Individual investors woke up to an unwelcome surprise as the popular trading app Robinhood restricted stock purchases of several "meme stocks" related to the surprise rally around GameStop. The trading platform Robinhood, a commission-free stock platform popular with casual stock traders, restricted trades of several stocks this morning, including GameStop, AMC, Nokia, and Naked Brand Group, Ltd. The platform provided no immediate explanation for halting their clients from buying the stocks, but it does follow on the heels of other major trading platforms, such as TD Ameritrade, placing restrictions on the same stocks. The decision was met with widespread derision on the Reddit community /r/WallStreetBets, which has been at the heart of the unexpected moves on Wall Street over the past week. Within an hour of delisting the stocks, Robinhood received over 100,000 1-star reviews on the app store:
after delisting GameStop and AMC, Robinhood has gotten over 100,000 1 star reviews in one hour on the app store, now set with a 1 rating. they deserve it pic.twitter.com/eDNDuPrj8r— Rod Breslau (@Slasher) January 28, 2021
Individual investors posting on Reddit rallied around GameStop stock in a response to hedge funds heavily "shorting" the stock. When an investor shorts a stock, they are betting that the price of the stock will drop over a period of time. The investor borrows said stock from another investor and then sells it to a third party. At the end of the agreed period of time, the short seller then purchases the stock and returns it to its original owner and pockets any difference between the two transactions. By driving up the price of GameStop's stock with a series of surprise purchases, Redditors created a "short squeeze" that forced short sellers to scramble and re-buy their stock at a loss, thus driving up the price even further. Other stocks, such as AMC and BlackBerry, were caught up in the rush as thousands of individual investors sought to make money off of the grassroots-driven market surge. Meanwhile, the stock market swings caught the attention of the White House, as the Biden administration noted that they were "monitoring the situation" surrounding GameStop's stock price hike.
Robinhood and other platforms' restrictions made an immediate impact on the meme stocks. GameStop's stock, which had risen as high as $450 a share overnight, plummeted to around $262 a share as investors were only provided with an option to sell their shares instead of invest more money into the market. AMC's stock saw a less severe drop, dropping from about $20 a share at the closing bell to around $13 a share. This is likely a short term shock to the market, but it could also be a portent for the end of the unexpected swing in random stocks caused by an Internet message board dominated by meme posts. Obviously, this continues to be a developing situation, and GameStop's stock could be at the center of even more surprises once the opening bell rings on Wall Street.
Robinhood issued the following statement about the restrictions: