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Stock Market How Robinhood went from dreams of a $20 billion IPO to Wall Street disaster in just 5 days


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Stock Market How Robinhood went from dreams of a $20 billion IPO to Wall Street disaster in just 5 days

Robinhood CEO Vlad Tenev embarked on an apology tour last week. Rafael Henrique/SOPA Images/LightRocket via Getty Images, Brendan McDermid/Reuters This story is available exclusively to Insider subscribers. Become an Insider and start reading now. Stock-market mania forced changes for many trading platforms, but Robinhood took the most heat. Politicians, regulators, and internet masses turned on…

Stock Market How Robinhood went from dreams of a $20 billion IPO to Wall Street disaster in just 5 days

Stock Market

Stock Market Vlad Tenev Robinhood

Robinhood CEO Vlad Tenev embarked on an apology tour last week.

Rafael Henrique/SOPA Images/LightRocket via Getty Images, Brendan McDermid/Reuters


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  • Stock-market mania forced changes for many trading platforms, but Robinhood took the most heat.
  • Politicians, regulators, and internet masses turned on Robinhood as it tried to mitigate the chaos.
  • One Robinhood software engineer said a reason he quit was the GameStop saga.
  • Visit the Business section of Insider for more stories.

Robinhood CEO Vlad Tenev said he was still asleep at 3:30 a.m. PT when Gretchen Howard, his chief operating officer, received an important call.

It was 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 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-racking. 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 said.

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 that, 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 video-game 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 Wall Street Bets had been egging on people to buy 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.

Read more: How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital’s short positions

Stock Market ‘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 Wall Street Bets chat forum and the hedge funds with short positions in GameStop shares. Heated conversations between the two sides took place on the subreddit and other online venues — the 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 jumped 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.

Stock Market RobinHood Chart Robinhood published a chart showing the surge in equities and options activity on its app during the GameStop market frenzy.

Robinhood


But during the time of the stock frenzy, 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.

Stock Market ‘Yo this is a f—ing crime’

When the trading restrictions took effect, GameStop sank 27%. The tense atmosphere inside Robinhood, and outside the company, kicked up several notches.

The Wall Street Bets 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 a lot 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 the food-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.

Stock Market robinhood cofounders Robinhood founders Baiju Bhatt and Tenev.

Robinhood


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 Twitter users with tens of thousands of followers, accused the venture-capital firm Sequoia Capital — one of Robinhood’s biggest backers — and the White House of strong-arming Robinhood into the decision. The post was so widely shared that the famous venture-capital 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 up to a four-star rating. Politicians from New York Rep. Alexandria Ocasio-Cortez to Texas Sen. Ted Cruz piled on. New York’s attorney general said she would review trading activity on Robinhood. Even Ja Rule, a Grammy-nominated rapper, weighed in, calling Robinhood’s actions “a f—ing 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 participants. I want to say that is categorically false,” Tenev said in an interview on Bloomberg TV. 

Read more: Robinhood makes hundreds of millions from selling customer orders. That business model is about to come into focus.

In a separate TV interview, Tenev 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.

Stock Market 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 Senate Banking Committee hearing is also in the works, according to The Hill. And the Securities and Exchange Commission 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,” one of the podcast’s hosts said.

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, DC-based “senior professional” with at least eight years of Capitol Hill policy experience to focus on regulatory and legislative affairs, with a particular eye toward 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 midmorning Friday with an optimistic tone, saying Robinhood would 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” but not providing much in the way of specifics.

Robinhood investors, led by Ribbit Capital and venture-capital 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 was also in talks with banks about raising $1 billion of debt.

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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, according to analysts at JMP Securities. By comparison, the Robinhood app was downloaded about 140,000 times during its most active day in March, when coronavirus fears sent stocks down sharply.

The new users and 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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