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Financial scandal around Robinhood and Gamestop explained

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Crypto-friendly platform Robinhood is at the epicenter of a financial scandal that threatens to overhaul Wall Street's market practices. The situation with the shares of GameStop and AMC Entertainment, hedge funds and the community on the Reddit platform has already been noticed in the US Congress.

What is GameStop?

GameStop is an American high street shop that sells games, consoles and other electronics. The company was expected to close its stores in 2021, but unexpectedly they have now made a stunning comeback in the Stock Market thanks to social platform Reddit and its users that decided to take on Wall Street.

Why is related to Reddit

Reddit is a social media platform where people are discussing topics, they are interested in. There is a forum called wallstreetbets. More than four million people are in it, discussing stocks and shares and where they're going to invest money.

What has happened to GameStop stocks?

To understand what has happened to Gamestop stocks we need to analyze such concepts as shorting and covering

What is shorting

Shorting is when big investor company, usually a hedge fund wants to make money by betting that a company's share price will fall.

They usually borrow some shares in a company from other investors and then sell them for 20 USD each waiting until they fall to 5 USD, and buy shares back. The borrowed shares are returned to the original owner, and the hedge fund gains a profit. In other words If you're sure the company will lose, you'd make a profit when you buy them back and the price has fallen.

Last week, amateur investors who read the Wall Street Bets forum on Reddit have invested money into buying the company's stock with the aim of pushing up the price. For the first time in history, a group of amateur investors managed to overcome a strategy of an institutional hedge fund!

What is covering

Covering is when hedge funds who borrowed these stocks need to quickly buy them back in order to prevent bigger loss (as price rises fast)

But this usually only adds a demand on it making their price even higher.

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What happened later

On January 28, Robinhood restricted trading to multiple assets. Among them were GME and AMC. Restrictions on GME trading did not affect private investors from Europe. GameStop shares are up 40% on January 29. On Friday, January 29th, Robinhood suspended accepting deposits and trading cryptocurrencies due to "unusual market situation"

Robinhood previously blocked Dogecoin (DOGE) cryptocurrency trading. During the day, the market value of DOGE has grown by almost 1000% because of Reddit users. For a short time, the coin got into the TOP-10 in terms of capitalization.

After this a lot of questions were arisen - the investors discussed legal action and accused Robinhood and other brokerages enacting their own form of market manipulation by restricting purchases of certain shares.

According to Reuters, social networking site Facebook has removed the popular Robinhood Stock Traders. It had 157,000 subscribers, including private investors who bought GameStop shares. The notice to the administrator said the community had violated the "adult sexual exploitation" policy.

However, the situation turned to be more than negative reviews for Robinhood. On January 28, a group of investors filed a lawsuit against the company, accusing it of "deliberately and knowingly" depriving private traders of the opportunity to invest.

Politicians and regulators actions

Sherrod Brown, a chair of the banking committee, commented in his tweet “People on Wall Street only care about the rules when they're the ones getting hurt. It's time for SEC and Congress to make the economy work for everyone. As Incoming Chairman of the SenateBanking Committee, I will be holding a hearing on the current state of the stock market.”

Rep Alexandria Ocasio-Cortez, mentioned that the restrictions are "unacceptable" and expressed support for a hearing.

Congressman Paul Gosar asked the US Department of Justice to investigate the incident with GameStop and Robinhood.

Massachusetts state regulator William Galvin called on the New York Stock Exchange to suspend GameStop for 30 days to allow a cooling-off period. "This isn't investing, this is gambling," he said in an interview. "This is obviously contrived."

What do you think about financial scandal around Robynhood? Shall regulators protect people or hedge fuds? Share your opinion in the comments below! If you wanna learn more or know more you can contact my team or you can jump into a one-on-one call with me right now clicking one of the the below buttons.

Alessandro Rocco Pietrocola is an entrepreneur, fintecher, investor, blogger and author based in London and operating mainly in Europe, Asia and Oceania with main focus on UK, Baltic Countries, Russia, China, Hong Kong, Malaysia, Singapore, UAE, Middle East and New Zealand as area of interest! At the moment is the CEO of Astorts Group. He is an UK FCA (Financial Conduct Authority) and NZ FSPR (Financial Service Provider Register) Approved Person and has great experience as director of regulated companies.
He uses to dedicate part of his life to inspire others and help them achieve the most out of their lives. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He is Member of Institute of Directors in London, Member of Changer Club in Riga, Member of Fintech Association of Hong Kong, Member of Singapore Fintech Association, Member of Non Executive Director Association in London and Member of Alumni Network of Draper University in San Francisco. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.
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