If you’ve somehow never heard of GameStop, start here.
When we last spoke to the rest of you readers, the big news involved Robinhood: The widely used retail trading app came under fire for its decision to restrict trading in popular Reddit stocks (e.g., $GME, $AMC).
Here are the latest updates (as of Sunday night):
Robinhood’s decision was grounded in market mechanics
As explained by Bloomberg’s indispensable Matt Levine, the stock market operates on a “T+2 settlement” model. What this means is that when you buy a stock, you receive the shares immediately but don’t actually pay for them until 2 business days later.
The credit risk over this 48-hour window falls on the stock seller, and the way the market deals with it is through clearinghouses — intermediaries between buyers and sellers that guarantee the trades.
$GME’s volatility concerned the clearinghouses, and they forced brokerages to put up more collateral and slow the trades in popular names. It wasn’t just Robinhood that restricted trading — so did Interactive Brokers, E*TRADE, TD Ameritrade, and Charles Schwab.
Robinhood raised an emergency $1B from investors…
… to help deal with the higher collateral requirements (a 10x increase). To be sure, Robinhood is far from blameless:
- Its business model easily allows risky investing behaviour, including options trading and investing on margin
- Its platform has seized up before under heavy trading and should have better guardrails in place
Further, its poor messaging led to hundreds of thousands of negative reviews and lawsuits. (The Above The Law blog notes Robinhood’s agreement with users means these suits will probably get thrown out.)
The ‘Reddit traders vs. hedge funds’ framing is too simplistic
There is big institutional money on both sides of the bet, as highlighted by Ranjan Roy, writing at Margins.
To wit: During the Robinhood trading pause, someone bought $187m of $GME (clearly, not random teens in their basements).
Retail traders also have been on both sides of the bet. Bloomberg’s Levine cites data from market maker Citadel that “retail investors were net buyers of [$GME] on Monday but net sellers” through Thursday.
There will def be more news to come this week, so keep an eye on this space.
