Jan 29, 2021
Robinhood Clobbers ‘Meme Stock’ Craze by Blocking Purchases of GameStop Shares
Robinhood, which also put a stop on AMC and BlackBerry buys, suggests the meme stock craze has devolved into gambling. Users on the Reddit forum r/wallstreetbets have threatened to sue.
By Michael Kan
UPDATE: Robinhood is reversing course, and will permit “limited buys” of new shares in GameStop and the other affected stocks starting on Friday.
In a new blog post, the company also provided a more detailed explanation for blocking the stock buys. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits,” it said.
“These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today,” the company added. “To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to.”
Original story:
The meme stock craze may have just ended in a flash. On Thursday morning, stock-trading app Robinhood announced it was restricting users from buying new shares in GameStop, AMC, and BlackBerry.
“In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK,” the company said. Users who own the shares can now only sell them.
The companies’ stock prices had all been soaring, thanks to users on a Reddit forum called r/wallstreetbets, which has 4.5 million followers. They banded together to buy shares in companies that hedge funds were betting against.
The biggest winner has been GameStop, a struggling video game retailer that saw its stock price balloon from $17 on Jan. 1 to an insane $347 yesterday. As a result, some users on wallstreetbets reported raking in tens of thousands, and even millions, of dollars from the stock buy.
But now the party may be over. After Robinhood announced the new restrictions, prices for many of the affected stocks tanked by as much as 30 to 50%. GameStop, for example, was trading at $469 a share earlier this morning only to fall to a stunning $264.
In the announcement, Robinhood-which offers commission-free stock trading-said its mission has been to “democratize finance for all.” Nevertheless, the company is indicating the meme stock craze has devolved into gambling.
“Amid significant market volatility, it’s important as ever that we help customers stay informed. That’s why we’re committed to providing people with educational resources,” the company said.
Still, the sudden price drops are bad news for many investors who joined the meme stock craze, hoping to make some cash. Users on r/wallstreetbets are outraged, and calling for a class-action lawsuit against Robinhood over the restrictions. “Allowing people to only sell is the definition of market manipulation,” a post on the forum says. Others have been telling users to hold on to their stocks.
At the same time, US lawmakers are starting to weigh in. “We now need to know more about Robinhood app’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” tweeted US Rep. Alexandria Ocasio-Cortez (D-New York.)
UPDATE: A class-action lawsuit has been filed in a US District Court in New York.
Originally published at https://www.pcmag.com.
