Robbinhood.com is a popular online brokerage firm that provides commission-free trading of stocks, crypto, options, ETFs, etc., through a mobile app and web platform. Robinhood was founded in 2013 by two former Stanford University roommates.
Gamestop.com is a video game retailer that operates physical stores across the United States, Canada, Australia, and Europe. Gamestop has closed 449 out of 3,190 stores existing today. Instead, they are moving to an e-commerce model and offering various services to their vast clientele.
What did happen in January 2021?
It started with a group of Reddit.com users on the subreddit r/wallstreetbets who noticed that many hedge funds had taken out massive short positions on GameStop stock, which they believed was undervalued. These users then began buying up shares of GameStop, driving up the price by up to 600% in four days, thus forcing those large Wall Street firms who bet that the stock would go down to lose billions in their portfolio (source: Santa Clara University)
As the price of GameStop stock continued to rise, Robinhood decided to restrict the trading of GameStop and other heavily shorted stocks, citing concerns about volatility and capital requirements. This decision was met with widespread criticism, with many accusing Robinhood of acting on behalf of the hedge funds and against the interests of its users.
The situation quickly became a hot topic on social media, with many users expressing support for the Reddit traders and calling for greater transparency and fairness in the stock market. The incident also sparked discussions about the power of social media in influencing financial markets and the need for regulation to prevent market manipulation.
Social media reaction
Robinhood.com users were furious after they blocked the possibility of buying and selling stocks of Gamestop, more than 120K tweets in just two days using the #boycottrobinhood. About users calling to boycott the app (according to businessinsider.com). Also, Robinhood users flooded the Google Play Store and Apple’s App Store with negative app reviews. This reaction was caused because Robinhood favored the hedge funds (Wall Street) and not the users, which are small investors. They argued that they were following regulatory requirements by the authorities. Robinhood.com has lost over 1 million users since 2021; investors filed than 50 federal lawsuits since.
Consequences of Robinhood, Reddit, and Gamestop Case
- Retail investors: The incident highlighted the power of retail investors to influence the stock market through social media, and many individuals became more interested in investing. However, it also exposed the risks of speculative investing and the potential for market volatility.
- Robinhood: The trading platform faced significant backlash for its decision to restrict trading during the GameStop situation. Many users accused the company of acting against their interests. This led to increased scrutiny of Robinhood’s business practices and raised questions about its commitment to its users.
- Hedge funds: The hedge funds that had bet against GameStop suffered significant losses due to the short squeeze, which put pressure on their investors and highlighted the risks of short selling. Melvin Capital Management for example, loss nearly $6.8 billion (according to the Wall Street Journal)
- Regulators: The incident prompted increased scrutiny of the stock market and the need for greater oversight and regulation to prevent market manipulation. It also raised questions about the role of social media in financial markets and the need to address these new risks.
- Public perception of the financial system: The incident fueled public distrust, with many individuals feeling that the system was rigged against them. This could have long-term implications for the industry and its reputation.
