GameStop Taught the Robinhood CEO a Lesson in PR

(Bloomberg Opinion) -- Sending ill-prepared or untested chief executives into the media wilderness can be disastrous — and sometimes comical.

A case in point is Vlad Tenev, the CEO and cofounder of Robinhood Financial LLC, the little company that has a trading app beloved by the small-fry investors who took down hedge fund giants in the GameStop saga.

Tenev appears to be a well-meaning young guy. And he's checked off a number of boxes on his way to the spotlight. In 2016, Forbes put him on its “30 Under 30” list, and last year Fortune added him to its “40 Under 40” version. Robinhood's success has made him wealthy, and he's been invited to share his wisdom to high school and college audiences. But amid the GameStop frenzy he embarked on a series of opaque — and sometimes unintentionally hilarious — interviews that failed to dampen the outrage at his decision to block Robinhood's customers from buying GameStop shares.

Here's Tenev with Bloomberg Television's Emily Chang last week, after she asked him to respond to the drama:

“There's a lot of misinformation out there,” Tenev said. “There's people saying that we were forced to do this by market makers we route to or any other market participants. And I just want to come out and say that's categorically false …. This was a technical, an operational decision that we made because Robinhood as a brokerage has financial requirements including clearinghouse deposits that we have to make to various clearinghouses.”

“So to protect the firm and to protect our customers we temporarily disabled buying.”

That's quite a mouthful, and some of it is hard to swallow. As shares of GameStop soared, in part because Robinhood's customers were buying them, hedge funds shorting the stock got crushed. And then, bam, Tenev closed the spigot. Who was he protecting? He said his customers.

“Robinhood has always stood, and will continue to stand, with the individual investor — their ability to have access to buying and selling stocks,” he told Chang.

In the interview, Tenev wandered all over the map, while displaying the warmth and transparency of a chatbot. He compared the demand for Robinhood's services to the demand for Clorox and Lysol during the Covid-19 pandemic, suggesting that his platform was similarly overwhelmed by an unforeseen crisis. Asked how it felt to have a prominent Democrat (Representative Alexandria Ocasio-Cortez) and a prominent Republican (Senator Ted Cruz) jointly criticize him, he offered this nugget, irony-free: “We are glad that both sides of the aisle are coming together here.”

Tenev might have simply explained that Robinhood's issue with “clearinghouse deposits” was what persuaded him to shut down his investors. Instead, he meandered and obfuscated, leaving his company mired in conspiracy theories about what actually occurred.

Clearinghouses help brokerages such as Robinhood settle trades. But if a clearinghouse is worried that a brokerage doesn't have the financial wherewithal to backstop billions of dollars of orders — torrents of GameStop buys, for example — it might ask the brokerage to fork over piles of extra money to protect the clearinghouse from crippling losses. If a brokerage can't post the money, it might not be able to stay in business. That's where Tenev found himself: squeezed by the market's machinery.

Tenev was worried about Robinhood's survival. I suspect that, in the moment, that mattered to him more than the interests of traders on his platform. All this became clearer this week when Tenev sat for another interview — with, of all people, Elon Musk.

The Tesla guru, self-styled philosopher, Covid-19 misinformer and unpredictable slayer of short-sellers, spoke with Tenev on Clubhouse, a new social media platform.

“Vlad, the stock impaler,” Musk said, introducing Tenev with a Dracula joke.

“Hey guys, thanks for inviting me up. It's good to hang with all of you,” Tenev responded, as if it were another day at the beach. “One of the great things is all of the people coming out of the woodwork to offer support for the company, offer, you know, advice.”

Tenev had just spent days getting slammed for blocking GameStop buys, and that felt like people coming out in support of the company? Musk wasn't having it.

“Spill the beans, man — what happened last week? Why can't people buy GameStop shares?” he said. “The people demand an answer.”

And for the first time, Tenev gave one that was complete. He told Musk he was awakened in the wee hours last week with a call from Robinhood's clearinghouse: Put up an extra $3 billion to back up all those purchases of GameStop shares. He somehow managed to negotiate that down to $1.4 billion and then began shoveling over the money.

As an added measure of protection — for himself and his firm — Tenev then told his customers that they couldn't buy GameStop. The guy who'd kept saying Robinhood stands for “democratizing access” to stocks wanted to stop trading in the most undemocratic of ways. 

“It sounds like this organization calls you up and they basically have a gun to your head,” Musk offered. “Either hand over this money or else.”

“Yeah, I think that's fair, we have to comply with these requirements,” Tenev said. “Twenty-four hours later, our teams raised over a billion dollars in capital.”

If it was that easy to raise money, maybe Tenev shouldn't have cut off his customers. But I'm not running his business.

He also told Musk that Citadel LLC — a company that operates a big hedge fund as well as a market-making arm, Citadel Securities, that handles lots of Robinhood trades — hadn't forced him to halt GameStop buys. Here's the thing about Citadel Securities though: Its relationship with Robinhood is lucrative. It gets to see what trading patterns emerge among Robinhood's customers, which is one reason Robinhood can offer commission-free trades to the little folks. But that's another story.

The moral of this story is that clarity and transparency can be curative. It shouldn't have taken so long for Tenev to explain why he clipped his investors' wings last week. Maybe next time — when, inevitably, there will be another round of bonkers excitement over an obscure stock — Tenev and Robinhood will better help their investors, and everyone else, understand what's going on.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.

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