GameStop unexpectedly turned from a dying retail chain to a buzzword, the latest obsession by the markets and media during its stock rally. They are the catalyst, the sling which David used to bring down Goliath, as retail amateur investors are getting the upper hand on well-established Wall Street institutions. Many hurdles stand in the way, such as Robinhood trade restrictions, which create an uncertain future for the company.
Robinhood Installing Restrictions On GameStop Stock
Robinhood, a California-based commission-free online trading app, was founded in 2013, with its ethos “let the people trade”. The Reddit rally used Robinhood to facilitate the purchase of GameStop stock. On 28th of January, Robinhood installed restrictions on GameStop stock, on the basis of ‘market volatility, igniting anger on Reddit and other online platforms. The power in numbers acting in the same way, facilitated by Reddit discussion boards, caused GameStop to surge over 900 percent higher in value since January.
Gamestop stock had been falling for the past six years, in which case shorting the stock would be the rational move. Short selling is borrowing a share, selling it, and agreeing to repurchase the debt at an agreed-upon later date, profiting if the future price is lower than the current. Many Wall Street institutions shorted the stock, without expecting Reddit’s intention to drive up the stock value by collective group forces from r/wallstreetbets 9.7 million members. Gamestop has become the poster child for meme stocks.
What Did Robinhood Restrict Apart From GameStop?
Apart from Gamestop, Robinhood restricted trading with AMC Entertainment, Bed Bath & Beyond, Blackberry, Nokia, Tootsie Roll, Trivago among others. Investors can close out their positions, but are unable to buy more options. This questions the freedom of investments, and the democratisation of finance, despite the company writing on their website that “democratising finance has been our guiding star since our earliest days”.
Just recently, Robinhood eased the restrictions installed, allowing more purchases. However, in relation to high volatility that was evident towards the end of the day, they implemented further restrictions. Investors were limited to buying a single share of restricted stocks, which expanded from 13 to over 50 companies. Many of these companies were considered ‘meme-stocks’, which are traded above their value due to the diminishing nature of their business structures, and Reddit’s interest. Jordan Belford, the self-proclaimed ‘Wolf of Wall Street’, in response to the blocking suggested that “Because of this decision Robinhood made, it’s gonna be very, very hard for them to stay in business, I believe”.
The controversy is that installing these restrictions play into the hand of Wall Street. Providing restrictions help the short-sellers, as it drives the stock price down, reducing the losses. With the limitations installed, GameStop share price plummeted from $347.51 to $193.60 in a single day.
Did Robinhood Become A Victim Of Its Own Success?
Robinhood have been hunting with the hounds and running with the hares. They had initially sided with the average Joe investor, providing easy access to finance with their commission-free structure, acting as a “a voice for the voiceless“ and their aim to “democratise finance”. However, by restricting purchases of GameStop and other meme-stocks Reddit has an interest in, it suggests their alliance with the Wall Street powerhouses.
Robinhood’s evident contradictions caused users to lose faith, the app a victim of its own success. In response to high volatility, and the restrictions for not buying more stock, it spurred rumours that Robinhood had its feet in two pools. Rumours circulating that establishment pressures for Robinhood tightening screws, from those institutions shorting the stock. However, Robinhood CEO, Vlad Tenev, said ”We were not forced by anyone to restrict trades. We did this on our own, but there was no liquidity problem. We did this proactively”. He also defended “We stand with the people who are making their voices heard through the markets, and showing the world that investing is for everyone, not just for the wealthy and not just the institutions” .
Acts like these caused users to jump ship, optimizing different online trading applications. Webull, a rivalling trading application, soared high up to number two on the app store, as investors are stepping away from Robinhood. Justin Reidy, a previous Robinhood user justified her choice to not use the app as “I don’t like the fact they can stop me from investing in GameStop”.
Actions Taken By The Securities And Exchange Commission
US highest financial regulator, The Securities and Exchange Commission, said they would “closely review actions” made by companies that “may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities”. There are at least 33 federal lawsuits filed against Robinhood, regarding the fair and equitable treatment of its customers, and lost opportunities to profit. James Cox, Securities law scholar at Duke University, said “I think Robinhood is in a difficult position. I’m hoping FINRA (Financial Industry Regulatory Association) opens up an investigation here”. However, Joseph Grundfest, professor at Stanford Law School, said “These aren’t the strongest complaints I’ve ever seen”, indicating skepticism of the lawsuits The lawsuits are pertaining to market manipulation from restricting investor access, or violations against FINRA rule 5310.01, which states that a broker “must make every effort to execute a marketable customer order that it receives fully and promptly”. Alexandria Ocasio-Cortez, a member of the US House of Representatives, said “this is unacceptable. We need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit” .
Robinhood has a tough decision to make, to side with the investors or Wall Street. Joshua Mitts, A law professor at Columbia Law School, said “They have to grapple with this fundamental inequality between retail investors and Wall Street professionals, and ask themselves whether they’re contributing to this or closing the gap. They bill themselves as the latter. But when users are restricted from trading, due to apparent failure to comply with capital requirements, it raises questions whether they’re filling that mission. They need to be more committed to retail investors — or they’re going to see an exodus”.
The irony of Robinhood is everclear, named after the man who closed the inequality gap, stealing from the rich and giving to the poor. Siding with Wall Street increases the inequality, and considering its user base are the investors they are opposing, it may not be promising for their long term.
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