Robinhood’s problems: What you should know about the GameStop stock trading controversy

Robinhood is under a lot of scrutiny thanks to its part in the stock market frenzy created by GameStop shares swinging wildly. The popular trading app was one of the primary tools for individual investors who jumped purchased shares of the video game retailer, which shot up by more than 14,300% last week but has since plummeted to less than $100 as of Wednesday’s close. But as much as the stock-trading app has contributed to the stock’s gains, it’s also drawn flak from users, Wall Street and the US government for how it handled the activity. 

Robinhood played a critical role when a group of Reddit posters saw an opportunity to make money while also giving a jab to Wall Street and hedge funds. However, Robinhood then slowed the stratospheric rise in GameStop and other companies when it restricted users from buying certain stocks. It reversed that decision on Friday and posted on its blog about what happened in all that stock trading. 

In short, regulations require it to have a certain amount of money on hand when people need to buy stocks, and it simply didn’t have enough at the time. While Robinhood users are able to trade stocks of GameStop and other companies with volatile prices, there are still questions about the events of last week, including whether something like that will happen again. 

We have some answers for the big questions about Robinhood, the actions it took and what might happen next. 

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What is Robinhood? 

Robinhood is an investing app that launched in 2015. It’s popular among millennials, who make up a majority of its users and can conduct a variety of investments for free. Read more about Robinhood here. 

What did Robinhood do last week? 

On Thursday morning, Robinhood posted a blog saying it was limiting users by preventing them from buying stocks from several companies such as GameStop, AMC and Nokia. It cited “market volatility” as its reasoning and would only allow customers to sell their shares of these companies, not buy or trade in any other way (more below). 

“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,” Robinhood said. In addition to AMC; Bed, Bath and Beyond; GameStop and Nokia, the companies that Robinhood listed by ticker symbol are phone maker BlackBerry, fashion retailer Express, headphone maker Koss and underwear company Naked Brand Group.

Why did it stop allowing customers to buy shares of GameStop and other companies? 

On Friday, Robinhood posted another blog about what happened. The company explained it was required to keep a substantial amount of money on hand in order to process all the trades happening through its clearinghouse, which is the part of the company that sends shares and money back and forth to other clearinghouses to complete trades. 

Robinhood CEO Vlad Tenev went into more specifics Sunday night when he jumped on the Good Time Show with Tesla CEO Elon Musk via the exclusive audio-only Clubhouse app. 

“At 3:30 a.m. Pacific, our operations receives a file from the NSCC, which is the National Securities Clearing Corporation,” he said during the show. “So they gave us a file with a deposit, and the request was around $3 billion, which is about an order of magnitude more than it typically is.” 

Tenev provided some context by saying that, up to that point, Robinhood had raised just $2 billion in capital. He went on to explain that the NSCC has a formula to determine how much a deposit it needed and one component of it involved risk, which can act as a kind of multiplier. 

“We had no choice in this case,” he said. “We had to conform to our regulatory capital requirements.” 

Tenev said that since then, the agency has worked with Robinhood to decrease the amount of funds needed. The company also raised $1 billion in emergency capital to make sure customers’ trades can happen. 

What did Robinhood prevent investors from doing?

Thursday afternoon, Robinhood sent an email to customers saying it would allow “limited buys” of those company stock starting Friday. The limits included a maximum number of shares users could own (at one point it was down to one GameStop share), no trading options, no borrowing money on credit also known as margin, recurring investments were skipped and no fractional shares, which are slices of a stock that can be bought for as little as a dollar. 

As of Tuesday, Robinhood increased the maximum of shares allowed for all the companies, with GameStop’s limit up to 100 shares total. The other restrictions are still in place. 

Who’s upset at Robinhood? 

A ton of people. The subreddit behind the GameStop’s skyrocketing share value, r/WallStreetBets, includes big users of Robinhood who felt they were slighted by the decision. 

The subreddit’s Twitter account said the freeze harmed small traders and favored the Wall Street establishment. “Individual investors are being stripped of their ability to trade on [the Robinhood app],” the tweet said. “Meanwhile, hedge funds and institutional investors can continue to trade as normal.”

Robinhood users flooded the Google Play Store and Apple’s App Store with negative app reviews. There were so many one-star ratings that Google intervened to remove tens of thousands of them. 

There’s was also a lawsuit filed Thursday in the Southern District of New York accusing Robinhood “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise … deprived retail investors of the ability to invest in the open-market.”

Several members of Congress, including Rep. Alexandria Ocasio-Cortez, Rep. Rashida Tlaib and Sen. Ted Cruz, called for a hearing on Robinhood’s actions. 

The New York attorney general says she will review what Robinhood did while the Texas attorney general launched an investigation on Friday. 

And the US Securities and Exchange Commission, which oversees the stock market, released a statement Friday that didn’t name Robinhood but said it will “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” 

SEC investigators are already reviewing social media and Reddit posts for any signs of fraud according to a report from Bloomberg Wednesday. The commission will also meet with newly appointed Treasury Secretary Janet Yellen, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission this Thursday to discuss the market volatility surrounding GameStop as reported on Wednesday by Reuters. 

Rep. Maxine Waters, a Democrat from California and chairwoman of the House Financial Services Committee, said Wednesday the committee will have a hearing to understand what happened in the past week. 

“We are going to have all the players. We will have not only [from] Robinhood, Vladimir Tenev, we’ll have him there,” Rep. Waters told Cheddar on Wednesday. “We’ll have the young man from Reddit, his name is Keith Gill, who basically started this mania, we will hopefully have some hedge fund representation there. We’re going to make sure that we’re not taking sides.”

Lawmakers and regulators already had an eye on Robinhood last year after a 20-year-old college student killed himself after building up a negative balance of $73,000 on the app. 

What other brokerages were restricting trades at the same time as Robinhood? 

Other investing apps and services also had issues with clearing trades similar to Robinhood. Cash App tweeted Tuesday it will not process trades for AMC and Nokia due to their broker, Axos, halting trades. 

“The clearing broker who processes our trades, Axos, has temporarily halted buys of $AMC & $NOK,” the company tweeted. “This was not Cash App’s decision — we disagree with this move wholeheartedly. We hope to make these stocks available for purchase again as soon as possible.”

A Cash App blog post explained further saying that the Depository Trust Company (DTC) informed Axos on Monday it would need to significantly increase capital requirements for the trades it would be processing. 

Webull is another investing app that tweeted Thursday it had begun restricting trades on shares of GameStop, AMC and Koss. Webull cited the “extreme volatility” of the stocks in limiting user transactions to closing positions. It later removed those restrictions the same day. Webull CEO Anthony Denier said the company’s clearing firm also received notice it would need to increase its capital requirements significantly in order to accommodate all the trades, which led to the temporary halt in trading on those volatile stocks. 

TD Ameritrade, another brokerage, said Jan. 27 it would put restrictions on the trading of stocks for GameStop, AMC and others. The brokerage firm confirmed the restrictions, saying it made the decisions “out of an abundance of caution amid unprecedented market conditions and other factors.” The limits included increasing the amount needed to borrow on margin and limiting other trade options such as short sales. 

Charles Schwab, Interactive Brokers, E-Trade and Public were other investing services that also limited trading last week because of market volatility. 

Correction, Jan. 28: An earlier version of this story incorrectly said TD Ameritrade had restricted new purchases of GameStop and AMC stocks. It’s restricting certain trades, but users are still able to purchase new shares from those companies.