Mobile brokerage firm Robinhood is essentially “shooting itself in the foot” by blocking its users from purchasing stocks of companies such as GameStop Corp. that were soaring in value after individual investors banded together to squeeze Wall Street hedge funds, according to analyst Charles Mizrahi—host of “The Charles Mizrahi Show” and creator of the Alpha Investor newsletter.
The company and various other platforms restricted access to purchases of hot stocks such as GameStop, Koss Corp., and AMC Entertainment Holdings Inc., a move that has prompted members of Congress in recent days to call for an investigation into whether there was collusion by hedge funds and the retail stock investment app.
Robinhood is the focus of a class-action lawsuit (pdf) filed in the Southern District of New York last week. The action accuses the firm of “purposefully, willfully, and knowingly” removing GameStop stock from its trading platform “in the midst of an unprecedented stock rise.”
The plaintiff says these actions “deprived retail investors of the ability to invest in the open-market and manipulating the open-market.”
“How could Robinhood stop trading in a stock during a frenzy, when a majority of their clients, or about half, are in there because of the ability to trade and make it easy. So are they shooting themselves in the foot?” Mizrahi said in an interview with The Epoch Times’ “Crossroads” program.
“It was coming,” said Mizrahi, referring to the class-action lawsuit against the company.
“Robinhood got the client that they wanted. They wanted the young person, they wanted the people, the millennials, who could look how easy it is to trade,” he said. “As a customer, why would I ever want to open an account with these people? Do you ever want to be in a position where you cannot get out of or into something you want?”
According to an update on its blog, Robinhood narrowed trading limitations to eight companies from 50 on Jan. 31. GameStop still faces limitations, as well as AMC and Blackberry Ltd.
“I don’t know if they’re shooting themselves in the foot here,” Mizrahi said. “We’ll watch this play out. I came to think, what’s their defense going to be? We had too many people wanting to buy or sell? You’re a broker. That’s what you’re supposed to be doing.”
“If there’s nothing that was done that was illegal to stop the trading in the stock, I don’t see any justification for that. It doesn’t make any sense that they should stop trading certain stocks because of crazy volatility.
“I don’t know what this is going to do here, maybe [it will] just give everyone a breather by stopping it. But I agree if you’re going to change the rules in the middle of the game, realize there’s going to be some pushback,” he said. “You just can’t do that.”
Robinhood CEO Vlad Tenev has denied what he described as a “conspiracy theory” that hedge funds prompted the mobile brokerage company’s decision to restrict users from purchasing shares in GameStop.
“I think I’ve said over and over again said that it’s not true,” Tenev said on Jan. 29. “Our decision to temporarily restrict customers from buying certain securities had nothing to do with a market maker or a market participant or anyone like that putting pressure on us or asking us to do that.
“It was entirely about market dynamics and clearinghouse deposit requirements, as per regulation.”
The Securities and Exchange Commission on Jan. 29 issued a rare joint statement from its acting chair and commissioners. It said it was working closely with other regulators and stock exchanges “to protect investors and to identify and pursue potential wrongdoing” and would “closely review actions … that may disadvantage investors” or hinder their ability to trade stocks.
“I think if you look at this entire situation, it’s a novel situation,” Tenev told Fox News. “A relatively small number of stocks have gone viral on the internet. And as things that go viral on social media and the internet do, there’s an exponential growth in interest. And so we have to be prudent. And we have to have prudent risk management. And that’s what the firm did.”