Meanwhile, US$1 trillion market capitalizations became increasingly commonplace among tech firms, and Cathie Wood’s Ark Innovation ETF — filled with speculative, low-cash-flow bets on big ideas — returned some 350% in about 11 months.
Robinhood didn’t create the frenzy, but it became emblematic of it. Its trading app turned securities trading into a video game and failed to fully convey the potential downside. In its early days, the app would even display a confetti animation to celebrate first trades, a feature the company scrapped under heightened scrutiny ahead of its July 2021 IPO. Robinhood was able to charge zero commissions because of its practice of payment for order flow — brokers pay Robinhood for routing trades their way — but critics say the scheme perverts the incentive to provide investors with the best possible trade execution.
Of course, retail stock trading proved to be a fleeting pandemic hobby for many people, much like amateur epidemiology and the sourdough bread-baking craze that took hold during the initial phase of US stay-home orders, as data on Google searches show.
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Trading was something people did out of boredom and in search of entertainment, but now the world is largely open and interesting again, and generating positive stock returns requires work. As the Federal Reserve moves to raise interest rates and risks tipping the economy into recession, investors must now pore over quarterly results and are forced to favour companies with actual cash flows. Indeed, among the only shares rising these days are oil companies, consumer staples and, sadly, those that profit from war, such as defense contractors.
The pandemic was also marked by an overflow of money into the economy that needed a place to go. Central banks printed money, and stimulus programs sent personal savings soaring as people found they had nothing to do with the cash: Many were hesitant to visit restaurants, concert venues and resorts. It’s no surprise then that Robinhood’s stock market debut coincided with near peak excess liquidity, and it’s mostly been all downhill from there. Its shares have declined three-quarters since the IPO.
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Robinhood’s tumble may well be part of a healthy cleansing, which has also included the retreat of mega-cap tech valuations to more normal levels. But pandemic era excess is still out there — just peek at soaring consumer prices or the cost of rent in Miami — and this economy probably has quite a bit more cleansing to go.
Robinhood has, of course, brought about real enduring change. It made commission-free online trading standard, and competitors everywhere were forced to follow its lead. It also introduced millions to the financial markets, and many will clearly stick around for the long haul. Perhaps I— like the people selling its stock — have been too hasty to write it off, and maybe the company will have a second act. But Robinhood the 2020-2021 icon is officially dead, and so is a lot of what it came to stand for. - Bloomberg Opinion:
