Traders Are Flooding Markets With Risky Bets. Robinhood's CEO Is Their Cult Hero. — WSJ
By Hannah Erin Lang | Photography by Bridget Bennett for WSJThe chief executive of Robinhood Markets took the stage at the online brokerage's annual summit in Las Vegas this fall decked out in a race-car driver's jumpsuit and customized Nikes.Vlad Tenev told the hundreds of cheering traders in the audience that they had chosen "one of the most intense lifestyles out there." He compared trading to driving a race car. "A finely tuned machine can make all the difference," he said, "and that's the role we feel Robinhood plays for our active investors."Risk-taking is back for individual investors, and few people have done more to stoke those spirits than the 38-year-old Tenev. Robinhood's trading app makes it easy not just to buy and sell ordinary stocks, but to invest in options, cryptocurrencies and other exotic financial products, even to make sports bets and play the prediction markets.The company's critics liken the environment to a casino, but its fans credit Robinhood with democratizing the lucrative world of sophisticated investments."He's almost building a cult," said Aaron Cook, a 28-year-old plumber who was in the audience in Las Vegas. Cook said he had used his profits from trading stocks, options and memecoins to buy a Jeep Wrangler and a $60,000 home.A host of new products have entered retail-investment markets in recent years and worked their way into the mainstream. Investors are wagering on the price of bitcoin and piling into ultrarisky types of options, such as the "zero-day" variety that expire rapidly and require perfect timing. They are buying futures contracts tied to all sorts of events, betting on whether a Taylor Swift album will top the Spotify charts or whether the Green Bay Packers will beat the Detroit Lions on Thanksgiving Day.Abishek Gopal, 35, said he wakes up at 6:30 a.m. to start trading zero-day options. It's a hobby he said he never would have picked up if not for how easy it is on Robinhood. "The thrill gets me going," said Gopal. "If $500 can get me $50,000 or $60,000, let me just try."Recent volatility, including steep slides in stocks and cryptocurrencies, have offered a taste of what happens when markets head in the wrong direction. Investors who leverage their bets with borrowed money supercharge gains in good times but get crushed in bad ones. The Nasdaq composite shed 6% in the first three weeks of November. The price of bitcoin has plunged 20% this month.Robinhood executives say they are on the right side of a long-term trend in markets to make all kinds of trading less expensive and more accessible to individual investors. Products considered risky now — from crypto to options — may become part of a typical retail investor's portfolio down the line, they say."The next generation of investors — that's who we serve," said Steve Quirk, Robinhood's chief brokerage officer. "We are introducing more asset classes and capabilities to people. That's what they want."Just a few years ago, Robinhood looked cooked. It was cast as a villain in the GameStop trading frenzy in 2021, when individual investors banded together to send shares of the videogame retailer skyrocketing, triggering mayhem on Wall Street before the stock fell back down to earth. At one point, Robinhood temporarily restricted trading of such "meme stocks," infuriating users who said they lost money.That February, Tenev told Congress that the "pattern day traders" at the center of that market chaos represented just 2% of Robinhood's customer base, and that most were long-term investors buying plain vanilla products.Since then, Tenev has come to realize that plugged-in, aggressive traders are actually key to his company's success.Power usersRobinhood offers a host of ordinary financial products, including retirement accounts and credit cards. It is the riskier products tailored to day traders that make the most money for the company. In the most recent quarter, customer trading generated more than half of Robinhood's revenue, and 78% of that transaction-based revenue came from crypto and options trading.Tenev said he directed his team to cater more to that group. "These are our most engaged customers that generate the lion's share of our revenue, " he said in an interview. "We put our best people on active traders."Robinhood's stock has more than tripled this year. It was added to the S&P 500 in September, replacing Caesars Entertainment, and quickly became one of its best performers. The value of Tenev's Robinhood stake has soared to nearly $6 billion.Robinhood's detractors say it is encouraging a gambling culture in markets. "It shouldn't be lost on anyone that a casino came out of the S&P 500 and Robinhood went in," said Tyler Gellasch, CEO and president of the Healthy Markets Association, which advocates for protections for individual investors.Robinhood's backers say the firm has been unfairly targeted by its critics, becoming a kind of industry punching bag held responsible for individuals' investment decisions and broader shifts in the market.Tenev, who immigrated to the U.S. from Bulgaria at age 5, launched Robinhood in 2013 with co-founder Baiju Bhatt, a former Stanford classmate. Their radical pitch was that Robinhood, unlike the Charles Schwabs or Fidelitys of the world, wouldn't charge customers to trade stocks.Tenev said he tries to make the company's investing presentations entertaining. Earnings conference calls are modeled after NBA postgame interviews, Tenev said, complete with a livestream video and an in-person audience. At a crypto event in June, a video that riffed on an old movie showed Tenev speeding through the French Riviera in a convertible. On stage, he wore a striped suit and scribbled a diagram on a chalkboard explaining a crypto concept called "tokenization.""I want it to feel like a concert," Tenev said of his events, joking that he would love to include pyrotechnics one day.Tenev said he used to stick to driving a Tesla Model 3, worried about being perceived as flaunting his wealth if he was spotted behind the wheel of a high-end sports car. Not anymore."I said, wait a minute, why am I even thinking about that? Why do I care what other people perceive of the CEO of Robinhood?" he said.He started buying classic cars. One of his favorites is a 1970 Lamborghini.Tenev speaks the language of Silicon Valley. He has said he believes artificial-intelligence will create a new world order, diminishing people's chances to earn income from labor and fueling participation in markets and trading on brokerage apps like his.Tenev is big on the concept of "tokenization," the idea that real-word assets such as shares of companies can be traded as tokens on a blockchain. At an event in France, he gave attendees "stock tokens" meant to represent a digital stake in AI company OpenAI. OpenAI later said the tokens were not equity in its company.Earlier this year, Robinhood pulled Super Bowl betting contracts from its platform after regulators raised concerns that the products might be illegal.Early challengesRobinhood took off during the pandemic, nearly buckling under a wave of demand. Homebound, cash-flush investors flocked to the mobile trading app in the millions.The GameStop saga thrust the young company into the national spotlight. "Those circumstances, I mean, they shook all of us," Bhatt said of that period.When interest rates rose and the pandemic's era of easy money ended, customers cut back on trading and Robinhood's revenue plunged. Investors soured on the stock. At one point, Robinhood's market capitalization was about equal to the cash in its bank account. Tenev laid off more than 1,000 employees, a decision he described as painful.There wasn't much to celebrate as Robinhood approached its first anniversary as a public company in June 2022. Tenev had set out for a family trip to Maui to clear his head, but thanks to a lengthy flight delay, he arrived exhausted.Then he got a call informing him of a rumor that controversial crypto entrepreneur Sam Bankman-Fried was considering buying a piece of Robinhood — a sign of the company's weakness. Bankman-Fried would eventually buy a 7.6% stake in Robinhood."I was asking myself: Am I the right person?" Tenev said. "Do I have it in me to do what it takes to climb out of this hole?"It was around this time, as the company struggled with unhappy shareholders, regulators and customers, that Tenev changed his mindset, those close to him said.Andrew Reed, a partner at venture-capital firm Sequoia Capital, one of Robinhood's early backers and a friend of Tenev, said the Robinhood team asked itself: "Why are we trying to be like everyone else?" Reed called that moment a "turning point."Tenev and Bhatt had built the company for the first-time investor, but had attracted many savvier, highly active traders. That group was driving a disproportionate share of revenue. It was clear that certain kinds of trades, such as options or crypto transactions, were more lucrative than ordinary purchases of stock.Tenev said he realized that he hadn't even been catering to that group or dedicating resources to it, which explained why many of those customers weren't happy with Robinhood's platform.Quirk, the chief brokerage officer, said the situation was comparable to an airline that was the least popular among its frequent fliers. "I mean, what business has that?" he said. "I said, 'We have to fix this.'"The change in approach stirred disagreements within the company, Quirk said, particularly among employees who thought that focusing on frequent traders was at odds with Robinhood's mission of democratizing finance for all. Quirk argued that by making the platform better for those heavy-duty customers, it would improve it for everyone.Fan following As the brokerage focused more on active investors, some coalesced into a kind of fan club for the company and its leader. At the "Hood Summit" in Las Vegas this fall, a line of customers snaked around the room, waiting to shake Tenev's hand and snag a selfie with him.Robinhood pays attention to customers like Gopal, the early-morning options trader. He has been invited to test new products early. At the Hood Summit, he was offered perks and a swag bag as a VIP customer.Some competitors have begun positioning themselves in opposition to Robinhood's approach. Days after Robinhood said it would expand its prediction markets platform to include contracts tied to technology and entertainment events, the brokerage Public ran an ad campaign with the slogan, "Wealth is not won in a bet." It advised viewers to give their company a try "if you're looking for a broker that's not also your bookie."Money managers have expressed concern that the markets have grown particularly risky this year. A handful of richly priced tech stocks are driving much of the S&P 500's growth. Billions have flowed into investments centered on artificial intelligence, with no clear evidence of when — or if — it will all pay off. A new class of meme stocks appeared this summer.Robinhood's traders seem to know the party won't last forever. Cook, who bought his first-ever plane ticket to travel from Florida to the Robinhood event in Las Vegas, said he takes profits off the table now and then. Gopal said he keeps a sign on his desk that reads "Do not act with compulsion."Neema Farhang, a 37-year-old consultant who switched to Robinhood from another brokerage last year, is now doing four times as many trades. Sitting on the sidelines, he said, isn't an option. "I know I can't afford to not be in the market," he said.Write to Hannah Erin Lang at [email protected]