GameStop trading: rebel retail investors accuse Wall Street of running a racket

The GameStop drama continues after the stock saw a massive crash yesterday, its value dropping by more than 75 per cent, going from a high of $483 to a low $112. The crash came after Robinhood and other major platforms used by retail traders took action to prevent additional purchase of stock in GameStop and other companies such as AMC Entertainment, Blackberry, and Nokia also hit by the retailer investor craze.

The price has since rebounded somewhat, to around $190. However, retail traders – many of whom bought high as the craze spread – are up in arms accusing Robinhood and other platforms of market manipulation. A class action lawsuit was quickly filed in the Southern District of New York formally accusing Robinhood of market manipulation. Meanwhile, on social media dark rumours swirled that Robinhood and other platforms had been leant on by hedge funds to stop the trading to try and limit the losses on their short positions (bets that a stock will go down).

The truth, however, seems to be more prosaic. As Robinhood explained in a statement. “As a brokerage firm, we have many financial requirements, including SEC [Securities and Exchange Commission] net capital obligations and clearing house deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.”

In essence, brokerage firms like Robinhood are required by law to have certain minimum levels of cash to hand to ensure they can cover their obligations and potential losses. The surge in traders, the sheer amount of money thrown around, and the wild fluctuations in prices means the assets its users were trading became riskier. This in return increased the amount of cash Robinhood was required to hold to meet its legal obligations on minimum capital requirements and to pay the deposits to the clearing houses that process its users transactions. Eventually, they couldn’t keep up and suspended trading in certain stocks.

Still, Robinhood is determined to get back in on the action. In an interview on CNBC last night Vlad Tenev, Robinhood co-founder, declared that Robinhood would start to open up trading in GME and other stocks again – news that prompted its share price to rally. To this end it has raised more than $1 billion from existing investors and tapped credit lines from banks to shore up its financial position.

Still, many seem far from pacified. One conspiracy theory still going strong claims Citadel Securities, which processes most of Robinhood’s orders, had pushed for a halt in GameStop stock trading to protect its parent company Citadel LLC which had bailed out Melvin Capital, a hedge fund hit particularly hard by Game Stop’s spiralling stock price. Citadel Securities’ statement that it had “not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business” has cut little ice in the online rumour mill.

Videos of irate traders going onto CNBC and calling for action to combat the retail trader have not helped matters. As well as a desire to get rich quick, a narrative that the little guys were beating Wall Street professionals at their own game and putting the hurt on institutions popularly seen as greedy and unaccountable, was a big part of the appeal for retail traders driving the stock prices sky-high.

Of course, this anti-establishment narrative was never wholly true. Some hedge funds like Melvin Capital and Citron Research were caught with their pants down but other big financial entities seem to have done well off the back of the retail investor frenzy. Black Rock, the world’s largest asset manager, is thought to have made up to $2.4 billion off the back of retail investors bidding up its 13 per cent stake in GameStop. Another winner is Donald Foss, who having made his money in subprime auto loans is exactly the sort of financier popularly despised.

Whatever the truth of the matter the popular rage sparked by the suspension of trading has attracted political attention. Even members of Congress have started to weigh in with a rare show of bipartisan unity. Face of the Democratic left Alexandra 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. As a member of the Financial Services Cmte, I’d support a hearing if necessary.” She was quickly retweeted by none other than Ted Cruz, the face of the Republican right and one of Trump’s closest allies. Sherrod Brown, Democratic Senator from Ohio, also promised an investigation.