The online brokerage Robinhood launched in 2013 with an egalitarian pitch worthy of its namesake: commission-free trading on a platform that has the common investor’s interests at heart. That veneer has shown cracks over the years, but perhaps none so visible as this morning, when Robinhood users found themselves unable to purchase the so-called meme stocks, like GameStop and AMC, that the WallStreetBets community on Reddit had recently sent soaring.
You could still sell those stocks—most of which still rank among the most widely held on the platform, according to the Robinhood app’s frequently updated “Most Popular” list—but otherwise? No dice. And while experts say that Robinhood was within its legal and regulatory rights to shut down the stonks party, its users are up in arms.
Understanding Thursday’s fracas requires a brief history of why GameStop shot up 1,700 percent this month. It goes like this: Traders on the WallStreetBets forums on Reddit and Discord, inspired by a new GameStop board member and the opportunity to squeeze short sellers like Citron Research, funneled their disposable income into shares of the beleaguered retailer. The higher the stock price rose, the more the shorts had to buy to cover their losses, turning a snowball into an avalanche. The volume of trading suggests that some institutional investors may have hopped on as well. Even Elon Musk gave it a plug.
This week a similar script played out with stocks for the movie theater chain AMC, electronics companies BlackBerry and Nokia, and more, albeit on a smaller scale. Robinhood disallowed the purchase of 13 stocks total; platforms like TD Ameritrade, Interactive Brokers, and Webull placed varying degrees of restrictions on high-volatility stocks as well.
“We continuously monitor the markets and make changes where necessary,” Robinhood said in a blog post. “In light of recent volatility, we are restricting transactions for certain securities to position closing only.” After the markets closed on Thursday, the company said it would allow “limited buys” of the securities it had restricted starting tomorrow.
Thursday's actions drew a swift and wide-ranging backlash. “Individual investors are being stripped of their ability to trade on @RobinhoodApp,” wrote the official Twitter account of the WallStreetBets moderators. “Meanwhile hedge funds and institutional investors can continue to trade as normal. What do you call a market that removes retail investors’ ability to buy to save institutional investors’ shorts?”
The incident even seemed to create rare common ground between US representative Alexandria Ocasio-Cortez (D-NY), who suggested on Twitter that it could merit a Financial Services Committee hearing, and senator Ted Cruz (R-TX), who concurred. Both the House and Senate Thursday announced upcoming hearings on the stock market in light of recent events.
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A class action lawsuit against the company has already been filed in the Southern District of New York, claiming that the app has “caused its customers substantial losses due solely to its own negligence and failure to maintain adequate infrastructure.” Robinhood declined to comment on the allegations. New York attorney general Letitia James said in a statement Thursday that her office is “aware of the concerns raised regarding activity on the Robinhood trading app, including trading relating to the GameStop stock. We are reviewing this matter."
Many of Robinhood’s detractors accuse the company of acting in the interest of institutional short sellers rather than the individual retail investors that rely on it. It wouldn’t be the first time the company allegedly put those big bankrolls first; in December it paid a $65 million fine to the Securities and Exchange Commission to settle charges that it had misled users about the revenue it made selling its customers’ orders to third-party trading firms. Robinhood did not admit or deny any wrongdoing as part of the agreement.
“To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” Robinhood said of the restrictions it imposed on Thursday.
Another complaint, filed around the same time as the SEC settlement, might be more instructive when it comes to Robinhood’s actions Thursday. On December 16, the state of Massachusetts accused Robinhood of “aggressively targeting young, inexperienced investors” and exposing them to “unnecessary risk.” It’s the latest in a long arc of accusations that Robinhood’s playful interface makes buying and trading stocks too easy and downplays the downside risk.
“They’ve gotten a lot of criticism that it makes it too easy to trade, too much fun to trade,” says Jim Angel, who specializes in market structure and regulation at Georgetown University’s McDonough School of Business. “When Robinhood sees a situation that they know is going to end really badly, they’re going to be worried that if they don’t do something, people are going to come back and say, ‘Why did you let me buy this stock at $300?’”
Financial experts universally agree that GameStop will eventually crash back to a price that reflects its actual fundamentals, and when it does, a lot of people are going to find themselves on the wrong side of that trade and lose a whole lot of money.
In that interpretation, Robinhood is something like a bartender cutting things off before the party turns into a riot. Restricting stock trades also isn’t unique; Angel points out that many brokers don’t let customers trade in penny stocks without special authorization, for instance. The difference with GameStop et al. is one of scale. “There’s definitely a history of this kind of paternalism,” Angel says. “But there’s a really good question of how paternalistic should the brokerage firm be?”
Then again, if Robinhood had its users’ best interests in mind, it could have made this exact move days ago; GameStop’s stock has long since abandoned any pretense of relating to the company’s fundamental financial outlook. “It’s a little late to do it to protect the customer base,” says Gabriel Rauterberg, a professor at the University of Michigan’s law school and coauthor of The New Stock Market: Law, Economics, and Policy. Especially given that Robinhood also may have helped spark a sell-off Thursday morning; GameStop is down 44 percent from Wednesday’s close, and losses in stocks like AMC have been even more dramatic.
It seems more likely that Robinhood is trying to protect itself from SEC scrutiny. It was just yesterday, after all, that the agency said it was “actively monitoring the on-going market volatility” and the various parties to it. “Since Covid-19 led to a massive increase in retail trading, Robinhood has been more in regulators’ sites,” says Rauterberg. GameStop is the most dramatic of these incidents but not the first; individual traders drove Hertz to improbable heights this summer while it was in bankruptcy, and WallStreetBets has previously given a boost to stocks like Plug Power and Lumber Liquidators. “Now it’s become undeniable that massive retail trading is leading to some weird things happening in the market.”
That wariness of regulators showed up in Robinhood’s statement Thursday afternoon. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits,” the company wrote. “Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.” Bloomberg reported Thursday that Robinhood had tapped into hundreds of millions of dollars of its credit lines recently, implying it did not have enough collateral on hand to satisfy regulators as it executed its customers' trades. The New York Times reported early Friday that Robinhood was raising an additional billion dollars from its investors in hopes of not having to further restrict trades.
Regardless of Robinhood’s motivation, it appears to have acted within its rights. “They certainly are free to limit their services in this situation,” says Kevin Haeberle, a securities law specialist at William and Mary Law School. “They have broad authority to do so.” The Financial Industry Regulatory Authority, which oversees brokerages like Robinhood, declined to comment.
Those who study the markets also argue that GameStop’s ascent is less quixotic than it is potentially harmful to the economy at large. “I think there’s a real temptation to view the stock market as a casino,” says Rauterberg. “But if stock prices become untethered from the actual economic value of companies, then the ability of the stock market to communicate information is broken.” In this view, it’s a tacheometric tool for the broader economy.
Restoring that function would provide little comfort for the retail traders and sideline observers who have long seen the stock market as divorced from reality to begin with, especially as indexes have soared higher despite a pandemic. Still, many WallStreetBets traders believe they can continue to ride GameStop stock to the moon, with or without Robinhood’s help. “AT THIS RATE $5,000 IS GOING TO BE NOTHING FOR GME,” one heavily up-voted Reddit post reads. It closed the day at $193.
UPDATE 1/29/31 6:45am ET: This story has been updated to include a NYT report that Robinhood is raising an additional billion dollars from investors.
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