How soon we forget companies like Robinhood that trade on the real dollar stock market did precisely that--disabled bank transfers, put in strict limits, etc.--during the GameStop/wallstreetbets fiasco a few years ago and they got away without any warnings, harm or investigation.
It's funny that lawmakers so mad about Robinhood putting the brakes on this[1], when all I had been reading prior to this year how Robinhood was recklessly gamifying investing[2]. Some people are absolutely going to lose their homes / retirement savings at the end of all this. I have no doubt they would have faced lawsuits and calls for regulation had they done nothing.
That's no excuse, especially for a financial services company like Robinhood. They have a duty to have process and people in place to prevent this exact type of issue.
Robinhood implemented restrictions before any other platform though they were not the only ones to do so, held restrictions longer than any of their competitors, used restrictions (sell only) in a way that was unique to Robinhood and falsely made public claims (later to be retracted) that they had chosen to do some or all of this "for the public good."
Practically no one was harmed by this. A penny or two per trade. It’s more the principle of the matter than the actual costs. The fact that Robinhood was clearly lying is the most concerning thing.
I mean, I honestly don't really blame Robinhood's leadership here. This is incompetence, by virtue of having no solid precedent or guidance on what is the right thing to do here.
Gamestop's stock rise was unambiguous market manipulation. Sure, the difference between a single actor driving up a stock and a bunch of random people on the internet doing it is significant. But what isn't ambiguous is that GameStop stock wasn't worth nearly 400 dollars, and whatever was going on was fishy. Maybe this legal because of the decentralized nature of the manipulation, but this was likely unclear at the time. It still seems unclear to this day.
If Robinhood continued to allow trades then they could be accused of being complicit in market manipulation. This was probably unacceptable to them. If they banned buying and selling GME then they'd have shitloads if pissed customers who lost money because Robinhood didn't let them sell. So prohibiting buys but not sales seems like the least-bad action. Yes, it has the effect of downward pressure on the stock. But all of the alternatives were worse.
2008 crash is a decent example of finance being rigged. Robinhood's handling of GameStop is not. They may be a pretty shit brokerage, but DTCC collateral requirements hit everybody, and they just didn't have enough money lying around to deal with that in the way a lot of customers would have wanted.
It's not an extreme reaction to see a company like Robinhood bending to the will of its real customers, aka Citadel, and concluding that they were both running out of liquid money because they allow instant trading for new users AND that they protected their customers from getting wiped out by limiting the ability of retail investors to buy GME.
"On Thursday, Robinhood was forced to stop customers from buying a number of stocks, like GameStop, that were heavily traded this week. To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation."
This is still commodity trading. There are rules and they apply. There are being investigated. I think you have a bit of an overestimation how swiftly Robinhood would be hit with anything. Recall it wasn't long ago when Robinhood received the ire of people, because they screwed their risk management (and by screwed I mean they didn't have any) and were unable to continue trading certain volatility securities. And thus, stopped the ability to buy said securities.
What was the punishment it received? A day in front of the Congress shifting blame? I would be a bit more cynic when dealing with these topics.
Everything about this story is just so frustrating.
- While the GameStop thing should be investigated and the lack of transparency criticized, Robinhood’s stated reason for halting the trades is plausible and corroborated by other people. I suspect their shadiness was because their internal finances are worse than they are letting on. The idea that they were acting as the foot soldiers of hedge funds (who were hardly overexposed to GME anyway) is preposterous.
- Robinhood absolutely deserves to get in legal trouble (like “send the CEO to prison”) for its horrendously predatory “appification” of retail investment[1]. I had a poor opinion of Robinhood and I was still shocked by how horrible their behavior was[2]:
> In 2019, Robinhood rolled out a new cash management feature with an early access waitlist and utilized gamification to reward customers who interacted daily with the application by improving their position on the waitlist. Customers who did not interact daily watched their position on the waitlist precipitously decline, while those who succumbed to the effects of Robinhood's gamification soared up and up the waitlist.
> In an effort to encourage trading, Robinhood provides lists of securities on its application, including lists of the most-traded securities on Robinhood's platform and the most popular securities traded by Robinhood customers. This is no different than a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to that customer.
> Robinhood advertisements use young actors and illustrate Robinhood's attempt to lure young, inexperienced investors into using its platform...[f]or example, one such advertisement contains a clip of a young adult saying "I'm a broke college student and investments might help my future tremendously."
There is a reason why stocks get straight up halted from trading due to extreme volatility. Robinhood had to the same on this extreme event to keep their company solvent. Just because folks don't understand how the market works doesn't mean it is a nefarious plot against the little guy.
A TOS isn't law. What Robinhood did altered the market price of several major stocks including AMC and BB. They will almost certainly be getting yet another SEC investigation.
On robinhood, their only sin through this whole situation was poor communication. Several firms had to restrict trading of GME and several other stocks because of clearinghouse restrictions. Robinhood was the first to try to explain publicly why they had to do that, and they explained it absolutely horribly.
With regards to treating investing like gambling, there's no real problem with that. There's definitely a market for it, and it's why /r/Wallstreetbets exists.
I've been reading WSB since yesterday and while I understand the outrage about blocking trading. They started blocking trading with $GME trading in the $400's, and a slew of redditors on WSB, Discord & Telegram pushing penny stocks. It started out a crusade against the hedge fund shorting $GME and quickly turned into rallying dumb money to pump and dump penny stocks. Looking at the direction things were going it seems like Robinhood acted responsibly in cutting off the buys of AMC, BB, NOK, etc. They're all stocks that have been propped up artificially in the last 48 hours based on the hype and attention generated by the Gamestop story.
No one serious thinks Gamestop stock is worth $400+. Robinhood cut off buying at the point when unsophisticated investors were caught up in a stampede to "stick it to the man." Seems like they did the right thing.
I'm not an apologist, but the fact is that Robinhood has gotten beaten up by the SEC over the years for not looking out for their users enough (rightfully so). But that also means I can see why they'd tread very carefully around protecting their users from losing their savings on GME. It's hard to have it both ways.
I don't support what Robinhood did, but to pretend that Robinhood specifically is the problem is a misdirection. The whole financial and business media has come out in favor of the poor hedge funds. The White House and SEC are "keeping an eye" on the situation: https://twitter.com/therecount/status/1354828593524826112. Discord has banned WSB and who knows what Reddit or other platforms will do soon. There are calls to halt trading the stock altogether: https://www.fool.com/investing/2021/01/27/gamestop-trading-o...
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