When The GameStops
It almost seems incredible that Reddit, the social media platform, was the cause of so much turbulence in Wall Street these past few weeks, and the deterioration of the popular trading app Robinhood’s reputation. Yet, that is precisely what happened over the past two weeks with a massive, unexpected surge in prices for stocks in Gamestop, AMC and others.
The story starts with an innocent post on Reddit’s popular Wall Street Forum, WallStreetBets, by user Keith Gill about his stock holdings of Gamestop, which, at the time, were valued at around $50,000. He went on to say that he thought the stock was actually undervalued, that he would continue to buy more, and (this is the important part) that several hedge funds had decided to short it. This was more than enough to convince the users of WallStreetBets, who self-described themselves as “the good guys,” to pile in on buying Gamestop stock, raising the stock by almost $400, almost a 2000% increase, hoping to hurt the hedge funds in retaliation for their perceived crimes in the 2008 crash. They also decided to raise the price on other stocks that they believed the hedge funds had shorted, such as AMC and Nokia. Regular investors, realizing the massive short term gains that could be made, also decided to join in on the rising wave of these stocks. Over the course of three days, they caused several hedge funds to lose billions, most notably Melvin Capital and Citadel.
To buy these stocks, most of these at-home, “little-guy” investors were using an app called Robinhood, an app that’s proclaimed message is to democratize Wall Street. Robinhood accomplished this by making it easy to open an account, making the app as simple as using any social media platform and charging no commission. However, what most Robinhood users do not realize is that when they click to buy or sell a stock, the process is a lot more complicated than just having the money leave or enter their account. There is a lot of background financial plumbing that is involved. When a transaction occurs, Robinhood itself goes to their brokerage firm and utilizes its own capital to pay for that transaction. Then, when the deal is approved and finalized three to five days later, the funds are taken from the user’s account. For all this to work, Robinhood must maintain a minimum amount of funds.
Due to the volatile and fast-paced nature of the Gamestop trading, Robinhood quickly found itself unable to be able to pay for all transactions involving that stock. Robinhood, facing a demand to pay over $1 billion, decided to unilaterally ban all further buying of Gamestop and other volatile stock. With this ban, the price of Gamestop fell fast and hard, going from around $350 to around $60 per share over a weekend. Investors, with the WallStreetBet forum serving as a ready echo chamber, quickly called a foul play, claiming that Reddit was in league with the hedge funds to hurt the little guys.
With well-known figures such as Elon Musk and Mark Cuban pointing fingers at Robinhood, as well as politicians from both sides of the political aisle, such as Representative Alexandra Ocasio-Cortez and Senator Ted Cruz, demanding an investigation, the reputation of Robinhood seems to be in tatters. The SEC has even decided to launch an investigation into Robinhood, saying, “The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” It also doesn’t help when the CEO of Robinhood, Vladimir Tenev, interviewed on CNN, gave very evasive answers as to why they prohibited trading the Gamestop stock. The Robinhood App, previously having a close to five-star review on Google Play and the App Store, over the course of one weekend was bombed by over 275,000 users giving it a one-star review. It seemed that Robinhood, instead of doing as its namesake, giving to the poor, was actually doing the opposite, taking from the poor. Robinhood has promised to become more transparent and to do whatever it can to repair its image, even going so far as to spend $5 million for a Super Bowl ad. Ultimately, only time will tell if Robinhood will be able to rebuild its reputation and once again become the trading app for the little guys.
Photo Credit: Pixabay
Photo Caption: These past weeks were marked by high market volatility in certain stocks like Gamestop fueled by the rise of small time online investors.