Progressive Rep. Alexandria Ocasio-Cortez (D-N.Y.) and conservative Sen. Ted Cruz (R-Tex.) found themselves in unusual agreement (but only briefly) on Thursday over an issue that’s taking the internet and Wall Street by storm: the battle between Reddit users and hedge funds.
Several online brokerages limited the trading of GameStop, AMC Entertainment Holdings Inc. and other stock picks favored by the r/WallStreetBets subreddit early Thursday after the loosely organized community pushed those shares and others to all-time and yearly highs in an effort to squeeze out short sellers over the past few days.
“We continuously monitor the markets and make changes where necessary,” popular trading platform Robinhood said in a statement. “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR and $TRVG. We also raised margin requirements for certain securities.”
In non-technical terms, that means the stocks preferred by Redditors can only be sold on Robinhood for the foreseeable future, which will necessarily cause the price of those stocks to fall or stagnate. Additionally, many other stocks must now be purchased in cash.
Vice Media’s Motherboard imprint framed the issue like this: “More than half of all Robinhood users own at least some GameStop stock. They are now unable to freely trade it.”
Ocasio-Cortez, who previously commented on the dust-up as the inevitable result of “Wall Streeters with a long history of treating our economy as a casino,” without necessarily taking sides in the fight, took a forceful position against Robinhood’s decision on Thursday.
“This is unacceptable,” she said via Twitter. “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services [Committee], I’d support a hearing if necessary.”
The Bronx-based democratic socialist also clarified that Robinhood wasn’t the only retail brokerage on her radar.
“Inquiries into freezes should not be limited solely to Robinhood,” she said in a later tweet. “This is a serious matter. Committee investigators should examine any retail services freezing stock purchases in the course of potential investigations – especially those allowing sales, but freezing purchases.”
Ocasio-Cortez also garnered support from Rep. Ro Khanna (D-Calif.), who took the opportunity to level a broader critique of Wall Street.
“Yes @aoc,” he tweeted. “We need an investigation into RobinhoodApp’s decision and who influenced that. And this shows the need for a financial transaction tax on hedge fund shorting and SEC regulations on short selling practices.”
Other Democratic lawmakers quickly piled on:
This is beyond absurd. @FSCDems need to have a hearing on Robinhood's market manipulation. They're blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who've used the stock market as a casino for decades. https://t.co/CGkJxVfzkv — Rashida Tlaib (@RashidaTlaib) January 28, 2021
Cruz, in an atypical but not unheard of political alignment, also lent his support to the Democrats’ call for an investigation:
The Lone Star State senator later re-posted a Drake meme critical of Robinhood which appeared to accuse the widely-used online trading platform of stealing money.
The trading freezes immediately caused the price of GameStop, AMC, BlackBerry and other stocks promoted by the online posting community to shed recent gains in substantial fashion.
GameStop was hit particularly hard by the announcement.
Premarket trading had the equity as high as $500 but Robinhood’s decision–quickly repeated by multiple additional brokerages–caused the price to plunge to $263.49 at the stock market’s opening bell.
GameStop’s stock price recently went parabolic, causing huge losses for hedge funds who had previously bet against its performance. Those bets, called shorts, can make money when a stock tumbles by borrowing shares, selling them and then replacing the borrowed shares with repurchased shares if and when the price drops.
The organic buying pressure from r/WallStreetBets, however, meant that many of those bets did not pay off–causing a short squeeze that caused multiple hedge funds to take billions of losses.
Ocasio-Cortez, for her part, wasn’t much interested in Cruz’s support.
“I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered three weeks ago so you can sit this one out,” she tweeted in response. “Happy to work [with] almost any other GOP that aren’t trying to get me killed. In the meantime if you want to help, you can resign.”
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praguepride on January 28th, 2021 at 20:12 UTC »
I could be wrong (this is hella complicated) but basically Robinhood markets itself as a "free trading app" because what it does is sell trading data that its user makes to big HFT (super fast and powerful trading houses) so if there are some big movers the HFT can make trades "ahead" of the users. That is why a user clicks the button and it will say "Buy for $100" but then they actually buy for $105 because an HFT went in and took a cut by quickly buying up the $100 and then reselling it at a higher price.
ANYWAY one of these HFTs is Citadel which is a HUGE customer for Robinhood. Citadel backs Melvin. Melvin is the main hedge that is looking to lose potentially tens of billlions in a squeeze.
So Citadel tells Robinhood to stop trading on GME to stop the bleed and Robinhood cuts the throats of its own user base to appease its Big Daddy.
Blatant market manipulation. These high powered hedges went around to every. Single. etrade platform and got GME delisted. Etrade? Gone. WeBull? Gone. Ally? Gone. Cash App? Gone.
From what I can tell the only places a Joe Schmoe can buy GME is through bank brokerages or Fidelity.
A_Novelty-Account on January 28th, 2021 at 20:12 UTC »
People should understand that the SEC fine and class action suit will likely cost Robinhood less than Citadel's losses on the Melvin bailout if Melvin goes under, along with whatever other position it has on GME.
They're aware it's probably illegal, they just don't give a fuck. If you want this kind of stuff to not happen again, don't just push for punishment, push for stronger laws.
Edit: In my jurisdiction, this decision from the company won't pierce the corporate veil and no one will go to jail. They are immune from non-financial punishment by virtue of the fact that Robinhood is a corporation unless they committed fraud. Welcome to the part of your capitalism that no one understands, and so everyone who does gets away with.
Other than SEC fines, Robinhood could be susceptible to disgorgement, which basically means they have to give back what they earned. The problem is that by doing this, they didn't earn anything off the stock, they simply kept a customer (Citadel). Even if they did, it's hard to know how much money was made because of their decision to stop investments into GME, versus how much was caused by other people piling on. There's probably a formula for that in the common law that a securities lawyer could give you. In any case, Robinhood literally got to the point where we are now by looking at the law and realizing the punishment was not a deterence. Think about that.
gamer4life83 on January 28th, 2021 at 19:30 UTC »
You damn right! I agree with the mods of WSB it is tantamount to market manipulation.