herdman woke khổng lồ the vibration of his điện thoại cảm ứng alarm under his pillow. He immediately checked the finance phầm mềm Robinhood for the trading price of a company called GameStop. Herdman, who is nineteen, is a freshman computer-science major at Dakota State University, where until recently he played center for the Dakota State Trojans football team, and he had been investing in the stock market for a month.

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Robinhood, which offers zero-commission trading in stocks and cryptocurrencies, pitches itself as an enlightened version of Wall Street; its stated mission is to “democratize finance for all.” Herdman’s friend Chase Bradshaw had introduced him khổng lồ trading on the app, which now consumed much of the time that he used to lớn spend playing video games. With a thousand dollars that his father had given him, Herdman had invested in a handful of securities, buying 11.5 shares of BioCryst Pharmaceuticals, which makes specialized medicines for rare diseases; five shares of Virgin Galactic, the spaceflight company founded by Richard Branson; six shares of Corsair, a gaming-equipment manufacturer; & five shares of Nordic American Tankers, an international oil-tanker operator; as well as 0.007 of a bitcoin. (Robinhood allows the purchase of fractional shares.) He felt a surge of excitement every time he saw a green number indicating that one of those stocks had gone up in value. All Herdman’s previous investments had been based on research into how global events might affect the fortunes of the various companies, but he had also been contemplating buying shares in GameStop, a struggling video-game retailer, after reading posts hyping the stock on an investing forums on Reddit called WallStreetBets. As the stock’s price crept up, from around fourteen dollars a mô tả in mid-December to almost forty a month later, he felt annoyed for not having acted sooner.


That morning, as soon as the stock market opened, Herdman sold nearly everything in his Robinhood account, leaving him with around twelve hundred dollars in cash. Grabbing a clean T-shirt from a plastic bin under his bed, he dressed and rushed to lớn his history class. As his professor delivered a lecture on Coney Island in the eighteen-hundreds, Herdman tracked the market on his phone from a seat in the back of the room. In his dorm after class, he bought shares of GameStop, whose ticker symbol is GME, in two bursts—first 13.77 shares, then sixteen—using all of the cash in his account. As he ate a microwaved pepperoni Hot Pocket, he watched the numbers on his screen. Within forty minutes, GameStop had jumped two dollars. Herdman decided to sell his only remaining non-GameStop holding—a clean-energy stock he’d expected to vì chưng well under the Biden Administration—and used the proceeds to buy 6.3 more shares of GME. “I was, like, screw it,” he told me recently. “I’m going all in.”

Herdman, as Dakota State proudly announced when he signed khổng lồ play for the Trojans, a little more than a year ago, is six feet two & two hundred và eighty pounds. He grew up in Aurora, Colorado. He has a full, ruddy face, thick black hair, & a goatee, và has a crucifix tattooed on his formidable right biceps. His mother, Karen, a former local TV news reporter and a highly ranked master in Tang Soo Do, a Korean martial art, told me that Cody had always been strong. By the time he was fifteen, she said, he could leg-press five hundred pounds and was a two-time power-lifting state champion. “I told him, ‘A time will come when you’re glad to lớn be bigger than everyone else.’ and when he got the football scholarship I said, ‘See, I told you,’ ” she said. “Cody’s one of those kids, he never has to lớn study for anything. He remembers everything. He picks up stuff really quick—if he’s interested in it.”

In the next few days, Herdman monitored the online chatter about GameStop. He was convinced that the price would continue lớn climb. He’d read about previous instances when large numbers of small investors had organized online & caused a stock khổng lồ rise, such as in 2008 with Volkswagen, which had quadrupled in price in two days. The prospect of being part of such a movement was so enticing lớn Herdman that, one night at the gym, he called his mother to lớn ask for more money. Herdman’s father is a retired electrician; his mother now teaches martial arts. The family finances had been tight in the past, but she said that she could give him about two hundred & fifty dollars, và told him khổng lồ talk lớn his father, Jerry.

Herdman explained the situation lớn his father as clearly as he could. Several large hedge funds, including Melvin Capital, a twelve-billion-dollar fund, had borrowed GameStop shares & had sold them short, betting that they would go down & that the company might go out of business. Millions of individual investors on Robinhood và other apps had decided to buy the shares—not so much because the company showed promise but simply in order to push the stock price up. As long as Herdman & the other investors kept buying, they would trigger a “short squeeze,” forcing the hedge funds lớn pay exorbitant amounts to buy the stock back. Herdman told his father, “Seeing these hedge funds get screwed is good for everybody.”


Jerry supported Cody’s investing as a valuable learning experience, but he always counselled him not to lớn trade more than he could afford lớn lose. Cody asked about cashing in some savings bonds that he had been given when he was a baby; his mom later agreed khổng lồ lend her son a hundred dollars against the bonds, which hadn’t yet matured. On Monday morning, Herdman bought four more shares of GameStop, which was trading at close to ninety dollars. He waited a few minutes, & then decided to lớn draw two thousand four hundred & thirty dollars from his Robinhood margin account, which allowed him khổng lồ borrow money from the company to lớn invest. He purchased another twenty-seven shares, bringing his total lớn around sixty-seven shares.


Herdman spent the next few days obsessively reading through WallStreetBets on Reddit. In less than a month, the number of subscribers to lớn the forum had nearly quadrupled, to lớn more than five million, và the talk of squeezing the hedge funds had turned into a collective expression of populist rage. “Literally everyone is on board,” one Reddit post read. “Left, right, trump supporters, trump haters. You want some sort of unification movement? Well this is it.” Someone else responded, “Instead of guillotines this time it’s beating them at their own game.” It was hard to lớn know how seriously to lớn take these pledges of class solidarity; a number of professional money managers had also made large investments in GameStop. The hedge-fund manager Michael Burry, who was featured by Michael Lewis in his book “The Big Short” for his prescient bet, in 2005, that the housing market would collapse, had bought & sold shares in GameStop. Some financial commentators speculated that professionals lượt thích Burry were somehow behind the phenomenon, manipulating the conversation and the tóm tắt price.


*

On January 27th, the stock hit three hundred and eighty dollars a share, fifteen hundred per cent higher than it had been two weeks earlier. Herdman’s Robinhood tài khoản showed a gain of about twenty-five thousand dollars—a “ridiculous” amount of money, to lớn his mind. He took a screenshot of his profits và sent them to a group of friends on Snapchat. “Oh my god, dude,” one of his friends wrote back. “You made as much money in a month as I’ve made over the course of a year.”

Reddit users’ goal to inflict pain on the hedge funds appeared khổng lồ be working. Dozens of news articles reported that Melvin Capital, which was managed by Gabriel Plotkin, a forty-two-year-old trader, was showing a loss of more than thirty per cent for the year, partly due lớn its GameStop short. Before launching Melvin, in 2014, Plotkin had been a portfolio manager at S.A.C. Capital, the fourteen-billion-dollar hedge fund founded by Steven A. Cohen. In 2013, S.A.C. Was indicted for insider trading, and, as part of a settlement, was required to pay $1.8 billion in penalties và fines. Cohen shut down S.A.C. He now runs Point72 Asset Management and owns the Mets. In late January, Point72 invested seven hundred and fifty million dollars in Melvin Capital’s main fund. In a move portrayed by the financial press as an emergency bailout, Citadel, a hedge fund managed by Kenneth C. Griffin, also invested two billion dollars. Plotkin denied that the new investments were due lớn a financial emergency. Griffin said at the time, “We have great confidence in Gabe and his team.”


Early the next morning, Robinhood made a startling announcement: “In light of recent volatility,” it had “restricted transactions for certain securities khổng lồ position closing only.” Robinhood would not allow any of its users khổng lồ purchase new shares of GameStop or other “meme stocks”—those that were trading wildly after being promoted on social media—including AMC Entertainment và BlackBerry. Robinhood users could only sell shares that they already owned. The move was sure lớn have the effect of halting the rise in GameStop shares—to Herdman, it looked lượt thích a manipulation of the market that would directly benefit the hedge funds.

After the stock market opened, GameStop plunged from $347.51, where it had closed the night before, lớn a low of $112.25. Herdman’s portfolio dropped sixty-six per cent, to ten thousand dollars. Other brokerages placed temporary limits on trading in GameStop, but Robinhood’s ban was one of the most restrictive, & most of the online anger focussed on it. Someone posted on Reddit, “robinhoods whole shtick is that they allow the little guys to lớn enter the market. Guess they don’t actually give two shits about the little guy and i hope they thua a ton of users from this.”

The investors challenging the Wall Street establishment attracted both Democratic & Republican supporters. Representative Alexandria Ocasio-Cortez tweeted that Robinhood’s restrictions were “unacceptable,” và said that she would support a congressional hearing into the company’s “decision lớn block retail investors from purchasing stock while hedge funds are freely able to lớn trade the stock as they see fit.” Senator Ted Cruz, of Texas, retweeted her message, adding, “Fully agree.” Some Robinhood employees saw the restrictions as selling out their users, & felt insulted when management attempted to lớn improve morale by distributing forty-dollar credits for the food-delivery phầm mềm DoorDash lớn employees. On February 18th, the House Financial Services Committee, headed by Representative Maxine Waters, held a hearing to lớn investigate, called “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.” Herdman and countless other Robinhood users made plans khổng lồ transfer their accounts to lớn the online brokerage owned by Fidelity Investments, the seventy-five-year-old financial-services company.

The following night, Herdman lay on his bed scrolling through WallStreetBets. In one post, titled “This Is for You, Dad,” someone using the name Space-peanut had written, “I remember when the housing collapse sent a torpedo through my family. My father’s concrete company collapsed almost overnight. My father lost his home.” Around the same time, the tác giả claimed to lớn have seen “hedge funders literally drinking champagne as they looked down on the Occupy Wall Street protesters.” The poster said that, as a result of the loss, his father had descended into alcoholism, & existed as only “a shell of his former self, waiting for death.”


More than seven hundred people commented on the post. Herdman thought of his own father, who, when Cody was a boy, had suffered a serious back injury on the job, and was given a hundred-and-twenty-five-thousand-dollar settlement, which he invested in the stock market và lost when the market collapsed in 2008. He had resorted lớn self-medicating with alcohol và painkillers. Around the same time, Herdman’s mother had lost work doing public relations for various martial-arts studios. Herdman started typing. “This is about more than just money, it’s about fucking these hedge fund managers until they understand what we’ve all gone through because of them,” he wrote. “I am holding to ensure my parents can live comfortable lives at the expense of the assholes that almost cost them their lives. This is for you, Dad.”

Robinhood was founded in 2013 by Vlad Tenev and Baiju Bhatt, who met as undergraduates at Stanford University. They have argued that putting the investing tools used by the wealthy into the hands of nonprofessionals could help reduce inequality. Tenev likes khổng lồ cite Thomas Piketty, the tác giả of “Capital in the Twenty-first Century,” who has described the wealth gap as an investing gap. The investing advantages enjoyed by the rich go beyond access to lớn the stock market, though; wealthy investors, unlike the relative newcomers who make up Robinhood’s base, have access to the most sophisticated financial information and opportunities, and can usually afford to chiến bại the money they risk on stocks.

The commission-free trading that Robinhood offers its users has been so popular that its competitors, including Fidelity, Charles Schwab, and E-Trade, were driven, in October, 2019, to cut their commissions of around five dollars per trade khổng lồ zero. Brian Barnes, the C.E.O. Of M1, a competitor of Robinhood’s that focusses on long-term saving and investing, said the app’s influence has been profound. “They’re the first company that introduced premier user experience & design in a điện thoại application khổng lồ finance, và they also dramatically lowered the cost of investing,” he said. “They’ve encouraged an entire population who wasn’t buying stocks lớn buy stocks. There’s a lot to lớn thank them for.”


Robinhood makes money in several ways, including by investing cash its customers have sitting in their accounts, the way banks do, and by charging five dollars a month for a “Gold” màn chơi of access, which gives users a margin tài khoản from which they can borrow money khổng lồ trade with. The majority of Robinhood’s revenue comes from trading volume: the more a user trades, the more the company makes. In this way, Barnes explained, the interests of Robinhood’s users often conflict with those of the company. The average person builds wealth through long-term investing rather than by rapidly trading in & out of stocks. Barnes described Robinhood as “more financial entertainment than investment management or wealth building. What they’ve created is an incredibly fun, exciting, legal casino in your pocket.” Charlie Munger, the ninety-seven-year-old business partner of Warren Buffett, the celebrated long-term-value investor, has criticized the frenzied day trading the company has facilitated among people with little prior knowledge. “It’s really just wild speculation,” he told the Wall Street Journal in February. “I think that we’re crazy to lớn allow it.”

Robinhood has become successful in Silicon Valley by following a trajectory similar khổng lồ that of other tech companies: behaving aggressively in pursuit of fast growth. In the first four months of 2020, more than three million people opened Robinhood accounts, bringing the total number of users to more than thirteen million. The median age of Robinhood’s users is thirty-one; about half of them are first-time investors.

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Representatives for Robinhood decline to say whether the majority of its users make or thất bại money, pointing out that other companies offering similar services don’t release this information. Tenev, the company’s C.E.O., revealed in February that the value of all its customers’ accounts was thirty-five billion dollars more than the total amount of money customers had deposited, although the distribution of this staggering profit is unknown. Last fall, Robinhood was valued at nearly twelve billion dollars; in March, it notified the Securities and Exchange Commission of plans khổng lồ hold an initial public offering.

Tenev is thirty-four & lives in Silicon Valley with his wife, Celina, and their two toddlers. Long & lean, he has a wide, pale face, dimples, and a mop of shiny dark hair. He was born in Varna, Bulgaria, and immigrated to lớn the U.S. When he was five. When we spoke recently, he recalled that when he was a small child the power nguồn went out for several hours nearly every day, và in the evenings his mother and father huddled around a battery-powered radio. From the window of the family’s apartment, Tenev’s father would monitor the line at the grocery store, where people waited khổng lồ buy milk & bread. Bananas, imported from Cuba, were a special treat. His father had once gone on a trip to Italy và brought back a small Lego set. “I thought it was the coolest thing in the world,” Tenev said.

His mother worked for a book publisher, và his father was studying for a Ph.D. In economics. His father read “banned literature,” including Western economic theory, và refused khổng lồ write his dissertation on Marxism, something that had been strongly encouraged. When the Cold War ended & Bulgaria’s Communist government fell, Tenev’s father applied for a scholarship at the University of Delaware, and moved lớn the U.S. In 1991, to pursue another Ph.D. In economics. A year later, Tenev’s mother joined his father, leaving Tenev behind with his grandparents. In the summer of 1992, when Bulgaria was in a severe economic crisis, Tenev’s “punk teen-ager aunt” accompanied him lớn America. Tenev and his parents moved into graduate-student housing in Hyattsville, Maryland, in an apartment complex filled with other immigrant families. Tenev’s father took a job as an economist at the World Bank, và Tenev’s mother, who had been working in a restaurant and at other odd jobs, enrolled in an M.B.A. Program at Georgetown University (she, too, later joined the World Bank), & the family settled in Washington, D.C. Tenev says that he spent much of high school studying và playing with computers, trying lớn set himself up to lớn be financially secure: “There was this fear that we’d get sent back to lớn Bulgaria, or they’d thua kém their jobs.”


*

During a summer research program at Stanford, Tenev met Bhatt, a fellow-undergraduate. Bhatt, too, was an only child of immigrants whose father was an academic. His parents had moved lớn the United States from India after his father was accepted into a Ph.D. Program in theoretical physics at the University of Alabama in Huntsville. Bhatt, who speaks fluent Gujarati, grew up in Poquoson, a small town in Virginia. At Stanford, he majored in physics; Tenev majored in mathematics. They became inseparable friends.


Tenev’s Stanford adviser, Larry Guth, recalled that Tenev had concerns about pursuing math as a career; one could spend years exploring a particular question only to lớn have that research come to lớn nothing. Tenev went on to lớn begin a Ph.D. Program at U.C.L.A., where he was astonished at how hard the other students worked for such small financial gain. “It’s obviously not a very lucrative profession,” he told me.

The financial crisis was creating economic pain across the country, but new tech companies were launching và expanding at a brisk rate: apple released the iPhone in 2007; Airbnb popularized home-sharing in 2008; & the following year Bitcoin was created. The buying & selling of stocks was growing increasingly automated. Trade orders now travelled from one computer lớn another, sometimes taking six or seven steps before being fulfilled. Tenev và Bhatt wanted to lớn design a platform that would eliminate most of the steps, making each stock purchase or sale even faster. They started a company và called it Celeris, the Latin word for “quick.” The technology would allow them khổng lồ take advantage of tiny price gaps in the market, for example, by buying a cốt truyện of táo khuyết on one exchange, & then selling it for a slightly higher amount on another exchange. Soon, Tenev & Bhatt decided lớn focus exclusively on software for high-speed trading, và formed a new company, called Chronos Research. Operating from a warehouse space in Bushwick, Brooklyn, they hired a group of engineers lớn develop the software, which they sold khổng lồ hedge funds and investment banks. They renamed the hàng hóa Zardoz, for a schlocky science-fiction film from 1974 starring Sean Connery.


By the fall of 2011, Occupy Wall Street protesters had taken over Zuccotti Park, in thành phố new york City’s financial district. Hundreds of people were sleeping in tents, protesting the inequality và corruption that the financial crisis had exposed. Acquaintances of Tenev và Bhatt accused them of being sellouts và traitors to the cause of economic justice. Tenev said that some of his friends, whom he characterized as “liberal hipster New Yorkers” and “artists or musicians,” participated in the protests. “I didn’t protest,” Tenev told me. “I was essentially running a company and trying lớn survive, myself.” Tenev took lưu ý of the collective frustration, but, he said, “I kind of thought the protesters weren’t really doing anything about it.” He went on, “I think a lot of people can be swept up in these narratives. The narrative at the time was ‘Financial industry bad. You’re either in the financial industry & are part of the problem or you’re not.’ ” Later that year, Tenev & Bhatt moved khổng lồ San Francisco. The Occupy movement had spread across the country, & protesters had erected a tent đô thị downtown that was visible from the windows of the office Tenev & Bhatt rented.

I wondered whether Robinhood’s goal of democratizing finance stemmed from a fundamental misunderstanding of the Occupy protests, and I asked Tenev whether he thought the protesters had been seeking greater access to lớn the stock market. Tenev said no, but he thought that the protesters didn’t necessarily know what they were missing; people were traditionally encouraged to invest in real estate, but it wasn’t as attractive an investment as the stock market, which historically has risen faster than home prices. “I think we have khổng lồ move away from the American Dream being about the thirty-year fixed mortgage,” he said.

Companies such as Uber, Instagram, & Foursquare were introducing new products designed for di động devices. Tenev and Bhatt decided to turn Chronos into a không tính phí stock-trading application aimed at millennials. There were already many companies, such as E-Trade, that offered low-cost stock trades to nonprofessional investors, but they weren’t designed to lớn function well on mobile devices. Tenev và Bhatt started referring lớn their company as CashCat, inspired by Bhatt’s deep fondness for, và serious allergy to, cats. They rented a garage-like space in downtown Palo Alto lớn use as an office.

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Tenev said that when Celina first introduced him lớn her friends, she would tell them that he “worked in finance,” quickly adding that he was a “good” finance guy—“the Robin Hood” of finance. Tenev and Bhatt seized on the name, & applied for a license to operate as a broker-dealer, which would allow the company lớn buy và sell securities on behalf of customers. In April, 2013, while they waited for approval, they launched Robinhood as a financial-news platform, where users could rate stocks and predict their performance. In an interview, Tenev described the company’s philosophy by paraphrasing a quote from Gordon Gekko, a character in the movie “Wall Street”: “The most important commodity that I have is information.”

Tenev & Bhatt wanted trading on Robinhood to be free. In order lớn earn revenue, Robinhood planned to engage in a practice called “payment for order flow,” or “PFOF” (pronounced “P-fof”). This involves taking customer orders to buy or sell stock và routing them lớn “high-frequency-trading firms” or “market makers”—companies that engage in the buying and selling of stock to facilitate customer orders. These firms “fill” the orders by buying or selling the shares as the user has requested; at the same time, they use complex computer algorithms lớn skim a little off the price the customer gets, keeping it for themselves. Predictable, unsophisticated trade orders typically present the greatest opportunities for the high-frequency-trading firms lớn make money. In exchange for access khổng lồ the orders, the firms pay rebates to lớn the brokerage company that routed the orders khổng lồ them. The rebates và the skimming are invisible khổng lồ the customer placing the trade order.

Payment for order flow is common among brokers, but it is controversial, because it appears to create an incentive for them khổng lồ send their customer orders khổng lồ whichever market maker is willing lớn pay them the most. The S.E.C. Requires that brokers disclose to their customers that they are engaging in PFOF và that brokers insure that their customers are getting the best prices for their trades. Proponents of the practice, including Robinhood, argue that PFOF results in customers getting better prices and faster execution. Some market experts disagree, và studies have been done showing that small investors would be better off without it. PFOF is restricted in countries including the United Kingdom, Australia, & Canada. In a 2004 letter submitted to lớn the S.E.C. During a debate about legalizing PFOF in the options market, an attorney representing Citadel Investment Group wrote, “The practice of payment for order flow creates serious conflicts of interest and should be banned.”

Tenev and Bhatt surely understood that eliminating commissions & then making it easy for users to trade like crazy would lead Robinhood to lớn potentially make an enormous amount of money. They spent the summer và fall of 2012 presenting their idea to venture-capital investors. According to Tenev, approximately seventy-five potential investors rejected them. Some were concerned about putting money into a startup that had not yet released its primary product. Others thought that millennials would not be interested in trading stocks. Some of Robinhood’s early prospective investors had ethical concerns about the company. Bill Gurley, a partner at Benchmark Capital, who has served on the boards of Uber & Zillow and previously worked as a research analyst at Credit Suisse First Boston, told me that when Tenev pitched the idea, saying Robinhood would rely on PFOF, he had qualms: “It made me feel bad. Emotionally bad. Because I think it is misleading khổng lồ people.” Gurley noted that other brokerage firms that followed the practice didn’t pretend lớn be doing good. “My issue with Robinhood is, I think their mission and what they say they stand for is not actually true.”