Robinhood CEO Vlad Tenev explained what he called the platform’s “very difficult decision” to restrict buying of GameStop (GME) and about a dozen other securities during a Thursday evening interview on CNBC.
He said the decision was made in response to requirements Robinhood must adhere to as a brokerage firm.
“We have lots of financial requirements, including SEC net capital requirements and clearinghouse deposits — that’s money that we have to deposit at various clearinghouses,” Tenev said. He added that such requirements can fluctuate based on market volatility and can be “substantial in the current environment where there’s … a lot of concentrated activity in these names that have been going viral on social media.”
He added: “In order to protect the firm and protect our customers, we had to limit buying in these stocks.”
Tenev also shot down speculation spread on social media Thursday that Robinhood restricted regular trading of the volatile stocks at the request of large Wall Street firms. One Robinhood user alleged in a class action lawsuit filed against the trading platform Thursday that the move was made “knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.”
The company plans to allow limited buying of the volatile stocks it restricted starting on Friday morning.
“Of course Robinhood stands for everyday investors,” Tenev said. “It pains us to have had to impose these restrictions, and we’re going to do what we can to enable trading in these stocks.”
New York Attorney General Letitia James is weighing in following Thursday’s Robinhood chaos, and said she plans to look into the situation.
Earlier Thursday, the app restricted trading of GameStop (GME) and several other volatile stocks, prompting fierce criticism. It plans to resume limited buys of such stocks on Friday.
Trading app Robinhood said it will resume limited buys of volatile stocks that it had restricted earlier in the day.
Starting Friday “we plan to allow limited buys of these securities,” the company said in a blog post Thursday. “We’ll continue to monitor the situation and may make adjustments as needed.”
Robinhood’s decision to limit trades of GameStop (GME), AMC (AMC) and others that were bid up by a group of traders on Reddit sparked an immediate and intense backlash from retail investors. The WallStreetBets subreddit accused the app of market manipulation.
Within hours of the decision, one Robinhood user had filed a class-action lawsuit against the company, which has built its reputation on democratizing investing.
US stocks ended sharply higher on Thursday. Economic reports in the morning underscored the need for more stimulus once again. Meanwhile earnings season keeps going. Apple (AAPL) was the worst performing Dow stock, closing down 3.5%, after reporting a blowout fourth quarter late Wednesday.
Elsewhere, some shine wore off for the Reddit favorites GameStop (GME) and AMC (AMC) after brokers and trading platforms restricted trading in those companies. GameStop closed down more than 44%, while AMC sold off more than 56%.
Webull is once again allowing users to buy stocks of GameStop, AMC and Koss.
Shortly before 11:30 am ET, Webull had announced it was restricting users from buying shares of those three companies because of “extreme volatility.”
At 2:35 pm, though, the company reversed course:
Many traders have been swarming to Webull and other alternative brokerage apps after Robinhood restricted trading for GameStop and others on Thursday.
Democratic Senator Sherrod Brown, the incoming chairman of the Senate Banking Committee, announced plans Thursday to hold a hearing on the turbulent state of the stock market.
“People on Wall Street only care about the rules when they’re the ones getting hurt,” the Ohio Democrat said in a statement.
The decision to hold a hearing comes after days of wild swings in shares of GameStop (GME), AMC (AMC) and other stocks bid up by a group of traders on Reddit. The enormous rallies have caused heavy losses for some hedge funds that bet against the stocks.
“American workers have known for years the Wall Street system is broken – they’ve been paying the price,” Brown said. “It’s time for the SEC and Congress to make the economy work for everyone not just Wall Street.”
Brown did not set a date or the parameters for a hearing.
A Robinhood user filed a class action lawsuit against the platform on Thursday after it restricted trading of GameStop (GME) stock — which has soared in recent weeks thanks to the support of Reddit traders — causing it to lose much of its value today.
The complaint alleges that Robinhood’s action deprived users of taking advantage of potential gains as GameStop’s stock rose later in the day, as well as making it impossible for them to “short” the stock in case it drops. It also alleges that Robinhood customers have endured “substantial losses” because of the move, and claims the trading platform violated Financial Industry Regulatory Authority rules by denying users the opportunity to trade the stock.
“Upon information and belief, Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers,” the complaint, filed by Brendon Nelson, alleges.
Robinhood said in a statement Thursday that, “in light of recent volatility, we are restricting transactions for certain securities to position closing only.”
The company took similar actions for other stocks, including AMC (AMC), BlackBerry (BB), Nokia (NOK) and others, something the suit also takes issue with.
“Robinhood continues to randomly pull other securities from its app for no legitimate reason,” the complaint states.
A hashtag once devoted to spreading baseless conspiracy theories about the 2020 election has now been taken over by investors fuming over the decision by online brokerages to restrict trading of shares of GameStop and other volatile stocks.
On Twitter, #StopTheSteal had been a major source of election misinformation, having been inspired by a now-banned Facebook group of the same name.
But on Thursday, as Robinhood moved to limit purchases of GameStop, irate Twitter users called for the stock trading app to “stop the steal” that is allegedly underway on behalf of hedge funds and at the expense of the retail investors (and Reddit users) who had driven up GameStop’s share price.
The hashtag is now filled with angry traders.
“When working class people lose money in the market it’s CAPITALISM,” wrote one user. “When a hedge fund loses billions because the working class played the game better then it’s STOP THE TRADING.”
“#STOPTHESTEAL OF EQUITY (ECONOMIC CAPITAL) FROM THE RETAIL INVESTOR,” wrote another.
The evolution of the hashtag from a hub of misinformation into a hotbed of populist economic fervor may only be temporary. But it underscores just how quickly conditions can change on social media.
Well that didn’t last long.
Even after it reported a record loss and warned of a larger loss in the first quarter than in the most recent three months, American Airlines shares took off like a rocket early Thursday. Shares were up as much as 87% at one point in premarket trading, with the help of investors posting on Reddit who hoped to drive up the price and put a squeeze on investors who bet against it by shorting it.
“AAL flying to moon?” wrote one investor. “Let’s see if we are going to get some tasty juice out of a squeeze.”
According to S3 Partners, about 19% of American shares are controlled by short-sellers. No other US airline has as much as 5% of its shares held by shorts.
But soon after the market opened, American shares reached their high of the day, rising 31.4%. And then they started a steady decline throughout much of the rest of the day. By mid-afternoon they were up less than 10%.
The roller coaster ride for GameStop (GME) shares is having a major impact on other companies in the retail world – the big mall owners that have shopping centers with GameStop and other struggling brick and mortar stores as their tenants.
Shares of Macerich (MAC), which like GameStop is both a favorite target of short sellers and the individual investors on Reddit who are trying to squeeze the shorts, fell nearly 20% Thursday. But the stock is still up more than 70% in 2021, including a nearly 40% pop in just the past five days.
Macerich isn’t the only mall owner tumbling Thursday. Shares of Washington Prime Group (WPG) and Tanger Factory Outlet Centers (SKT) each fell sharply but they both have still gained more than 25% in the past week.
And then there’s PREIT (PEI). It also fell sharply Thursday but is up about 25% in the past few days and has more than doubled this year – even though the mall owner filed for bankruptcy last November.
Scott Crowe, chief investment strategist at CenterSquare Investment Management, a real estate investing firm, said in an email to CNN Business that the most distressed parts of the retail real estate world have soared. But that can’t last forever.
“Speculative mania will continue until it is tested and breaks,” he said.
That appears to be what’s happening today.
GameStop (GME) is looking a lot less hot in the early afternoon: The retailer’s shares are down 40%.
But it was a different story earlier in the day when GameStop’s stock rose s much it became the biggest company by market capitalization in the Russell 2000, America’s small-cap stock index.
This morning, when GameStop soared to a high of $483 per share, its market capitalization was $33.7 billion, pushing the previously largest company Plug Power (PLUG) to second place, according to Refinitiv.
Since then, GameStop’s fortune has turned and the company is only the third largest player in the index.
But here’s what’s even crazier: At its peak, GameStop’s weight in the Russell 2000 index was 1.03% thanks to its sudden ascent. At the start of the week it had just been 0.13%, which gave it the 170th spot in the index, and coming into the year it was only 0.04%, or the 747th rank of the index, according to Refinitiv.
What difference a few days can make.
Webull, a trading app seen as an alternative to Robinhood, is also restricting users from buying new shares from GameStop (GME), AMC (AMC) and Koss (KOSS), a small headphones company whose stock took off this week.
The company announced the news in a tweet Thursday, citing market volatility as the reason its halting share buying in these companies.
“Due to the extreme volatility in the symbols AMC, GME, and KOSS, our clearing firm will no longer be able to support clearance on these symbols. As a result, Webull is forced to set all transactions in these symbols to liquidate only.”
Robinhood and other platforms came under fire for their decision to restrict trades Thursday. The Reddit group WallStreetBets, which has led the jaw-dropping surges in those stocks, accused Robinhood of market manipulation.
As the stock frenzy continues, trading app Robinhood is restricting transactions for certain securities including GameStop (GME), BlackBerry (BB) and AMC (AMC). Senator Ted Cruz and Representative Alexandria Ocasio-Cortez — two lawmakers from opposite ends of the political spectrum — aren’t happy about it.
On Thursday, AOC, a progressive Democrat, tweeted: “This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.”
Cruz, a conservative Republican, retweeted Ocasio-Cortez with a surprisingly un-ironic “Fully agree.”
Robinhood is free for investors, touting itself as democratizing the world for young traders. So how does the app make money? In part through a controversial industry practice known as payment for order flow.
Here’s how it works: Brokerage firms like Robinhood can cash in on where they send customers’ trade orders. Broker-dealers – including market movers like high-frequency trading firms – pay Robinhood for executing the trades with them.
That works out well for Robinhood, whose CEO has previously defended the practice to CNN Business’ Matt Egan. But it hasn’t always been ideal for Robinhood’s investors.
In 2019 the company was fined by a regulator for sending customer trading orders a few years prior to four broker-dealers without guaranteeing the best price.
Robinhood said at the time that the charges no longer reflected their current practices. But then again in December 2020, the company agreed to pay a $65 million fine to the SEC to settle similar charges – that Robinhood failed “to satisfy its duty to seek the best reasonably available terms to execute customer orders,” and didn’t disclose that it received payments for order flow.
The SEC said Robinhood benefited from executing the trades that weren’t ideal for its customers, and that investors lost out on $34.1 million (even after taking into account the savings from the commission-free trades).
GameStop (GME) was up as much as 39% Thursday before crashing as much as 67%.
The roller coaster was set in motion after Robinhood banned trades of the stock earlier this morning.
The last time GameStop fell was January 20, when it slipped less than 1%. In the 13 trading sessions since GameStop announced its new board, the stock has risen 500% and has fallen at the end of just 3 sessions.
Some users aren’t thrilled that Robinhood has restricted trading of several hot stocks, including GameStop (GME), BlackBerry (BB), Bed Bath & Beyond (BBBY) and Nokia (NOK).
The app’s ratings has fallen to a 1 star on Google Play. Reviewers are criticizing Robinhood for the move and calling it “market manipulation.” Another person wrote “Horrible app, no notion of a free market.”
Robinhood is still maintaining its 4.8 out of 5 rating on Apple’s App Store.
Sure, GameStop’s (GME) stock has surged this year. But investors in headphone maker Koss have a message for millennial GameStop traders — hold my coconut pineapple hard seltzer.
Koss (KOSS), a small Milwaukee-based firm, has soared 800% in 2021 — from just under $3.50 a share to about $47. Most of the stock’s gains have taken place in the past week. GameStop, if you’re keeping score, is up “just” a little more than 600% year-to-date.
Why is Koss doing so well? After all, the company reported a nearly 4% drop in sales in its most recent quarter due to weaker demand at big retailers,
It appears that Koss has also received positive mentions from Reddit’s WallStreetBets members. The company, like GameStop, is a target of short-sellers — as hedge fund manager Will Meade pointed out on Twitter. Koss gets a fair amount of love from the headphones subreddit as well.
Koss was not immediately available for comment about the stock’s surge. But CEO Michael Koss said in the company’s October earnings report that things are going better for the company than the headline numbers would suggest.
“We experienced an increase in online direct-to-consumer sales driven by the continuation of people studying and working from home. Additionally, we saw a rebound in our export markets, especially in Europe, and in many of our US-based distributors,” Koss said.
Still, the stock’s huge move has some consequences. Koss was one of eight stocks — along with GameStop, AMC (AMC) and BlackBerry (BB) — that is now restricted by Robinhood. Koss shares were extremely volatile Thursday, swinging from big gains to a nearly 50% loss by midday.
Billionaire Dallas Mavericks owner Mark Cuban told CNN that the frenzy happening around stocks like GameStop is “truly business as usual with the only change being small stock traders giving the business to the big short sellers.”
Cuban tweeted support for the Reddit group sending GameStop sky-high.
He also sent a warning to naysayers:
GameStop might be tumbling but the major stock indexes are soaring today.
The Dow is up some 500 points, or 1.6%, after just an hour and a half of trading.
The S&P 500, the broadest measure of the US stock market, is up 1.5%, and the Nasdaq Composite is up 1%.
Even the small-cap Russell 2000 index, which GameStop (GME) is a constituent of, is up 0.6% despite the fateful gaming retailer’s shares dropping 24%.
The man who founded WallStreetBets on Reddit says he could never have predicted the frenzy around stocks like GameStop.
Speaking to Julia Chatterley on First Move, Jaime Rogozinski said:
Watch the full interview below.
