Paying heed to the hedge funds may end up costing the company in the long run.
There is still ongoing fallout from the GameStop stock saga, as much about the backroom dealings of Wall Street have become exposed. While many market players are in ‘’pay no attention to the man behind the curtain’’-mode there is an undercurrent of distaste left with the smaller investors who saw the markets clearly taking sides. Things came into clearer focus when the term ‘’Basement Bandits’’ began to be applied to those upstart investors who were making legal stock purchases, to the chagrin of the big money firms.
One of the more disturbing revelations was in the actions from the small-cap investing app, Robinhood. Serving initially as the portal through which the organized purchasing moves were made the stock app took action against its customer base, at the behest of the billion-dollar hedge fund managers. After a time of wild price runs, Robinhood put a stop to trades on a handful of the targeted stocks. Then the company went further, going so far as to actually sell the positions many accounts had in GameStop, and the others.
This has not resulted in a positive response in public perception, something that resonates in a negative fashion with a company about to go public. Robinhood has had plans to roll out an initial public offering of its stock, a plan that must now be in the balance, at least for the immediate future. In a way you can feel for the executives, as the stock app became placed firmly between two competing forces; its customers desired one result that ran contrary to the desires of the hedge fund backers of the company.
Robinhood customers literally paved the way to financial crises for its partners. Now the company is in professional limbo. It appeared that the company was taking the side of the billionaire set on Wall Street, a mockable stance for the company named after a hero of the little guy.
A CEO of an investment app comments on the GameStop furor:
“We saw a need to suspend trades this week as the behavior we saw is not conducive to proper market operation.
The act of taking money from the wealthy for poorer investors is the opposite of what Robin Hood stands for.” pic.twitter.com/PaPD7r3wSg
— Bullwork Online! The Bulwark Commentary Site (@TheBullwork) January 30, 2021
As a result of taking action in response to completely unforeseen events Robinhood has generated a huge negative backlash. The company is facing no less than 33 lawsuits from investors who come together after they were affected by the company’s actions last week. While initially thought to be easily dismissed, as the app’s terms of service outline such court actions are invalid, the hitch in that defense is this does not apply to class-action suits, of which these are categorized.
Public perception and a slew of lawsuits are hardly the kind of influences you want on your desk when attempting to sell the good name as you take a company public. On top of which Robinhood is wading through a mountain of paperwork requirements. After the volatile situation of day trade activity on about a dozen stocks exploded the company was hit with a financial backing requirement. As Robinhood was the conduit for the frenzied purchasing it was required, by order of Wall Street’s Depository Trust Clearing Corporation, to have billions of dollars in equity on hand to back the transactions.
This can be seen as a move by the DTCC to shield the hedge funds from further damage. Robinhood had to scramble to get funding from its investors, and while it was in a panic the company was essentially forced to halt the trades before it incurred even more fiduciary responsibility, which it likely would have been unable to meet.
This has not been a successful sell to its customers. Many have become outraged at the limits placed on their portfolios, and they took to slamming the company on ratings online. This led to the tech giants like Apple stepping in, placing all new limits — this time on comment sections. They prevented any comments that were posted lower than 3-star reviews. It became just another move that showed the titans who have each other’s backs.
This bad blood behavior is all going to affect a Robinhood IPO introduction, should it come to pass anytime soon. How ironic will it be if there are those who end up turning a profit by short-selling Robinhood stocks the day it goes public?