The WallStreetBet, GameStop, RobinHood story

I've found this whole WallStreetBet/GameStop/RobinHood thing fascinating.

For those of you unaware of what's going on, here's a brief explanation. There's a group for stock market investors on Reddit called WallStreetBet where ordinary folk — so-called retail investors — get together to discuss stocks. They collaborated to buy loads of shares in a company called GameStop, which is a video game and consumer electronics outlet based in Texas.

On 12 January the share price of GameStop was $19.95 and the collaborative efforts of the WallStreetBet crew pushed that share price up to a maximum end-of-day price of $347.51 on 27 January. That's a tidy profit.

They did a lot of their trading through a broker called RobinHood, which is an online, app-based broker that offers to trade with zero cost.

The thing is, institutional investors were short on GameStop, meaning they had their hedge funds betting the price would go down. As a result of the WallStreetBet collaboration to push the share price up, the institutional investors' hedge funds lost billions.

WallStreetBet did to the institutional investors what the institutional investors have been doing to retail investors all along. They bought massive amounts of shares en bloc, which in itself pushes the price up. The same works for selling en bloc to push the price down. If you're ahead of the curve, you're better positioned to know when to buy or sell. Normally it's the institutional investors who are ahead of the curve, but in this case it was the retail investors connected by the WallStreetBet group.

Many say the primary intent of the WallStreetBet group was to stick it to the institutional investors in this manner, and the institutional investors where very unhappy to be trumped by impudent retail-investing upstarts in this manner. They cried quite a bit.

Now, back to RobinHood, the trading platform a lot of these investors used. As I said, they allow people to trade for free, but they have to make their money somehow. They get paid for what's called order flow. When you place a trade with RobinHood (or any share trading platform), that trade is passed to market makers for execution. Market makers will quote a bid (buy) price and ask/offer (sell) price. These prices will not be the same. The bid price might be £5.00 and the ask price might be £5.05. This small difference is the market makers' profit (it's called the bid-ask spread, for what it's worth).

So market makers make money from trading frequency as much as anything, and they will pay e-brokers like RobinHood a commission to trade for them.

As GameStop was hitting new highs, RobinHood mysteriously stopped people buying the share, only allowing them to sell it. This meant its share price dropped to around $193. It's still up a lot on its $19.95 original price, but the drop certainly pleased the institutional investors.

So why did RobinHood only allow people to sell these shares? The only explanation they gave was that it was a "risk-management decision". Make of that what you will.

As far as the WallStreetBet retail investors where concerned, though, RobinHood was complicit with the institutional investors, who could still trade freely of course. One RobinHood user, Travis Shetler, summed it up like this:

It seems like a breach of trust and like they’re simply pandering to the top few percent of traders.

They’re sending a message that the minute the people at the top start losing money, then we’re going to do whatever it takes to get them their money back, even if that means unfairly manipulating the markets at the expense of the average Joe.

He has a point, although an alternative explanation is that RobinHood just fell short of capital.

It looks bad for RobinHood, though, and that was reflected by 100,000 users leaving the app negative reviews, most of which Google deleted.

It has caught the attention of politicians in the US and — perhaps surprisingly — there's a fair amount of bipartisan support for the retail investors. There are threats of all sorts of investigations into RobinHood, although whether any of those investigations will actually happen is another matter.

As a small-time market investor myself, I've found this story interesting to follow. Power to the people etc.

Update 30 January 2021

RobinHood opened up trading in GameStop again but initially limited people to 5 shares in the company, and that later dropped to 1 share.