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Sunday, July 25, 2021

Reddit vs. Wall Street: Robinhood also removes all restrictions

Users of the US trading app Robinhood can now buy as many Gamestop shares as they want again. But they have clearly lost their value.

The US stock trading app Robinhood has lifted all interim trading restrictions after more than a week and thus possibly counteracted the continuous decline in value of the Gamestop share. After an unprecedented price rally in the securities of the troubled game retailer, Robinhood had prohibited the purchase of shares in Gamestop and some other companies last Thursday and was therefore criticized.

Retail investors vs. hedge funds

The background to the restrictions was a test of strength between short sellers and above all, but not only, small investors. Short sellers borrow shares for a certain period of time, sell them immediately at the current rate and rely on being able to buy the paper at a lower price later if the price falls and to be able to return it when the loan ends. Hedge funds specializing in short sales had bet large sums of money on a falling price of the Gamestop share.

Small investors who organize themselves mainly on Reddit, however, have driven up the price of the Gamestop share through massive purchases and thus thwarted the plans of the short sellers. The short sellers were forced to buy their maturing Gamestop shares at the high prices and suffered large losses. The billion dollar hedge fund Melvin Capital was on the verge of insolvency.

Serious allegations

But Robinhood and similar apps had restricted trading in the stock and interrupted the price increase. Robinhood justified the move with “persistent market volatility”. Other brokers, such as the German start-up Trade Republic, reacted in a similar way, but withdrew the restrictions earlier .

Small investors felt thwarted on their profit path, and serious allegations followed. They suspect that the trading platforms wanted to keep their backs on the hedge funds. Robinhood and Co. deny this: Due to the immensely increased trading activity , there was a risk that financial security was no longer sufficient. But the outrage was not only great among the investor community, but also in politics. Investigations of the events have already been announced in the USA.


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