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Markkula Center for Applied Ethics

Robinhood: Legend or Fairy Tale? It’s Important That we can Tell the Difference

gamestop storefront and logo sign

gamestop storefront and logo sign

Ann Skeet

John Minchillo/Associated Press

Ann Skeet (@leaderethics) is the senior director of leadership ethics at the Markkula Center for Applied Ethics. Views are her own.

The World Economic Forum, Deloitte, and the Markkula Center for Applied Ethics at Santa Clara University, collaborated last year to write a white paper about baking ethics into organizations. We advocated using proven behavioral psychological nudges to raise people’s attention to ethical issues in business settings, help them decide what to do about them, and motivate them to act. In reality, some of the most effective nudges that exist are laws and regulations. These must be kept current to reverse information bankruptcy, identified as this year’s most serious trust issue in the Edeleman Trust Barometer.

Recent news coverage explains the complexities of the GameStop market bubble. The phenomenon was driven by commentary on the social media platform Reddit and created by trades on the brokerage platform Robinhood. The saga illustrates how some business models erode public trust.

The white paper included an unusual note within it, not a traditional footnote citing other sources, though the paper has plenty. In part, referring to decisions corporate executives make regarding the responsible use of technology, it reads: “… the degree of regulation in a company’s industry may shape the relevant scope for ethical deliberation.”

Recent market events exemplify what we meant when we went on to say, “even as those financial obligations and operations may themselves be relevant topics for ethically oriented discussion.” Companies with inherent conflicts of interest, struggle to be effective and ethical at the same time, a hard truth, sort of the business equivalent of saying your baby is ugly. We have enough experience and data with online platforms by now to see that conflicts of interest are baked in.

In this story, we find a tale of two such platforms. Social media platforms, like Reddit, have received more scrutiny than brokers like Robinhood. Consumers now understand that products they use without charge are monetizing their data, selling digital advertising or information to other businesses.

Brokers also have inherent conflicts of interest, which the GameStop bubble revealed. Robinhood, and other brokers, are required, to either raise capital or reduce clients’ risky trading to cover both ends of the trade when markets become unsettled. Robinhood encourages trading by people unfamiliar with market risks and mechanisms. Under certain conditions, such as the ones that arose recently, Robinhood must prevent those people from trading, putting its own interests and the interests of its clients in conflict.

Much ink has been spilled on Section 230 of the 1996 Telecommunications Act, protecting internet platforms from liability based on the actions of people using them. Some see analogies to other business liability protections from stupid things people do with products. Those familiar with publishing news, as I am, see a standard that traditional media companies are held to through slander and libel laws that platforms evade in Section 230. Traditional media companies incur the costs of insuring what they publish is true, or at least that reasonable accuracy efforts have been made. Social platforms do not.

Traditional investors incur costs of researching and making trades they believe will benefit their clients. Professional investors have been required to do this through a U.S. regulation known as the fiduciary rule, that has gone on and off the books with each presidential administration. The rule arose as more people used IRAs, or defined contribution plans, rather than defined benefit pension plans. When in place, financial professionals must place their client’s financial interests first. When not in place, those professionals need only find “suitable” investments. Even then, the fees charged by financial professionals are predicated on a value proposition that the professional can get better returns than an individual investor. The asymmetrical risk brokers carry and must act on at times adds additional costs.

Quality costs money. As a society, we have tolerated an erosion of information quality advanced by social media platforms because we enjoyed the conveniences they offer, and we were initially unaware, perhaps, that our personal information was being sold to the business market.

Businesses that serve consumers and other businesses simultaneously often involve conflicted interests. Laws, thoughtful regulation, and industry norms set boundaries to reconcile these conflicts. These boundary-setters must be refreshed to generate the quality information that stabilizes commerce and creates fair markets that we rely on as a public good. 

Let us remember that Robinhood was a legendary outlaw. Scholars differ on whether he was a real person or a fairy tale figment. The United States serves as the commercial bellwether for the global financial markets. For it to continue being seen as adhering to the rule of law, its elected and appointed officials need to do the work, updating laws like Section 230, and regulations like the fiduciary rule, to preserve these common goods.

Feb 12, 2021

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