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Why did Robinhood shut down GameStop Trading?

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Robinhood is an online brokerage firm that prides itself on making it easy to buy and sell stocks. But if you are a user of this popular trading platform, you would have found it impossible to buy a few specific stocks on Thursday.

Specifically, you could not have bought shares of GameStop (NYSE: GME), AMC (NYSE: AMC); BlackBerry (NYSE: BB); Bed Bath & Beyond (Nasdaq: BBBY) or Nokia (NYSE: NOK) on Robinhood starting January 28.

In a released statement, Robinhood provided strong rationale for closing transactions in GameStop shares, as well as transactions in the other mentioned shares. But many were not happy with the brokerage’s explanation for its actions, and Robinhood has now indicated that it will change course, allowing a limited purchase of GameStop shares starting Friday.

Here’s what you need to know.

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Here’s why Robinhood shut down GameStop trading

On January 28, Robinhood suspended the ability to buy GameStop stock. App users were allowed alone to sell their positions, not to open new ones or to add to their existing holdings in GME.

The brokerage house declaration explaining his actions as follows: “We constantly monitor the markets and make changes as necessary. In light of recent volatility, we limit trading for certain securities to closing positions only. The statement, which was posted on Robinhood’s website and emailed to its millions of users, also said: “In a context of high market volatility, it is more important than ever to help customers to stay informed “.

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Robinhood was not exaggerating on the volatility of GameStop stocks. Shares rose over 1,800% during the month of January and the price fluctuated several hundred dollars per share in a single trading day. What makes this even more remarkable is that the company is a retailer widely regarded as obsolete in the age of online sales, and prior to the past few weeks its stock price was below $ 20.

There is, of course, an explanation for the stock buying frenzy that led to Robinhood’s decision to close trading.

Users of a Reddit sub-forum called r / WallStreetBets decided to capitalize on the fact that GameStop is the preferred stock for short-term hedge funds. With hedge funds betting big on the decline in the value of the company’s shares, the Redditors chose to start buying, pushing the share price up.

This created a “short squeeze” as those who bet against GameStock had to buy stocks to cover their shorts. The feedback loop has led GameStop’s price to climb rapidly, especially as Redditors have encouraged buyers of GME shares to ban their shares from being loaned to short sellers.

Wall Street hedge funds began to waste a lot of time as some individual investors demanded staggering profits with GameStock’s stock price skyrocketing. But the fun ended when Robinhood closed deals, preventing more investors from buying, which caused stock prices on Earth to plummet.

While Robinhood may have indeed acted to protect its clients – buying into GameStop under these conditions is undoubtedly risky – many expressed concern that the broker was acting to protect Wall Street insiders from losses, rather. than its customers.

Lawmakers, including progressive icon Alexandria Ocasio-Cortez and conservative felt Ted Cruz, have called for hearings on Robinhood’s decision, and some app users are seeking class action lawsuits against Robinhood, with one user tweeting: “Robinhood canceled stock orders on #gme #amc # NOK etc … There should be a class action lawsuit. I thought we had a free market. So Wall Street is okay with me losing hundreds of dollars , so that wealthy investors cannot be called on their risks …. #wallstreetbets. ”

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Trade will resume on Robinhood on Friday

After a day of criticism on social media, Robinhood announced Thursday night that it would lift its restrictions on Friday and allow at least limited commerce from GameStop.

“Starting tomorrow, we plan to allow limited purchases of these securities,” the company said in a statement. He went on to say that “we will continue to monitor the situation and may make adjustments if necessary”.

The brokerage has justified its previous actions on the basis of SEC brokerage regulations, which they say “exist to protect investors and the markets and we take our responsibilities to comply with them, including through of the actions we have taken today “.

Finally, the company responded to the accusation that it acted to protect Wall Street, stating unequivocally that “this was a risk management decision and was not made based on of the direction of the market makers to whom we turn. We are starting to open the trade. for some of these titles responsibly.

Still, as trading resumes on Friday, trading on GameStock remains a high-risk proposition as the current share price is not justified by the company’s underlying business activity. If you are considering using Robinhood or another brokerage firm to buy GameStop shares, make sure you understand the dangers of this type of trading.

Christy bieber has no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry. The Motley Fool has a disclosure policy.

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