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

As the stock soared, traders took advantage one day and some hedge funds suffered losses with the companies’ short bets. This dynamic has caused short pressures, where heavy stock purchases force short bettors to buy shares of the shares to limit their losses, thus increasing the share price even more.

As small investors bought more and more shares on Thursday, the mobile trading app Robinhood and several other brokers restricted access to shares that were popular among the traders. The traders had the choice to own or sell their shares. Small investors were furious about the brokers. GameStop and AMC stocks sank in response to the restrictions.

Robinhood Markets Inc. started trading stocks and options again early Friday, and the share prices of GameStop and AMC rose 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 the trading of volatile shares and options to meet the increased deposit requirements of the clearing houses.

The Depository Trust & Clearing Corp. operates the major U.S. equity clearing house, which assists in the processing and settlement of transactions. Due to a delay between investors buying or selling a stock, and when their cash is actually exchanged for securities, brokers like Robinhood have to keep deposit accounts at the clearing houses to show that it is good value for money. In risky times, the clearing brokers ask brokers to put more money to cover transactions and insure against losses. When Robinhood and others saw an increase in trading volume over the past few days, DTCC requested a cash increase.

In an interview, Robin Ten CEO Vlad Tenev explained on Thursday that Robinhood had seen an unprecedented increase 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 the requirements.

Robinhood customers were not happy with the restrictions. A group of individual investors on Thursday filed a complaint of action against the company, claiming that it ‘deprives their clients of the ability to use their service’, as well as a possible profit from trading without a legal reason.

By Friday, Robinhood had relaxed the stock restrictions, to tighten them later in the day. Users may purchase a maximum number of one share and five option contracts for GameStop.

How did WallStreetBets build so much momentum on Reddit?

Reddit’s WallStreetBets forum promotes investment by the devil. The community, founded in 2012 by a consultant now living in Mexico City, withdrew from the convention and adopted offensive descriptions of the users, or ‘autistics’, their investment decisions and their consequent gains and losses. The community has a heavy meme culture and a tongue-in-cheek celebration of big investments that went wrong. At WallStreetBets, the financial world is fun and funny, whether you win or lose.

It is also the place where the amateurs go after Wall Street players, and share their joy when the pros suffer heavy losses. The amateur trading world exploded during the Covid-19 pandemic thanks to volatile markets and seclusion from lockouts, driven by cheap trading and an increase in accessible mobile trading apps. The Federal Reserve’s intervention in the markets in March rewarded amateur traders who bought ‘the dip’ and bought stocks at low prices and later benefited. Discussions on social media have the potential to go viral and raise stock prices.

Amid many new GameStop activities on the forum, the moderators temporarily made the forum private on Wednesday, citing difficulties in keeping up with all the posts and comments, but reopened an hour later. The chat service Discord on Wednesday banned WallStreetBet’s server, who spoke to users in real time, for violating community guidelines.

While WallStreetBets participants are by no means representative of the millions of amateur traders, the now six million strong communities declare themselves to be the place for the investor.

What does Wall Street say?

Several high-flying hedge funds with short books, or bets against companies, suffer 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 brokerages have struggled with technical issues and service interruptions amid the insane trading.

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

Onmin and Facebook.

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

Short seller Andrew Left, a target for internet attacks, said he would stop sending reports on short sellers. “When we started Citron, it had to be against the foundation. We have actually become the establishment, ‘said Mr. Left in a video said.

Some professional investors question the tactics of amateur traders who work en masse and whether the online placement is stock manipulation.

What do politicians say?

Politicians from both sides of the aisle criticized the brokers for the trade restrictions they imposed this week, while others called for investigations and more regulations.

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

She continues: ‘As a member of the Financial Services [Committee], I would support a trial if necessary. In a later tweet, she explains that: “Committee investigators should investigate retail services that buy shares in the course of potential investigations – especially those that allow sales but freeze purchases.”

•Senator Ted Cruz

(R., Texas) tweeted that he agrees with Representative Ocasio-Cortez.

•Sen Sherrod Brown

(D., Ohio), the forthcoming chairman of the Senate Banking Committee, said he plans to hold a hearing of the committee to concentrate on the functioning of the stock market.

•Sen Pat Toomey

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

•Senator Elizabeth Warren

(D., Mass.) Called on the Securities and Exchange Commission and other agencies to tighten regulations, pointing out that the professional investors who have been hurt by the recent short-term pressure on hot stocks have been benefiting for years from individuals.

•Rep. Maxine Waters

(D., California), chair of the House Financial Services Committee, said it would hold a hearing ‘to investigate recent activity surrounding GameStop (GME) shares and other affected stocks, with a focus on on short selling, online trading platforms, gamification and its systemic impact on our capital markets and retail investors. ”

•The White House said officials, including Treasury Secretary Janet Yellen, are monitoring the frenetic trading activity.

On the regulatory side, the SEC issued two statements saying it was monitoring stock market volatility. In its latest Friday, the SEC also said it would “review actions taken by regulated entities that could harm investors or otherwise unnecessarily hamper their ability to trade certain securities.”

What comes next?

It’s anyone’s guess what’s next in these ‘nerds vs. Wall Street ‘vete is.

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

Several hedge funds suffered heavy losses and withdrew their exposure to the stock market on both the long and short side of their portfolios.

GameStop the stock and GameStop the company tell two different stories. GameStop is a retail chain of more than 5,000 stores struggling to stay relevant in a business that is switching to digital, as Dan Gallagher, Heard’s columnist, explains. Although the company has made some smart moves recently, the double-digit revenue is still expected to decline 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, contrary to what their company performance would suggest.