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Shares of companies, including video game retailer GameStop, soared again on Friday as an army of small investors targeting Wall Street regained access to amateur stock trading platform Robinhood.
The app, assembled by a crowd of small activist investors to snare hedge funds in a “short squeeze” costing them billions, had suspended the purchase of stocks like GameStop, the AMC theater chain and BlackBerry on Thursday.
But it secured a $ 1bn (£ 730 million) cash injection from its backers on Thursday night, which the company said it required to allow its users to resume their shopping spree, which began on the WallStreetBets chat forum. Reddit.
The decision to allow what Robinhood said would be “limited purchases” resulted in GameStop shares rising more than 70% in early trading on Friday, taking its notional value to more than $ 21 billion, nearly 80 times what it was worth this time last year.
Shares in the company had skyrocketed a day earlier, ending the day down 44% after Robinhood banned users from buying more shares, threatening the Reddit rebellion.
The U.S. Securities and Exchange Commission also jumped into the battle between small investors and Wall Street hedge funds on Friday, warning both brokerages and small traders that it was closely monitoring potential wrongdoing. .
“The commission is working closely with our regulatory partners … to ensure that regulated entities meet their obligations to protect investors and identify and pursue potential wrongdoing,” the SEC said.
In the UK, the Financial Conduct Authority issued a warning to British hobby traders who were planning to jump into the fray.
The FCA advised them to use “extreme caution” and warned that they could lose money quickly and irretrievably. While Robinhood is not available in the UK after canceling a launch last year, platforms like Trading212 offer a similar service.
We caution UK investors in certain US listed stocks being discussed online to exercise extreme caution. Volatile markets are unpredictable and mean that you can lose money quickly. Losses are unlikely to be covered by the Financial Services Compensation Plan #wallstreetbets
– Financial Conduct Authority (@TheFCA) January 29, 2021
Robinhood allowed buying to resume after turning to investors to withdraw at least several hundred million dollars through a line of credit from banks led by JP Morgan and including Morgan Stanley, Goldman Sachs and Barclays.
A Robinhood spokesperson on Friday described the $ 1 billion (£ 730 million) injection as a “strong sign of confidence” that will help it “serve our customers more”.
Robinhood also contacted existing investors, which include hedge funds Sequoia Capital and Ribbit Capital, about emergency financing, according to the New York Times.
The move to halt transactions had outraged users of the platform, which says its mission is “to democratize finance for all,” and prompted questions from US politicians.
Vlad Tenev, the co-founder of Robinhood, took to Twitter to quash theories that the temporary ban was trying to protect hedge funds, some of which pay the company for the right to run their users’ operations, which is known as “market creation”.
“This decision was not made at the direction of any market maker we direct or other market participants,” Tenev said. “We plan to allow limited purchases of these securities. We will continue to monitor the situation and make any necessary adjustments. However, we cannot control the rapid dissemination of information and misinformation that takes place on social media. “
Robinhood’s explanation of why it needed to suspend trading is complex, making it difficult for the company to reject accusations of Wall Street cronyism made by its users, celebrities, and even politicians as disparate as Republican Ted Cruz and Democrat Alexandra Ocasio. -Cortez.
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Many of Robinhood’s traders have not been buying stocks in the traditional sense, but instead using options, essentially borrowing from the company to finance their operations.
Like any financial instrument broker, Robinhood processes these trades through “clearing houses” who want to know that the broker can fulfill those trades if all goes wrong and its clients are unable to fund their own positions.
The sheer volume of trading at companies like GameStop, and the wild movement of their shares in the markets, meant that Robinhood was in danger of having very little money available to do that.
That, Robinhood says, is the reason it had to suspend operations on Thursday. Raising $ 1 billion from investors has put the company in a position that satisfies clearing houses that it has enough money to allow it to resume operations.
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