The cryptocurrency-friendly platform Robinhood has found itself at the centre of a financial scandal that threatens to reshape Wall Street’s market practices. The situation surrounding the shares of GameStop and AMC Entertainment, hedge funds, and the Reddit community on the platform has already drawn the attention of the U.S. Congress.
On 29 November 2020, a member of the r/WallStreetBets subreddit disclosed that the hedge fund Melvin Capital had short positions in GameStop (GME) shares. Subsequently, users decided to buy these shares to prevent the big players from dragging the company under.
On December 1, the price of GME was around $16, but from January 12 it began to rise sharply. The peak came on January 27, when the price on the New York Stock Exchange hit $347. By the time of writing, GME was trading at about $193.60.
The pump of GameStop shares proved costly for Melvin Capital. According to the Wall Street Journal, as of January 25 the fund had lost 30% of its capital. It was supported by market maker Citadel and hedge fund Point 72 Asset Management with $2.7 billion. The total losses of short sellers on GME this month are estimated at more than $19.75 billion.
Citadel is closely tied to the Robinhood mobile platform. In June, according to Financial Times, the platform’s marketing subsidiary accounted for more than 35% of Robinhood’s income. The same platform was used by many r/WallStreetBets participants to purchase GameStop shares.
On January 28, Robinhood restricted trading in several assets, including GME and AMC.
In light of current market volatility, we are restricting transactions for certain securities to position closing only, including $AMC and $GME. Read more here.https://t.co/CdJMjGAeFH
— Robinhood (@RobinhoodApp) January 28, 2021
Trade restrictions on GME did not affect retail investors in Europe. On January 29, shares of GameStop rose by 40%.
In the Robinhood blog the platform pledged to launch limited trading on January 29. One of the r/WallStreetBets participants said the limit was up to five shares.
On Friday, January 29, Robinhood paused deposits and trading of cryptocurrencies due to an “unusual market situation,” reports CNBC.
Earlier, Robinhood blocked trading of the cryptocurrency Dogecoin (DOGE). Calls to buy appeared on Reddit — as the pump unfolded, the coin reached an all-time high at $0.087. In a 24-hour period, DOGE’s market value rose by almost 1,000%. The coin briefly surged into the top-10 by market capitalization.
Dogecoin has entered the top-10 cryptocurrencies by market capitalization
The community erupted in response to the platform’s actions. Members of the r/WallStreetBets subreddit organized a campaign to lower Robinhood’s rating in the Google Play Store.
According to 9to5Google, the rating fell to one star. After that, Google removed more than 100,000 negative reviews for policy violations, raising the app’s rating. At the time of publication, Robinhood’s rating on the Play Store stood at 4.3.
According to Reuters, the social network Facebook removed the Robinhood Stock Traders group. It had 157,000 subscribers, among them individual investors who bought GameStop shares. In the notice to the administrator, the group was said to have violated the policy on “sexual exploitation of adults.”
https://hub.forklog.com/reddit-protiv-fondy-kto-pobedit/
Yet the situation proved not all doom for Robinhood. On January 28 a group of investors filed a class action lawsuit against the company, accusing it of “deliberate and conscious” depriving private traders of the opportunity to invest.
On January 29, a Bloomberg report said the trading platform raised funds to ensure operations and to settle with clients. The agency reported that lenders included JPMorgan and Goldman Sachs.
The New York Times noted that the sums amounted to $500-600 million from six banks. Sources also said the company sought emergency funding from investors including Sequoia Capital and Ribbit Capital.
The link with Citadel further angered the community. Twitch co-founder Justin Kan said the market maker had “reloaded the shorts” before Robinhood imposed restrictions.
Just got a tip that Citadel reloaded their shorts before they told Robinhood to stop trading $GME.
If this is true, Ken Griffin and the Robinhood founders should be in jail.
This is class warfare.
— Justin Kan (@justinkan) January 28, 2021
Barstool Sports founder Dave Portnoy accused Point72 founder Steven Cohen of having “put a hand to criminal events to save hedge funds at the expense of ordinary people.”
I don’t do offline. That’s where shady shit happens. You bailed out Melvin cause he’s you’re boy along with Citadel. I think you had strong hand in todays criminal events to save hedge funds at the cost of ordinary people. Do you unequivocally deny that? https://t.co/x8MQhTXSIW
— Dave Portnoy (@stoolpresidente) January 28, 2021
Portnoy also stated that he would not rest until those responsible for today are behind bars.
I Won’t Rest Till The People Responsible For Today Are Behind Bars pic.twitter.com/tlbHD4TPQ0
— Dave Portnoy (@stoolpresidente) January 29, 2021
Don Jr. urged an “immediate investigation” into the Robinhood and Citadel situation.
Any Republican in Washington DC worth a damn should be calling for an immediate investigation into Robinhood and Citadel.
And while they’re at it, subpoena Janet Yellen & lets find out if there was pressure coming from the Biden Admin to protect their cronies on Wall Streeet!!!
— Donald Trump Jr. (@DonaldJTrumpJr) January 28, 2021
Sen. Sherrod Brown, chairman of the U.S. Senate Banking Committee, urged a review of market rules.
“Wall Street cares about the rules only when they run into problems… It’s time for the SEC and Congress to make the economy work for everyone, not just Wall Street,” says the statement.
Representative Paul Gosar asked the DOJ to open an investigation into the incident with GameStop and Robinhood.
My letter to DOJ to open an investigation regarding #GameStop #RobinhoodApp and anti competitive actions between Big Tech and Wallstreet. #wallstreetbets https://t.co/5B9eTcLLSq pic.twitter.com/SO79vyZYCp
— Paul Gosar (@DrPaulGosar) January 28, 2021
In a statement, the SEC said it would carefully monitor companies like Robinhood. The agency did not directly name the platform but hinted at the pricing of “some stocks.”
The operator of the cryptocurrency derivatives exchange FTX expressed condolences to Robinhood colleagues. Earlier the platform added the tokenized GameStop shares to its listing.
The FTX Support team would like to offer our condolences to whoever answers emails at Robinhood https://t.co/NRI1xtTdQI
— FTX — Built By Traders, For Traders (@FTX_Official) January 29, 2021
The host of h3h3Productions Ethan Klein said he would continue buying GME stock until the “criminal hedge funds” go bankrupt.
Im buying game stock, I don’t care if I lose it all and I will continue to invest in companies being shorter by criminal hedge funds until they are all bankrupt
— Ethan Klein (@h3h3productions) January 29, 2021
Robinhood has not been new to regulators’ scrutiny. In September 2020, the SEC and FINRA reacted to user dissatisfaction over a March outage.
In December 2020, Massachusetts state regulators announced plans to sue Robinhood, arguing that the company’s marketing policy exposed customers to “unnecessary trading risks.”
The SEC accused the platform of misleading users by stating that it did not charge trading fees.
Recall that in late 2020 Robinhood acceded to pay$65 million to settle regulator claims.
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