Trading app Robinhood faces backlash after placing restrictions on Reddit-fueled stocks

Robinhood, the popular trading app which has crafted its mission to “democratize investing for everyone,” is now facing a brand identity crisis as it faces backlash in the wake of its move to wrestle back some control of erratic stock trading. This morning, Robinhood added restrictions to users trying to buy or trade popular stocks like GameStop, AMC, BlackBerry, Bed Bath & Beyond, Nokia and others found on Reddit r/WallStreetBets, the subreddit where retail investors have banded together to drive up stocks on pre-digital brands popular some 20 years ago. Investors can no longer purchase specific stocks and Robinhood raised margin requirements for certain securities. Other stock platforms like Interactive Brokers and broker Ameritrade have also placed restrictions on the respective stocks. Robinhood cities “current market volatility” behind the decision, which was causing big losses for hedge funds that have shorted those companies. GameStop's stock price shot up to $347 at Wednesday’s close, a 437% gain from its Monday price of $64. Similarly, shares of AMC Entertainment were up 300% this week. The publicity around the effort has driven several big-pocketed fringe investors and other low-key players to take their chance with the stock too. Within hours of the restrictions being implemented, GameStop stock fell by more than 30% to $240. The app’s decision has sparked heated backlash on social media with some Robinhood users outraged that the app would limit buying on certain stocks despite its free-trading promise. The situation has put Robinhood in a tough spot just as the company prepares for an IPO, which is when it would sell shares in its own company to the public and to banks. The company has to show it is a responsible force in the market, an image that the latest activity could undercut, but it also needs to keep its devoted users. Prominent individuals like U.S. Rep. Alexandria Ocasio-Cortez and Alex Lieberman, CEO of newsletter company Morning Brew, expressed their frustrations. 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. https://t.co/4Qyrolgzyt— Alexandria Ocasio-Cortez (@AOC) January 28, 2021 The backlash bridged the partisan divide, with staunch conservative Sen. Ted Cruz tweeting that he agreed with the liberal Ocasio-Cortez. The push from online investors sought to prove a point, alleging that the free trading system is rigged against the very people using it. Prerna Lal, an immigration and tax attorney, believes the Reddit investors have been successful in showing the flaws of the system: A bunch of redditors just showed us that it's not really a "free market" when hedge fund investors can shut down trading the moment they start losing. Bet with the people instead of against them!— Prerna Lal #BlackLivesMatter (@prernaplal) January 28, 2021 You can no longer buy GameStop stock on Robinhood. Ditto Nokia, AMC, and all the other stocks that had been shorted.The free market is only free until rich people lose money.— Yvette, exiled Queen of the Seychelles. (@TheSciBabe) January 28, 2021 Other well-known people such as Ken Bone and influencers like Shady Penguinn, took to Twitter to persuade others to hold their shares and “not to sell” and “hold the line,” with many calling Robinhood’s interaction “market manipulation.” Several Twitter users declared they would turn to Robinhood competitors Webull and CashApp. It’s a problem inherent to Robinhood’s open platform: How and when to control marketplace instability without offending its own users who can normally choose to place their stock bets on any companies they want. It’s a new phenomenon where an online community can come together and decide to rally up support to drive up share prices, and likely won’t be the last. But other observers are scrutinizing the role of Reddit users, including Alex Stamos, a former chief security officer at Facebook. I don't know if any laws were broken this time, but Reddit now has a problem: it is the home for a community of hundreds of thousands of people who have demonstrated the ability to move billions of dollars based upon the urging of, at most, a couple dozen anonymous accounts.— Alex Stamos (@alexstamos) January 27, 2021 Robinhood did not immediately repond to a request for comment. In a blog post, the company stated: “We’re committed to helping our customers navigate this uncertainty. We fundamentally believe that everyone should have access to financial markets. We’re humbled to have helped many people invest in the markets for the first time. And 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.” Update: After the closing bell on Wall Street, Robinhood sent out an apology email to all customers and published a blog post, writing that the app will start to "allow limited buys" of the securities it restricted this morning. In the post, Robinhood says the decision was based on risk-management and "not made on the direction of the market makers we route to." "We stand in support of our customers and the freedom of retail investors to shape their own financial future," says the app.

Trading app Robinhood faces backlash after placing restrictions on Reddit-fueled stocks

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