Hot cakes tomorrow
On Thursday morning, Robinhood restricted purchases of GameStop and the other stocks, which had been driven to unusually high prices by coordinated activity on the r/WallStreetBets subreddit. The decision to restrict purchases provoked a significant backlash, and several congressional committees have already pledged to investigate Robinhood in the wake of the action. 1
The problem is, this is shutting the barn door after the cows have already wandered out. The problem isn’t that people are buying the stock. The problem is that a large group of them are not selling the stock. If anything, I bet this fans the flames, and it’ll sell like hot cakes tomorrow.
Robin Hoodwinked
The move has infuriated members of the WallStreetBets subreddit. A top post on the subreddit this morning calls the decision “market manipulation,” with angry comments calling for users to “dump robinhood for good” and lamenting the ensuring fall in stock prices that shortly followed the announcement. The group’s official moderator account has also protested the decision by Robinhood, highlighting the unfairness of the fact that day traders cannot make new investments in the stocks when traditional firms still can. 2
Yeah, it looks pretty bad. If they weren’t frustrated before, they definitely are now. And it’s definitely not going to convince them to sell their shares. If anything, it’ll strengthen their resolve to hold onto them.
Working for the Hedges
So Robinhood doesn’t exist to make money from its customers. They exist to allow hedge funds to make money by giving them access to what Robinhood customers 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. That’s crazy. 3
They weren’t the only brokerage to halt the purchases, but to allow the sales clearly helps the hedge funds that overshorted GameStop. That seems pretty clearly market manipulation, especially when you make your money from the hedge funds.