Robinhood and other brokerages took steps to stop the buying frenzy surrounding firms such as GameStop but only sparked more volatility in the market, with angry customers and politicians arguing the curbs unfairly benefit bigger investors.
An investment story has been doing frantic rounds on social media, leaving a lot of people very confused as they get whiplash trying to follow heated exchanges that include GameStop, one subreddit and a Robinhood.
Some people say the GameStop saga is analogous to DVD rental company Blockbuster slowly going bust after Netflix launched.
The 'short' of it
What was missing from the Blockbuster scenario was an online army of small, or day time, investors determined to defeat big bad Wall Street behind the epic bust of 2008.
Their weapon: free trading apps, one in particular – Robinhood. The individual investors bought a lot of shares using Robinhood, causing GameStop and other unprofitable stock to rocket. Big investors who bet on GameStop stock failing lost a lot of money, the very same investors whose business allows Robinhood to be free for smalltime traders.
The result: Robinhood on Thursday turned against the people using its app to trade and closed the buying of GameStop and others.
But what’s going on with GameStop’s stock doesn’t make sense to a lot of people.
Here's a breakdown of the saga with more details and a look at how we got here:
This is how the system is rigged.— Joe McCann (@joemccann) January 28, 2021
The elites aren't even trying to hide it.
Robinhood, who's revenue is largely tied to Citadel, restricts trading in $GME, $AMC, and $NOK.
Users can only sell, not buy.https://t.co/ASnCVnosgQ
📈What is happening with GameStop's stock?
It’s been maniacal this month.
After sitting around $18 three Fridays ago, it doubled in four days.
It kept shooting higher, before nearly doubling on Tuesday and then more than doubling again on Wednesday to $347.51. On Thursday, it gave back a chunk of those gains and finished the day at $193.60, down 44 percent. But it’s still up an amazing 928 percent through the first few weeks of 2021.
🎮 And the company itself?
It’s still struggling. GameStop, based in Grapevine, Texas, sells video games at more than 5,000 stores, and the pandemic has been keeping customers away.
More worrisome is the long-term shift by customers away from brick-and-mortar stores and toward buying games online.
Enthusiasm has grown for GameStop’s prospects after the company said earlier this month that a co-founder of Chewy, the online seller of pet supplies, was joining its board. Investors see Ryan Cohen helping GameStop’s digital transformation. But analysts still expect GameStop to keep losing money in its next fiscal year.
🤓 Is Reddit involved?
Yes, particularly those in a group called “WallStreetBets” or r/WallStreetBets subreddit.
Their discussions are full of ideas for the next big trade to jump on, self-deprecation and an appreciation of both winning and losing bets, as long as they’re bold.
They’ve been encouraging each other to keep buying GameStop and push it ever higher, or “to the moon.”
“We broke it. We broke GME [GameStop’s stock market ticker] at open,” one Reddit user wrote on Monday after the NYSE halted trading.
Another Reddit user wrote in an open letter to CNBC: “Your contempt for the retail investor (your audience) is palpable and if you don’t get it together, you’ll lose an entire new generation of investors.”
The wallstreetbets page, added two million followers in the last 48 hours.
🤯 Reddit alone pushed the stock up more than 1,000%?
No. A big reason for that is how deeply hated GameStop’s stock was by hedge funds and other professional investors on Wall Street.
Many were betting on GameStop’s stock to fall by “shorting” it.
🤑 What is a short?
It’s how investors can make money off a stock falling.
If you sell a share at $10, expecting it to decrease and it falls to $5, you can buy it back at that price and pocket the extra $5.
In reality, investors borrow a share of GameStop and then sell it. Later, if the stock price does drop as they expect, they can buy the stock at a lower price and keep the difference.
GameStop is one of the most heavily shorted stocks on Wall Street.
u can’t sell houses u don’t own— Elon Musk (@elonmusk) January 28, 2021
u can’t sell cars u don’t own
u *can* sell stock u don’t own!?
this is bs – shorting is a scam
legal only for vestigial reasons
😖 What is a short squeeze?
It’s what happened with GameStop’s stock.
When a stock is very heavily shorted, a rise in its price can force short sellers to get out of their bets.
To do that, they have to buy the stock, which pushes the stock even higher and can create a feedback loop.
As GameStop’s short-sellers have gotten squeezed this month, smaller and first-time investors have been egging each other on to keep the momentum going.
To be clear, this decision was not made on the direction of any market maker we route to or other market participants.— VLAD (@vladtenev) January 28, 2021
📴 What did Robinhood have to say about it?
Robinhood CEO Vlad Tenev says the app restricted trade in some stocks such as GameStop, AMC, Blackberry and others to protect the company and its customers.
Those stocks slid on Thursday, paring losses only after Robinhood eased the curbs on Friday.
"We understand our customers are upset, we're doing what we can to re-enable buying in these names," he said.
"We want to be clear in the communications, and I own that we should have been out there a little bit sooner."
Tenev said Robinhood had tapped credit lines "so that we could maximise, within reason, the funds we have to deposit at the clearing houses," to facilitate more trade.
The app took a $1 billion infusion from backers, the Guardian reported.
The app now counts more than 13 million users.
Robinhood CEO Vlad Tenev speaks out after the company decided to restrict trading in GameStop and other stocks today. “In order to protect the firm and protect our customers we had to limit buying in these stocks,” he tells @andrewrsorkin. https://t.co/LsJ5iNjJAB pic.twitter.com/yJATy66TcZ— CNBC (@CNBC) January 29, 2021
Robin Hood is a 501(c)(3) charitable organization. We are not affiliated with any for-profit businesses that use a similar name.— Robin Hood (@RobinHoodNYC) January 28, 2021
☝️There was also confusion when people started mixing up the trading app with a charity with the same name.
Wall Street does everything to make money.— Nelini Stamp 🐺🐜 (@NelStamp) January 28, 2021
The most ridiculous of them hedge funds.
This led to several bubbles and led to the 2007-2008 financial crash and crisis.
🎮 Do these smaller investors believe in GameStop's business?
There’s been a flavour of that in the discussions. But lately it’s been more about inflicting pain on short-sellers, hedge funds and other big financial firms. Many talk about it in terms of evening the ledger with the financial elite, who benefited from years of gains as other people fell further behind.
Buying GameStop “isn’t about greed,” one user wrote on Reddit, after citing all the recessions “they” caused and the times “they” got bailed out with taxpayers’ dollars. “It’s about taking back what’s ours, what we’ve already paid for.”
“This is for making us work on Thanksgiving night all the way through black friday at 9.50 an hour,” another user wrote on Reddit.
😭 Options? Margin trading?
If by now your eyes are watering, we're with you.
Options and margin trading are ways that investors can make a big profit with relatively small payments up front, if the stock moves in the right way.
Many of the traders pushing up GameStop are smaller-pocketed or novice investors.
When they buy stocks “on margin,” they’re using borrowed money, which can supercharge their gains and losses.
With options, an investor can buy the right to buy the stock at a later date at a certain price. If the stock hits that target, investors can reap a bigger return than if they simply bought a share. But if it doesn’t, it can mean a total loss.
📉 Where does Wall Street see GameStop stock ending up?
Much, much lower.
Over the long term, a stock’s price tends to track with the company’s profits, and GameStop’s prospects for earnings remain cloudy.
Many Wall Street analysts have price targets for GameStop at $15 or below.
🛑 Is it just GameStop swept up in this?
Other heavily shorted stocks have been seeing a surge of interest recently as investors look for the next GameStop. American Airlines, BlackBerry and other formerly downtrodden stocks have had extreme swings in price this week.
Tenev said trading was limited on Robinhood on "13 viral stocks."
👀 What about the broader market?
Critics used to dismiss investments in companies just over a belief that they will have a meteoric rise as a sideshow, saying the excess was confined to a few corners of the market.
But Wednesday’s broader-market tumble gives some caution.
Sharp losses for short-sellers may have pushed them to sell some of their other stock holdings to raise cash, and several investors say that contributed to Wednesday’s 2.6 percent slide for the S&P 500.
It was the worst day for the market since October.
"we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants." https://t.co/P3IMlwB62h (2/2)— SEC_News (@SEC_News) January 27, 2021
🔍 Did anyone see this coming?
Maybe not to this degree.
But brokerages have been making it ever-easier for novices to get into the market and trade.
Commissions have dropped to zero, and people can trade on their phones.
As each barrier to trading has fallen, consumer advocates cheered the broadening playing field. But they also warned it’s possible to have too much of a good thing.
Too-easy trading could encourage people to make too many trades that are too risky for them.
🔨 What about the SEC?
The struggling video game retailer’s stock has been making stupefying moves this month, wild enough to raise concerns from professional investors on Wall Street to the hallways of regulators.
The US Securities and Exchange Commission has said it’s noticed all the volatility in the market and is taking a closer look.
It is the SEC’s job to protect investors, and the expectation across Wall Street is that investors holding GameStop at these lofty prices are likely to be hurt when its price falls.
What sets this case apart is all the communication going on between investors on Reddit, as they goad each other to push GameStop higher, said Chester Spatt, a former chief economist at the SEC and a finance professor Carnegie Mellon University’s Tepper School of Business.
But he said it’s difficult to declare it a clear case of market manipulation.
In the end, there may be no way to prevent people from pushing a stock too high and potentially burning themselves.
“A lot of people now feel like they’re empowered, and they don’t have to go through the traditional players” of Wall Street to invest, Spatt said.
“And in fairness, they didn’t do that great going through the traditional players.”
The stock market isn’t our economy – it’s a giant casino and playground for billionaires. The SEC needs to clean it up – and Congress needs to do more for working families barely hanging on by their fingernails. pic.twitter.com/3dR7CaktNr— Elizabeth Warren (@SenWarren) January 29, 2021
😲 😡 What are the reactions?
Anger has spread beyond the investment community with rappers and US politicians on both sides of the aisle joining the backlash.
Senator Sherrod Brown, Democrat of Ohio, the incoming chairperson of the Senate Banking Committee, responded to the market mayhem.
"People on Wall Street only care about the rules when they’re the ones getting hurt," he wrote on Twitter.
1st class action against @RobinhoodApp— Robinhood Class Action (@ClassRobinhood) January 28, 2021
just filed in Manhattan federal court, hours after app restricted individual, retail investors from buying #GME shares. Plaintiff alleges illegal market manipulation while #wallstreetbets users denounce the app
LETS GOOOO!!!!!!!! pic.twitter.com/CTApNE0L92
This is unacceptable.— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.
As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
Democrat Representative Alexandria Ocasio-Cortez's tweet was shared by Republican Senator Ted Cruz who commented "fully agree."
AOC has held Cruz responsible for the Capitol insurrection in which her life was under threat as well and did not take his RT too kindly.
I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out.— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
Happy to work w/ almost any other GOP that aren’t trying to get me killed.
In the meantime if you want to help, you can resign. https://t.co/4mVREbaqqm
Tesla founder Elon Musk, whose shares have also been a retail favorite, also commented on Ocasio-Cortez's tweet saying "Absolutely."
Here come the shorty apologists— Elon Musk (@elonmusk) January 28, 2021
Give them no respect
Celebrities also chimed in. "Yo this is a fucking CRIME what @RobinhoodApp is doing DO NOT SELL!!!", tweeted rapper Ja Rule.
They hedge fund guy shorted these stocks now we can’t buy them ppl start selling out of fear... we lose money they make money on the short... THIS IS A FUCKING CRIME!!!— Ja Rule (@jarule) January 28, 2021
"This was always a potential issue with Robinhood," said Ian Kar, co-founder and chief executive of research provider Fintech Today. "When are you responsible for helping your users make good financial decisions, versus allowing them to trade freely?"
"They support a capitalist free market only when it works for them. What we saw today was not a free market and it forced an awful lot of people to lose an awful lot of money," said 18-year-old Myron Sakkas of Coventry, a student at Warwick University.
"When ordinary people try to make money in a system where only rich traders can make money, that's what happens," he told the BBC.
It is not appropriate for Robinhood CEO Vlad Tenev to protect investors who shorted GameStop. Why would @RobinhoodApp help investors who thought the stock would fall & hurt investors who thought the stock would rise? @SEC_Enforcement should investigate Robinhood’s rigged actions. https://t.co/WxlavMP9ao— Ted Lieu (@tedlieu) January 29, 2021