Robinhood CEO: Tokenization can curb meme-stock 'market failures'

On the five-year anniversary of the infamous GameStop (GME) meme-stock rally, Robinhood Markets (HOOD) CEO Vlad Tenev addressed how to prevent a repeat of "one of the strangest and most visible equity market failures in recent history."

GameStop was at the center of the retail investor-driven short squeeze during the Covid pandemic when the struggling retailer saw its stock price soar to over $500 in late January 2021 after trading at just over $17 per share at the beginning of the month. It eventually crashed back down to just above $50 about a week later.

Because of the massive surge of stock buying on its app, in which retail investors were also buying up shares of AMC Entertainment Holdings (AMC) and BlackBerry Limited (BB) in addition to GameStop, Robinhood faced a $3.7 billion margin call from the clearing house that settles its customers trades in the early morning hours of Jan. 28, 2021.

The problem was that the company only had $700 million for collateral, which meant it needed to raise $3 billion in just a few hours. While Robinhood rushed to raise the collateral, it halted trading on GameStop, AMC and any other meme stocks.

The decision to halt trading led to a public uproar, resulting in multiple lawsuits and a Congressional hearing.

"Retail investors who wanted to buy GameStop were understandably livid," Tenev said in a lengthy post on X. "In their eyes, Robinhood went from a hero to a villain."

Tenev blamed "a set of complex clearinghouse risk-management rules" that required brokerage firms "to put up huge amounts of cash to reduce the risk in the days between a meme stock trade and its settlement."

"What happens when you combine slow, outdated financial infrastructure with unprecedented trading volume and volatility in a small number of stocks?" he said. "Massive deposit requirements, trading restrictions, and millions of unhappy customers."

Tenev advocates for real-time settlement

At the time, there was a two-day settlement for stock trades, which the Securities and Exchange Commission (SEC) changed to one day in the wake of the meme-stock rally, which Tenev called "arguably the most consequential accomplishment of the otherwise horrific (Gary) Gensler era at the SEC."

Although the trade settlement has been shortened, Tenev argues that the tokenization of securities on blockchains, which allows for real-time settlement and 24/7 trading, is the ultimate solution to preventing another meme-stock trading crisis.

"No lengthy settlement period means much less risk to the system and less pressure on both clearinghouses and brokerages, so customers can freely trade how they want, when they want," he said.

Tenev added that as "the advantages become increasingly clear, I believe it is inevitable that the US embraces this technology."

This can only be accomplished through "regulatory clarity," he noted.

"Fortunately, we now have a timely opportunity," Tenev said. "Current leadership at the SEC is embracing innovation and facilitating experimentation with tokenization."

However, based on many of the responses to Tenev's post, it's clear many retail investors still harbor resentment against Robinhood over the fallout from the GameStop meme-stock rally when the app halted trading on certain stocks during the frenzy.

“Nothing you do to ‘champion’ for retail will buy you grace for how this was treated,” one person posted. “You are a villain and instead of calling balls and strikes you played along. SHAME.”

“I cancelled my Robinhood account and promised to never use their products again,” said another. “Sucks because it’s an objectively good app and they released a lot of cool things since, but 5 years ago they showed me how they do business.”

And another person posted on X that tokenization "will allow for even more fraud, as brokers like yours will lend out increasingly more amounts of 'shares' that aren’t backed with the underlying securities. SCAM."

Robinhood's stock is down 10.5% to start the year.