UPDATE: Congress is getting involved.
House Finance Committee Chairwoman Maxine Waters (D-Calif.) announced on Thursday that she will “convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.”
Incoming Senate Banking Committee Chairman Sherrod Brown (D-Ohio) also announced plans to hold a hearing. “American workers have known for years the Wall Street system is broken — they’ve been paying the price,” he wrote in a statement. “It’s time for SEC and Congress to make the economy work for everyone, not just Wall Street.”
Original story below.
Progressive Democrats are demanding congressional inquiries into Robinhood after the online financial trading app restricted purchases of GameStop and other fast-rising stocks, a move that comes at a time when many small-scale day traders were betting on the stocks to rise and several massive hedge funds were desperate for them to fall.
On Thursday, Robinhood said it was “restricting transactions for certain securities to position closing only.” In plain language, that meant that people could use the app to sell shares in the companies, but not to buy them. Professional trading outfits, such as hedge funds, could still buy and sell shares, as they don’t depend on the app for transactions.
Prices of GameStop crashed Thursday morning, plunging from the mid-$300s to as low as $126.01 shortly after 11 a.m. By a bit after noon, they’d recovered to the mid-$200s, but were still down sharply on the day.
Here are words that feature prominently on RobinHood’s website: “We’re on a mission to democratize finance for all.”
Rep. Alexandria Ocasio-Cortez tweeted that Robinhood’s move was “unacceptable” and said she’d use her seat on the House Financial Services committee to support a hearing on the matter. She followed up by saying the inquiry should extend beyond Robinhood. “We now need to know more about [Robinhood’s] decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” she wrote.
Rep. Rashida Tlaib, another high-profile progressive, called Robinhood’s move “beyond absurd” and accused the service of manipulating the market to protect hedge funds at the expense of individual investors. “They’re blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who’ve used the stock market as a casino for decades,” she wrote.
Investors have filed a class-action lawsuit in the Southern District of New York against Robinhood, saying the company had “deprived retail investors of the ability to invest in the open market” and that it had “manipulated the market.” Fox Business’ Lydia Moynhian was among the first to report the lawsuit.
Stock in GameStop, a brick-and-mortar retailer of video games and other electronics, has been the subject of a power struggle between hedge funds and a loosely affiliated group of individual investors and Reddit posters. The hedge funds made large-scale financial bets on GameStop declining in value, using a technique called “short-selling” that would allow them to profit when the company’s shares lost value. A group of investors posting on the subreddit WallStreetBets was on the other side of those trades, snatching up shares of the stock in mid-January and encouraging them to not sell.
The redditors pitched the move as both an investment strategy and an opportunity to stick it to Wall Street. The pitch was that, by banding together, they could bump up the stock price, boosting their own portfolio while taking a stand against companies poised to profit off the company’s failure. So far, it has worked: Demand for GameStop stock soared, and at the close of trading Wednesday, GameStop was trading at $347.51 a share — a massive jump for a stock that opened the year at less than $20 per share. While down off its high, the stock is currently trading well above its pre-mania price.
For the hedge funds that had bet on the retailer’s demise, it has been a financial disaster. Melvin Capital, an aggressive short seller which, per the Wall Street Journal, managed $12-billion-plus in assets at the start of the year, did not reveal its total loss after closing its position on GameStop, but reportedly needed a $3.5 billion cash infusion to stay stable. Other hedge funds reportedly remain on the hook for anti-GameStop bets, setting up more dominoes to fall.
GameStop’s rise prompted a furious debate over the role of online communities in investments. Some critics noted that the surge in the stock’s price was driven mainly by irrational exuberance and not based on any strengthening of the company’s fundamentals. Others countered by claiming that that’s how a large part of the stock market has worked for decades — and these critics didn’t seem to mind until it favored smaller investors at the expense of large ones.
This post has been updated.