Unlike traditional brokerages, which charge a fee for buying and selling, Robinhood offers these seemingly free trades because it makes its money in large part by selling the trades to big buyers, many of them other hedge funds. It’s those players that will make the real money—and in turn pay Robinhood for the privilege.
The restrictions came because, under its business model, Robinhood could not put up the kind of capital required for all of these trades in the clearinghouses where they are eventually settled, the company wrote in a blog post. So it wasn’t that Robinhood had an interest in kneecapping the short squeeze. Rather, it was never a suitable platform for engineering a squeeze of this scale—based on “free” trades by retail investors precisely because those investors were never its true customers.
These consequences do not necessarily flow from any particular malice from the company or its employees. Instead, it’s always important to pay attention to a company’s incentives, and especially how it makes money. This is especially crucial with digital platforms, where the real mechanisms aren’t as easily visible. If a retailer sells shoes, for example, you expect them to make money … selling shoes. For many digital platforms, though, the users are not the actual customers, and that has profound consequences.
These dynamics play out across many digital platforms. Similar to how Robinhood makes money not from individual traders, who are its users, but from its hedge-fund customers, Facebook, Twitter, YouTube, Reddit, and the rest make money by selling our attention to advertisers or anyone looking to influence people. This business model also fuels surveillance because paid influence operations work better if they have more data to improve their targeting; data allow them to better find ways to “engage” us. And if there is one thing we know about a social species like humans, it is that in-group versus out-group dynamics (us versus them) are very engaging. Similarly, novelty and misinformation are often attractive, and the truth boring and unengaging. Thus, even though the engineers at these companies don’t set out to amplify tribalism and polarization, the algorithms they let loose on us inevitably do, as a corollary of their optimization target.
This complex interplay between business models, technology, and existing power structures in our society means that we have to move beyond simple narratives: The underdog is winning! Technology is liberating us! The underdog has lost! It must be technology’s fault! To understand the Robinhood and GameStop episode, it is also essential to understand how Wall Street operates, and how the fortunes of big corporations and their executives have become intertwined with it.
On February 2, GameStop closed at $90, less than 20 percent of its all-time high, which it had reached just a few days earlier. Like many internet stories, the narrative may start with the “little guy” winning—David against Goliath—but they rarely end that way. The little guy loses, not because he is irrational and too emotional, but because of his relative power in society.