The story of the Robinhood stock trading app has come full circle. Once host to stock-pumping that saw near-worthless stocks like GME reach stratospheric levels before the app paused trading in them, the app has now paused trading in its own stock …
Background
We explained back in January what was happening at the time.
GME was one of several stocks whose value shot up when a bunch of Reddit users entered into a coordinated buying spree.
Any significant increase in demand for a stock tends to push the price up, but there was an extra factor in this case. The Redditors had chosen stocks whose prospects were extremely poor, GameStop being a case in point: a retailer of physical games media in an already declining market, further hit by a pandemic.
There was method in this apparent madness. When a stock is in decline, investors will often “short” the stock. This means they borrow stock to immediately sell it. They then wait for the price to fall, buy the stock for less than their selling price and return it to the owner, pocketing the difference. More specifically, the coordinated action made heavy use of options, as this lets you get more bang for your buck.
These options have an expiry date, however, and if the price goes up instead of down, they are forced to buy the stock at a higher price, taking a loss. If the price is rising rapidly, then all the shorters will pile in to buy the stock in order to minimize their losses, and that buying frenzy pushes the price higher. It then becomes a vicious circle known as a “short squeeze.”
Robinhood responded by suspending trading in the stocks, but was accused of doing so to protect the hedge funds to whom it sold trading data – which prompted both SEC and Congressional investigations.
Trading limits in the stocks concerned were eventually removed, but there was one more to come …
Robinhood stock trading app stock suspended
Robinhood itself went public, and has now suspended trading in its own stock after rising more than 60% in less than a day. TechCrunch reports.
Trading of Robinhood shares has been halted due to volatility. The company’s stock paused at $65.60 on Robinhood itself. Yahoo Finance has a higher $77.03 price on the company’s equity, up a stunning 64.59% today. Things are fluid, but Robinhood may have been halted, and then rose again when it resumed trading […]
Recall that Robinhood went public at $38 per share, the low end of its range, and sank in its early trading sessions to below its IPO price. Now, it’s worth $54 per share.
The sharp rise appears to be for the same reasons: belief that large investors were shorting the stock due to its poor initial performance, but the NY Post says that some experts dismiss this.
“There’s not nearly enough short interest to affect a stock price that significantly,” Ihor Dusaniwsky of S3 Partners told The Post. “This is a long buying not a short covering rally.”
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