A day after shares of U.S. retailer GameStop rose 135% -- a wild upswing spurred by an online army of investors on a mission to challenge the dominance of Wall Street -- Robinhood, the stock-trading app at the center of it all, clamped down. Almost immediately, GameStop's shares plunged, falling 75% in 90 minutes. The limits on trading by Robinhood and other online brokerages, put in place as fears of market instability grew more widespread, set off a furious outcry among small investors. They claimed that the very apps that had democratized trading -- Robinhood in particular -- were now doing the bidding of Wall Street. Small groups of investors protested outside the New York Stock Exchange and at the Menlo Park, California, headquarters of Robinhood, a company that popularized the notion of commission-free trading.
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? 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.
Robinhood can now add a class action lawsuit to its growing list of headaches after it said it would restrict users from trading GameStop and other stocks. A class action lawsuit was filed in New York Thursday, alleging that Robinhood "deprived their customers of the ability to use their service," in an effort "to manipulate the market for the benefit of people and financial intuitions." The lawsuit comes hours after Robinhood informed users that it would restrict a handful of stocks, including GameStop, Blackberry, AMC, and American Airlines, due to "recent volatility." The company also said it would raise margin requirements for some securities. "We continuously monitor the markets and make changes where necessary," Robinhood said.
The first thing you spot on the home page of subreddit r/WallStreetBets is a banner featuring a cartoon character in a suit riding on a yacht, with a street sign reading "Wall St" sitting on top. While the Reddit community might not look serious, its collaborative investing strategy has captured the attention of Wall Street. The subreddit has played a key role in the shares of struggling video retailer GameStop surging by more than 1,000% at times this week. The Reddit revolt focused on a strategy called short selling, where hedge funds make money by betting that share prices will fall.These investors earn by identifying a stock expected to drop in value, then borrowing shares from another investor and immediately selling them. By the time they have to return the shares, they hope they're able to buy the stock at a lower price, to profitfrom the difference.
Shares in companies including videogame retailer GameStop soared again on Friday, as an army of small investors taking aim at Wall Street regained access to amateur share trading platform Robinhood. The app, weaponised by activist small investors to trap hedge funds in a "short squeeze" that has cost them $20bn on paper by some estimates, had suspended buying of stocks such as GameStop, cinema chain AMC and BlackBerry on Thursday. But it secured a $1bn (£730m) cash injection from its backers on Thursday evening, which the company said it required to allow its users to resume their buying spree, which began on the WallStreetBets forum of chat forum Reddit. The decision to permit what Robinhood said would be "limited buys" resulted in GameStop's shares climbing more than 67.6% on Friday, taking its notional value to more than $22bn, nearly 80 times what it was worth this time last year. The company's shares had whipsawed a day earlier, finishing the day 44% lower after Robinhood barred users from buying more stock, threatening the Reddit rebellion.