On Thursday morning, Robinhood started blocking users from buying stock in GameStop, AMC, BlackBerry, Nokia and other stocks at the epicenter of wild market volatility. "In light of recent volatility, we are restricting transactions for certain securities to position closing only," the company said. Other trading apps were soon forced to follow suit, when clearing house Apex said it would no longer accept buy orders of some of the volatile stocks.
On its face, Robinhood's decision doesn't quite make sense. Robinhood has seemingly benefited from the retail investor-fueled boom: The long-time favorite of Reddit's WallStreetBets community has rapidly gained traction in the wider world, surging to the top of the U.S. App Store charts on Wednesday.
By blocking the most popular stocks from being traded, Robinhood instantly ignited fury from some of its users. "This is market manipulation" was the headline of one top Reddit post this morning, while another proposed a class action lawsuit against the company. These people know how to hold a grudge, remember: They've spent the past week boosting GameStop stock partly because they're mad at a hedge fund.
Robinhood's not the only brokerage to take action. Others, including Interactive Brokers, TD Ameritrade and Charles Schwab have introduced certain restrictions, such as raising margin requirements. But Robinhood appears to be the only U.S. brokerage to have voluntarily banned purchases — and as the poster child of democratized retail investing, the decision feels both more important and unexpected than the others'.
So why did Robinhood do it? It seems to be betting that it's the least bad of the available options. While Redditors might know what they're doing with these stocks, the bulk of the people downloading the app on Thursday morning probably couldn't explain how the GameStop short squeeze works. If the stock crashes — which many think is inevitable — those new, inexperienced users will likely be very, very mad. Looking for someone to blame, they might pick Robinhood for failing to protect them.
It's not just users Robinhood has to worry about, either. Last month, regulators in Massachusetts filed a complaint against the company for exposing investors to "unnecessary trading risks." They accused it of "falling far short of its fiduciary standard" to investors, arguing that the company has gamified stock trading to an unhealthy degree. Stepping in today is one way for the company to show that it is willing to protect investors when they're at risk, potentially keeping regulators at bay.
Earlier in the day, Robinhood users appeared to be abandoning ship in favor of other apps, including Webull and Public. But the party ended for both of them, too, when Apex said it would no longer accept buy orders for the stocks. Still, by pulling the plug later than Robinhood, and by blaming a third party for the decision, Webull and Public might be able to save face.In the same way that Twitter and Facebook's Trump ban boosted moderation-light apps like Parler, Telegram and Gab, Robinhood's difficult decision could light a fuse under its competition.
This story is developing and has been continually updated.