Robinhood Revolt: App Faces Lawsuit after Halting Trades on Gamestop and Other Securities
In a show of force made possible by social media and a Reddit forum, main street investors are turning against Wall Street hedge funds, beating them at their own game in what can only be described as 2021’s version of a David vs. Goliath pump and dump.
There has been an unprecedented showdown in the markets this week that has caught the attention of everyone from Barstool Sports' Dave Portnoy to Elon Musk to Republican and Democratic leaders alike. This unprecedented market volatility begins on the Reddit forum r/WallStreetBets. Here, amateur investors (mainly college-age individuals) have banded together to make the stock prices of certain struggling companies skyrocket. In turn, hedge funds who have bet against this stock using a short sell strategy are finding themselves on the losing end of the deal as they come to the realization that these companies that they bet on to lose are actually growing exponentially.
The end result? These hedge fund short sellers are losing big bucks. They have lost an estimated $5 billion year to date with a loss of $917 million on Monday and $1.6 billion on Friday.
At the center of this controversy is GameStop. Unsurprisingly, Reddit users, a diverse community with a fair share of video game lovers, banded together because of their support and loyalty to the company. Their dedication to GameStop’s vision soon turned into a strategy to beat Wall Street's best at their own game. By riling up the masses on Reddit, and later on TikTok and Facebook, retail traders were able to drive GameStop shares to unprecedented levels.
At the start of the year, the stock was trading at $17.25 per share. This past Monday, the stock jumped over 822% to $159.18 per share. The volatility caught the eyes of Elon Musk, resulting in him tweeting about it. This in turn caused the price to jump another 40% after hours. On Wednesday, the stock peaked at $347.51 per share. On Thursday, the stock jumped up yet again to $483 per share triggering a temporary halt in trading on the New York Stock Exchange.
It's not just GameStop being used as a vehicle to beat hedge funds valued at billions of dollars. Reddit users have banded together to revive other nostalgic companies that are all but duds. AMC, BlackBerry, Nokia, Bed Bath & Beyond, and other companies have seen an unprecedented spike in stock value over the past couple of days.
While retail investors have seemingly found a way to hit Wall Street where it hurts, other seasoned investors are warning against the mania. Investor Michael Burry, who rose to fame after betting against the housing bubble, shared on Twitter that investing in GameStop was “unnatural, insane, and dangerous.” Like many critics, he called for “legal and regulatory repercussions.”
Robinhood Hit With Class Action Lawsuit
On Thursday, popular trading app Robinhood, the platform used by many of these retail investors, put a temporary stop to trading certain securities, including GameStop.
As a result, a class-action lawsuit was filed against the company in the Southern District of New York. The lawsuit claims that Robinhood is rigging the market against its customers by putting limitations on which stocks a consumer can and cannot buy. The lawsuit reads, "Robinhood's actions were done purposely and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood's customers." The lawsuit goes on to explain that retail investors missed out on opportunities while Wall Street investors were allowed to continue participating in trading.
For many users who turned to the platform because of its commission-free investing and philosophy of giving everyday Americans an opportunity to invest in the stock market, this move directly contradicts what Robinhood stands for.
Shortly after the lawsuit was filed, Robinhood put out a message to its customers through a blog post which read in part “In light of the extraordinary market conditions this week, we temporarily limited buying for certain securities this morning. Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed. “
SEC Monitors Volatility, Concerns Raised about Regulation
The SEC stepped in earlier this week by releasing a press statement that read, "We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”
Although the SEC has publicly announced that they are monitoring market volatility, the issue of regulation within the market and among investors has had everyone from government officials to retail traders scratching their heads. Lawmakers on both sides of the aisle have publicly criticized Robinhood's decision to stop trading the securities in question.
Rep. Ro Khanna, D-Calif., called for “more regulation and equality” within the markets. Khanna points to the reality that “While retail trading in some cases, like on Robinhood, blocked the purchasing of GameStop, hedge funds were still allowed to trade the stock.” Khanna highlights the real-life implications of this situation by stating, "Wall Street poured billions into shorting this stock to crush this company and put workers out of business. The future of this country lies in that access and equality across every sector of our economy."
Member of the Financial Services Committee Rep. Rashida Tlaib, D-Mich., called Robinhood’s actions “beyond absurd” and called for a hearing on “Robinhood’s market manipulation.” Tlaib explains, “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.”
The chair of the committee, Rep. Maxine Waters, D-Calif., stated late Thursday that a hearing would be held to examine GameStop “and other impacted stocks with a focus on short selling, online trading platforms, gamification, and their systemic impact on our capital markets and retail investors.”
The incoming chair of the Banking Committee, Sen. Sherrod Brown, D-Ohio, also called for a hearing on the “current state of the stock market.” Brown stated, “People on Wall Street only care about the rules when they’re the ones getting hurt. American workers have known for years the Wall Street system is broken – they’ve been paying the price. It’s time for the SEC and Congress to make the economy work for everyone, not just Wall Street.”
And in a moment of solidarity, Senator Ted Cruz, R-Texas, tweeted in agreement to a tweet shared by Rep. Alexandria Ocasio-Cortez, D-NY, that criticized Robinhood for their actions to "block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”
In a partisan show of unity, Congress is planning to start hearings that will look into Robinhood’s actions to halt trading.
