...Of GameStop,Robinhood And The Tech Regulation Conversation:(Part 2)

NB: You can read Part 1 HERE!

Robinhood is an online stock trading app that prides itself with, among many other things, "democratizing finance for all" and also offering "commission-free investing, plus the tools you need to put your money in motion". The app's actions last week during the GameStop stock saga were to go against both of these descriptions last week.

When the Reddit dudes started their crusade against the shorts, most of those who heeded their rally did so through Robinhood and other stock trading apps alike. On Thursday, at the peak of the GameStop stock saga, Robinhood decided to halt buying of GameStop stock and other rapidly rising stocks through its app. Other users even reported that the app was, as a matter of fact, selling these stocks without their consent. As one can imagine, a lot of its users were not happy.

"How can an app named after a character who stole from the rich to give to the poor now want to stop the poor from beating the rich dudes at their own game and making money for a change in a system which every day disadvantages the poor man working man? Oh, the irony", one tweet went. The difference was that unlike the real Robinhood, Robinhood the app never took from the rich and it sure as hell did not give to the poor. As matter of fact, it is a product of the rich.

Most people who use Robinhood think that the stocks they buy and sell through the app belong to them. The truth is, they do not. Robinhood, like your Facebook, Twitter, Instagram, etc is a free app. Now here is the rule of thumb when it comes to apps. If you getting and using it for free, then you are not the customer, but the product. You are not a user but the user. Facebook and Google use you to get advertising billions from marketers, Robinhood uses the stocks that users purchase on their platform to make fortunes for themselves.

Here is how Robinhood works; When a user signs up for a new account, they are automatically assigned what is referred to as a "margin account". One of the characteristics of a margin account, according to Investopedia, is that "...for a margin account, the securities in this account may be lent out to another party at any time without notice or compensation to the user...". This is exactly what Robinhood was doing with its users' stocks.

What happens when a user deposits money into a Robinhood account and starts trading stocks "commission-free" is that, Robinhood pools these stocks with others into what is called an "order-flow" and sells it to the rich dudes, being the hedge funds—Citadel in this case. Order flows are basically pending trade activity that brokers like Robinhood sell to the rich dudes to enable them to influence how the broker routes its clients' orders for fulfillment. In short, it is a legal form of bribery.

Citadel then uses this info in the order flow to "provide you liquidity" by front-running your trade. By doing this, Citadel is reducing the quality of your transaction because it gets a tiny commission from front-running your trade which is in the order-flow but the good news is that, well that tiny commission is what actually covers the costs of having you trade commission-free. So technically, you are paying commission for trades on this so-called "commission-free" app, you are just not doing it directly and to your knowledge.

So the stock that you trade on your Robinhood account actually belongs to Robinhood and not you. They just give you a whole lot of ownership rights which give you quasi-ownership. A facade. So one might ask, "wait, if I don't own the stock, what happens to it when Robinhood fails and shuts down then?"Well, you would just be a creditor with a claim against Robinhood for the amount equal to the stock in your Robinhood account.

So does Robinhood communicate with app users that they sell their stock on their behalf without their knowledge or permission? Well, they actually do, otherwise, they would have caught a fraud charge a long time ago. All this information is shared with the user on the terms and conditions of use of the platform, which, as always, most people do not bother to go through.

When you clicked "I agree" on those terms and conditions, you gave Robinhood the permission to take the stock that you bought on the platform and lend it to the rich dudes to short stocks like GameStop. Robinhood gets a variable borrow rate for loaning your stock to the rich dudes and does not share any of it with you, the supposed stock "owner".

This is where the tech regulation conversation comes in. How long are tech companies going to continue to legally swindle users by hiding behind terms and conditions of use of their creations? How long are tech companies going to keep being able to straddle the line between legality and criminality without consequences?

When Robinhood decided to halt trading of the high-volume trading stocks like GameStop last week, many resorted to conspiracies about how Robinhood was assisting its rich dudes' friends like Citadel (who bailed out Melvin Capital Management, the hedge fund which had shorted GameStop and lost big in the process) to not incur as much as losses in the short-squeeze at the expense of its average working people retail investor app users. The fact that Citadel turned out to be Robinhood's biggest market maker by virtue of being one of the biggest buyers of Robinhood users' trading data i.e. "order-flow", fueled the conspiracies even further.

The truth of the matter, in fact, is that nothing Robinhood did was illegal. As a matter of fact, it was necessary, as this thread brilliantly explains. Unethical? Yes, it was. But ethics are a largely trivial matter in tech. One thing we should have learned over these years of dealing with tech companies is that ethics are not really at the forefront of how they do business. From Facebook and its constant privacy violations to Google and its anti-competitive and bully-like business practices, the running narrative in tech is that as long as it's legal then it is fine to do even if it affects the user— or in this case, the used— negatively.

Like most Facebook users do not know that the company sells their data for a profit, most Robinhood users did not know that the company was lending their stock to hedge funds without their permission so they could short companies like GameStop. This is no one's fault but the users' because at the end of the day, the terms and conditions are available for them to read and understand before agreeing to use the apps and we decide to naively click on"I agree" without reading because we trust tech companies to behave in our interests. Big mistake.

It is this naivety and lack of regard for our data that will continue to provide tech companies with loopholes that allow them to exploit working-class people for the sole benefit of the rich like what happened with Robinhood last week. Government regulation of tech practices is not going to put them on the leash. As a matter of fact, it will only serve as a barrier to market entry for other apps that may have purer intentions than the current guys.

Only we, the users, have the power to fix tech companies and make them behave. When WhatsApp was thought to be misbehaving a few weeks ago, many abandoned the app for more ethical options like Telegram and Signal. The same can be done for any other tech company which fails to respect users and treats them as a mere product. For every Facebook, there is MeWe, Vero, Ello, etc. For every Google, there is  DuckDuckGo, StartPage, Quant. For every Robinhood, there is SoFi, Stash, Betterment, etc. Users are too spoilt for choice to put up with constant disrespect and exploitation by tech companies.