Robinhood confronts a GameStop sequel

Note: Transcripts are automatically generated from episode audio, and are not fully corrected for spelling, grammar, and formatting.

Copy LinkReflections on Robinhood and the GameStop Frenzy

BOB SAFIAN: To begin today’s episode, I need to take you back to early 2021. 

REPORTER: The stock that everybody’s talking about right now? There’s only one stock they’re talking about:  GameStop. 

REPORTER #2: GameStop.

REPORTER #3: GameStop.

REPORTER #4: GameStop.

REPORTER #5: GameStop. 

REPORTER #6: Creating more than 2 billion in wealth for its biggest shareholders just over the past couple of weeks.

REPORTER #7: Several large hedge funds were severely wounded in the process. The weapon of choice for these new traders are platforms like Robinhood that have become popular during the pandemic.

SAFIAN: My guest today is Robinhood’s CEO, Vlad Tenev, who became a key figure in the GameStop craze. GameStop was a failing retailer, suffering as hedge funds bet against it. Reddit users, who were eager to take on the rich and powerful, flocked to buy shares, largely on Robinhood, causing GameStop’s stock to surge. The craze spread to other so-called meme stocks.

Robinhood’s systems got overwhelmed, they moved to restrict trading, and the Reddit crowd got angry. Vlad found himself testifying in Congress, apologizing for the mess. 

Since then, Robinhood made it through that fire and went public, only to face new challenges. Today, Vlad and I talk about those challenges, including a recent revival of the meme stock craze that kept him up at night. I’m Bob Safian, former editor in chief of Fast Company, founder of The Flux Group and your host. This is Rapid Response

SAFIAN: I’m Bob Safian. I’m here with Vlad Tenev, the CEO of investment platform Robinhood. Vlad, thanks for joining us. 

VLAD TENEV: Thanks for having me, Bob.

SAFIAN: I see behind you there’s a chalkboard with lots of things written on there.

TENEV: So this is a wall of buzzwords, just different things that have Entered the cultural zeitgeist over the years. When Robinhood launched the word millennials was just like floating around everywhere. So that was, I think the original buzzword. FinTech is also up there. I’m kind of cheating. I’m looking in the reflection to see what’s up there. 

SAFIAN: I’m curious, among the buzzwords I wanted to ask you about, maybe it’s back there behind you is meme stocks? 

TENEV: A hundred percent it’s on that chalkboard.

Copy LinkThe return of meme stocks

SAFIAN: So back in 2021 there, there was a meme stocks frenzy. Companies like GameStop and AMC saw their share skyrocket retail investors piled in, driven by the subreddit, Wall Street Bets. Robin, who was among those in the news at the time. Now, in recent days, we saw resurgence of meme stocks.

GameStop and AMC again flew up. Then down Robinhood saw a burst of trading. I saw that you posted on April 14th that your trading volume that day was one of the highest in the past 12 months in this latest round. When did you personally first realize that meme stock action was back with such intensity?

Like where were you? How did the news come to you? How did you react? 

TENEV: Yeah. I think the first time that I really noticed something was up was actually Sunday night, and it was in the overnight session that Robinhood offers. So one of our recent products is called 24 hour market, where we now allow over 900 stocks to be traded 24 hours a day, five days a week. 

Most places only allow you to trade during market hours, which is 9:30 to 4 p.m. Eastern. Robinhood was basically the only place where stocks can even trade Sunday night, and people are using Robinhood pretty much exclusively to take positions and trade in overnight hours. 

SAFIAN: Do you personally monitor, like overnight or were you just up like with the kids? Like how do you know this is happening at night? 

TENEV: It was after the kids had gone to bed. It was probably like 12:30, and there’s very few times of the day that I can be alone at home in front of a computer and not have kids swinging off each arm. So that’s when I do a lot of my work. And I noticed that there was something going on in social media, and fortunately the first thing I checked there is, are people upset at Robinhood? What’s the sentiment? And that indicates whether we’re having some kind of issue, and fortunately things were, were by and large running smoothly.

SAFIAN: And do you then, like, stay up all night to make sure that everything stays okay? ‘Cause you have that sort of haunt from the last time round.

TENEV: Yeah, well, certainly I make sure my phone is next to me in the off chance that I do sleep, but I generally get a little bit more amped up, but I did manage to get at least some sleep.

SAFIAN: It sounds like a long night. Yeah.

TENEV: Yeah, without the big red phone. I didn’t have to play the role of fireman and come in with my big hose and put out the fire. That’s kind of how it felt at some points in ‘21.

Copy LinkIs Robinhood a meme stock?

SAFIAN: Robinhood’s now public. Some commentators recently started describing Robinhood itself as a meme stock. Now, is that good or is that bad?

TENEV: I think that the definition of meme stock is a little bit ill defined. You can draw it back to the early days of COVID, more and more people were relying on streaming media and at home consumption of video. So there was this element of like technological disruption, but also kind of like disruption of the physical realm because we just weren’t allowed to go to brick and mortar stores. Everything was shut down by the restrictions. And, in times past, the U.S. Government would have kind of stepped in to bail out some of these old, kind of iconic brands.

But instead, retail stepped in. So I think from that standpoint, I would not say that Robinhood fits into the meme stock universe. I mean, we’re not a legacy brick and mortar brand. In fact, we’re probably closer to the agents of disruption that are driving change in the industry. We’ve put the industry under a lot of pressure to change first with the mobile revolution and zero commissions.

Now with things like, 24 hour market, it’s really pushing technology as a change agent in financial markets. And of course the companies continue to diversify. We announced a credit card with 3 percent cash back. We have an amazing high yield product that’s been growing. 

I don’t think that we’re like the typical meme stocks, but I do think that we have retail customers who are in the business of retail and having retail shareholders and kind of speaking directly to them is a big part of our philosophy for how we operate as a public company. 

Copy LinkThe secret sauce behind Robinhood

SAFIAN: Yeah, I mean, your founding was kind of predicated on the idea of opening up investing to more people, you know, your name alludes to helping those who aren’t powerful. But of course, the original Robinhood was also viewed by authorities as an outlaw. 

You recently received a Wells notice from the SEC that the company is being investigated has to do with cryptocurrency trading. I think what the SEC says might be unregulated securities. Do you prefer to ask forgiveness than permission? How do you approach that? And is this issue with the SEC related to your philosophies around that?

TENEV: Wow. I wasn’t sure where you’re going to take that question. You know, Robinhood himself grew up in the forest that sort of assembled his team of merry men out there.

And the forest kind of represented the absence of law and regulation. But of course, what happens when Robinhood himself moves into the castle and kind of becomes King and of course has to conform to laws. And I think that’s, what’s, what’s so interesting about the legend.

And it sort of reflects the journey of Robinhood, as a company, because to some degree we started as an insurgent we’re disrupting, but now our model has turned into the standard model. And we have become sort of like more institutional in a sense. So how could we find the ways to disrupt and turn that energy inward to ourselves?

And we’ve had to continue to evolve that. I mean, the programs were running that actually give people. Our 3 percent retirement match program has incredible incentives to move large amounts of assets to Robinhood. And now we’ve become one of the biggest and market share for transactions in a relatively short amount of time.

Now we’re coming after the assets and we think we can have people move in their incredibly serious long term funds into Robinhood. I think the secret sauce behind Robinhood and what makes us unique from every Financial company doesn’t have anything to do with our approach to regulation or anything like that.

But it starts with the customer. And when we design a product, the first question we ask is, how can we make the economics 10 times better than anything else that’s out there? And then the second question we ask is: Can we make it work? Is it possible to like structure the financials and make it reasonable?

And I think every other financial company that I’ve come across does those in the opposite order.

Copy LinkHow hyperinflation in Bulgaria impacted Vlad 

SAFIAN: You grew up in DC, but you’re an immigrant from Bulgaria if I have that right.

TENEV: Yeah, that’s right.

SAFIAN: A family left as communism was collapsing. How does that experience impact the way you look at financial markets?

TENEV: Well, I mean, my dad left to the U.S. in 1991 to go to Delaware. I left in ‘92. But in 1991, Bulgaria had an inflation rate of, I wanna say around 130%. So, you know, we’re  crying about 7 percent inflation in the U.S.

And it’s bad, and it’s painful, but it’s not 130 percent inflation. And actually in 1997, you know, we still had grandparents and aunts and uncles back home in Bulgaria. Bulgaria went through hyperinflation of around 1000 percent in a year, which was at the time the highest in the world, which is not a distinction that you want to have as an economy.

And zeros were being added to the bills. Shopkeepers were under a lot of strain because they had to replace all of the tags on all of their goods on pretty much a daily basis. My grandparents were using copper cookware to store value because they didn’t have access to functional markets that they could safeguard their wealth in.

I think to some extent this is still happening. I mean, you’re seeing it in Turkey, you’re seeing it in markets like Ecuador, Venezuela. And in those places, there’s a distinct need for cryptocurrency. And what you’re starting to see also is them holding U.S. dollars in tokenized form. So yeah, there were a lot of learnings and most of all, you kind of appreciate the value you have in this country of a stable currency. That’s the reserve currency and kind of a liquid vibrant financial system that has been the envy of the world and has driven so much wealth creation.

So it was very, very humbling in a sense, because I’ve kind of experienced what happens if it’s not that, and how much of our society, sort of like, takes these things for granted in, in how we function. 

SAFIAN: Vlad certainly sees the financial market differently from others, which is both why Robinhood has been successful and why he’s sometimes found himself in hot water, whether that’s with the SEC or when it comes to meme stocks. After the break, we’ll get into whether trading stocks is like gambling, and how he feels he’s matured as a leader. Stay with us.

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Before the break, we heard Robinhood CEO Vlad Tenev share how GameStop and other meme stocks kept him up at night. Now we talk about the prospect of 24-hour trading on the New York Stock Exchange, whether Robinhood is like sports gambling apps, and how he feels he’s matured as a leader. Let’s jump back in. 

Copy LinkIs 24-hour trading a good thing?

You mentioned the 24-hour trading that Robinhood enables, and I saw a New York Times report, I think about potential 24-hour trading on the New York Stock Exchange, which some who worked on the exchange were less excited about this ‘always-on’ trading. Do you think, like, will it lower volatility and risk? Will it make all of us worry all the time? Like, do you have any uncertainty about where this leads for markets? 

TENEV: I don’t think there’s going to be any negative externalities to it really. I mean, you can kind of see it in crypto markets that have been 24-hour by design. There’s a lot of work necessary to make traditional markets 24-hour. And we haven’t even gotten to weekends yet. Like, weekends are kind of the next frontier of complexity there. 

But to answer your question, most of the action happens in data centers in New Jersey. If you look at the floor of the New York Stock Exchange nowadays, it’s basically a media enterprise. I mean, there’s a little bit of trading happening, but they’re doing tours. It’s basically a museum, and CNBC broadcasts from there. So the days of people in the pits shouting and handing out paper tickets and the tallest people getting their trades completed before the average height people are long gone. Most of it’s happening in data centers anyway. So yeah, it seems just archaic to me. It’s like, what if Amazon was open from nine to four? You know, it’s all happening electronically, so there’s no reason for it.

SAFIAN: Some folks think of trading differently than they do investing. Do you ever worry that enticing individual people to trade might not always be in their best interests?

TENEV: So we do have an active trading side of the business where we aim to be number one in market share in the active trading market. And that’s where our options, offerings, equities, 24 hour market, new innovations like that, new assets like futures comes in. And then we also have things like our high yield product and retirement and advisory and the mass market products.

You can think of us almost like a car manufacturer. So let’s say you’re Mercedes. You have your Formula One and AMG unit, which is a little bit more niche, right? The market for it is smaller, but it’s the folks that really care about performance. They care about innovation. And then they’re selling SUVs and minivans to the mass market. So I think the same thing can be relevant with Robinhood. I do think we can serve both types of customers under one brand.

Copy LinkThe impact of simplifying trading for the masses

SAFIAN: Robinhood makes it so easy for people to trade. I understand you’re a big sports fan, right? Gambling on sports has gotten big — controversial in some quarters, but you know, FanDuel and the Draft Kings have made it so easy to bet, right? Now they have programs to protect gambling addicts. Do you think about Robinhood’s role in any way, in that sort of balance? 

TENEV: Yeah, and by the way, that’s a huge problem. It’s like you can’t even watch a game anymore without having the gambling just pushed on you. You’re seeing the lines they’re advertising.  I think when it comes to trading, one of the misconceptions is that we’re somehow promoting active trading products to passive investors and vice versa. It’s not really how it works. The people that are in the active trading demographic want very, very specific things. And the folks that want retirement products tend to want different things. 

SAFIAN: So you’re not worried that you’re encouraging bad habits. You’re not being paternalistic about the way you’re thinking about your customers, like, “Oh, I have to protect them from their own impulses.”

TENEV: Well, generally our philosophy is, since we don’t provide financial advice, we want to make really, really good tools that people can use. And we have done a lot of things to minimize confusion. Like, for example, in 2020, we were in the news a lot because customers were trading Hertz, which was a company that had gone bankrupt. Now, actually, in hindsight, I think that ended up a reasonable trade, so customers ended up making money there, but certainly, we want to avoid bandwagoning in the sense that someone’s just buying a company without having the information that it might have filed for bankruptcy. And the way we’ve addressed things like that is to display contextual banners when people are most likely to see it. And also make sure that we have really up to date news feeds and we have more information for customers. But I think the regulators have made it pretty clear that they don’t want brokers to put their hands on the scale and say, “I actually don’t think you should be buying this.” I think if you really want to buy an individual stock, of course you should be able to. And the inability to do that, I think, is contrary to having a free market. I think part of what makes America America is the ability to kind of make decisions with what you do with your money. 

Copy LinkRobinhood’s advantage over the financial incumbents

SAFIAN: You disrupted other e-brokers with free trades. Now you’re offering a match on retirement account deposits, which no one else has done. That kind of offer costs Robinhood money. Do you think of that as a marketing expense to bring in new customers?

TENEV: I think that better economics are a replacement for marketing expense to some degree. I think if you’re a financial product, the user experience isn’t just how the app looks or how you can navigate the screens, so much of the value of a financial product to a user is how much more money is coming into your pocket. 

If we can attack the margins that the incumbents typically have in our industry, and we also have a technology foundation that gives us an operating cost advantage, it’s sort of like a stacked advantage, right? You saw that in 2019, when they kind of begrudgingly lowered their commissions to zero, you know, their stocks cratered by some companies like TD Ameritrade, it was north of a 30 percent drop in one day. TD Ameritrade right now is being disassembled and kind of all of those customers are being migrated over to Schwab. We saw a lot of these accounts transferring to Robinhood. 

Copy LinkHow Robinhood has changed since going public

SAFIAN: We’ve talked mostly so far about your view of the market as a service provider. Robinhood is also a public company. So you are in the market as a CEO. I had Airbnb’s Brian Chesky on the show recently, and he said that when you go public, you go from being a great founder to what he called a “crappy CEO” because it’s such a different job and role. How has your approach to your job shifted? 

TENEV: I think that, I mean we dealt with many things and we had many challenges. There was an increase in interest rates. We went from a zero interest rate environment to the highest interest rates in over 30 years. We did that as a public company and a lot of people were saying Robinhood might be a zero interest rate phenomenon. How are they going to adapt to this new environment of high rates, tight monetary policy, less interest in investing? And we had to change. The entire firm into one that’s much more diversified. We rolled out new products to customers.

And so as a company, it’s made us much more robust and resilient, and sometimes I think if we were private and maybe we weren’t under the pressure of reporting quarterly results to the street and sharing our progress with all of our stakeholders in a very public way, there wouldn’t have been as much pressure to like correct and pivot and and diversify the business as aggressively and maybe we would have like kept the status quo for for many more years. So I think going public while painful, was just a very, very big engine of growth and development for the company and for me personally.

Copy LinkHow Vlad Tenev has matured as a leader

SAFIAN: I’ve talked to some folks who work with you, and they said, “Vlad’s really matured as a leader,” and I’m curious what that means to you. Like do you know what they’re referring to?

TENEV: I’m not sure. I mean, everyone can have a slightly different view of things. Yeah, I think one of the things I think about is at some point, whether it’s by maturing as a leader or just getting older and having kids and all these things, I kind of realized that maybe, it’s less important to behave and do things in a way that others expect, and it’s just like saying what you think being true to yourself. Being authentic is very, very important. And I think a lot of times, and this is especially true in public markets, it could be scary out there. There’s so many things that can hurt your stock price. If you say the wrong thing, regulators can get upset. Some analyst might misinterpret it, and you’re sort of like running these loops in your head of, “okay, before I say something, let’s run it through my seven or 10 internal checks to make sure I’m saying what people expect of me,” and you kind of get into, like, being an actor, acting in the role of the CEO.

I think figuring out how to get past that and really just being a full authentic human that says what they want to say and believes it, I think that was kind of a growth process for me. I’m still going through it. Like, I don’t think that I’ve fully figured that out.

Copy LinkPreparing for “the largest wealth transfer in history”

SAFIAN: So what’s at stake for Robinhood right now? 

TENEV: If you look out 10 years, what I want Robinhood to be is for our customers who are going to be all over the world, we want all of their financial assets to be custodied at Robinhood and all of their financial transactions to go through Robinhood.

A lot of the money and assets out there are held by the older generations. The baby boomers were like more and more getting past retirement age, and there’s going to be a lot of bequests to Gen X and later to millennials. And we’re building the capability to be the best place for those assets to move to. So I think if we actually execute on this path, we should be the premier default destination for what’s going to be the largest wealth transfer in history. And I think that’ll keep snowballing over the coming decades. And we should be positioned quite well to benefit from that.

SAFIAN: No small ambitions for you here. Vlad. Thank you so much for doing this.

TENEV: Thank you.

SAFIAN: Robinhood has been a party-crasher for a lot of established finance firms, and Vlad seems committed to embracing a renegade spirit. But as he also admits, once a renegade is successful, rules become more important. 

Like Vlad, I’m a big believer that finance should be democratized. But I’m more wary about the dangers of misunderstanding financial markets, particularly for those without the resources to absorb losses. Those on the right side of GameStop trades made a ton of money, but those on the wrong side got hammered. The key in investing, as in any business venture, is being clear-eyed about what you’re getting into. We’ll never avoid risk, and we don’t want to, not entirely. But we do want to be as aware as possible of the risks we’re taking. I’m Bob Safian. Thanks for listening.