There's a lesson in the Robinhood saga that has nothing to do with stocks or finance or trading. There are plenty of lessons about those things, but this one is about perception. Perception matters.
In some cases, perception matters even more than reality. In matters of trust, for example. You can do all the right things, for all the right reasons, but if those reasons are unclear, the perception may be that what you're doing is wrong.
That's because your brand is a promise. It tells your customers what you stand for, and what they should expect from you. As you deliver on that promise, you build trust. If it appears that you've done something that betrays what you say you stand for, you have a problem. Again, that's true even if it's only a matter of perception.
That's exactly what happened with Robinhood.
If somehow you've missed the chaos over the last few days, Robinhood is the app at the center of the current frenzy around stocks like GameStop and AMC, among others. It's popular among day-traders, especially those on the WallStreetBets subreddit.
It became very unpopular when it suddenly told its users that they would no longer be able to purchase shares of those stocks on Thursday morning. That fateful decision may have been entirely necessary for risk-management reasons, but the way the company handled it betrayed everything its brand stood for.
Robinhood's brand was built on the promise that it was "on a mission to democratize finance for all." It's right there on the website.
You can see, then, why it might be a problem when the app stopped its users from trading certain stocks. The big guys, with their access to brokers at hedge funds and trading firms, could still carry on with business as usual. It was the "little guy" who was getting shut down.
Considering that the motivation behind buying stocks like GameStop and AMC was an effort to "stick it to the hedge funds," the response had an especially toxic impact.
If you're the app that is "democratizing finance for all," it's really bad when it looks like you're shutting down retail traders to the benefit of the big guys. If your brand is built on the outlaw hero who stole from the rich guys and gave to the poor, it's a bad look if it appears that it was all just a show--that you shut it all down after one when things got rough for the rich guys.
Robinhood built its entire business, and, more important, its brand, on serving the little guy who didn't have access to the same tools as the billionaire class. Then, in a day, it completely destroyed that brand--again, not because of reality, but because of perception.
Worse is the fact that when Robinhood shut off the ability to buy certain stocks on Thursday, those stocks tumbled. Sure, it let you sell whatever position you already had, but you could no longer buy more. That meant that as the price fell, Robinhood's users were losing their bet. Robinhood was literally costing them money.
It wasn't that they bet wrong and lost money--that's just the reality of trading stocks. They were losing money because the trading app they trusted had betrayed that trust, and it looked like it was because the game was rigged.
The biggest lesson here is that most of what happened was totally avoidable. Robinhood's biggest problem isn't just that it shut down trading for certain stocks, but the perception of why. It wasn't helped by the company's lack of any real communication--just a statement about "market volatility."
Co-founder Vlad Tenev told CNBC, "In order to protect the firm and protect our customers, we had to limit buying in these stocks." That didn't do much to make things better.
Later, the company sent out an email that said, in part:
It's been a tough day, and we're grateful to you for being a Robinhood customer. In light of the extraordinary market conditions this week, we temporarily limited buying for certain securities this morning. Starting tomorrow, we plan to allow limited buys of these securities. We'll continue to monitor the situation and may make adjustments as needed.
This was a temporary decision made to best continue serving you, and was not an easy one to make. We know it's led to frustration and confusion, and wanted to provide some clarity.
There were other things in the email about SEC net capital obligations and clearinghouse requirements, but all of that is meaningless to someone who was counting on you to do what you promised. It certainly doesn't "provide some clarity." It's all just words that don't matter at all to someone who felt like the app they trusted had suddenly betrayed them.
Again, it doesn't matter this isn't exactly what happened. It's most certainly what it looked like.
The company's email closed out by saying: "We stand in support of you, our customers. Democratizing finance for all means giving more people access, not less."
Whether it was really wise for someone to take out a second mortgage and put it all in a meme stock is certainly up for debate. For that guy, however, it probably doesn't feel like Robinhood was standing in support of its customers. It certainly didn't feel like "more access, not less."
That's the point. Your brand is built on trust--trust you earn by continuing to deliver on the promises you make over a long period of time. It takes a long time to build a brand, but not long at all to destroy it. In Robinhood's case, it took less than a day.