Robinhood Blocks Buying – but Not Selling – GameStop, AMC, and BlackBerry Stock

Chaim Gartenberg, writing for The Verge:

Robinhood has added new limits to its app to restrict users from buying or trading any of the popular Reddit r/WallStreetBets stocks, including GameStop ($GME), AMC ($AMC), BlackBerry ($BB), Bed Bath & Beyond ($BBBY), Nokia ($NOK), and more. Users will still be allowed to close out existing positions but won’t be able to buy more of the stocks. The company is citing “recent volatility” in the market as the reasoning behind the change.

The development is the latest in an ongoing saga that has seen a group of Reddit users from the WallStreetBets subreddit band together in an effort to drive up the stock prices of companies like GameStop and BlackBerry, in defiance of traditional hedge funds that had shorted those firms. Robinhood — a popular stock market application that allows amateur day traders to purchase those stocks without fees — has been a key tool in the Reddit group’s ability to push prices up.

Preventing their users from buying — but not selling — a particular stock is bananas. It absolutely reeks of market manipulation.

The basic problem, as I understand it, is that Robinhood is beholden not to its users, but to hedge funds. Robinhood’s big hook to users is that they don’t charge any fees on trades. On the surface, that sounds like the classic First CityWide Change Bank SNL skit. But Robinhood does make money — just not from its retail customers. What they do is charge hedge funds for access to the firehose of Robinhood retail transactions, and these big traders have milliseconds of advance notice of trades, during which they can play arbitrage. Here’s a good thread on Twitter explaining it. Update: I’m not saying there’s anything fishy about no-fee brokerages. I’m only pointing out that they do make money on trades, just that when you look at how they do make money, you can see how they might have a conflict of interest.

So Robinhood doesn’t exist to make money from its users. They exist to allow hedge funds to make money by giving them access to what Robinhood retail users are buying and selling a fraction of a second in advance.

This whole GameStop mania is in large part driven by the fact that hedge funds are short on GameStop, and need GameStop’s bubble to pop now. I’m not saying Robinhood is trying to help hedge funds who shorted GameStop, but if they were trying to do that, the obvious way would be to do what they’re doing — disallow buying GameStop (et al.) but allow selling, to facilitate a sell-off panic. And Robinhood isn’t just any broker — they’re a favored broker of the WallStreetBets crowd, with a remarkable 56 percent of Robinhood users owning some amount of GameStop stock. Update: Motherboard has since retracted this number, but there’s no question Robinhood is — well, was — incredibly popular with the WallStreetBets crowd.

Thursday, 28 January 2021