GameStop reveals anomalies

Robinhood, the platform built upon democratising investment, has become an illustrative example of an intrinsic issue for the stock market: it is perceived to be a rigged game that talks big about supporting free markets but protects existing players.

In recent weeks, amateur investors aggregated on social media platform Reddit and created a powerhouse trading bloc that strongly competed with hedge funds in market-making around individual stocks.

Over the span of two weeks, that group pushed electronics and gaming merchandise retailer GameStock Corp from $19.95 to $347.51, triggering significant losses for many hedge funds who had effectively been ‘betting’ that the stock price will fall as the business continues to decline.

In a seemingly hypocritical move for a financial services company with the articulated mission to “democratize finance for all”, Robinhood announced that they would be restricting trading on GME stock options.

They argued they had a requirement to “protect investors and the markets”, but in effect their decision protected hedge funds at the expense of the individual investor.

Leaving aside legitimate questions of market manipulation, critics might argue that the financial services industry appears to be hypocritical: they are all for free markets when insiders benefit, but suddenly want regulation when existing players are challenged.

Furthermore, this GameStop debacle is yet another example of social media’s ability to incite collective action in an unprecedented manner. The social media aspect is interesting… social news aggregation and discussion website Reddit was the vehicle of aggregation for Robinhood users.

Motives behind Robinhood’s decision to block retail investors from purchasing stock remains unclear and has driven speculation that they received pressure from hedge funds themselves. The decision is also perplexing as hedge funds were still able to trade stock freely as they saw fit.

Ultimately, this is an evolving situation with no clear solution. One solution is that the SEC acknowledges the Redditors as legitimate actors and regulates both them and the hedge funds equally.

Contrarily, you could go in the other direction and deregulate both the hedge funds and Redditors and let them continue what they are doing.

We’ll see what ramifications come from this social media movement of collective action. But it is necessary to acknowledge that this epitomises qualms around the divide between the influence of corporate privilege, and the rest of us.