Several online stock brokers have restricted their user’s abilities to buy shares in numerous companies, including GameStop, Nokia and AMC.
The move comes after millions of amateur investors encouraged by a Reddit forum called “r/Wallstreetbets” decided to buy stock in an attempt to outmaneuver hedge fund investors who had signalled their intentions to short it.
The key to what’s happening is “shorting”; this is where an investor tries to make money by betting that a company’s share price will fall. However, when hedge fund investors tried to short GameStop stock, they failed to profit because the amateur investors were successful in driving up GameStop’s stock price from around $17 last week to a high of $376 on Wednesday, causing the hedge fund investors who had planned to short around $6 billion.
However, several online brokers have now restricted purchases, one of the most prominent being a popular free trading app called Robinhood, which has around 13 million users. Robinhood announced that “in light of recent volatility,” the stock of GameStop and several others would be restricted, only allowing traders to close their positions, which allows them to sell but not to buy more shares. Robinhood also announced that it would be increasing the amount of money traders would need to put down for certain securities bought on margin.
These changes had immediate effects with GameStop’s stock whipsawing and closing down 44% as the Dow Jones rallied 300 points with the restrictions evidently soothing large investors. Robinhood released a statement saying that it aimed “to democratize finance for all’ and that “we’re determined to provide new and experienced investors with the tools and resources to help them invest responsibly for their long-term financial futures.” However, this did little to sooth the tempers of the furious investors who had received notifications from Robinhood saying that their shares of GameStop had been sold without prior permission.
With an estimated half of Robinhood’s 13 million users owning shares in GameStop, it did not take long before the company was hit with several class action lawsuits, complaints to the Securities and Exchange Commission, and accusations of market manipulation because of its recent actions.
When Democratic representative Alexandria Ocasio-Cortez tweeted that the halting of trading was “unacceptable” she found an unlikely companion in Republican senator Ted Cruz who tweeted “fully agree” in response. Ocazio- Cortez also said that as a member of the House Financial Services Committee, she would “support a hearing if necessary”. Another Republican senator Marsha Blackburn from Tennessee called on Robinhood to “free the traders”, Blackburn also tweeted that “once again Wall Street is crushing the little person on Main Street”.
ARTICLE NATHAN REID
POLITICS EDITOR: CARSON CHOATE
PHOTO CREDITS: THE NEW YORK TIMES