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Robinhood Accused of Stock Price Manipulation As It Freezes Purchases of Certain Stocks

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Robinhood's logo. Which might be a leaf or a quill, highly stylized If you’ve been following stock market news, there are likely a few companies you’ve heard about that you likely didn’t expect. GameStop ($GME), Blackberry ($BB), Nokia ($NOK), AMC ($AMC) and others. But why? GameStop’s stock price skyrocketed. Many other stocks did as well, against expectations of investment firms. In fact, the rapid gains were so unexpected, they triggered a “short squeeze.” Investment firms found themselves at the mercy of stocks with prices rising after firms had bet they’d fall.

This morning, Robinhood, and soon after, numerous other brokers, announced they would not allow users the ability to purchase any of these stocks. The result of which caused a dramatic downturn of the prices of these stocks.

Was what Robinhood did market manipulation? That’s the accusation of many users who claim Robinhood hurt the value of their holdings intentionally, to meet margins and help large hedge funds, like those that own a stake in Robinhood. Robinhood denies the accusation, saying it was done to protect themselves and their users from volatility. A class action lawsuit brought forward in New York says otherwise.

Today was one of the most confusing, hectic, and troubling days in the stock market since 2008. Thanks to large groups on Reddit and potentially questionable motives and tactics from brokers, there could be many more interesting days like this in the future.

Disclaimer: I own some of stock mentioned in this article and am currently a Robinhood customer. As always, I won’t that that influence the factual nature of my reporting. Tweets provided are not my own, and do not necessarily reflect my own views. Also, nothing in this post should be misconstrued as advice.

In This Article:

Shorts? Squeeze?

Gamestop's meteoric rise, growing by 1,395.05% in the last month, and that's with today's significant losses.

Let me introduce you to shorts. These are bets that investors make that a stock will fall in value. Investors borrow stock at a price, sell it, and buy it back at a lower price, before returning it. To put it in a way that is both topical and perhaps easier to understand. Say you have a friend. They lend you a video game for a week, and need it back by Friday. You take that game and sell it to GameStop for $15. You believe there will be a special $10 promotion for the game coming up, and you’re willing to bet it will happen before you have to return the game. The game comes out, and you buy it for $10. You then go back to your friend and return the game, now $5 richer.

Or, perhaps the game doesn’t come out. You go back to GameStop to buy the game back, only to find that they’re now charging $35 for the game. You buy it anyway, as you must return it to your friend. Now you’re $20 poorer.

This is (mostly) how shorts work.

Now, we could sit here and point out that it’s quite unethical to take something that isn’t yours and sell it in the hopes of making a profit, but that’s a discussion for another day.

The GameStop logo, the word "GameStop"

Now, what’s a short squeeze? Let’s say that $10 game comes out, but it’s in limited quantities. People buy them all up. You can’t even buy your original game back. Demand is higher than supply, so the price skyrockets. You have to run on to ebay to buy it for $50, so you do. People drove up demand and, knowing you had to return the game, you had to go along with the drastically higher prices. Your buying of the game at the higher price only tells resellers that the price can be even higher.

That’s the squeeze. Those buying back stock to cover the stock they borrowed found its value skyrocketing, and had to buy to cover their losses as best as possible. They have to buy, and they’ll do so at nearly any cost. Eventually, in the case of GameStop, it reached the point where there wasn’t enough stock to cover their shorts. The stock value skyrocketed.

Wall Street Bets 🚀

We can’t discuss the controversy around GameStop and these other stocks without mentioning Wall Street Bets (WSB). WSB is an online community, a subreddit on Reddit. There, people share memes about the stock market. They often post huge losses from bets that didn’t pay off, as well as times when those bets did pay off. They also discuss investments they’re making.

GameStop came across their radar. It seemed a few investment firms, in their mind, were unfairly shorting GameStop’s stock. They were influencing the price down. However, someone, or a group of users, figured out the fatal flaw in the hedge funds’ bets. There were too many. If they could buy up enough stock, they wouldn’t be able to cover their losses, and drive GameStop stock skyrocketing. It was the perfect storm for a short squeeze. To WSB, it was a chance for David to take down Goliath.

Gamestop is a game retailer. Like most retailers, they’re struggling during the apocalypse pandemic. If you ask anyone on WSB why they bought $GME, they’ll just say, “We like the stock.” It’s a joke, a meme, but there were many reasons people bought in. Some wanted to take advantage of a possible short squeeze driving up the price. Others saw a retailer struggling and thought it could be a good time not to short a company, but to instead support it. Others saw a low-priced stock that could become far more expensive once the PS5 and Xbox are available in large quantities. Whatever the reason, WSB decide they were going to take GameStop to the moon.

And they did.

Other Favorites

WSB also singled out a few other stock they believed to be under-performing. BlackBerry, for example. BlackBerry name is a household name, like Blockbuster, and people expect the same of it. That is, that it started dying around the same time the iPhone came out. But BlackBerry has been outperforming expectations on their earnings per share, they sold some patents, recently partnered with Amazon for work with their QNX system and Amazon’s IVY sensor system for cars, and are in many cars already. For uses it for its Sync system. BlackBerry seemed to be moments away from a massive rebound, and WSB pounced. The volume was so high, it drove the stock, once trading below $8, to over $24. If you ask WSB how high it will go, they’ll once again point to the moon, likely with a rocket emoji.

There’s also AMC, the movie theater company who hasn’t seen much business in a year due to the pandemic. Betting that the pandemic will end and people will go back to movie theaters isn’t a crazy idea, especially if the stock is under-valued, according to your bet that people will be eager to go back to theaters soon. WSB once again, pounced, and the stock price rose.

There are a number of stocks that WSB frequently flocks to. Sometimes to drive up the price with group buying, sometimes just to help each other out, or sometimes because it’s just fun to bet on (hello, Tesla). Regardless, it’s a group of people sharing their investments and predictions, like a bar in the financial district.

Only, there are tens of thousands of people at the bar.

Robinhood

https://twitter.com/reckless/status/1354873749389123585?s=20

Robinhood is an online stock broker. For no fees, you can buy stock as you want it. You even get a free stock if signing up through an invite. The company sold itself as a beginner stock trader’s paradise. A way to build up a portfolio the easy way. Bet on stocks, invest in retirement, or even trade cryptocurrency. It was a site for the little guy. Robinhood was even named after the legendary hero who stole from the rich to give to the poor.

But on Thursday morning, users claim Robinhood reversed course.

Robinhood blocked the purchase of a number of these popular stocks, even ones that were not rapidly gaining value at the cost of short sellers. This gave users only one option: sell your stocks. Some unverified user reports claim that Robinhood sold their stocks without their permission.

The result was exactly what hedge funds hoping to short these stocks wanted: drastically lowering stock prices.

“We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock. We are reviewing this matter.”

– NY Attorney General Letitia James (D)

Robinhood is now the target of a class action lawsuit claiming they manipulated stock on behalf of large hedge funds. Some even claim that Robinhood may have been influenced by their own dependency on Citadel, a firm that owns Melvin Capital, one of the funds most hurt by the short squeeze. However, it’ll take a thorough investigation to prove this. Thanks to complaints to the Securities and Exchange Commission (SEC), and a class action lawsuit, we may get to the bottom of this.

Robinhood’s Defense

“In order to protect the firm and protect our customers we had to limit buying in these stocks.”

– Vlad Tenev, Robinhood CEO

In an email to investors after markets closed, Robinhood admitted that it had “been a tough day.” They thanked users for being customers and stated that on Friday, they’d start allowing “limited buys of these securities.” They claim they did not halt buying to manipulate stock prices, but instead made a “temporary decision” to control “volatility.” Of course, today was one of the more volatile trading days of the week, with stock tanking as much in a day as it had grown over the last week. Robinhood stands by their statement that they did so to fulfill “SEC net capital obligations and clearinghouse deposit” requirements. It seems that Robinhood is claiming they couldn’t financially guarantee the shares people were trying to buy.

Investors seem unwilling to accept Robinhood’s statement without scrutiny. When doesn’t the stock market involve volatility and risk?

What’s Next?

“It’s long past time for the SEC and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do.”

– Sen. Elizabeth Warren (D-MA)

Many investors lost money not due to the fluctuations of the free market, but due to Robinhood and other brokerage firms’ decisions to limit some or all of these popular stocks today. They’ve lost faith in many of these institutions, which are supposed to be guided on principles of free trade capitalism, with regulations put in place to protect businesses and investors, not cover the losses of large hedge funds who bet against a company and lost. They’re frustrated, and, if Robinhood and other brokers acted specifically to influence the stock price, looking to pursue legal options.

They’re not alone. Politicians from both sides of the isle have spoken up. From Alexandria Ocasio-Cortez and Elizabeth Warren to Ted Cruz and Donald Trump Jr. Alexandria Ocasio-Cortez expressed the desire to investigate Robinhood, and Ted Cruz said, “Fully agree.”

This lead to AOC pointing out that she didn’t want to negotiate with a man who helped rile up a mob to get her killed just a few weeks ago, but that she’d be happy to work with any other Republican not involved with the Capitol insurgency. But that, too, is a story for another day.

More than half of Robinhood’s supposedly 13 million users own some GameStop stock. This was a decision that took choice away from at least 6.5 million investors, and hurt every one of their portfolios. It did, however, benefit short sellers who desperately needed a large dip like this. It’s because of those conflicts of interest that we’ll be talking about this day and these stocks for weeks to come. Meanwhile, investors who have lost faith in Robinhood will likely leave the broker in droves. But Robinhood wasn’t alone. Interactive Brokers, Webull, TD Ameritrade, and others similarly stopped the sale of popular stocks. This controversy is widespread. Robinhood is at the middle due to the large percentage of its users holding shares in these companies.

Wall Street Bets isn’t letting GameStop or their other beloved stocks go. They’re holding on to them with “diamond hands,” that is, holding firm. They still want these stocks to go to the moon, to skyrocket in price. Perhaps with enough rocket emojis on Reddit, they will.

🚀🚀🚀

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