Robinhood Tarnished Their Brand by Siding With the Hedge Funds

Tom Stevenson
Photo by Austin Distel on Unsplash

Unless you’ve been living under a rock, you’ll be aware of what’s going on with GameStop.

In case some people remain unaware of the story, here’s the lowdown. GameStop, which sells video games, has suffered due to COVID. The company closed many of its stores due to lockdowns and a downturn in trade from the pandemic.

Hedge funds, never shy to make a quick buck, noticed this and decided to short the company toward the end of last year. By shorting the company they are betting the value of GameStop’s shares will decrease. When that happens, the short sellers buy them back later at a reduced price.

Investopedia describes the practice as such:

“Short sellers bet on, and profit from, a drop in a security’s price. This can be contrasted with long investors who want the price to go up.”

In these scenarios, the short sellers usually force the price of a stock down and come out of the process richer. Except this time, they hadn’t counted on an army of Reddit investors determined to defy them.

This gaggle of retail investors gobbling up GameStop’s shares saw the value of a single share increase from $18.84 on December 31 to $347.51 on January 27. You don’t need me to tell you what an astronomical rise that is!

How did plucky retail investors beat the gigantic hedge funds? By using an app called Robinhood. That’s right, an app named after the English folk hero who stole from the rich to give to the poor.

For a month, this story played out in real-time. As the price of GameStop stock increased the shorts got squeezed. They now needed to buy more shares of GameStop to cover their positions. Retail investors who had got in early saw the value of their shares skyrocket over the course of a month.

In one case an investment of $50,000 became $22 million off the back of the incredible run. The success of this run prompted users on Reddit to target other companies such as AMC, Blackberry, and Nokia, causing their valuations to rise too.

This all happened through an app on smartphones. Until the fun ended on January 28, when Robinhood tarnished their brand forever.

One simple action was all it took. They stopped people from trading.

Let the People Trade

The purpose of a stock market app is to allow ordinary folk to buy and sell stocks without commission. Before the advent of these apps, you had to go through a brokerage which involved a lot of hassle and costs.

The beauty of apps such as Robinhood and WeBull is that they simplified the process. Open the app, search for the stock you want to buy, push a button, and you’re good to go.

These apps democratized trading and brought a lot of people into an arena that had been the preserve of Wall Street. Robinhood was the market leader in this industry. By the middle of 2020, the app had 13 million users.

In the retail investing world, comprised of millennials and everyday folk, Robinhood were the 1,000-pound Gorilla. The Big Dogs. They’d spent years building their brand and customer base, a move that had seemed to have paid off by the start of 2021.

Rumors were flying around Robinhood could go public at some point in 2021. But, they didn’t count on the frenzy around GameStop. A situation that had developed because of users on their app.

At the close of trading on January 27, GameStop was trading at $345 a share. The stock had rallied through the recommendations of users on a subreddit called r/wallstreetbets. The higher the stock climbed, the further word spread, and the more clamor there was to jump onboard the one-way ticket as GameStop went to the moon.

The following day, Robinhood decided to stop users trading GameStop and other popular stocks such as AMC. The ins and outs of whether they made this decision themselves or not, don’t matter.

The decision itself was flawed. One which could haunt them for years to come. From a marketing perspective, it was a terrible decision. Retail investors, the little guys, taking on the big Wall Street hedge funds and winning, all from an app called Robinhood.

It was poetic. A story worthy of a Hollywood film. The name of the app never felt more appropriate. Yet, a day later, they tarnished their brand by preventing their users from buying stock, while the hedge funds were still able to trade.

Now, the name was a poorly scripted joke. Go onto Robinhood’s Twitter and this is what you see.
Robinhood’s now ironic tagline on Twitter. Image By Author

That’s right, a claim to democratize finance for all. Up until January 28, this statement was correct. Now, it comes across as a hollow marketing slogan. A nice line, but hollow in reality. There’s nothing democratic about restricting what users can and can’t buy.

If this had been a small event, Robinhood would have been able to ride out the storm. But when millions of people were waiting to open their app and start trading, it was a recipe for disaster. How no one at the company didn’t foresee the inevitable backlash is unbelievable!

The irony of an app called Robinhood standing behind the hedge funds, instead of ordinary people, is glaring.

It’s a marketing disaster that may be hard to recover from. Their decision will have only increased demand for these stocks. Instead of helping the situation, they’ve made it worse.

All trust has evaporated between the company and its users. The free market should be free and open to all. Robinhood’s decision has proved it’s freer for the fat cats than it is for the little guy. Not only have they damaged their own brand, beyond repair, but they’ve also struck a blow at the notion of free-market capitalism itself.

This was a golden opportunity for Robinhood to live up to their claim to ‘Let the people trade.’ They could have positioned themselves as being on the side of the masses against the powerful hedge funds and billionaires. It could have supercharged the company and sent it to the next level in terms of brand recognition. Instead, they chose to side with the financial establishment, making a mockery of their tagline and their name.

Will Robinhood recover from this? It’s hard to say. The sense of betrayal will linger longer than the short squeeze. Some people will forget what happened and continue to use the app. But I’m sure the vast majority of people will ditch it and take their money elsewhere.

What this story shows is that your brand needs to align with your values. If you call your company Robinhood, a certain exception comes with that. A belief you’ll be allowed to compete on the same terms as the big boys and beat them once in a while. Not that you’ll have the rug pulled out from under you once the hedge funds cry foul.

No amount of explaining, apologies, or groveling will improve the situation. Had Robinhood let the momentum behind GameStop ride out, they would have been fine. They were an integral part of the GameStop story, but now it’s for all the wrong reasons.

Their brand name will forever be synonymous with this moment. Instead of living up to their name, they’ve tarnished it. From now on, Robinhood will be the go-to marketing case study on how to destroy your brand in one day.

By inverting the principle of their brand’s name, they set the stage for their own demise.

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