Fintech

What Robinhood got wrong

"When you brand yourself as the company helping the little guys take on the big guys, and then shut it down, you shouldn't call yourself Robinhood."

What Robinhood got wrong

Dan Egan, Betterment's managing director of behavioral finance and investing, talks Robinhood.

Photo: Betterment

GameStop's wild stock ride on Wall Street got so crazy recently that Robinhood and other platforms had to press pause on any more trades in those shares, as well as other affected stocks.

Betterment, the robo-investing platform that focuses on consumers with longer-term investment goals, was largely spared in all the excitement.

But Dan Egan, the fintech startup's managing director of behavioral finance and investing, was naturally paying close attention to what was happening. His job is to "keep an eye on how people actually make decisions," he told Protocol.

He shared his thoughts Thursday morning shortly after Robinhood announced the suspension of trades in GameStop and other stocks.

This interview has been edited for clarity and brevity.

What's your reaction to what happened?

Bubbles and mania always happen. At some level, what we're seeing right now is nothing new. But there's also a lot that is different or that is new. Psychologically, there's a huge difference between something costing anything like five cents, and it being free. When something becomes free, we over-consume. We don't think about whether or not we really care about what we're doing.

Another element is accessibility. It is now in your pocket. You can get push notifications from trading apps, etc. It's on a small screen that often is devoid of a lot of other context.

A broad-based context that is important to keep in mind is that we are in a pandemic. People are not able to go out and do a lot of the usual things that make them feel like a part of society and have connections to other people. We've got social media and so on that concentrate and funnel them during a time of a lack of connection into feeling that they are part of a movement or a tribe. There's obviously a psychological repugnance to the idea of short selling, and the fact that hedge funds are the 1% and we should destroy them. It became much more of a social movement game where they say, "Can we actually put a hedge fund out of business?"

There's a couple of things going on now that we need to be aware of. Robinhood gets paid for order flow. I have no idea if there's anything [conspiratorial about] Robinhood saying, "We don't want more risk from all this GameStop stuff. We're going to stop allowing people to trade it." That can happen without any kind of conspiracy theory or any kind of [belief that], "Oh, they're rewarding the people who actually pay them."

But I do think it's worth saying that Robinhood's traders or whatever, they don't pay them. The market makers and the hedge funds are the people who pay them. So right now, Robinhood's actual customers, the people who actually pay them, are telling them, "Hey, could you slow down this kind of trading? Because we're not sure that we can manage the risk of it right now."

How was Betterment affected?

Betterment invests our clients in low-cost diversified portfolios and exchange-traded funds. So some part of our clients' money would have been in GameStop and AMC and so on, but they're in it through diversified ETFs.

What do you think about Robinhood's decision to suspend trading? There's the view that it actually may hurt them long term.

Absolutely. When you brand yourself as the company that is helping the little guys take on the big guys and redistribute the wealth, and then exactly at the point in time when that is happening, you shut it down, it's very clear you shouldn't call yourself Robinhood.

Clearly, there's more focus on fintech trading platforms, and even some skepticism about the use of these types of apps and platforms. This was underscored by the comments of Massachusetts Secretary of the Commonwealth Bill Galvin, who also filed a legal complaint against Robinhood, which he has accused of turning a risky financial activity into a game. How do you view concerns about investment platforms?

Robinhood and other brokerages, they don't care if you're good at trading or if you're making money or not: They're completely indifferent to it. They care that you are trading.

On the other hand, we charge 0.25% of our clients' money that we manage. If we lose money, we lose revenue. The kind of analogy I have here is that you would never tell somebody, "Oh, you're just learning to ski? Go to the top of the mountain and take the toughest trail down," because they're likely to really get hurt. You start off on bunny slopes and you learn how to do stuff there, and then you go slightly steeper, and then you build up muscle memory, the ability to read the ground.

The same thing is true of investing. I don't mind people who like DIY trading, per se. But I don't like it when a company puts a person up at the top of the mountain, with no experience and no ability to understand what they are getting into in ways that can dramatically hurt them, then just [lets] them loose. You should only let people who have shown that they can really handle the full gamut of options trading derivatives margins, etc. They should prove that they really can handle what they're getting into. And I don't think that a lot of the brokerages do that well.

That's a point Galvin raised. Do you think that Robinhood is doing that, exposing amateurs to unnecessary risk?

Robinhood definitely has made it easier. They have made it easier to get yourself into trouble. By virtue of not understanding how things work under the hood, they've done it in a way that makes it seem like a fun game rather than serious investment.

What are your thoughts on the push for new or more regulation? How do you see it affecting your business?

We're a fiduciary. We're held to that high standard already. None of the concerning regulations are a problem for us because we already do all these things.

From our point of view, it's great. More and more consumers should have the option to be treated by an expert in a way where they can trust those options, where they don't have to be second guessing or considering whether or not they're getting taken advantage of. I do think that regulation always needs to be done carefully so that it benefits consumers, and it doesn't just shut down choice.

Overall, do you think what happened and the reactions also hurt other platforms like Betterment?

Yeah. One of our competitors doing something really bad and getting lumped in together, definitely there's the possibility of that. I think people are expecting the ability to do these things now. It's just a question of using a provider who seems to have a good reputation. There's lots of choices out there.

LA is a growing tech hub. But not everyone may fit.

LA has a housing crisis similar to Silicon Valley’s. And single-family-zoning laws are mostly to blame.

As the number of tech companies in the region grows, so does the number of tech workers, whose high salaries put them at an advantage in both LA's renting and buying markets.

Photo: Nat Rubio-Licht/Protocol

LA’s tech scene is on the rise. The number of unicorn companies in Los Angeles is growing, and the city has become the third-largest startup ecosystem nationally behind the Bay Area and New York with more than 4,000 VC-backed startups in industries ranging from aerospace to creators. As the number of tech companies in the region grows, so does the number of tech workers. The city is quickly becoming more and more like Silicon Valley — a new startup and a dozen tech workers on every corner and companies like Google, Netflix, and Twitter setting up offices there.

But with growth comes growing pains. Los Angeles, especially the burgeoning Silicon Beach area — which includes Santa Monica, Venice, and Marina del Rey — shares something in common with its namesake Silicon Valley: a severe lack of housing.

Keep Reading Show less
Nat Rubio-Licht

Nat Rubio-Licht is a Los Angeles-based news writer at Protocol. They graduated from Syracuse University with a degree in newspaper and online journalism in May 2020. Prior to joining the team, they worked at the Los Angeles Business Journal as a technology and aerospace reporter.

While there remains debate among economists about whether we are officially in a full-blown recession, the signs are certainly there. Like most executives right now, the outlook concerns me.

In any case, businesses aren’t waiting for the official pronouncement. They’re already bracing for impact as U.S. inflation and interest rates soar. Inflation peaked at 9.1% in June 2022 — the highest increase since November 1981 — and the Federal Reserve is targeting an interest rate of 3% by the end of this year.

Keep Reading Show less
Nancy Sansom

Nancy Sansom is the Chief Marketing Officer for Versapay, the leader in Collaborative AR. In this role, she leads marketing, demand generation, product marketing, partner marketing, events, brand, content marketing and communications. She has more than 20 years of experience running successful product and marketing organizations in high-growth software companies focused on HCM and financial technology. Prior to joining Versapay, Nancy served on the senior leadership teams at PlanSource, Benefitfocus and PeopleMatter.

Policy

SFPD can now surveil a private camera network funded by Ripple chair

The San Francisco Board of Supervisors approved a policy that the ACLU and EFF argue will further criminalize marginalized groups.

SFPD will be able to temporarily tap into private surveillance networks in certain circumstances.

Photo: Justin Sullivan/Getty Images

Ripple chairman and co-founder Chris Larsen has been funding a network of security cameras throughout San Francisco for a decade. Now, the city has given its police department the green light to monitor the feeds from those cameras — and any other private surveillance devices in the city — in real time, whether or not a crime has been committed.

This week, San Francisco’s Board of Supervisors approved a controversial plan to allow SFPD to temporarily tap into private surveillance networks during life-threatening emergencies, large events, and in the course of criminal investigations, including investigations of misdemeanors. The decision came despite fervent opposition from groups, including the ACLU of Northern California and the Electronic Frontier Foundation, which say the police department’s new authority will be misused against protesters and marginalized groups in a city that has been a bastion for both.

Keep Reading Show less
Issie Lapowsky

Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

Enterprise

These two AWS vets think they can finally solve enterprise blockchain

Vendia, founded by Tim Wagner and Shruthi Rao, wants to help companies build real-time, decentralized data applications. Its product allows enterprises to more easily share code and data across clouds, regions, companies, accounts, and technology stacks.

“We have this thesis here: Cloud was always the missing ingredient in blockchain, and Vendia added it in,” Wagner (right) told Protocol of his and Shruthi Rao's company.

Photo: Vendia

The promise of an enterprise blockchain was not lost on CIOs — the idea that a database or an API could keep corporate data consistent with their business partners, be it their upstream supply chains, downstream logistics, or financial partners.

But while it was one of the most anticipated and hyped technologies in recent memory, blockchain also has been one of the most failed technologies in terms of enterprise pilots and implementations, according to Vendia CEO Tim Wagner.

Keep Reading Show less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Fintech

Kraken's CEO got tired of being in finance

Jesse Powell tells Protocol the bureaucratic obligations of running a financial services business contributed to his decision to step back from his role as CEO of one of the world’s largest crypto exchanges.

Photo: David Paul Morris/Bloomberg via Getty Images

Kraken is going through a major leadership change after what has been a tough year for the crypto powerhouse, and for departing CEO Jesse Powell.

The crypto market is still struggling to recover from a major crash, although Kraken appears to have navigated the crisis better than other rivals. Despite his exchange’s apparent success, Powell found himself in the hot seat over allegations published in The New York Times that he made insensitive comments on gender and race that sparked heated conversations within the company.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

Latest Stories
Bulletins