This raised serious questions about the way Robinhood made its money and its relationships with other Wall Street players like Citadel and other high frequency trading firms. However, in January 2021, Robinhood suddenly prohibited its retail customers from buying GameStop and other meme stocks, which precipitated sudden and dramatic price declines resulting in huge losses for the many retail traders who bought near the top or the stock on the way up. These are the primary reasons Robinhood claims to “democratize finance” and bring the riches of Wall Street to Main Street. The weapon of choice by many of those trading the meme stocks like GameStop stock were mobile phone-based apps like Robinhood, which offered so-called “commission-free” trades, and a supposedly fun and engaging user interface that makes stock trading easy and enjoyable if not a “delightful” experience. This became known as the “ Reddit rebellion,” which inflicted billions of dollars of losses on several hedge funds, and ultimately driving one (Melvin Capital) into liquidation. Because those hedge funds had substantial short positions in those companies, many of those retail traders decided to execute a short squeeze. The trading frenzy was fueled in significant part by an army of retail traders discussing which meme stocks to trade on forums such as Reddit’s “r/wallstreetbets.” Many of those traders were also determined to beat the Wall Streeters at their own game by inflicting harm on hedge funds thought to be bad actors for unfairly targeting certain companies. For example, over the course of just 16 days, from January 11 to January 27, GameStop’s share price rose by 1,600% even though it was highly unlikely, to say the least, that GameStop’s business prospects improved by 1,600% in just over two weeks. This pandemonium all burst into the public consciousness in January 2021, when a media frenzy reported on a trading frenzy that erupted in the stock market around so-called “ meme stocks” such as Blackberry, AMC, and, most notably, GameStop, whose value skyrocketed to unimaginable heights despite dim business prospects. All of that and more is discussed in a law review article written by Better Markets that appeared in the Western New England Law Review entitled “Democratizing Equity Markets With and Without Exploitation: Robinhood, GameStop, Hedge Funds, Gamification, High Frequency Trading, and More” which can be read in full here. Equity markets and finance more generally can be genuinely “democratized” (meaning lower costs, easier access, a more delightful experience, etc.) without exploitation, manipulation, and predators enriching themselves at the expense of retail investors and the buy side more generally. In this case, one financial firm in particular, Robinhood, also used slick marketing, predatory app features, hip/cool logos, and a legendary name to disguise the owners’ get-rich-quick schemes (in addition to outright illegal conduct for which it has been sanctioned by regulators repeatedly). Such claims are often just cover for manipulation and exploitation. That presented an opening for upstart firms to pitch Main Street investors, claiming that they were going to “democratize Wall Street” with easy access to stock market riches and less expensive if not free financial products and services.īut, of course, riches don’t come easy, and nothing is free on Wall Street. Much of that is intentional and by design to enable large, entrenched financial firms to extract wealth from the unwary or mislead. Wall Street has been too exclusive, expensive, opaque, and complicated for way too long.
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