Reddit has been running the stock market, and now Wall Street wants to regain control. With retail traders squaring off against hedge funds, volatility is running rampant. In the middle of all of it, Robinhood has restricted trading on GameStop (NYSE:GME) and seven other high-flying Reddit stocks. So as the Robinhood bans draw controversy, what should you know?
Up until now, Robinhood has been synonymous with the massive upswings in Reddit stocks. Posters rally hype on r/WallStreetBets and then place their trades on commission-free Robinhood. Yesterday, Robinhood was one of the brokerages facing outages due to all of the trading activity. Today, the company is taking a different stand.
In a blog post that has angered celebrities like Ja Rule and Mark Cuban, Robinhood announced it would place restrictions on eight Reddit stocks. As of now, investors can only close out their positions on these stocks. There are also additional margin requirements on certain securities. As the company advertises, this is all about keeping customers informed amid volatility. It uses the blog post to direct customers to its expanded Robinhood Learn resources for more information about what is happening in the market.
Unsurprisingly, Robinhood bans on GME stock have stirred up quite a fuss. But what should you know now? And what other stocks are facing restrictions?
Robinhood Bans Fact No. 1: GameStop Leads the Way
It is not surprising that GameStop was the first equity to draw this ire.
Redditors came into the spotlight thanks to massive gains in GME stock, taking struggling shares to $100, $200, $300 and even higher. Along the way, users tossed out moonshot targets like $5,000, explaining how a turnaround narrative and short squeeze would pave the path.
Remember, there is somewhat of a turnaround story at play here. Chewy (NYSE:CHWY) founder Ryan Cohen has promised to help GameStop better rival Amazon (NASDAQ:AMZN). This speaks to its need for an e-commerce model and direct-to-consumer sales. Cohen has since been added to the board, along with two other former Chewy executives. But even beyond this narrative, GameStop has become a symbol of r/WallStreetBets.
Now, as r/WallStreetBets urges its community to “hold the line” and avoid selling GME stock, hedge funds are in a cash crunch. Melvin Capital has allegedly closed out its short position at a great loss. David Faber warned viewers on CNBC that other hedge funds could need rescue financing. As this all unfolds, regulators, politicians and celebrities are chiming in. As of this writing, GameStop has shaved off some of its gains and is down to $226.
Robinhood Bans Fact No. 2: What Are the Other Stocks?
Seven other stocks are now too risky and too high-flying to trade, at least according to Robinhood. That list includes Reddit stocks:
- AMC Entertainment (NYSE:AMC)
- BlackBerry (NYSE:BB)
- Bed, Bath & Beyond (NASDAQ:BBBY)
- Express (NYSE:EXPR)
- Koss (NASDAQ:KOSS)
- Naked Brand (NASDAQ:NAKD)
- Nokia (NYSE:NOK)
Each of these companies has a wildly different business, but the story is similar.
Investors want to find the next GameStop and be the next r/WallStreetBets millionaire. AMC Entertainment, for example, is a hard-hit movie theater operator. Facing high short interest and pandemic challenges, a former Goldman Sachs portfolio manager identified it as a prime Reddit target. Koss is a legacy audio equipment maker, similar to GameStop in its brick-and-mortar retail and consumer electronics focus.
Over the last three trading days, each of these names has rocketed to new highs, propelled on by r/WallStreetBets. Each has packed a punch for short-selling hedge funds. And each has raised eyebrows across Wall Street. Just think about the fact Build-A-Bear Workshop (NYSE:BBW) was rallying this morning!
Regardless of the rationality behind the rally in these Reddit socks, Robinhood is taking a stand. For better or for worse…
Robinhood Bans Fact No. 3: What Comes Next?
InvestorPlace contributor William White highlighted exactly what is at stake. Yesterday, Robinhood was an in-demand platform representing a major moment in stock market history. Today, investors are taking to social media to decry the company. For instance, Jeff Seibert took to Twitter (NYSE:TWTR) to ask why Robinhood would place trading restrictions if the exchange had not halted trading. Others have used social media to support the “hold the line” and “do not sell” movements.
With 1-star reviews and app deletions trending, some users think a class-action lawsuit against Robinhood is on the way.
No matter what happens, this is a story to watch.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.