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The trading platform RobinHood Markets Inc. faces charges of market manipulation for the rally suffered by the so-called meme stocks in its app in 2021, when a group of users of the social network Reddit in the Wall Street Bets forum instigated a massive purchase of shares of virtually bankrupt companies, such as GameStop or BlackBerry, which caused a sudden appreciation of these in a matter of hours.
Among the instigators of the rally was Elon Musk himself and several well-known traders of the social network.
In finance, a short is a person who speculates that the prices of certain stocks are going to fall, so he borrows shares to sell them in the market, buys them back when the price falls, replenishes the owner’s portfolio, and earns the difference between the sale and the purchase.
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Among the stocks with the most shorts in the market were companies such as GameStop, BlackBerry, AMC, and Tesla. The latter, despite being the most valuable company in the market, is considered by many investors to be overvalued, including Michael Burry, who anticipated the sub-prime crisis in 2007.
Unfortunately, the shorts are not only individuals, there are also commercial banks, and investment and pension funds that invest the savings of millions of people in this type of financial instrument. The meme stock craze cost these funds and their savers billions of dollars.
To curb the meme stock frenzy, trader RobinHood had to block the purchase of shares of at least 9 companies, which proceeded to sue the online broker accusing it of manipulating the market against these companies. This lawsuit is in addition to others that include legal actions by individuals against RobinHood.
Although the phenomenon was not unique to RobinHood, the Securities and Exchange Commission (SEC) pressured the broker to contain the bullish rally in the stock market. The SEC’s pressure, along with RobinHood’s blockade, caused multiple protests on Wall Street itself, led by angry traders who accused the regulator of acting in favor of large financial groups to the detriment of the interests of small investors.
RobinHood in legal and financial trouble
Some analysts have determined that RobinHood’s platform is responsible for the surge in several stocks due to a change in which the firm reported fractional trades.
Fractional trading allows investors to buy parts of a single stock, rather than the entire security. This type of financial instrument has become popular on trading platforms such as RobinHood, where it is often used to purchase portions of expensive stocks such as Tesla or Apple, whose individual prices are beyond the reach of many small traders.
Apparently, RobinHood started reporting fractional purchases as if they were full stock purchases, thus causing trading volumes to be artificially inflated, which led many unwary traders to invest in meme stocks.
The recent lawsuits have taken a toll on RobinHood’s reputation, which has lost users and revenue as a result. Recently, the broker has determined to lay off up to 23% of its staff, after it made a reduction of more than 9% of its workforce in April. In total, RobinHood has had to lay off more than 1,000 people to stay afloat.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica