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

As stocks rose, some traders took advantage in one day, and some hedge funds with short bets against the companies suffered losses. This dynamic has created a short-term pressure, when the hard purchase of shares forces short bettors to buy shares from shares in order to limit their losses, thus increasing the share price even more.

As small investors continued to buy more shares on Thursday, the Robinhood mobile trading app and a few other brokerages restricted access to popular shares among these traders. Traders were left with the choice to keep their shares or sell them. Small investors were angry with brokerages. GameStop and AMC shares fell in response to restrictions.

Robinhood Markets Inc. reopened trading early Friday for stocks and options, and GameStop and AMC stock prices rose again.

Why did Robinhood and others block transactions with these shares?

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

restricted access to volatile stock trading and options to meet the increased requirements of deposits from clearing houses.

Depository Trust & Clearing Corp. operates the main clearing center for US stock transactions, helping to process and settle transactions. Because of a gap between when investors buy or sell a stock and when their money is actually exchanged for securities, brokerages like Robinhood have to keep deposit accounts with clearing houses to show that they are good for money. In risky periods, clearing companies require brokerages to raise more money to cover transactions and to insure against losses. When Robinhood and others saw an increase in transaction volume in recent days, the DTCC called for an increase in cash.

In an interview on Thursday, Robinhood CEO Vlad Tenev explained that Robinhood had seen an unprecedented increase in its deposit requirements. By restricting the ability of investors to buy shares in GameStop and 12 other companies, online trading platforms have sought to limit future increases in these requirements.

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

By Friday, Robinhood had eased stock restrictions to tighten them later in the day. Users have the right to purchase a maximum number of shares and five option contracts for GameStop.

How did WallStreetBets grow on Reddit so much momentum?

Reddit’s WallStreetBets forum encourages a devilish investment approach. The community, created in 2012 by a consultant now living in Mexico City, is actively circumventing the convention by adopting offensive descriptions of its users, known as “autistic”, their investment decisions and their won and lost results. The community has a culture of heavy memes and a tongue-in-cheek celebration of big wrong investments. At WallStreetBets, the world of finance is fun and entertaining, whether you win or lose.

It is also the place where amateurs go after the power players on Wall Street, sharing their joy when professionals suffer heavy losses. The world of amateur trading exploded during the Covid-19 pandemic due to volatile markets and blockchain isolation, supported by low-priced trading and a proliferation of affordable mobile trading applications. The Federal Reserve’s intervention in the markets in March rewarded amateur traders who “bought the dive,” buying shares at low prices and profiting as they grew later. Discussions on social networks have the potential to go viral and raise stock prices.

Amid many new GameStop activities on the forum, moderators temporarily took the private forum on Wednesday, citing difficulties in maintaining all posts and comments, but then reopened it an hour later. Discord chat service on Wednesday banned the WallStreetBet server, which users were talking about in real time, for violating community rules.

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

What does Wall Street say?

Several large hedge funds with short cards 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 faced technical problems and service interruptions amid the frantic transaction.

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

Discord and Facebook.

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

Short seller Andrew Left, the target of internet attacks, said he would stop broadcasting short seller reports. “When I started Citron, it had to be against the institution. We have actually become the unit “, said Mr. Left in a video.

Some professional investors have questioned the tactics of mass-market amateur traders and whether posting online is a stock manipulation.

What do politicians say?

Politicians on both sides of the aisle have criticized brokerages for the trade restrictions they have implemented this week, while others have called for investigations and more regulation.

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

She continued: “As a member of the financial services [Committee], I would hold a hearing if necessary. In a later tweet, she clarified that “The committee’s investigators should examine any retail services that freeze stock purchases during potential investigations – especially those that allow sales but freeze purchases.”

•Sen. Ted Cruz

(R., Texas) wrote on Twitter that he agrees with Rep. Ocasio-Cortez.

•Senator Sherrod Brown

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

•Senator Pat Toomey

(R., Pa.), A top Republican on the banking panel, told Capitol Hill reporters that he was disturbed that “a platform would suddenly freeze retail investors who are simply exercising their right to buy.”

•Sen. Elizabeth Warren

(D., Mass.) He called on the Securities and Exchange Commission and other agencies to step up regulations, noting that professional investors suffering from the recent brief spill of hot stocks have benefited individuals for years.

•Rep. Maxine Waters

(D., California), chair of the House Financial Services Committee, said he would hold a hearing “to examine recent work around GameStop (GME) and other affected actions, with a focus on short selling, online trading, gamification and their systemic impact on our capital markets and retail investors. ”

•White House said officials, including treasury secretary Janet Yellen, are pursuing the frantic trading activity.

In terms of regulation, the SEC released two statements this week, saying it is monitoring stock market volatility. Most recently on Friday, the SEC said it would “review actions taken by regulated entities that could disadvantage investors or unduly inhibit their ability to trade certain securities.”

What’s next?

Anyone who assumes what follows in this fight “nerds vs. Wall Street ”.

As of Friday, Robinhood eased trading restrictions for customers for 13 volatile shares, after raising more than $ 1 billion from its existing investors. As a result, GameStop and AMC have returned from Thursday’s declines.

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

GameStop stock and GameStop company tell two very different stories. GameStop is still “a retail chain of more than 5,000 stores struggling to stay relevant in a digital business,” as Heard columnist Dan Gallagher explains. While the company has recently made some smart moves, it is expected to report double-digit revenue declines for the second year in a row. Meanwhile, the stock has increased more than 25 times in the last three weeks.

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

at Blackberry, several stocks are seeing rising stock prices, as opposed to what their company’s performance would suggest.