Investors are leaving Robinhood on principle and this is why

I’ve been a Robinhood investor since 2015 when the app first launched.  I chose to use Robinhood as my brokerage because of commission-free trades.  Robinhood was the first to offer commission-free trades and it was revolutionary at the time.  I’ve invested in the stock market for six years using Robinhood, and not once in my life have I ever paid a dime to a stockbroker.  I introduced Robinhood to numerous colleagues and encouraged them to use the platform instead of continuing to pay broker commissions as if it were still the '90s. 

I didn’t buy GameStop (GME) stock or any other equities that got short squeezed last week, nor did I have the desire to.  I have my own methodical investing strategy that doesn’t involve gambling money on margin or shorts.  My strategy is super complex: Step 1 -- Buy, Step 2 -- Hold, Step 3 -- Repeat.  More power to the investors who short stocks and/or trade on margin, but if they lose doing it, they needn’t blame anyone but themselves.

Risk is inherent to investing.  The challenge of investing successfully is evaluating risk.  There’s nothing wrong with shorting stock, but the mechanics of a short are such that there’s limited upside and infinite downside.  This isn’t about: “big guy” verses “little guy,” hedge funds versus Robinhood investors, or Wall-Street versus Main Street.  Big hedge funds hold short positions and some Robinhood investors also hold short positions. 

It’s about equality in the free market.

Individuals should be free to choose how they invest their own money and billion-dollar hedge funds should also be free to choose.  If either a “big guy” or a “little guy” wants to make risky investments like shorts, fine, but neither should whine like a child when they lose money due to the risk associated with the investment they voluntarily entered into. 

Unfortunately, whining is what happened last week as billion-dollar investing firms got caught with their pants down after accumulating more shorts of GameStop (GME) than the actual number of shares of the stock that exist.  This created a scenario like a game of musical chairs where there aren’t enough chairs for everyone. 

Numerous investors took note of this “negative float” of GameStop stock and proceeded to buy up shares while coordinating in public forms like Reddit.  This drove the stock price up as investors with shorts scrambled to buy any remaining shares to stop their losses from growing larger as the stock price surged higher and higher (because a short is a bet a stock price will go down).

If Robinhood investors lost money due to their choices of investment, they would have accepted their losses and moved on.  They would have had no recourse.  However, when the billion-dollar hedge funds lost on this occasion they responded by demanding special favors from brokerage firms like Robinhood to restrict buying of GME stock.  Robinhood should have said 'no' to this demand but they didn’t.  Instead, Robinhood chose to disable the ability of their users to purchase GME (and other) stock.

On Thursday, Robinhood investors received apology emails and push notifications from Robinhood management about Robinhood’s (poor) decision to restrict free trade.  My recommendation to Robinhood, instead of the apology campaign, is to update their brokerage agreement stating Robinhood will never restrict trades again in the unethical manner we witnessed last week.  Robinhood investors won’t hold their breath for Robinhood management to grow a spine on this, so in the meantime, many Robinhood investors are initiating transfer of their holdings both cash and equity to other brokerage firms that don’t bend a knee to the whims of random hedge fund managers.

Robinhood’s actions to restrict free trade is an unprecedented sabotage of individual freedom in the financial market.  It is the financial equivalent of censorship of free speech carried out by big tech companies.  Hopefully Robinhood will one day bounce back from this setback and chose to align itself with the right side of history and support free trade for all individuals.  In the meantime, we must insist on equality in the financial markets in keeping with the ideals that make our country great.  Ronald Regan put it best when he said: “If we lose freedom here, there is nowhere else to escape to.  This is the last stand on earth.”

Image: Ahmad Ardity / Pixabay / Pixabay License