Stock-trading mobile application Robinhood halted trading to a number of companies, including GameStop, on Thursday, citing “recent volatility” in the stock market. This came after Reddit users, earlier this week, dramatically pushed the stock prices for GameStop up, incurring billions worth of losses to Wall Street hedge funds. The move by Robinhood, as well as other app-based stock traders like TD Ameritrade and WeBull, came under immense scrutiny by individual traders, politicians, and law makers alike.
What happened?
Earlier this week, amateur individual stock traders, known as retail investors, banded together in the r/WallStreetBets thread on community chat forum Reddit, and collectively drew up the stock prices of United States (US) computer game store GameStop—a dying physical store incurring losses in the age of online game stores. The social media users, in what is being dubbed as a “Reddit rally,” decided to buy stocks in bulk in heavily shorted companies, including GameStop, thereby increasing their demand and raising their share prices.
A shorted company is one which has had bets placed against it by short sellers, or shorts. While stock traders usually buy stocks with the hope that their share prices will rise, resulting in profit for the traders, short sellers borrow shares in declining stocks and sell them, hoping for their price to fall so they can buy them back at lower rates and pocket the difference.
GameStop started the year as one of the most heavily shorted companies on the stock market, with Wall Street giants like Melvin Capital and Citron Research having placed bets that its share prices will further fall. The Reddit users’ unexpected and coordinated effort to raise share prices of GameStop resulted in the Wall Street hedge funds losing bets worth billions of dollars.
This caused drastic fluctuations within the stock trading market, with GameStop’s stock jumping more than 822%, from $17.25 per share at the beginning of the year to a high of $159.18 on Monday, and briefly crossing $450 per on Thursday before closing at $193.60.
Following these events, stock trading mobile apps like Robinhood, which had been utilised for efficient stock trading by the Reddit users, halted the trading of stocks for shorted companies like GameStop, BlackBerry, and AMC. This move invited the ire of individial stock traders, who accused Robinhood of unfairly protecting giant hedge funds from the consequences of unexpected fluctuation in the stock market brought about by legitimate means.
At least one lawsuit was also filed against Robinhood in the US District Court in New York on Thursday, which claimed that Robinhood was manipulating the stock market by unfairly restricting investors from trading GameStop and similar companies.
Robinhood App faces condemnation
US lawmaker Alexandria Ocasio-Cortez, a Democratic member of the US House of Representatives, tweeted that Robinhood’s trade restriction was “unacceptable.” In a separate tweet, she said: “Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.”
Many notable figures, including Republican Senator Ted Cruz and business magnate Elon Musk endorsed Cortez’s message.
Democratic Sherrod Brown said: “People on Wall Street only care about the rules when they’re the ones getting hurt.”
US Representative Rashia Tlaib called on the House Committee on Financial Services to hear a case against Robinhood’s actions, claiming it is “stealing millions of dollars from their users to protect people who’ve used the stock market as a casino for decades.”
Donald Trump Jr claimed that “this is what a rigged system looks like.”
Tesla and SpaceX CEO Elon Musk termed the practise of shorting “a scam.”
Now what?
The US House Financial Services and Senate Banking committees are now sheduled to hold a hearing regarding the stock market events. Democratic Representative Maxine Waters said the hearting will focus on “short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.”
Meanwhile, Robinhood has announced that it will start allowing limited trade of restricted securities on Friday, and will then monitor the market situation.
