In the first week of a Joe Biden presidency, House Rep. Alexandria Ocasio-Cortez (D-NY) and Sen. Ted Cruz (R-Texas) have found themselves on the same side of a debate. The target: Reddit vs Robinhood.
Robinhood, a commission-free investing tool, is self-described as an app where the founders “believe the financial system should be built to work for everyone.” However, Reddit users are challenging that description from co-founders Baiju and Vlad Tenev due to a recent shake-up with GameStop investments.
While Wall Street investors are usually the dominant force for investing and trading stocks, the Reddit community has given them a run for their money. The social media platform users teamed up to invest in GameStop, an electronic retail company. These users became short sellers (when a stock price is most likely to decline, an investor borrows the stock from the lender, then sells it, and then buys it back at a lower rate). This procedure can be risky because it’s dependent on the price actually dropping in order to make a profit.
In the simplest terms, let’s say you buy 10 apples at $1 each. Someone tells you those apples are about to go bad so you lend them back to the store at the same price of $10. A day later, those apples are now worth $0.75 each. You decide to rebuy the same number of apples at $7.50. You’ve now made a profit of $2.50 from your original $10 purchase.
Reddit users succeeded at short selling, buying GameStop up in droves and increasing its stock to 1,500 percent. While some short sellers may just be interested in making a profit and doing the same thing as more sophisticated Wall Street execs, CNN confirms that “many are motivated by a populist desire to punish hedge funds and other elite investors.”
Instead of Robinhood coming to the defense of community users who trade daily, it sided with hedge funds and raised its margin requirements to 100 percent. (This means brokers must require investors to maintain a minimum amount of equity as long as they hold onto the stock. If the equity dips below that minimum, investors will have to honor a “margin call,” meaning they would have to deposit more funds or securities. So they can’t just focus on making a profit on GameStop and then leaving.)
But Robinhood didn’t just stop at making users add more funds instead of immediately investing, trading and buying back. As of today, the investment app banned users from buying GameStop, along with other short seller go-tos on Reddit such as AMC, Bed Bath & Beyond, Best Buy and Nokia.
For young traders, this led to immediate backlash, especially considering the rumored success of these trading tactics. One Redditer went as far as to say he paid off thousands of dollars in student loans with his GameStop profit, posting a payment confirmation of $23,504.45.
As a loyal Bernie Sanders’ supporter and just as vocal about canceling student debt, this kind of financial success was all but certain to catch the eye of Rep. Ocasio-Cortez.
From @AOC Twitter account, “This is unacceptable. We now need to know more about @RobinhoodAppâ€™s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, Iâ€™d support a hearing if necessary.”
In what may have startled both Democrats and Republicans, Senator Cruz retweeted her comment with his own take: “Fully agree.” Although Rep. Ocasio-Cortez opted out of teaming up to work with Senator Cruz due to him making excuses and defending the Capitol Riot while threats against her own life were made by Texas man Garret Miller, she did confirm that she’d be willing to work with other Republicans who felt this trading block was unjust.
“I am happy to work with Republicans on this issue where thereâ€™s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out,” she tweeted to Senator Cruz.
Whether these two are on the same page or not, Senator Cruz does appear to understand the outrage from Reddit users. He retweeted a tweet from Barstool Sports, showing rapper Drake’s “God’s Plan” music video but in reverse, with the Toronto rapper taking away the money he’d given to strangers.
While Congress members have the option to decide whether they want to dive into the GameStop vs Reddit vs Robinhood controversy, one Reddit user filed a class-action lawsuit today to fight against the app restriction. If Brendon Nelson, the plaintiff, wins the lawsuit, the U.S. District Court for the Southern District of New York must immediately require Robinhood to reinstate GameStop on its platform, plus provide an undetermined award due to Nelson’s inability to buy GameStop stocks as the rate continues to climb higher.