GameStop Stock, Reddit, and Robinhood: What You Need to Know

As stocks skyrocketed, some day traders took advantage and some hedge funds short-bets on the companies took a loss. These dynamics created a short squeeze, where buying large stocks forces short gamblers to buy shares of the stock to limit their losses, causing the stock price to rise even more.

As retail investors continued to buy up more stocks on Thursday, the mobile trading app Robinhood and several other brokers restricted access to stocks popular with those traders. The traders had the choice of holding their shares or selling them. Small investors were furious with the brokers. GameStop and AMC shares fell in response to the restrictions.

Robinhood Markets Inc. reopened stock and options trading early Friday, and GameStop and AMC stock prices rallied again.

Why did Robinhood and others block trading in these stocks?

Robinhood and other brokers including WeBull Financial LLC, E * Trade Financial Corp. and Interactive Brokers Group Inc.,

limited access to trading of volatile stocks and options to meet increased clearing house deposit requirements.

The Depository Trust & Clearing Corp. operates the main clearinghouse for US equity trading and assists in the processing and settlement of transactions. Due to a delay between when investors buy or sell a stock and when their money is actually exchanged for securities, brokers like Robinhood must hold deposits with clearing houses to show that they are good for the money. In risky times, clearing houses ask brokers to put in more of their own cash to cover trades and insure against losses. When Robinhood and others saw a surge in trading volume in recent days, DTCC asked for an increase in cash.

In an interview on Thursday, Robinhood Chief Executive Vlad Tenev explained that Robinhood saw an unprecedented rise in its deposit requirements. By limiting investors’ ability to buy shares in GameStop and 12 other companies, the online trading platforms sought to limit future increases in those requirements.

Robinhood customers were not happy with the restrictions. A group of individual investors filed a class-action complaint against the company on Thursday, claiming that it “denied their customers the opportunity to use their service,” as well as potential profits from trading for no “legitimate reason.”

On Friday, Robinhood eased inventory restrictions, only to tighten them later in the day. Users are allowed to purchase a maximum of one share and five options contracts for GameStop.

How did WallStreetBets build so much momentum on Reddit?

Reddit’s WallStreetBets forum promotes a devil-may-care approach to investing. Founded in 2012 by a consultant now living in Mexico City, the community actively eschews convention and takes offensive descriptions of its users, known as ‘autistic people’, their investment decisions and the resulting profits and losses. The community has a heavy meme culture and an ironic celebration of big investments gone wrong. At WallStreetBets, the financial world is fun and funny, whether you win or lose.

It’s also where the amateurs go after Wall Street players and share their joy when the pros suffer big losses. The amateur trading world exploded during the Covid-19 pandemic thanks to volatile markets and the isolation of lockdowns, bolstered by cheap trading and a proliferation of accessible mobile trading apps. The Federal Reserve’s intervention in the markets in March rewarded amateur traders who ‘bought the dip’, bought stocks at low prices and benefited as they rose later. Social media discussions can go viral and drive stock prices up.

Amid much new GameStop activity on the forum, the moderators took the forum temporarily private on Wednesday as they struggled to keep track of all the posts and comments, but reopened an hour later. Chat service Discord on Wednesday banned WallStreetBet’s server, which users spoke to in real time, for violating community guidelines.

While the participants in WallStreetBets are in no way representative of the millions of amateur traders, the now six million strong community proclaims itself as the place for every man’s investor.

What does Wall Street say?

Several high-flying short book hedge funds, or bets against companies, are suffering double-digit losses in the volatile market, including Melvin Capital Management, Maplelane Capital, Candlestick Capital Management, D1 Capital Partners and billionaire investor Steven A. Cohen’s Point72 Asset Management.

Online brokers face technical problems and service disruptions during hectic business.

Some amateur investors on social media platforms have attacked Wall Street professionals online and made insults and threats on Reddit, Twitter,

Discord and Facebook.

Short sellers are no stranger to criticism, but social media users share personal information, hack social accounts and text family members.

Short seller Andrew Left, a target of internet attacks, said he would stop sending short seller reports. “When we started Citron, it was against the establishment. We have actually become the establishment, ”said Mr. Left in a video.

Some professional investors have questioned the tactics of massively operating amateur traders and whether posting online is equity manipulation.

What do politicians say?

Politicians from both sides of the aisle criticized brokers for the trading restrictions they imposed this week, while others are calling for investigation and more regulation.

•Rep. Alexandria Ocasio-Cortez (D., NY) tweeted Robinhood for blocking “retail investors from buying stock, while hedge funds are free to trade the stock as they see fit.”

She continued: “As a member of the financial service [Committee], I would support a hearing if necessary. In a later tweet, she clarified that, “Investigators from the committee should investigate, during potential investigations, all retail services that freeze inventory purchases, especially those that allow sales but freeze purchases.”

•Sen. Ted Cruz

(R., Texas) tweeted that he agreed with Rep. Ocasio-Cortez.

•Senator Sherrod Brown

(D., Ohio), the incoming chairman of the Senate Banking Committee, said he plans to hold a committee hearing to focus on how the stock market functions.

•Senator Pat Toomey

(R., Pa.), A leading Republican on the bank panel, told reporters on Capitol Hill he was concerned “that a platform would suddenly freeze retail investors who are simply exercising their right to make a purchase.”

•Sen. Elizabeth Warren

(D., Mass.) Called on the Securities and Exchange Commission and other agencies to tighten regulations, noting that the professional investors suffering from the recent short squeeze in hot stocks have been abusing individuals for years.

•Rep. Maxine Waters

(D., California), the chair of the House Committee on Financial Services, said she would hold a hearing “to investigate recent activity around GameStop (GME) stocks and other affected stocks with a focus on short selling, online. trading platforms, gamification and their systemic impact on our capital markets and private investors. “

•The White House said officials, including Finance Minister Janet Yellen, are keeping an eye on the hectic trade activity.

On the regulatory side, the SEC released two statements this week saying it is monitoring stock market volatility. In its latest on Friday, the SEC also said it would “review measures taken by regulated entities that could disadvantage investors or otherwise unduly hinder their ability to trade certain securities.”

What is next?

Everyone can guess what’s next in this “nerds vs. Wall Street” feud.

As of Friday, Robinhood relaxed trading restrictions for clients on 13 volatile stocks by raising more than $ 1 billion from its own existing investors. As a result, GameStop and AMC came back from Thursday’s declines.

Several hedge funds have suffered significant losses and withdrawn their exposure to the stock market on both the long and short sides of their portfolios.

GameStop’s stock and GameStop’s company tell two very different stories. GameStop, the company is still “a retail chain of over 5,000 stores struggling to stay relevant in a business moving to digital,” explains Heard columnist Dan Gallagher. While the company has recently taken some smart steps, it is still expected to report a double-digit sales decline for the second year in a row. Meanwhile, the stock has increased more than 25 times in the past three weeks.

And GameStop isn’t alone. From AMC to Bed Bath & Beyond BBBY 5.02%

for Blackberry, several stocks see their stock prices rise, contrary to what their company performance suggests.