Robinhood and other platforms suspend retail investors from trading GameStop, citing significant market volatility.
On Thursday, January 28, in the midst of the GameStop Corp. (NYSE: $GME) short squeeze saga, Robinhood decided to suspend its users from purchasing additional shares of GameStop and only allowed them to close their position. Starting Friday January 29, they claim they will allow limited transactions.
Robinhood, a popular online broker that features commission-free trading and a user-friendly interface, gets its name from an old story in which the hero, Robinhood, steals from the rich and gives to the poor. Robinhood’s mission is “to democratize finance for all,” and that “everyone should have access to the financial markets.” As a result, Robinhood is the chosen broker for over 13 million retail investors.
This all began when users of the Reddit forum r/WallStreetBets noticed that hedge funds had taken out huge short positions on GameStop. They decided to orchestrate a short squeeze by pumping up the price of the stock. This forced hedge funds to buy back shares further increasing the price. Other investors started buying the stock as well, causing GameStop’s share price to spike 600%.
Robinhood’s decision to suspend trading brought into question the balance of power within the financial markets. The two sides in this saga are the Wall Street hedge funds and users of the Reddit forum r/WallStreetBets.
Wall Street claims that users of r/wallstreetbets are manipulating the market while r/WallStreetBets claims they are just using typical Wall Street strategies against Wall Street.
The traders “are making no effort to conceal their apparent intent to manipulate the price of the stock” – Former chief of the Securities and Exchange Commission’s market abuse unit, Daniel Hawke
By deciding to suspend trading, Robinhood is arguably siding with Wall Street instead of the average man. This decision received backlash and scrutiny from both retail investors and politicians.
Bipartisan scrutiny of Robinhood’s decision is a big deal for retail investors. If any government action is taken, it could result in a big win for them over Wall Street and set precedent on how cases such as these are handled in the future.
What does this mean for Robinhood?
So far two lawsuits have been filed against Robinhood. The first lawsuit filed in New York alleged market manipulation while the second lawsuit filed in Illinois alleged Robinhood’s actions were to “protect institutional investment at the detriment of retail customers”
Users of the platform voiced their anger by review-bombing Robinhood on the app store. At one point Robinhood’s rating dropped to one star after nearly 100,000 negative reviews. Google has since removed these negative views, citing violation of policy.
With trading suspended for retail investors it will be difficult for them to continue to pump up the stock and complete the short squeeze. This is to the benefit of the large hedge funds, saving them billions of dollars while hurting the average retail investor.
It is important to remember that the reason GameStop is in this situation is because it is a poorly performing company. In this instance, share price does not accurately reflect the business and eventually the stock price will fall.
It is also important to consider what will come out of these events:
- What will happen to GameStop’s share price in the next few days?
- What will happen with other potential short squeezes such as AMC Entertainment Holding Inc. (NYSE: $AMC), Nokia Oyj (NYSE: $NOK), and BlackBerry Ltd (NYSE: $BB)?
- Will government action be taken against r/wallstreetbets or Robinhood?
- Will Robinhood users leave the platform for other brokers?
As you continue investing and monitoring the situation be sure to keep these questions in mind.
These are unprecedented times, highlighting the tensions between the wealthy and the average man.