Amid all the overdone excitement about GameStop, AMC et al last week, the trading platform that some think enabled the overdone excitement, Robinhood, began to receive a lot of criticism. Supposedly its eventual decision to disallow purchases of GameStop, American Airlines and others signaled “cronyism” whereby the market app for the little guy protected hedge funds from too much buying, and ever higher share prices. Don’t buy the assumptions.
For one, it quickly became apparent why Robinhood stopped trading in certain companies: it apparently lacked the capital to process the volume of trades coming its way. Capital requirements foisted on it by regulators helped make its decision a certainty.
After that, it’s worth pointing out yet again that stock prices aren’t all about, or even a lot about, supply versus demand. If so, every public company would go out of its way to limit the number of its shares in the marketplace from the outset. And their share prices would likely plummet.
Indeed, in order to buy shares, one must be able to sell them. Limited supply means limited trading, which means a limited ability for big investors to own the stock in the first place. Big, institutional buyers require enormous liquidity in shares to own them. A limited share float paradoxically works against the very demand that some think drives share prices up. Still, the biggest informer of a stock’s price is the market’s expectation about all the dollars that company will earn in its lifetime.
After that, it’s worth speculating on another reason for Robinhood’s reticence during last week’s frenzy. Think back to the end of the 20th century. It was then that the internet quickly emerged as a life and world-changing innovation. There was no doubting its staying power, countless internet companies were formed in the U.S., and around the world, but it’s useful to point out that most of these high flyers eventually went belly up. This was progress.
Silicon Valley isn’t the richest, most innovative economic region in the world because all of its businesses succeed. In truth, it’s the most prosperous precisely because most of what’s tried out there fails. Out of myriad entrepreneurial leaps that result in myriad bankruptcies emerges a few home runs. The home runs pay for a failure rate in Silicon Valley that exceeds 90%.
The problem was that in 2000 and 2001, this crucial axiom about progress in pockets of innovation wasn’t understood. Particularly by the political class and the media members who enable politicians.
With all manner of internet companies going under, including countless public companies whose shares had once been coveted by institutional and individual investors alike, politicians began acting like…well, politicians. Those “greedy” Wall Street investment banks that put the proverbial “lipstick” on a busted internet’s “pigs” were going to have to pay for having done so. “Main Street” investors lost their shirts buying these “pigs,” so politicians came to the rescue. Many readers doubtless remember all this.
Henry Blodgett paid multi-million dollar fines for having had the temerity to put a $400 price target on Amazon. If analysts or traders talked about a certain company or stock on television or to a newspaper reporter, all sorts of disclosures had to be made. “Wall Street” was evil because some public companies had gone under.
Except that “Wall Street” never hid the truth about IPOs. As a rule they were risky. As a rule share allocations in IPOs were largely made to large institutions who knew about investing, and yes, losing money. You see, when IPO shares were going up, up, and up, politicians and retail investors moaned that “mom & pop” investors were being left out of moneymaking bonanzas. Actually, they were being left out because there’s nothing certain when it comes to the stock market.
More than a few small investors found this out the hard way when they piled into popular internet era shares. Does anyone remember JDS Uniphase, eToys, and theglobe.com? The problem is that much like the automobile boom in the early 20th, the internet boom was going to leave a lot of failures in its wake. Yes, progress. Lots of intriguing businesses were funded in the early and late parts of the 20th century as a consequence of remarkable technological advance, but most weren’t going to make it. Such is life in a dynamic economy.
Except politicians don’t like downside. They can only understand up. In politics failure is rewarded with more money. They didn’t realize that in commerce, failure is rewarded with closure. And investors being wiped out.
The speculation here is that its retail investors being wiped out had Robinhood’s owners worried. Perhaps they’d seen this awful movie before.
Perhaps they remembered what happened back in the early part of the 21st century. Back then politicians once again acted like politicians when internet shares stopped going up. They lashed out at the investment banks that had the nerve to fund companies whose share prices didn’t go up forever. Politicians live on another planet.
Applied to Robinhood, how very unnerving to see one’s base of customers purchasing shares of GME at nosebleed prices, and at valuations that some felt were divorced from reality. Could the shares fall as quickly as they’d risen, thus wiping out so many who’d piled in on the way up? What would Elizabeth Warren, AOC and Ted Cruz do?
Something to think about. Maybe Robinhood’s actions had more to do with fear of that parallel universe that is Washington than people think.