Et was last January when individual company share prices went haywire. Back then, small investors banded together to outsmart short sellers and make their bets bounce. The most prominent example of this was the computer games chain Gamestop: The price rose to $350 after being below $20 just days before – only to collapse again afterwards. Many of the mostly young buyers did not buy the papers from banks, but were active with the so-called neo-brokers – above all with Robinhood. But it was too much for the American stock exchange, which also banned trading in some shares. The background was unclear at the time and also ensured that the American Congress dealt with the topic. Now a meticulous report has been released by Democratic lawmakers showing just how close it was that Robinhood could have collapsed – with unforeseen consequences for the stock markets.
To understand how it came to this, you have to look at the history of Robinhood: The company did pioneering work in the area of commission-free securities trading, its business model is based on the so-called Payment for Order Flow (PFOF). Robinhood does not trade itself, but sells its customers’ orders to so-called market makers, who compete to fill those orders. This made it possible for Robinhood and many other neo-brokers to offer their services at very low prices or even for free – not only in America, but also in Europe. For example, a famous German provider is Trade Republic, which has had success with a similar business model in Germany, but is fighting against stricter regulation by the European Commission. Either way, it hasn’t been a problem since then to trade stocks quickly and cheaply. This has also opened stock trading to a broader range of people.