Did Robinhood Lose Its Investor Base Forever?

GameStop -- the mall-based videogame chain -- was dying slowly for years until Robinhood investors came along to try and save it. Over five frenzied days of trading last week, GameStop stock grew five-fold in price -- at one point Friday, it was up by more than seven-fold -- bringing some long-term GameStop investors' gains to more than 1,625% just in the month of January.

Urged on by social media posters on Twitter, Reddit, and TikTok, and attracted by advertisements from the commission-free, smartphone app-based brokerage, lots of new investors joined Robinhood and used its no-fee trading platform to purchase options in and shares of GameStop. Some of those investors then quickly moved on to other heavily shorted equities, AMC Entertainment, BlackBerry and Nokia among them.

Image source: Getty Images.

One by one, shorts were squeezed, share prices surged, and investors got richer ... until all of a sudden the gains stopped. Some major brokerages, including Robinhood, ceased trading on several highly volatile stocks. The abruptness of the move left investors confused and upset, unclear of why this was happening, and unaware of the complex inner workings of brokerages that might have caused it to happen.

And so the complaining began:

@oneilthomas97

There's a whole class war going on in the middle of a pandemonium #stocks #amc #gme #nok #nakd #robinhood #stocktock

♬ original sound-Lubalin

@mercyojo

Hold people hold! #stockmarket #stockstobuy #robinhood #fypthis

♬ original sound-sounds for slomo_bro!

As of Monday, the company had settled upon the compromise of limiting trading in just eight specific stocks:

But this was a compromise Robinhood's users had never bargained for, nor agreed to -- and they didn't take it well. 

@claire.lolz

🤦‍♀️ #capitalism #stocks #robinhood #comedy

♬ Rasputin (7" Version)-Boney M.

@robinhoodkid

Got a little feisty on that 3rd point. #robinhood #ceo #GME #AMC #gamestop #girlstalkstocks #moneytok #fintok #stocktok #viral #fyp

♬ Who Is She-Qveen Herby

In short, in the absence of a quick and clear explanation of federal regulations that might have necessitated the move and any about Robinhood's (and others') liquidity problems, the company's investor base concluded that Robinhood management was simply in league with the hedge fund operators. It was, so the thinking went, limiting trading in order to protect the hedge funds' "billions" from the "normal people."

(In fact, in a lawsuit filed last Thursday, aggrieved Robinhood traders alleged just this: That "Robinhood's actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood's customers.")

Now, the company is facing some significant legal headaches and potential liability. After growing its user base from 3 million to 13 million last year alone (according to NBC), Robinhood is at risk of squandering all that growth, and losing the faith of its clients. Management insists that its loyalty to "everyday investors" remains unchanged, that it never wanted to prevent people from buying the stocks in question, and only limited trading because of "clearinghouse-mandated deposit requirements."    

But some Robinhood users aren't buying it. They want an apology from the CEO, a clearer explanation of what went wrong -- and a promise to fix it. Failing that, many of them may simply leave Robinhood -- forever.