What Happened to Robinhood App During GameStop Stock Market Controversy

During the GameStop stock market controversy, the Robinhood app was at the center of a heated debate. The app's decision to restrict trading in GameStop's stock was a major point of contention.

The controversy began on January 13, 2021, when a group of retail investors on the Reddit forum WallStreetBets coordinated a massive short squeeze against GameStop, a struggling video game retailer. This led to a significant surge in GameStop's stock price.

The Robinhood app, which allows users to buy and sell stocks, was one of the platforms where this trading activity took place. However, on January 28, 2021, the app suddenly restricted trading in GameStop's stock, limiting users to selling only, and imposing a minimum stock price threshold of $100.

This move was seen as a way for Robinhood to manage risk and prevent further volatility in the market.

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Robinhood faced a major outage in March 2020 during the pandemic, which may have caused some customers to lose money.

The platform's technology was criticized by FINRA in 2021 for failing to properly supervise its capabilities, leading to outages and critical systems failures.

Robinhood's trading restrictions on meme stocks in early 2021 were a major controversy, with the company citing a large volume of margin calls by its clearing company.

Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt, who were classmates at Stanford.

The company has grown significantly over the years, adding over 10 million net-funded accounts in 2021, nearly doubling the number of users on the platform from the previous year.

Robinhood's earnings showed a net loss of $3.69 billion in 2021 compared to a net profit of $7 million in 2020.

The company's total net revenue for 2021 increased to $1.82 billion from $959 million in 2020.

In June 2021, Robinhood was fined $70 million by the Financial Industry Regulatory Authority (FINRA) for "systematic failures" that included system outages and providing false or misleading information.

Robinhood has almost half a million people on a waiting list for its new IRA product, which aims to help gig workers and young people save for retirement.

The company's mission is to democratize finance, first through stock trading and now with retirement savings.

Robinhood will make money on its IRA product through collecting a share of profits on customers' trades and lending out shares of stocks to short sellers.

The Census puts the number of Americans without retirement savings in the tens of millions, which highlights the scope of the retirement savings problem in the US.

Robinhood provides measures of safety through its own efforts and regulatory protection.

One of these measures is having a substantial amount of money on hand to process trades, as required by the clearinghouse.

This is to ensure that trades can be completed and customers' shares and money are sent back and forth.

The company's CEO, Vlad Tenev, explained that this deposit can be a significant amount, such as the $3 billion requested by the National Securities Clearing Corporation on January 29.

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Robinhood raised $1 billion in emergency capital to meet this requirement and ensure customers' trades can happen.

Regulators have also worked with Robinhood to decrease the amount of funds needed, showing the collaborative effort in maintaining investor safety.

These measures are not foolproof, but they are in place to protect investors and provide a safe trading experience.

Robinhood's decision to limit users on January 28 was a surprise to many. The company cited "market volatility" as its reason for restricting transactions on certain securities.

Robinhood specifically mentioned $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD, and $NOK as the affected companies. These included AMC, GameStop, and Nokia, among others.

On January 28, Robinhood allowed users to only sell their shares of these companies, not buy or trade in any other way. This move was a significant change in the way users interacted with the app.

Robinhood's statement said, "In light of recent volatility, we are restricting transactions for certain securities to position closing only..." This meant that users could only close their existing positions, not open new ones.

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Robinhood's trading restrictions on meme stocks in early 2021 were a major controversy. The platform limited trades of so-called meme stocks after a number of smaller investors banded together via social media to push up the price of GameStop, AMC, and several other stocks.

This led to a series of lawsuits against Robinhood, but most of them have been dismissed. However, the potential for sudden trading restrictions may not appeal to investors and potential users of Robinhood.

The company cited a large volume of margin calls by its clearing company, National Securities Clearing Corp, as the reason for the restrictions.

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The risks of trading on Robinhood are real and have been highlighted by regulatory bodies.

FINRA indicated in 2021 that Robinhood failed to properly supervise its technology, leading to outages and critical systems failures.

A major outage occurred in March 2020, which may have caused some customers to lose money.

Robinhood also placed trading restrictions on many investors in early 2021, limiting trades of meme stocks.

This move was made in response to a large volume of margin calls by its clearing company, National Securities Clearing Corp.

Lawsuits against Robinhood following these restrictions have largely been dismissed, but the potential for sudden restrictions may not appeal to investors.

Despite using data security measures, Robinhood faced a data breach in November 2021, where a fraudster obtained access to customer support systems and lists of millions of customers.

On January 28, Robinhood sent an email to customers saying it would allow "limited buys" of GameStop shares starting the next day. The limits included a maximum number of shares users could own, no trading options, no borrowing money on credit, recurring investments were skipped, and no fractional shares.

The restrictions were in place due to a large volume of margin calls by Robinhood's clearing company, National Securities Clearing Corp. Robinhood CEO Vlad Tenev explained that the company had to conform to its regulatory capital requirements, which involved a deposit of around $3 billion, an order of magnitude more than typical.

As of February 3, Robinhood increased the maximum number of shares allowed for all companies, with GameStop's limit up to 500 shares total. The other restrictions were still in place.

Robinhood was not the only investing service to restrict trades. Cash App, Webull, TD Ameritrade, Charles Schwab, Interactive Brokers, E-Trade, and Public also limited trading due to market volatility.

The restrictions were not a decision made by these companies, but rather a requirement by their clearing brokers. For example, Cash App's clearing broker, Axos, temporarily halted buys of AMC and Nokia due to increased capital requirements.

Robinhood had to raise $1 billion in emergency capital to ensure customers' trades could happen. The company had raised just $2 billion in capital up to that point.

The public backlash against Robinhood was swift and intense. A ton of people, including users of the r/WallStreetBets subreddit, were upset with the company's decision to freeze trading on GameStop's stock.

Users of the Robinhood app flooded the Google Play Store and Apple's App Store with negative reviews, resulting in tens of thousands of one-star ratings. Google intervened to remove many of these reviews.

Several members of Congress, including Rep. Alexandria Ocasio-Cortez, Rep. Rashida Tlaib, and Sen. Ted Cruz, called for a hearing on Robinhood's actions. The New York attorney general also said she would review what Robinhood did.

The US Securities and Exchange Commission (SEC) released a statement saying it would "closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities."