Most of the panellists were key players during a two-week period last month when millions of small investors went off on Reddit and other online forums to buy GameStop and took the stock to stratospheric levels. These small investors were motivated, at least in part, by a desire to hurt big Wall Street companies like Mr. Plotkins Melvin Capital, who had bet that GameStop’s shares would fall as online games and streaming became more frequent.
Understand what happened to GameStop
The broker of choice for retail investors was Robinhood, which has become very popular due to its combination of commission-free trading and playful features. As volatility increased, Robinhood and other brokerage firms were forced to curb stock buying in order to meet deposit requirements with clearing houses. However, many of Robinhood’s clients believed it preferred its Wall Street partners.
Robinhood is paid by Citadel Securities and other firms to route client orders to these companies, which is common practice with retail brokers. Citadel, in turn, makes money using its high-speed trading machines to exploit tiny differences between buying and selling prices. These are often fractions of pennies, but it quickly adds up to the large number of trades Citadel executes.
Finally the GameStop rally ended. In the final week of January, the company’s share price rose from $ 65 – where it closed the previous week’s trading – to an intraday high of $ 483 on Jan. 28. That surge resulted in around $ 30 billion in wealth on paper. While people who sold at the peak were most likely to make profits, those who bought at the peak suffered deep losses when GameStop’s stock price collapsed. Shares are down more than 90 percent from their January 28 high.
But in a saga as remarkable for its human characters as it was for the lack of clear heroes and villains, Robinhood was the target for both Republican and Democratic lawmakers.
“I love your company because, if properly managed, it offers investment opportunities to people who are currently excluded from the market for one reason or another,” said Anthony Gonzalez Republican of Ohio. He added, “At the same time, I believe that a security flaw in your business model has clearly been exposed.”
Founded in 2012, Robinhood is a Silicon Valley creature subscribed to an ethos that has often put rapid growth above all else. The problem with this approach, whether it’s Facebook or Uber, is that companies often can’t foresee the problems that come at such a rapid pace.