With a pandemic still raging and a much-anticipated presidential transition underway, a group of gung-ho Redditors has nonetheless managed to shift the national conversation toward the state of our financial markets. Members of Congress, CEOs, Wall Street traders, and possibly your mom are all talking about the impact of an unprecedented rally in a handful of once low-valued stocks, including GameStop, AMC, Blackberry, and now a cryptocurrency that started as a joke.
The whole saga began about two weeks ago when the Reddit community /WallStreetBets, a home for wacky finance memes and Hail Mary investing plays, decided to work together to put pressure on hedge funds that had large short positions on the stocks, with GameStop emerging as the biggest target.
This wasn't the subreddit's first rodeo. Members, some of whom are experienced traders, had put pressure on short sellers in the past, but never at this scale. Within days, the price of $GME was surging, as a so-called short squeeze ensued, and more and more retail investors piled into shares using zero-commission trading apps such as Robinhood and TD Ameritrade.
GameStop's price continued to skyrocket into this week, and then trading apps such as Robinhood put temporary restrictions on buying activity on the targeted stocks. Suddenly, what started as an odd subplot in Wall Street's equity boom was bringing up hotly contested issues of fairness and legality in the era of easy retail investing.
"We had to make a very difficult decision to protect our customers and our firm," Robinhood CEO Vladimir Tenev told Cheddar on Thursday. "We haven't really seen anything like this before and to prudently manage the risk and deposit requirements we had to restrict buying in these 13 stocks, but customers that held them could sell throughout."
Critics of the platform accuse Robinhood of colluding with its biggest partner, Citadel Investments, which executes trades for the trading app and is also connected with Citadel Securities, which backed one of the biggest short sellers of GameStop. In addition, a class action lawsuit has been filed against Robinhood alleging market manipulation.
On the flipside, some Wall Streeters see /WallStreetBets as setting a potentially dangerous precedent that could undermine market stability as retail investors treat the market like a casino and chase gains completely unrelated to a company's financial health or growth prospects.
Jaime Rogozinski, the founder of the forum who was kicked off the platform for violating its terms of service, contested this characterization, saying Wall Street was a casino long before social media came along.
"Wall Street, these big institutions, they use fancy terms ... mortgage-backed securities, credit default swaps, derivatives, collateral, whatever. WallStreetBets calls these things a bet, and they call it a YOLO. It's no different than what they're doing," said Rogozinski. "We're just doing it an unapologetic way."
But social media, retail investing, and securities law have never collided to such a messy degree, and some legal experts say this is completely uncharted legal territory.
"This is going to be a hard case to prove any criminal activity," said Nisa Amoils, a venture capital investor and securities lawyer. "First of all, Robinhood's terms and conditions protect them from what they did. Second of all, it's very hard to prove that there was collusion here."
Rogozinski, for his part, agreed that this was an odd situation.
"I can't pretend to know whether or not what's happening right now is considered legal, but one thing's for sure it's weird," he said. "I think that's why it got so much attention."
