Robinhood Blocks Traders on Reddit and Beyond from Buying GameStop Stock – Make Sense of the Market Mayhem

The stock market is known for its volatility, but the rapid rise of GameStop (NYSE: GME) and AMC (NYSE: AMC), manipulated by a rogue group of retail traders on the social media platform Reddit subthread WallStreetBets has everyone from Wall Street to Washington scratching their heads – and, in some cases, scrambling to stabilize stock prices.

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People are calling the events of the past week a “hedge fund massacre,” because major Wall Street investment firms are losing their shirts on their short positions. On Tuesday, after GameStop stock rose 91%, hedge fund Melvin Capital closed out its short position after losing potentially billions, according to a CNBC report. Citadel and Point72 then helped the struggling hedge fund with an infusion of close to $3 billion, as Melvin Capital manager Gabe Plotkin told Andrew Ross Sorkin that the firm would not be declaring bankruptcy.

The Dow fell 600 points overnight but is back up close to 40,000 again Thursday afternoon.

“These big institutions that were very exposed due to their short positions are forced to liquidate other blue chip assets,” explains Chris Hanse, Business Director for Option Hunters, an options and trading community. “That’s partially what drove the market so far down yesterday. They’re taking money out of companies like Apple, Microsoft and Facebook and using it to cover the shorts.”

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In a supposed effort to stabilize the market, stock trading platforms like TD Ameritrade, E-trade, and Robinhood either prohibited trading on stocks promoted by WallStreetBets or limited actions to sell calls only. TD Ameritrade said in a statement that they put restrictions in place “in the interest of mitigating risk for our company and clients.”

Along with GameStop and AMC, other stocks with trading restrictions on multiple platforms include Bed Bath & Beyond, Blackberry, Nokia, Express Inc., Koss Corp., American Airlines, Tootsie Roll, Trivago and Naked Brand Group — all stocks mentioned in the subreddit WallStreetBets.

“They’re limiting the ways retail traders can trade,” Hanse says. “The trading platforms put the lockdown on people being able to trade so much, and now we’re seeing the market rebound. It’s not a coincidence.”

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“I don’t think a lot of people were aware this could happen because they’re so new to the stock market. I was surprised by Robinhood, because this kind of regulation goes against their core values. They have the connection to small traders – take from the rich and give to the poor. And then they turn around and institute this policy to protect big money institutions.”

At the same time, Hanse believes the events of the past week had been building momentum for several years. “In the last year or so we’ve seen so many retail investors coming in and people using social media, they can create trends that will push the market up or down.”

It’s a dramatic shift of power, as Wall Street investment firms previously had this ability by moving billions of dollars “to keep the stock market where they want it to be,” Hanse explains. If the government takes regulatory action against retail traders doing the same thing, then, “it’s not really a free market anymore,” he tells GOBankingRates.

Meanwhile, President Joe Biden, Treasury Secretary Janet Yellen, and others in Washington are “carefully monitoring” the situation, Press Secretary Jen Psaki said.

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The list of lawmakers weighing in include Senator Ted Cruz, California state Representative Ro Khanna and Alexandria Ocasio-Cortez all discussing regulations – but not for retail traders. In fact, they want to ensure Robinhood and other retail trading apps cannot limit the market for retail traders.

Ocasio-Cortez 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.” Khanna retweeted AOC’s thoughts, adding, “We need an investigation into RobinhoodApp’s decision and who influenced that. And this shows the need for a financial transaction tax on hedge fund shorting and SEC regulations on short selling practices.” Ted Cruz also retweeted Ocasio-Cortez, much to the surprise of many (including AOC) given their previous disagreements.

Will there be market regulation? If so, in which direction? That’s the question of the day, says Gust Kepler, CEO of BlackBoxStocks, an options analytics tool and trading community: “The SEC can always regulate anything they want to regulate. It is their arena and they make the rules.”

Meanwhile, everyone from famous investor Mark Cuban, Tesla CEO Elon Musk, Barstool Sports’ Dave Portnoy (famous for his day trading obsession), Mets owner Steven Cohen and renowned venture capitalist Chamath Palihapitiya have weighed in or are impacted by the week’s market chaos. Strange bedfellows, to be sure:

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Kepler may have summed it up best: “I think it would be very hypocritical for any regulatory agency to stifle the will of the investing public to go long against some of these short positions. The recent gamification of fintech apps combined with the broad reach of social media has democratized trading for the masses. It is a two-sided market and may the best team win.”

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This article originally appeared on GOBankingRates.com: Robinhood Blocks Traders on Reddit and Beyond from Buying GameStop Stock – Make Sense of the Market Mayhem