Robinhood, the zero-fee trading app that was supposed to level the playing field for individual retail investors, made a decision last week that destroyed seven years of goodwill in less than a day. The trading platform decided to try and help the rich take back what the poor had temporarily taken from them.
After a day trading subreddit called r/wallstreetbets led a buying frenzy of stocks shorted by hedge funds, Robinhood found itself facing unprecedented levels of trading and volatility. The buying frenzy led to a historic short squeeze in which retail traders faced off against Wall Street hedge funds over “meme” stocks like GameStop (GME) and AMC Entertainment Holdings (AMC).
On Thursday, Robinhood CEO Vlad Tenev made the decision to restrict buying of the shorted meme stocks but allowed investors to continue selling them. The decision outraged day traders, politicians, and celebrity figures alike, drawing accusations of Robinhood trying to protect institutional investors at the expense of retail investors.
Robinhood claimed it was trying to protect retail traders from taking risks they might not fully understand. The platform also pointed to statements made by the SEC saying (without naming names) that “extreme stock price volatility has the potential to expose investors to rapid and severe losses” that could “undermine market confidence.”
Meanwhile, last week Robinhood raised $1b of new funding from existing investors.