Why everyone is suddenly mad at this stock market app
First it is the Redditors, who plan to skyrocket the shares of a sleepy video game retailer. Then it was the shorts of the hedge funds they had planned to reverse. Now one of the weirdest weeks on Wall Street has a new main character: the Robinhood scholarship app.
With a historic rise in the price of GameStop by hitting millionaires and showing the stock market’s vulnerability to coordinated action and mass hysteria, all eyes were on the Silicon Valley startup that made it easy to get a share of action – until suddenly it isn’t.
The Menlo Park, Calif., Company came under heavy criticism on Thursday after block its users from buying or trading a set of stocks that had been sky-priced by a combination of hedge funds and individual traders helping each other in online forums.
The blocked shares are mainly from struggling companies including Tootsie Roll, AMC Entertainment, Bed Bath & Beyond and most notably GameStop, which rose from $ 17.25 on January 4 to a high of $ 347.51 on Wednesday.
The response was swift. Critics, including Democratic Reps Alexandria Ocasio-Cortez of New York and Ro Khanna of Fremont, Calif., Have suggested that the company, by banning transactions, is serving the interests of Wall Street institutions rather than small investors. Atty from New York. General Letitia James tweeted that his office actively investigate concerns about the Robinhood transactions. Senate Banking Committee Chairman Sherrod Brown (D-Ohio) announced he would hold a hearing on “the current state of the stock market”.
On Thursday afternoon, a group of users filed a class action lawsuit against Robinhood over its decision to freeze stocks. And on a street corner outside the company’s headquarters in Menlo Park, five young men stood in the rain. They were holding homemade signs that read: “Fuck you, I bought more” and “FREE GME; People> Profit”. A shirtless man was handcuffed by police nearby. No one honked in support.
How did it come to this? Founded in 2013, Robinhood provides an easy way for users to start trading stocks. By the summer of 2020, more than 13 million people had registered, stuck in their homes and seeking to profit from the rising stock market, which in turn was being driven by near-zero interest rates set by the Federal Reserve.
This new popularity has brought the company to closer scrutiny, with critics claiming that it gives inexperienced users too much access to complicated financial products, leading some to financial ruin and, in the case of a 20-year-old trader, suicide. In December, after a $ 65 million settlement with the SEC over allegations the company gave customers bad prices on deals, a group of users filed a class action against the company for allegedly failing to inform them that it is selling its stock purchase orders to trading companies, who can then profit from the price arbitrage and the knowledge gained from watching millions of transactions unfold .
Robinhood’s popularity also meant that when individual investors on the WallStreetBets Reddit forum hatched a plan to execute a potentially lucrative financial maneuver with the shares of GameStop and other hapless companies, it became a key interface between this mass of investors and the stock market.
As Times columnist Michael Hiltzik willing This week, GameStop’s shares were sold heavily short, meaning a number of major financial firms had bet on their shares going down.
The editors saw an opportunity in this fact. If they could drive up the price of GameStop shares by simply buying a lot of them, then at some point all the short sellers would be forced to buy the shares of Redditors at the new high price.
The shortcut for this maneuver is a short press. Over the past four days, short sellers have lost over $ 5 billion.
But how did the share price get pushed so high? A full account of what happened this week will have to wait until the dust settles, but there are a few basic dynamics at play.
First, many investors have decided to buy options rather than the stocks themselves; these options are contracts with an intermediary that give the investor the right to buy a certain amount of shares at a certain price at a certain date in the future. If the market price is higher than the option price on that date, the investor earns money on the difference.
The intermediary often buys a number of shares of the same company to cover potential losses if the stock skyrockets. This means that investors who buy options can double their effect on the stock.
Second, many big investors got wind of this plan, which was laid out in detail in public, and decided to join it. , etc.
Third, Elon Musk tweeted about it on Tuesday night.
As of Wednesday morning, the stock had hit nearly $ 350, with more buyers and more short sellers expecting the bubble to burst soon. Just before midnight, Robinhood sent out a notification that it would prevent users with options on GameStop and AMC from purchasing more options – they would only be able to close their deals, stopping the cycle. The next morning, the company released an announcement that the restrictions also applied to 11 other stocks, including BlackBerry, Express and Tootsie Roll.
Users took to social media to cry foul and post screenshots showing Robinhood was automatically selling their holdings in the stocks in question. Reached by email, a spokesperson for the company said he had informed clients he would “take proactive steps to reduce risk, including closing risky positions before the expiration date.” .
After the market closed on Thursday, Robinhood announced that it would allow the “limited buy” of the stocks in question to resume on Friday. Other trading platforms were jostling each other, some restricting transactions and others allowing GameStop transactions to resume normally. On WallStreetBets, users continued to post encouragement to their fellow speculators to hold on and hold on for a supposed surge ahead on Friday.
GameStop, the company at the heart of the frenzy, remained silent this week, releasing a statement on Thursday about winning an award for having an LGBTQ-friendly workplace that made no mention of the volatility of the stock.
A Los Angeles GameStop employee who answered the phone at the Slauson and Western Avenue store said the financial fury hadn’t changed their job. “It’s business as usual here,” the employee said. “I’m just here to sell games.”
Times editor Suzanne Rust contributed to this report.
This story originally appeared in Los Angeles Times.