Following its decision to suspend trades for GameStop on January 28, the well-known investing app Robinhood came under fire. Traders on Reddit started buying the company’s stock, which caused shares of the game store to spike.
Besides capturing stock purchases by users, Robinhood made the surprising decision to restrict purchases of GameStop, citing challenges with volatile stock and regulatory restrictions. Being in the trading craze, Robinhood has come under scrutiny from users, lawmakers, and authorities.
About Robinhood
In 2015, the investing app Robinhood was introduced. It is well-liked by millennials, who account for the bulk of its customers and have access to a range of free investments. Read more about Robin Hood here.
How did things turn out with GameStop and Robinhood?
On January 28, early in the day, Robinhood posted a blog telling customers that it was limiting their ability to buy shares of various companies, including GameStop, AMC, and Nokia. Invoking “market volatility” as a rationale would only allow clients to sell their shares of specific companies, not to buy or trade in any other way.
We are limiting trades for some stocks, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD, and $NOK, to position closing only in light of recent volatility, according to Robinhood.
Why did Robinhood restrict stock purchases in GameStop?
Robinhood published a second blog on the incident the next day. The corporation explained that it was important to keep a sizable cash reserve to process all trades made through its clearinghouse—the component of the company that transfers shares and money to other clearinghouses to complete trades.
When Tesla CEO Elon Musk joined the Good Time Show with Robinhood CEO Vlad Tenev via the exclusive Clubhouse app, provided more details.
He stated, “Our operations receive a file from the National Securities Clearing Corporation at 3:30 a.m. Pacific.” So they provided us a file with a deposit, and the request was for roughly $3 billion, which is more than it usually is.
Tenev gave some background information by stating that Robinhood had only raised $2 billion in funding until now. He continued by describing the NSCC’s formula for calculating the size of a deposit required, which included a factor for risk that may serve as a multiplier.
We had no other option in this situation, he said. Our regulatory capital requirements had to be met.
He told that since then, the organization has collaborated with Robinhood to lower the required amount of funds. The corporation secured $1 billion in emergency funds to ensure that customer trades could take place.
When was trading GameStop stock again permitted on Robinhood?
Customers of Robinhood received an email announcing that the company would start allowing “limited buying” of specific stocks the next day.
The restrictions included a cap on the number of shares users could own (at one point, it was one GameStop share), the absence of trading options, the prohibition of margin borrowing, the suspension of recurring investments, and the prohibition of fractional shares, which are fractions of a stock that can be purchased for as little as a dollar.
Robinhood upped the number of shares permitted for all the companies on February 3; GameStop’s restriction was increased to a total of 500 shares. The other limitations remain in effect.
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