Robinhood limiting GameStop trading: Is this illegal?

Positioned to already be one of the top 2021 stories in markets, GameStop’s stock, the once prominent game buying & selling outlet connected to malls & video rental stores, is up thousands of percent this month. You would think that now might be a good time to buy in, right? Well, if you’re part of the commission-free & stock trading app Robinhood, you may not get that chance. 

There’s a lot of curious information to unpack here, and unpack we shall! Why is it that GameStop, a company that hasn’t been relevant since the 2000s is trending upward? Why is Robinhood limiting Gamestop trading? Why do we care so d@#% much? Let’s delve in and uncover some of the bizarre details of this story. 

GameStop

Founded in 1984 is Dallas, Texas, GameStop operated as a video game, consumer electronics, and gaming merchandising retailer. Perhaps best recognized as the popular mall “babysitter” for our teenage sons, where we could drop them off and let them frolic on the free video game testing stations, GameStop has seen a slow decline over the years due to numerous factors. 

For one, as proven with DVDs, the platform of physical media is dying, with streaming services & digital downloads serving as the prominent way to get your hands on the latest game. The market conditions for video games are evolving, making it impossible for a business like GameStop to survive in the dimming years to come. 

However, in January 2021, GameStop experienced a short squeeze which resulted in an increase in stock by about 500%. A short squeeze typically occurs due to technical factors in the market, when, for example, there’s a lack of supply but an excess of demand for a stock, due to short-sellers liquidating their positions. Essentially, profiting in the stock market off of a figure that’s going down.  

Robinhood

Founded in 2013, Robinhood is a FINRA regulated broker-dealer. In simpler terms, it’s a free-trading app that lets investors trade stocks, options, and is actually one of the few brokers that provide investors the opportunity to trade cryptocurrency, or digital currency that utilizes an online ledger. 

Connecting the dots

Given the idea that GameStop is a dated business that will likely die off in the near future, certain hedge funds & institutional investors are opting to bet against this company succeeding, making a ton of money off of its decline. This result is something that both Wallstreet & smart betters took advantage of . . . until something unexpected happened. 

A group of young investors on Reddit called “wallstreetbets” inspired by free trading, like Robinhood, found a way as a group to squeeze the Wallstreet hedge funds out of the trade, making the stock pop in the process. Elon Musk, the CEO of Tesla even egged on the process when he tweeted out “Gamestonk” in support of the wallstreetbets community on Tuesday night. 

Robinhood becomes King John

On Thursday morning, Robinhood users posted on Twitter a message from the investor app that stated “This stock is not supported on Robinhood”, specifically related to GameStop, AMC, Nokia, and Bed, Bath, and Beyond. 

Just before the stock exchanges opened on Thursday morning, Robinhood made the following post: “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.”

This move takes away the opportunity for individual investors to trade while institutional investors & hedge funds can continue to go about business as usual. 

Is this legal?

While the legalities of this move are still in question, Robinhood is already facing two customer lawsuits after restricting transactions and depriving individual traders of the ability to manipulate & invest in the market. 

It’s fair to say that many Robinhood users will be seeking lawsuits of their own in the coming weeks should the investor app continue to suspend specific stocks while raising ethical “free trade” questions in the process.