GameStop Stock, Reddit and Robinhood: what you need to know

As stocks soared, some day traders profited and some hedge funds with short bets against companies suffered losses. This dynamic has created a short squeeze, where the purchase of heavy shares forces sold punters to buy shares of shares to limit their losses, thus increasing the share price even more.

As retail investors continued to buy more shares on Thursday, the mobile trading app Robinhood and several other brokers have restricted access to popular stocks among these brokers. Traders were left with the choice to keep their stocks or sell them. Small investors were furious with brokers. GameStop and AMC’s shares plummeted in response to the restrictions.

Robinhood Markets Inc. opened trading again on Friday for stocks and options, and the stock prices of GameStop and AMC have skyrocketed again.

Why did Robinhood and others block negotiations on these shares?

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

restricted access to volatile stock trading and options to meet the increasing deposit requirements of clearing houses.

The Depository Trust & Clearing Corp. operates the leading clearinghouse for stock trading in the United States, helping to process and settle trades. Because of the lag between when investors buy or sell a stock and when their money is actually exchanged for bonds, brokers like Robinhood need to keep deposit accounts at clearing houses to show that they are good for the money. In times of risk, clearing houses ask brokers to allocate more of their own money to cover transactions and insure against losses. When Robinhood and others experienced an increase in turnover in the past few days, DTCC requested a cash increase.

In an interview on Thursday, Robinhood Chief Executive Vlad Tenev explained that Robinhood saw an unprecedented increase in its deposit requirements. By restricting investors’ ability to buy shares in GameStop and 12 other companies, online trading platforms have tried to limit future increases in these requirements.

Robinhood’s customers were not satisfied with the restrictions. A group of individual investors filed a class action lawsuit against the company on Thursday, alleging that it “deprived its customers of the ability to use its service” as well as of potential gains from trading “without a legitimate reason”.

On Friday, Robinhood loosened his stock restrictions, only to increase them later in the day. Users can purchase a maximum number of one share and five option contracts for GameStop.

How did WallStreetBets on Reddit gain so much momentum?

Reddit’s WallStreetBets forum promotes a carefree approach to investment. The community, created in 2012 by a consultant who now lives in Mexico City, actively avoids conventions by adopting offensive descriptions of its users, also known as “autistic”, their investment decisions and their resulting gains and losses. The community has a strong culture of memes and an ironic celebration of big investments that went wrong. At WallStreetBets, the world of finance is fun and funny, whether you win or lose.

It is also the place where amateurs go after powerful Wall Street players, sharing their joy when professionals suffer huge losses. The world of amateur commerce exploded during the Covid-19 pandemic, thanks to volatile markets and blockade isolation, driven by low-cost trading and a proliferation of affordable mobile trading apps. The Federal Reserve’s intervention in the markets in March rewarded amateur traders who “bought the drop” by buying stocks at low prices and profiting from the subsequent rise. Discussions on social media have the potential to go viral and drive stock prices up.

Amid many new GameStop activities on the forum, moderators temporarily made the forum private on Wednesday, citing the difficulty of keeping track of all posts and comments, but then opened it again an hour later. The Discord chat service on Wednesday banned the WallStreetBet server, which users used to speak in real time, for violating community guidelines.

Although WallStreetBets participants are by no means representative of the millions of amateur traders, the now strong community of six million proclaims itself as the place for the common investor.

What is Wall Street saying?

Several high-risk hedge funds with short books, 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 have struggled with technical problems and service disruptions amid hectic trade.

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

Discord and Facebook.

Short sellers are no stranger to criticism, but social media users are sharing personal information, hacking social accounts and sending text messages to family members.

Short seller Andrew Left, the target of Internet attacks, said he would discontinue sending short seller reports. “When we started Citron, it was supposed to be against the establishment. In fact, we have become the established system, ”Left said in a video.

Some professional investors have questioned the tactics of amateur brokers who work in droves and posting online is stock manipulation.

What are politicians saying?

Politicians on both sides of the corridor criticized brokers for the trade restrictions they put in place this week, while others called for investigations and more regulations.

•Rep. Alexandria Ocasio-Cortez (D., NY) called Robinhood in a tweet for blocking “retail investors from buying shares while hedge funds are freely able to trade the shares as they see fit.”

She continued: “As a member of Financial Services [Committee], I would support an audience if necessary. “In a later tweet, she clarified that:” Committee investigators should examine all retail services that freeze stock purchases in the course of potential investigations – especially those that allow sales but freeze purchases. “

•Sen. Ted Cruz

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

•Sen. Sherrod Brown

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

•Sen. Pat Toomey

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

•Sen. Elizabeth Warren

(D., Mass.) He asked the Securities and Exchange Commission and other agencies to step up regulations, noting that professional investors who are suffering from the recent decline in profitable stock sales have been taking advantage of individuals for years.

•Rep. Maxine Waters

(D., California), the chairman of the House Committee on Financial Services, said he would hold a hearing “to examine recent activity around GameStop (GME) shares and other impacted actions focusing on short selling, trading platforms online, gamification and its systemic impact on our capital markets and retail investors. “

•The White House said officials, including Treasury Secretary Janet Yellen, are keeping an eye on frantic commercial activity.

On the regulatory side, this week, the SEC issued two statements saying it is monitoring stock market volatility. On its last Friday, the SEC also said it would “review actions taken by regulated entities that could harm investors or unduly inhibit their ability to trade certain securities”.

What’s next?

No one knows what’s coming up in this “nerdy vs. Wall Street”.

On Friday, Robinhood eased trading restrictions for clients on 13 volatile stocks after raising more than $ 1 billion from his own existing investors. As a result, GameStop and AMC recovered from Thursday’s declines.

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

GameStop the stock and GameStop the company tell two very different stories. GameStop is still “a retail chain of more than 5,000 stores struggling to stay relevant in a business that is moving to digital,” explains Heard columnist Dan Gallagher. Although the company recently made some smart moves, it is still expected to record double-digit revenue drops for the second consecutive year. Meanwhile, the stock has risen more than 25 times in the past three weeks.

And GameStop is not alone. From AMC to Bed Bath & Beyond BBBY 5.02%

for Blackberry, several stocks are seeing their stock prices rise, in contrast to what the company’s performance suggests.