Popular investment app robinhood became the center of controversy after it decided to freeze gamestop operations on January 1st. 28. The video game retailer’s stock soared after traders on Reddit began frantically buying the company’s stock. Since then, GameStop’s stock has tanked only to soar once again.
robinhood played a pivotal role when a group of reddit users saw an opportunity to make money while also taking a hit on wall street and hedge funds. However, Robinhood made the surprising decision to restrict game purchases, citing issues with volatile stocks and regulatory requirements. Due to its involvement in the trading frenzy, Robinhood has come under scrutiny from its users, regulators, and lawmakers.
Reading: Robinhood backlash
We have some answers to the big questions about robinhood, the actions it took, and what could happen next.
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what is robinhood?
robinhood is an investment app that launched in 2015. It is popular with millennials, who make up the majority of its users, and can make a variety of investments for free. read more about robinhood here.
what happened to robinhood and gamestop?
on the morning of January. On February 28, Robinhood posted a blog saying that it limits users by preventing them from buying shares of various companies, including Gamestop, AMC, and Nokia. it cited “market volatility” as its reasoning and would only allow clients to sell their shares of these companies, not buy or trade in any other way (more below).
“in light of recent volatility, we are restricting trading of certain securities to position closure only, including $amc, $bb, $bbby, $expr, $gme, $koss, $nakd and $nok” robinhood said. . in addition to amc; bed bath and beyond; Gamestop and Nokia, the companies that Robinhood lists with the ticker symbol are phone maker BlackBerry, fashion retailer Express, headphone maker Koss, and underwear company Naked Brand Group.
why did robinhood prevent users from buying gamestop shares?
On January 1st 29th, robinhood published another blog about what happened. The company explained that it had to keep a substantial amount of money on hand to process all trades that go through its clearinghouse, which is the part of the company that sends stock and money to other clearinghouses to complete trades.
Robinhood CEO Vlad Tenev went into more detail when he participated in the show Good Time with Tesla CEO Elon Musk via the exclusive audio-only Clubhouse app in January. 31.
“at 3:30 a.m. pacific time, our operations receive a file from the nscc, which is the national securities clearing corporation,” he said during the show. “So they gave us a file with a deposit, and the request was about $3 billion, which is about an order of magnitude more than it usually is.”
tenev provided some context by saying that, up to that point, robinhood had raised only $2 billion in capital. He went on to explain that the NSCC has a formula for determining how much a deposit needs and one component of it involves risk, which can act as a kind of multiplier.
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“We had no choice in this case,” he said. “We had to meet our regulatory capital requirements.”
tenev said that since then, the agency has worked with robinhood to decrease the amount of funding needed. The company also raised $1 billion in emergency capital to make sure customer trades can go through.
when did robinhood allow investors to trade gamestop shares again?
robinhood sent an email to customers on the afternoon of January 1st. 28 saying it would allow “limited purchases” of shares of that company starting the next day. the limits included a maximum number of shares users could own (at one point this was reduced to one gametop share), no trading options, no lending money on credit aka margin, skipping recurring investments, and no shares fractional shares, which are slices of a share that can be purchased for as little as a dollar.
from February. 3, robinhood increased the maximum shares allowed for all companies, with gamestop limiting up to 500 shares in total. the other restrictions remain in effect.
who’s mad at robinhood?
a lot of people. The subreddit behind gamestop’s skyrocketing share value, r/wallstreetbets, includes heavy robinhood users who felt slighted by the decision.
The subreddit’s twitter account said the freeze hurt small traders and helped the wall street establishment. “Individual investors are being stripped of their ability to trade on [the robinhood app],” the tweet read. “In the meantime, hedge funds and institutional investors can continue to operate as normal.”
Robinhood users flooded the Google Play Store and Apple App Store with negative reviews of the app. There were so many one-star ratings that Google stepped in to remove tens of thousands of them.
There was also a lawsuit filed on January 1st. on February 28 in the southern district of new york accusing robinhood of “willfully, willfully and knowingly removing ‘gme’ stocks from its trading platform amid an unprecedented stock surge…deprived investors retailers of the ability to invest in the open-market.”
several members of Congress, including Rep. Alexandria Ocasio-Cortez, Rep. rashida tlaib and sen. Ted Cruz called a hearing into Robinhood’s actions.
the new york attorney general says she will review what robinhood did while the texas attorney general’s office launches an investigation.
and the us securities and exchange commission. The US, which oversees the stock market, issued a statement that did not name robinhood but said it would “closely review actions taken by regulated entities that may harm investors or unduly inhibit their ability to trade.” certain values”.
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sec investigators are already reviewing social media and reddit posts for signs of fraud, according to a report by bloomberg. The commission also met with newly appointed Treasury Secretary Janet Yellen, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission to discuss market volatility around Gamestop, Reuters reported.
Representative Maxine Waters, a Democrat from California and chair of the House Financial Services Committee, held a hearing on Robinhood’s actions called Game Stop? who wins and who loses when short sellers, social media and retail investors collide. The CEOs of Reddit, Robinhood, Citadel, and Melvin Capital, along with the Reddit cartel that spearheaded the game-buying frenzy, attended the hearing via video conference.
While the executives were grilled by the committee, not much new information was uncovered in the five hours.
Following the hearing and a lawsuit from the family of an app user who committed suicide, robinhood said it would invest in its customer service. The legal action against the investment platform centers on how Alex Kearns, a client of 20 years, received no response from the company after the app showed he had racked up $730,000 in losses. robinhood customer service finally responded to the issue and confirmed that i didn’t owe the money, but it was too late.
on Feb. On February 26, Robinhood confirmed that it was working with US regulators, state prosecutors and the SEC on various inquiries about the company’s practices, as reported by Yahoo Finance.
what other investment services restricted transactions like robinhood?
Other investment apps and services also had issues with trade settlement similar to robinhood. The Cash App tweeted that it would not process trades for AMC and Nokia due to their broker, Axos, halting trades.
“The clearing agent that processes our trades, axos, has temporarily stopped buying $amc and $nok,” the company tweeted. “This was not a decision by the cash app; we do not wholeheartedly agree with this move. We look forward to making these shares available for purchase again as soon as possible.”
A Cash App blog post further explained that the Depository Trust Company (DTC) informed Axos that it would need to significantly increase capital requirements for the trades it would be processing.
webull is another investment app that tweeted Jan. on the 28th it had begun to restrict operations with shares of gamestop, amc and koss. webull cited the stock’s “extreme volatility” by limiting user trades to closing positions. it then removed those restrictions the same day. Webull CEO Anthony Denier said the company’s clearing house also received notice that it would need to significantly increase its capital requirements to accommodate all trades, leading to the temporary halt of trading in those shares. volatile.
td ameritrade, another brokerage, said jan. 27 would put restrictions on stock trading for gamestop, amc and others. the brokerage firm confirmed the restrictions, saying it made the decisions “out of an abundance of caution amid unprecedented market conditions and other factors.” the limits included increasing the amount needed to borrow on margin and limiting other trading options, such as short selling.
charles schwab, interactive brokers, e-trading and public were other investment services that also limited trading last week due to market volatility.
correction, January. 28: An earlier version of this story incorrectly stated that td ameritrade had restricted new purchases of gamestop and amc shares. is restricting certain transactions, but users can still buy new shares of those companies.
