Robinhood and other retail brokerages took steps to tamp down the speculative frenzy surrounding companies such as GameStop, but the actions only sparked more volatility in the market and an outcry from users of the platforms and some members of Congress who say small investors are being treated unfairly.
GameStop stock has rocketed from below $20 earlier this month to close around $350 Jan. 27 as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall.
The action was even wilder on Thursday: The stock swung between $112 and $483 before closing down 43.2% at $197.44. It then shot back up 60% in after-market trading.
Robinhood said Jan. 28 that investors would only be able to sell their positions and not open new ones in some cases. Robinhood also required investors to put up more of their own money for certain trades instead of using borrowed funds.
Besides GameStop, Robinhood said trading in stocks such as AMC Entertainment, Bed Bath & Beyond, Blackberry, Nokia, Express Inc., Koss Corp., American Airlines, Tootsie Roll, Trivago and Naked Brand Group would be affected by the new restrictions.
The frenzy surrounding shares of GameStop, AMC and others has drawn in an influx of investors with little or no experience trading stocks. That poses a challenge for brokerages that cater to small investors, said Andy Nybo, managing director at Burton-Taylor International Consulting.
“The brokers were forced to take action because they would be in the firing line if an unsophisticated investor loses money,” he said.
The surge in the use of stock options fueled by individual investors has some brokerages nervous and explains why some have taken steps to restrict trading. The potential issue centers on the possibility that a brokerage that isn’t capitalized well enough could run into trouble if a large number of investors suddenly lose money on options trades that don’t go their way.
Brokerages often lend investors money to make their trades, and could be exposed to huge losses if many investors are suddenly wiped out and can’t pay back the borrowed funds.
In an interview Jan. 28 on CNBC’s “Closing Bell,” Interactive Brokers chairman and founder Thomas Peterffy laid out some of the concerns that prompted his brokerage to limit trading.
“If our customers are unable to pay for their losses, we have to put up our own money,” he said, adding that Interactive Brokers “doesn’t have a problem,” as it has $9 billion in equity as a cushion.
Robinhood CEO Vlad Tenev also told CNBC that his company does not have a liquidity problem. He said the steps Jan. 28 were taken “preemptively” to protect the firm and its customers, and not at the behest of any hedge fund or market maker.
“I know how Clorox and Lysol felt in the pandemic when they were running out of hand sanitizer and supplies,” Tenev said. “We just haven’t seen this level of concentrated interest marketwide in this small number of names before.”
Robinhood’s stated goal is to “democratize” investing and to bring more regular people into investing. The company has forced huge, ground-shaking changes for the brokerage industry, such as its decision to charge zero commissions for customers trading stocks and exchange-traded funds. That’s why some users took Thursday’s actions as an affront.
Robinhood investor Carlos Amaya said the app’s action on Jan. 28 was a disappointment to users like him who prided themselves on being a “different breed of investors.”
“We pride ourselves in the name Robinhood because we’re trying to make more money and be the next people at the top,” he said. “You would expect Robinhood to let us do our thing instead of blocking us and saying it’s for our protection.”
Investors upset over the trading portals’ restrictions are getting some sympathy from some members of Congress.
Democratic Sen. Sherrod Brown of Ohio, who is set to become chairman of the Senate Banking Committee, announced that he will hold a hearing on the GameStop situation. Rep. Maxine Waters, D-Calif., also announced a hearing in the House Financial Services Committee.
Rep. Alexandria Ocasio-Cortez, D-N,Y., called Robinhood’s actions “unacceptable,” and said she would support a hearing to explore why the online brokerage is blocking small investors from buying stocks while hedge funds “are freely able to trade the stock as they see fit.”
Democratic Rep. Ro Khanna, whose California district sits in Big Tech’s Silicon Valley, called for “more regulation and equality in the markets.” In a statement Jan. 28, Khanna accused Wall Street of spending billions to “crush” GameStop and “put workers out of business” instead of investing in future technology.
India-West Staff Reporter adds: Robinhood was co-founded by Indian American Baiju Bhatt, according to a report on techstory.in.
Bhatt, whose parents immigrated to the U.S. in 1984 from India, earned his B.A. in physics in 2007, as well as a master’s degree in mathematics a year later, both from Stanford.
He met his close friend and partner, Vladimir Tenev, at Stanford, the report added. Before founding Robinhood in April 2013, Bhatt and Tenev worked for financial institutions in New York City, where they used to build high-frequency trading platforms. Through this, the report said, they realized that high-frequency traders and electronic trading firms pay effectively nothing to execute trades.
According to moneycontrol.com, Robinhood is a trading platform operated by American financial services company Robinhood Markets Inc. It is a broker-dealer registered with the U.S. Securities and Exchange Commission, and has its headquarters in Menlo Park, California.
Bhatt and Tenev are now co-chief executive officers of the company, moneycontrol.com said.