Democratizing trading: After GameStop, does more need to be done?

Democratizing finance has been a dominant theme in recent years — with companies vying to create a level playing field and give amateur investors the same opportunities that hedge funds and institutional investors enjoy.

There have been some successes along the way. Purchasing stocks is a lot easier now than it was a few years ago. The internet has helped to demystify the equities markets… enabling anyone to train themselves in technical analysis and access the latest intelligence. The costs associated with gaining exposure to shares have also tumbled.

One of the companies that fired the starting gun on this journey was Robinhood — named after the storied figure in English folklore who stole from the rich to give to the poor. The platform was built on the belief everyone should have access to financial markets, making investing “friendly, approachable and understandable for newcomers and experts alike.”

It was an enticing message — and one that encouraged people to sign up in their masses. But this vision was dealt a massive blow as a result of the GameStop short squeeze, which was spearheaded by the Reddit forum r/Wallstreetbets. A band of retail investors was taking on short-selling hedge funds — driving the stock price from $20 to $483 within weeks.

Rapidly running out of cash to cover these transactions, Robinhood slammed on the brakes and announced that it was suspending purchases of GME stock altogether. Restrictions later followed. This caused a backlash among Redditors, and threats of a boycott, with the company accused of caving into hedge funds.

Dozens of class-action lawsuits have followed, with some even claiming that Robinhood “stole from the poor to give to the rich.” And inevitably, some crypto enthusiasts have pointed to how decentralized finance and digital assets help solve this — because they actually have the potential to democratize the world of trading.

A flawed business model?

Robinhood is now dusting itself off — with the company’s CEO apologizing to customers at a congressional hearing and describing the situation as “unacceptable.”

But this isn’t the first time that the trading platform has ended on the wrong side of customers. In December 2020, the U.S. Securities and Exchange Commission charged Robinhood with “failing to satisfy its duty to seek the best reasonably available terms to execute customer orders,” with the company paying $65 million to settle the charges.

The SEC alleged that “misleading statements and omissions” had been made in how the company communicated to its customers. This concerned the fact that Robinhood would send customer orders to firms for execution and receive payment in exchange. Although one of the trading platform’s big selling points to customers was the fact that it is “commission free” — the regulator said the “unusually high” use of other trading firms meant that orders were often executed at inferior prices.

Even after the savings that users made from paying no commission were taken into account, the SEC estimated that its customers ended up missing out on $34.1 million. As SEC official Joseph Sansone noted: “Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars.”

At the time, the company told Cointelegraph that “the settlement relates to historical practices that do not reflect Robinhood today.”

Are crypto-powered platforms an alternative?

Quantfury says it is aiming to solve the issues seen with centralized trading platforms by offering commission-free trading and investing — giving people access to real-time spot prices from global crypto exchanges with zero fees.

The platform offers stocks, cryptocurrencies, exchange-traded funds and futures — adding that it is driven by a determination to be transparent and honest. Quantfury’s trading data is digitized and published anonymously using a smart contract, meaning that the authenticity of volumes on its platform can be easily verified.

According to the brokerage, it also offers a broader range of features — enabling users to go long and short, benefit from guaranteed execution, and fund their account balances in crypto of their choice.

Leveling the playing field is an issue that Quantfury’s founder Lev Mazur is passionate about. In an article setting out the truth behind retail trading, he wrote: “Billions of dollars are being lost daily by simple folks globally to hazardous trading platforms, whose only goal is to churn and burn their users with manipulated asset prices, as well as both visible and hidden fees.”

Over the past two years, the company says that it has ensured that its users, who call themselves Quantfurians, are not put at a disadvantage — enabling them to be masters of their own fate.