Robinhood Backtracks, Says It Will Allow ‘Limited Buys’ of GameStop and Others – What’s Really Going On?

John Lamparski/SOPA Images/Shutterstock / John Lamparski/SOPA Images/Shutterstock

Thursday afternoon, Robinhood and other trading platforms halted trading on select stocks touted by WallStreetBets, the subreddit group of retail day traders intent on taking down short sellers by buying shares of stocks that didn’t seem to have much of a chance of success. These stocks include, most notably, GameStop (NYSE: GME), but also AMC Entertainment (NYSE: AMC) (yep, the movie theater company), struggling retail chain Bed Bath & Beyond (NASDAQ: BBBY) and Nokia (NYSE: NOK), the cell phone manufacturer.

See: Robinhood Blocks Traders on Reddit and Beyond from Buying GameStop Stock – Make Sense of the Market Mayhem
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“Robinhood caters to individual investors, so you can certainly imagine a situation where they want to offer some protection,” Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business, told CNBC. “On the other side of that, annoying your client base is a business cost.”

In defense of its decision, Robinhood released a statement to subscribers saying, “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.”

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In plain English, it sounds like Robinhood may have run out of liquid capital to cover all the trades Thursday. A report on Bloomberg seems to substantiate this claim, noting that the firm tapped into several hundred million dollars’ worth of credit from lenders that include the Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Yet, it’s impossible to ignore rumors that Citadel Capital, which bailed out hedge fund Melvin Capital with close to $3 billion, owns a stake in Robinhood. In fact, the investment firm is actually Robinhood’s largest customer. Even if the link is not related to direct ownership, Robinhood has a financial stake in keeping Citadel happy and profitable.

See: Institutional Investors and Retail Investors: What Is the Difference?
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Nonetheless, Robinhood told subscribers it would “allow limited buys of these securities” starting Friday. Meanwhile, the stock trading platform faces a class action lawsuit initiated in the Southern District of New York and several private lawsuits, including one initiated in Chicago.

Robinhood claimed in a statement reported by CNBC, “This was a risk-management decision, and was not made on the direction of the market makers we route to” — presumably referring to Citadel.

The next few days should show whether Wall Street is truly a “free market” or if the platforms that make it possible for retail investors to earn money day-trading have a stake in who can trade what, and when.

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