GameStop Stock and AMC stocks seemed to skyrocket after a Reddit post began, now apps like Robinhood have set limits on the number of shares available for purchase. Small independent stock buyers are calling this unfair and only beneficial to the one percent.
Companies such as GameStop and AMC were at a low in the market early in 2020, once the pandemic hit their values dropped. Gamestop locations are to this day closing their doors permanently, and AMC in most areas have not reopened their doors.
A subreddit began by a group of the name the WallStreetBets, here anyone could discuss any information on stocks and investments. Here traders have been known to take a gamble on stocks and “meme stocks” quickly caught their attention. (Many of these meme stocks were in correlation with failing companies)
Add the addition of Elon Musk simply tweeting out “Doge” on Feb 3, and “ur welcome” knowing it would gain major value for the cryptocurrency Dogecoin.
Dogecoin, a cryptocurrency that has mainly been seen as a joke in comparison to its top competitor, Bitcoin, has had a value typically under one penny for most of 2020.
When the value of Dogecoin reached one penny, purchases skyrocketed. Cryptocurrency is a currency, that when purchased, can rise or fall in value, and can be resold for US currency without the effects of government regulation. (Some countries have banned cryptocurrency)
Gamestop stocks increased over 400% within the last month according to Robinhood. Musk also tweeted out “Gamestonk!!” on Jan 26 with a direct link to the WallStreetbets. Though AMC has dropped down, most likely due to Robinhood’s (an online brokerage app for buying/selling stocks and cryptocurrency) limits on share buying, there is still talk of it increasing again.
Jan 27 AMC stock values were rising, due to subreddits, and the next day was predicted to blow up. Whether a gain or rise in value, traders were ready to buy. But traders quickly realized their orders weren’t submitting on Robinhood, the app was extremely overwhelmed.
On Jan 28 a message was sent to its users through the app, “Our mission at Robinhood is to democratize finance for all … In light of recent volatility, we restricted transactions for certain securities to the position closing only. We also raised margin requirements for certain securities.”
The initial message didn’t give direct information on why certain shares (Gamestop and AMC) were taken off and left it’s users in a vague state. The message did state how the app has helped small traders learn about the stock market, “In 2020, more than 3.3 million people read out articles through Robinhood Learn.” Robinhood claims they’re determined to continue their work in making sure everyone has the help “for their long-term financial futures.”
Chris Cuomo of CNN spoke with the CEO of Robinhood, Vlad Tenev, on why they would limit shares on an app that supposedly is to “take from the rich and give to the poor” as Cuomo put it “starve the little guy.” on Jan 29.
Cuomo’s main criticism surrounded the idea that the limitations only seemed to be placed because it had begun hurting large investors, including one of Robinhood’s main investors.
Cuomo asks why should people believe Robinhood did this for the right reasons, Tenev responded, “We have no choice, we have to comply with all financial requirements,” Cuomo points out the (SCC) hasn’t declared any of Robinhoods actions as necessary.
Tenev reinstates that certain brokers have to follow guidelines and regulations and it was in no intention to put anyone down, just necessary precautions.
Planet Money, a podcast hosted by Nick Fountain and Mary Childs spoke with Annie Masa, an investing reporter at Bloomberg News, on Feb 3. Masa broke down why there are delays whenever purchasing from a brokerage app, and what that means for companies like Robinhood.
Masa starts off by comparing how buying stocks have changed. People would have to call their broker over the phone and place an order for their stock, the broker then would call over to someone who works on the trading floor, New York Stock Exchange for example, who is also making negotiation with yet a third person on the floor who sells the stock, and eventually gets back to the ordinal broker.
Buyers not only would have to pay for the stock purchase but the broker for the labor. When online brokerage apps became available this cut out having to make calls and prices dropped immensely, but Masa explains that there is still a middleman when you submit an order from Robinhood.
Robinhood sends your order over to other firms like Citadel Securities, “the company’s in the business of matching people who want to buy stock with people who wants to sell stock,” host Childs summarizes how Robinhood gets paid by Citadel to do this process, and in return, Citadel makes a small profit when there’s a small difference between what buyers are offering and what sellers asking.
Citadel securities pay Robinhood to make sure that there are smaller traders buying because if there are only big companies selling stocks, Citadel would actually lose money. They need the back and forth trade to make a profit themselves.
Brokerages have to post money (to a clearinghouse) for stock purchases in between the waiting period before you own the stock to guarantee trades, in case buyers decide they want to opt-out. So when hundreds of thousands of people were trying to buy GameStop and AMC, Robinhood would have had to post 3 billion dollars.
This was a heavy demand for Robinhood, “An order of magnitude,” Tenev stated on social media, one which they did not have. So when the limitations took place on those certain stocks, this was in order to not have to put up the entire 3 billion Robinhood did not have.
Fountain and Childs make it clear that there is no evidence of market manipulation, however, at this point internet stock traders were wildly upset as they believed they were “pumping up the stock” as Fountain put it.
On Feb 4, Robinhood had reopened trading for Gamestop and AMC, but the criticism has left a sour taste in most small traders’ mouths, many have now considered other options.
On Feb 3 Investorjunkie put out its list for its top alternatives to use instead of Robinhood:
- Ally Invest
- TD Ameritrade
- E* TRADE
- Charles Schwab
While many brokerage apps went through similar approaches like Robinhood, the damage had been done, and although thousands still use the apps, others are starting to gain much more attraction as thousands continue to join the stock market.