GameStop Stock, Reddit and Robinhood: What You Need to Know

As stocks soared, some traders benefited for a few days and some hedge funds with short bets against the companies suffered losses. This dynamic created a small squeeze, where strong stock buying forces bettors to buy stock shares to limit their losses, raising the stock price even further.

As small investors continued to buy more shares on Thursday, the mobile trading app Robinhood and several other brokers restricted access to popular shares among those traders. Traders were left with the option to hold their shares or sell them. Small investors were furious with the brokers. The shares of GameStop and AMC sank in response to the restrictions.

Robinhood Markets Inc. it reopened early early Friday for stocks and options, and GameStop and AMC stock prices skyrocketed again.

Why did Robinhood and others block the operations of these actions?

Robinhood and other brokers, including WeBull Financial LLC, E * Trade Financial Corp. and Interactive Brokers Group Inc.,

restricted access to stock trading and volatile options to meet the increased deposit requirements of clearing houses.

The Depository Trust & Clearing Corp. operates the main clearing center for securities transactions in the United States, helping to process and liquidate transactions. Due to a lag between when investors buy or sell shares and when their cash is actually exchanged for securities, brokers like Robinhood have to keep deposit accounts in clearing houses to prove they are good for money. In times of risk, clearing centers ask brokers to put more cash in to cover transactions and make sure of losses. When Robinhood and others experienced an increase in trading volume in recent days, DTCC requested an increase in cash.

In an interview Thursday, Robinhood CEO Vlad Tenev explained that Robinhood experienced an unprecedented increase in its deposits. By restricting the ability of investors to buy shares of GameStop and 12 other companies, online trading platforms tried to limit future increases in these requirements.

Robinhood customers were not satisfied with the restrictions. A group of individual investors filed a class action lawsuit against the company on Thursday, alleging that it “deprived its customers of the ability to use its service,” as well as the potential gains from trading without ” no legitimate reason ”.

On Friday, Robinhood loosened stock restrictions, only to tighten them later. Users can purchase a maximum number of one-share contracts and five options per GameStop.

How did WallStreetBets drive Reddit so hard?

The Reddit WallStreetBets forum encourages a devil-focused approach to investing. The community, created in 2012 by a consultant who now lives in Mexico City, is actively shunning the convention and adopting offensive descriptions of its users, also known as “autistic,” their investment decisions, and their resulting victories and losses. . The community has a heavy meme culture and a celebration of big wrong investments. At WallStreetBets, the world of finance is fun and entertaining, whether you win or lose.

It’s also the place where fans go after Wall Street players, sharing their joy when professionals suffer heavy losses. The world of amateur trade exploded during the Covid-19 pandemic thanks to market volatility and blockchain isolation, driven by low-cost trade and the proliferation of affordable mobile commerce applications. The Federal Reserve’s intervention in the markets in March rewarded amateur traders who “bought the dip,” acquiring shares at low prices and making profits as they increased. Debates on social media can go viral and raise stock prices.

Amid much new GameStop activity on the forum, moderators temporarily took the forum as private on Wednesday, citing difficulties in keeping all posts and comments up to date, but then reopened it an hour later. The Discord chat service on Wednesday banned the WallStreetBet server, which users used to talk to in real time, for violating community guidelines.

While WallStreetBets participants are by no means representative of the millions of amateur traders, the community that now has six million people proclaims itself as the place for all investors.

What does Wall Street say?

Several high hedge funds with short books or bets against companies suffer double-digit losses in the volatile market, including Melvin Capital Management, Maplelane Capital, Candlestick Capital Management, D1 Capital Partners and billionaire investor Steven A. Cohen’s Point72 Asset Management.

Online brokers have had problems with technical issues and service outages amid the frantic trade.

Investors fond of social media platforms have attacked Wall Street professionals online, pressuring insults and threats on Reddit, Twitter,

Discord and Facebook.

Short sellers are no strangers to criticism, but social media users share personal information, hack social media accounts, and send text messages to family members.

Short seller Andrew Left, a target of Internet attacks, said he would stop sending short seller reports. “When we started Citron, it had to be against the establishment. In fact, we have become the establishment, ”Left said in a video.

Some professional investors have been questioning the tactics of amateur traders working en masse and whether publishing online is a manipulation of values.

What do politicians say?

Politicians on both sides of the aisle criticized the brokers for the trade restrictions they set this week, while others called for investigations and more regulations.

•Representative Alexandria Ocasio-Cortez (D., NY) called Robinhood in a tweet because it blocked “retail investors from buying shares while hedge funds are free to trade shares they deem appropriate.”

She continued: “As a member of financial services [Committee], I would support a hearing if necessary. “In a subsequent tweet, he clarified that:” Committee investigators should examine any retail service that would freeze stock purchases in the course of possible investigations, especially those that allow sales but freeze purchases “.

•Sen. Ted Cruz

(R., Texas) tweeted that he agreed with Rep. Ocasio-Cortez.

•Senator Sherrod Brown

(D., Ohio), the new chairman of the Senate Banking Committee, said he plans to hold a committee hearing to focus on the functioning of the stock market.

•Senator Pat Toomey

(R., Pa.), A first-rate Republican from the banking group, told reporters on Capitol Hill that he was upset “that a platform would suddenly freeze retail investors who are simply exercising their right to buy.”

•Sen. Elizabeth Warren

(D., Mass.) He called on the Securities and Exchange Commission and other agencies to step up regulations, noting that professional investors suffering from the recent reduction in hot stocks have taken advantage of individuals for years.

•Representative Maxine Waters

(D., California), the chair of the House Financial Services Committee, said she would hold a hearing “to examine recent activity around GameStop (GME) shares and other affected actions with a focus on short sale online trading platforms., gamification and its systemic impact on our capital markets and retail investors “.

•The White House they said officials, including Treasury Secretary Janet Yellen, are monitoring frantic business activity.

As for regulation this week, the SEC has released two statements stating that it controls stock market volatility. On Friday, the SEC also said it would “review actions taken by regulated entities that could disadvantage investors or unduly inhibit their ability to trade certain securities.”

What comes next?

Everyone can guess the following in this “nerds against Wall Street” dispute.

As of Friday, Robinhood eased trading restrictions on customers of 13 volatile shares after raising more than $ 1 billion from its own existing investors. As a result, GameStop and AMC bounced back from Thursday’s declines.

Several hedge funds have suffered heavy losses and have retreated their exposure to the stock market on both the long and short sides of their portfolios.

GameStop the stock and GameStop the company tell two very different stories. The GameStop company remains “a commercial chain of more than 5,000 stores struggling to maintain relevance in a business that goes digital,” says Heard columnist Dan Gallagher. Although the company has made some smart moves recently, it is still expected to report double-digit revenue declines for the second year in a row. Meanwhile, stocks have risen more than 25 times in the past three weeks.

And GameStop is not alone. From AMC to Bed Bath & Beyond BBBY 5.02%

in Blackberry, several stocks see stock prices rise, in contrast to what their company’s performance would suggest.