By Petr Svab
Small stock investors are fighting against broker platforms that have banned retail investors from buying certain stocks, including those of Gamestop (ticker: GME), which has been used by many small investors as a vehicle to force a short squeeze on hedge funds that aggressively shorted the video game retailer’s stock.
The investors are accusing online stock trading platforms such as Robinhood of manipulating the market in favor of the hedge funds. The platforms stated that they shut down purchases of GameStop and several other stocks due to “volatility” in the markets.
One Massachusetts investor filled a class-action lawsuit against Robinhood in a federal court in New York on Jan. 28, accusing the firm of “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market.”
The rush to buy GameStop shares started several weeks ago when it appears users of the massive Reddit forum, “r/wallstreetbets,” noticed that a $12 billion hedge fund, Melvin Capital Management, was holding a large short position against GameStop.
A short position refers to a sale of borrowed stock in which an investor borrows a stock from its owner, sells it, and then waits for the stock price to go down so he can buy it again and return it, pocketing the difference.
The forum members figured that Wall Street hedge funds were betting on GameStop’s failure so heavily that if the price of the stock was to go up instead, they’d be eventually forced to buy it at the higher price, incurring massive losses and pushing the price yet higher in what’s dubbed a “short squeeze.”
The forum members then encouraged each other to buy the stock to make the squeeze happen.
Starting mid-January, the price indeed started to grow from less than $20 per share to more than $30, then $40, then $70, forcing unspecified billions of losses on Melvin Capital.
If sustained, the squeeze could theoretically extract exorbitant sums from any Wall Street players who didn’t manage to close their GameStop short positions in time.
The price eventually peaked above $500 in the morning of Jan. 28, around the time Robinhood and Interactive Brokers announced they had suspended purchases of the stock and several others, including Blackberry, AMC Theaters, Express, and Koss, which seem to have been used by small retail traders in a similar fashion.
“We continuously monitor the markets and make changes where necessary,” Robinhood stated in a Jan. 28 release. “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities.”
Later in the day, the company stated it will start allowing “limited buys” of GME and the other stocks starting Jan. 29.
“To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” it stated in a release.
Some users complained online that Robinhood forcibly entered orders to sell their GameStop stocks. It appears this happened because of the increased margin requirements. If investors buy stocks with borrowed money, they need to keep a certain amount of stocks or other securities in their accounts. The company reserves the right to liquidate the stocks that are no longer sufficiently covered.
Clients are always provided with margin requirements, equity, and cushion in real time, the Robinhood director of media communications told The Epoch Times via email. Those clients that are left without proper equity are automatically liquidated by the system.
Another platform, Interactive Brokers, stated on Jan. 28 that “it has put AMC, BB, EXPR, GME, and KOSS option trading into liquidation only due to the extraordinary volatility in the markets” by midday on Jan. 27.
“In addition, long stock positions will require 100% margin and short stock positions will require 300% margin until further notice,” the Jan. 28 release reads. “We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only. We will continue to monitor market conditions and may add or remove symbols as may be warranted.”
Interactive Brokers didn’t respond to a request for comment.
Webull platform also stopped the purchases of several symbols.
“Due to the extreme volatility in the symbols AMC, GME, and KOSS, our clearing firm will no longer be able to support clearance on these symbols,” it stated in a Jan. 28 tweet. “As a result, Webull is forced to set all transactions in these symbols to liquidate only.”
Webull didn’t respond to a request for comment.
It announced releasing the restrictions several hours later.
The purchase ban didn’t go well with investors on the Reddit forum.
“CLASS ACTION AGAINST ROBINHOOD. Allowing people to only sell is the definition of market manipulation. A class action must be started, Robinhood has made plenty of money off selling info about our trades to the hedge funds to be able to pay out a little for causing people to loose [sic] money now,” read a Jan. 28 post “upvoted” by more than 180,000 users.
“Everyone open an account other that Robinhood. It might take a couple of days to be able to use but I think its pretty clear that as most of us aren’t billionaires in hedge funds, Robinhood doesn’t have our back, and has no problem seeing the working class loose [sic] millions because of their doing. Put them out of business, they don’t deserve it.”
The New York lawsuits states that “upon information and belief, Robinhood is pulling securities like GME from its platform in order to slow growth and help benefit individuals and institutions who are not Robinhood customers but are Robinhood large institutional investors or potential Investors.”
Robinhood declined to comment when reached by The Epoch Times.
Is It Over?
The ban on purchases only is particularly effective at relieving the squeeze. When retail investors are only allowed to sell, only the institutional investors are allowed to buy. If the establishment players hold back on purchases, the market will gradually get flooded with sale offers, pushing the price down, therefore prompting yet more sales.
However, this scenario assumes the retail investors are willing to sell. The Reddit forum users have stalwartly urged each other not to sell until the squeeze gets drastic and the price astronomical. Their “end game” is to force a situation in which the institutional investors don’t have enough GameStop stock among themselves to return all the stocks they borrowed and shorted. If such a situation ensues and most of the retail investors still refuse to sell, the price could reach unexpected heights.
It isn’t clear if this is, in fact, feasible as some investment powerhouses seem to still hold large quantities of Gamestop stock.
So far, it seems the squeeze isn’t over. While the Gamestop price dropped as low as $126 in the Jan. 28 morning trading, it quickly climbed over $230 again.
Some lawmakers who usually have little to agree on have come to the small investors’ defense, including Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Ted Cruz (R-Tex.).
Why Is This Happening?
The motivation on the part of the investors appears to be threefold:
- Profit. It appears the forum members believed they could force a short squeeze on Melvin Capital and possibly others if they banded together and thus make a quick fortune on the inflated stock price. It appears some of them already have to some degree, saying they managed to pay off their school, health care, and other bills thanks to cashing in on the stock.
- Making a statement. Many of the forum members appear to see themselves as the underdogs of the stock market. They seem to consider the establishment players as acting unscrupulously, unethically, and perhaps illegally. Many said they don’t even plan to sell the GameStop stock. They just want to punish the hedge funders who shorted it.
- Sympathizing with GameStop. It seems at least some of the members saw it as unfair that Wall Street was betting so heavily against GameStop, which has suffered a declining business model of selling physical box video games. The company has tens of thousands of employees and has been trying to revive itself, but Wall Street analysts have continued to write it off.
The phenomenon has raised both the question of influence of social media on the markets as well as the ethical and practical implications of short sales.
But the structural issues with the stock market won’t be solved by the GameStop rush, noted investment adviser and risk management expert Richard Smith.
The phenomenon represents “the chickens coming home to roost,” he told The Epoch Times in a phone call.
While many of the small investors have joined the rush in hopes of “making a quick buck,” he said, they are also acting out of a “sense of disenfranchisement.”
They are “absolutely right,” he said, that what they have managed to pull off collectively has been done many times over by the large players, some of whom are powerful enough to manipulate a stock with a single move.
The effect of social media is that a bubble such as this one can form in a “much more compressed time frame,” he said.
He predicted that in the end, the ones profiting from the bubble the most won’t be the small guys.
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