Should Robinhood app have halted buying on GameStop stock?
- Robinhood is a finance app that works with unlimited commission-free trades in stocks, ETFs, and buying and selling cryptocurrencies.
- Wall Street and Gamestop have been at odds for months. Reddit users bet more on the company and skyrocketed Gamestop shares, making Wall Street investors furious.
- After the apparent “surge of volatility” in Gamestop stocks, Robinhood and other financial apps blocked trades for said company.
- According to Robinhood’s user agreement, the company may at any time “without prior notice restrict or prohibit” user trading.
- Nine investors including Fidelity FMR, BlackRock, and Chewy made $16 billion on Gamestop stock already this year.
When hedge funds play the kind of games recently seen by the Reddit group WallStreetBets, they can crash entire economies and can be guilty of breaking the law. However, the Reddit Trading Twitter account itself notes that this kind of manipulation of the stock market is nothing new. As the hosts of The Hill's Rising point out, these hedge funds were attempting their own manipulation, which would have likely squeezed GameStop out of business. This practice is all too common on Wall Street. But now that some smaller investors have banded together to play the game against the people who invented it, the big firms appear to be using their connections to upend the table.
Robinhood's CEO, Vlad Tenev, tried to claim that they made the decision to comply with SEC 'mandated financial requirements,' which doesn't actually seem to be the case. In another video, Rising's Saagar Enjeti explains that the way Robinhood makes money is by selling the trading information from the smaller investors on their platform to larger Wall Street firms, who can then 'front run' the smaller trades and make 'hundreds of millions of dollars' in the process. Robinhood has previously had to pay a $65 million fine for 'misleading statements and omissions in customer communications' in another case in which they actively gave orders to 'firms that would give the company higher revenues rather than the best prices for customers.' They may try to portray themselves as being on the side of 'the little guy,' but the evidence seems to suggest that Robinhood was actually trying to protect their real friends on Wall Street.
The outrage over Robinhood's decision to halt GameStop buying is the result of ignorance regarding the market. The financial service company did what seemed to be the best option for everyone involved.
According to USA Today, the GameStop debacle started as a coordinated attempt by subreddit r/WallStreetBets, from Reddit, to drive up the price of GameStop's stocks. And Robinhood has been accused of having 'gamified stock trading to an unhealthy degree,' which can indeed place people at risk. However, one of the main reasons Robinhood decided to halt GameStop buying was to protect inexperienced customers from market volatility. The inexperienced buyers who flooded the market after hearing about the GameStop action don't know what they're doing and will suffer huge losses if the market crashes. With the influx of buyers, the market volatility increases, which increases the risk of a crash.
The anger directed at Robinhood comes from the inexperienced users who are frustrated at not being able to manipulate the market without understanding that it puts everyone at risk. With that anger over the potential crash of the now volatile market comes new risks to Robinhood. The firm has many financial requirements that fluctuate due to market volatility and when there is a large influx of buyers into a certain market.
Considering Robinhood's decision, other brokerage firms have taken action by raising requirements, including Charles Schwab and TD Ameritrade. This solidarity shows that Robinhood made a decision that other brokerage firms agreed with, which was the best move for everyone involved.