Will Robinhood.com Go Bankrupt?

Let's start by saying something that probably everybody can agree with:

This was a terrible week for Robinhood.com, the zero commission brokerage that has suddenly found itself in the middle of a storm of controversy.

Robinhood built up its business by making the trading of stocks and options easily available to the masses.

The company built its business by appealing to the average person who was previously shut out of the market. Now, they said, everybody could have a seat at the table.

Robinhood essentially turned its previously thriving business to ashes this week due to the Gamestop situation.

After shares of Gamestop soared due to a short squeeze/gamma squeeze that originated on the WallStreetBets community on Reddit, Robinhood put Gamestop into liquidation only mode, which meant that their customers could only sell and not buy Gamestop.

This led to weakness in Gamestop and the rest of the "squeeze stocks", and people were rightly furious.

Free market? It sure didn't seem like it this week.

People were especially furious because of Robinhood's relationship with Citadel LLC, one of the largest hedge funds in the world.

One of the reasons why Robinhood is able to offer zero cost commissions is because they sell their order flow to Citadel.

Citadel, as you likely know, backstopped Melvin Capital (along with the Point72 hedge fund) with a multi-billion dollar infusion of cash. Melvin Capital was getting wrecked by the squeeze in Gamestop, and they likely would have gone under without the capital infusion.

So Citadel has a relationship with Robinhood, and Citadel has a very real interest in the Gamestop short squeeze, as they have a billion plus on the line due to their investment in Melvin Capital.

So, when Robinhood elected to put Gamestop (and others) into liquidation-only mode, Robinhood's customers flipped out.

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One thing is practically certain - Robinhood's business is clearly under strain.

The company raised $1 billion from its investors on Thursday.

The company put some ridiculous limits on the buying of shares/options on their app. For instance, as of Friday afternoon, Robinhood was restricting the number of shares you could buy in certain companies. If you were a Robinhood customer, you could only buy 1 share of GME or AMD, to name a few.

That's ridiculous.

Robinhood blamed the trade settlement firm that it uses for the restrictions that it had to place on certain stocks on Thursday and Friday.

This doesn't change the fact that many of Robinhood's customers are seething mad and promising to take their money out of the company.

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The question now becomes - will Robinhood survive this situation after infuriating its previously loyal customer base?

Bovada, a major offshore sports betting firm, placed odds on Robinhood.com declaring bankruptcy. Here they are:

Will Robinhood.com Declare Bankruptcy in 2021?

No, 1.77
Yes, 1.909

This means that the "No" side is a slight favorite, though the "Yes" side is better than a coin flip as well.

This means that bettors believe that there is a better than 50% chance that Robinhood declares bankruptcy in 2021.

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In my opinion? I don't think that Robinhood survives this as an independent company. In my opinion, they'll be swallowed up by another company within a year.

Don't forget that Robinhood was planning an IPO, and now they are reeling.

Filed under: General Knowledge