In what seems to be the most exciting news of 2021 so far, popular trading app Robinhood is facing quite a bit of backlash for restrictions they made following the surge of several stocks targeted by a sub-Reddit forum. For those who are not aware, Robinhood is a financial services company whose mission is to “democratize finance for all” by offering commission-free trading on individual companies, options and ETFs. The trading app got its name from the widely known fairy tale, Robin Hood, depicting a thief who stole from the rich and gave to the poor. Ironically enough, Robinhood did not act like Robin Hood when it came down to it.
The popular trading app was caught in the crosshairs of WallStreetBets, a sub-Reddit forum for speculative investing which has chosen to take on the largest Wall Street hedge funds in an effort to short squeeze them out of positions in companies such as GameStop (GME), AMC (AMC), Bed Bath & Beyond (BBBY), and Nokia (NOK). GameStop being the main stock played, its surge forced short sellers who were betting against the stock to buy shares to hedge their positions, sending the stock soaring even higher. It hit an all-time high of $483 before plummeting down to its current value of $52.40.
Although the army of retail investors were successful, their dreams of keeping these stock prices high did not last long. On January 28th, the popular trading app infuriated users by freezing trades on several of these stocks, only allowing users to close positions, not add. The company defended the move in a blog post, calling it a “risk-management decision” undertaken in the face of “extraordinary circumstances.” Almost immediately after restricting the trading of such stocks, Robinhood was hit with a class-action lawsuit. Fast-forward a little bit and they are now facing dozens of lawsuits. At least 30 parties across 10 states have sued the company in federal court, many seeking class action status. These lawsuits claim that Robinhood’s actions rigged the market against its customers and deprived retail investors of potential gains they could have made. They allege that Robinhood users lost millions of dollars because they were unable to buy or sell stock during the freeze, and that the company chose to “manipulate the market” to help other financial institutions.
The hearing will be on February 18 and is set to investigate how retail trading pushed the most popular of the forum stocks, GameStop, from trading below $20 at the beginning of January to around $340 at the end of the month, according to a New York Post report. The hearing will be attended by Citadel CEO Ken Griffin, Robinhood CEO Vlad Tenev, Melvin Capital Management CEO Gabriel Plotkin, Reddit co-founder Steve Huffman and the Reddit user who led the horde, Keith Gill. In a statement made by Representative Maxine Waters, who will chair the hearing, “I am concerned about whether or not Robinhood restricted the trading because there was collusion between Robinhood and some of the hedge funds that were involved with this.” As we can see from the plethora of lawsuits, she is not the only one speculating Robinhood’s actions. Will Robinhood face consequences? Will they be able to bounce back from all the negative press? This hearing could very well be a defining moment for Robinhood’s future.