The Robinhood app is facing charges after the GameStop case: the short squeeze that sent its shares soaring wasn’t just due to Reddit.
Reddit brought together the community that bet on the rise of the shares of GameStop, AMC and American Airlines. All cases of companies that seemed to be on the brink of the abyss returning to the crest of the wave thanks to groups of very young people who found themselves on Reddit, but who acted on Robinhood.
Robinhood is the trading app popular in the US among the youth. It taught them to do what their parents couldn’t: enter the financial markets, on their own, without the need for brokers or intermediaries. Accused of turning trading into a game, Robinhood has actually had the merit of expanding an industry that seemed reserved only for professionals.
The GameStop case has been described as a group of very young people who brought high finance to its knees, as a hedge fund like Melvin Capital found itself in difficulty and needed a liquidity injection of almost 3 billion to avoid going bankrupt.
The truth is that the financial markets are not used to the volatility of cryptocurrencies. Rise of 300% in a short time are not contemplated, especially if large investors are exposed. This was enough for even the White House to start monitoring the situation.
In the end, high finance prevailed and Robinhood, from being a trading app for all, restricted the trading it had facilitated so much. It did so with a post on its blog announcing that the changes would be applied to American Airlines, AMC, GameStop and other stocks prey to volatility. The result was that those stocks lost value as suddenly as they had risen.
The blog reads:
“We’re committed to helping our customers navigate this uncertainty. We fundamentally believe that everyone should have access to financial markets. We’re humbled to have helped many people invest in the markets for the first time. And we’re determined to provide new and experienced investors with the tools and resources to help them invest responsibly for their long-term financial futures”.
A point also confirmed by CEO Vlad Tenev on Twitter:
“As a brokerage firm, Robinhood has many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today”.
“To be clear, this decision was not made on the direction of any market maker we route to or other market participants.
Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and make adjustments as needed.
We cannot control, however, the lightning-fast spread of information and misinformation that takes place on social media, and for that I am incredibly sorry to our customers and staff for this”.
Robinhood, the app halts GameStop trading: reactions
The decision triggered a lot of criticism. There was talk of a trading ban.
Tyler Winklevoss was very harsh:
“Robinhood was always lies and fancy marketing. They never cared about the Wall Street Bets crowd, they only cared about selling the little guy order flow to Citadel. Today, they showed their true colors to the world”.
Robinhood was always lies and fancy marketing. They never cared about the Wall Street Bets crowd, they only cared about selling the little guy order flow to Citadel. Today, they showed their true colors to the world.
— Tyler Winklevoss (@tyler) January 28, 2021
Jimmy Song was also blunt:
“Robinhood is a free/no-commission brokerage.
If it’s free you’re the product. And guess who you’re being sold to? Hedge funds”.
Robinhood is a free/no-commission brokerage.
If it's free you're the product. And guess who you're being sold to? Hedge funds.
— Jimmy Song (송재준) (@jimmysong) January 28, 2021
It is rumoured that Robinhood’s decision was influenced by pressures (denied) and not only by the risk that the co-founder feared, of breaking the regulations imposed by the SEC due to the high volatility of the markets.
And it must be said that other apps similar to Robinhood have made similar decisions. Robinhood is only the most popular but by no means the only one.
Of course, up until a week ago, it was said that Robinhood was dangerous for young people who approached finance unprepared. After the GameStop case, it is quite clear that Robinhood is also dangerous for hedge funds, which in any case came out of it better protected than the users for whom Robinhood was intended.