The Robinhood stock-trading app suffered from “degraded performance” Thursday morning, the company said. The problems arose as users bombarded the app with negative reviews after Robinhood stopped the sale of certain stocks driven up by Reddit users.
This is the latest twist in the tumultuous (and still unfolding) story of Reddit versus Wall Street. It started when coordinated Redditors banded together to drive up the share price of GameStop after a hedge fund shorted the stock.
The (foiled) Big Short
The news, for those who haven’t been following, goes like this: Redditors found that hedge funds were shorting several stocks, including GameStop.
Short selling, aka shorting, is a trading strategy in which an investor bets that a stock or security will go down in value. They borrow certain shares and then sell the borrowed shares to buyers who are willing to pay the market value. They then bet the price will go down and, when it does, they can buy up the number of shares they borrowed at a new, lower price — carving themselves out a nice profit.
However, things don’t always go to plan. If a stock increases in value, traders risk theoretically unlimited losses. That’s because they have to buy the shares back at a higher price in order to return them to the lender.
after delisting GameStop and AMC, Robinhood has gotten over 100,000 1 star reviews in one hour on the app store, now set with a 1 rating. they deserve it pic.twitter.com/eDNDuPrj8r
— Rod Breslau (@Slasher) January 28, 2021
In this instance, Redditors engaged in coordinated buying to drive the share price of particular stocks. This strategy increased the market value of the companies dramatically, despite the fact that the business fundamentals did not necessarily change.
Along with GameStop, other companies that surged include Blockbuster, AMC Entertainment and BlackBerry. However, on Thursday Robinhood stopped users from acquiring GameStop and some other stocks. Users could sell, but not buy. “In light of current market volatility, we are restricting transactions for certain securities to position closing only,” the company wrote on Twitter.
Now the Robinhood app appears to have gone offline for some users. The Independent newspaper reports:
“Robinhood said it was experiencing ‘degraded performance’ over a variety of its services. It said that its iOS, Android and web apps were ‘experiencing a service disruption’ and that it was also ‘experiencing issues with equities, options, and crypto trading.'”
The service might be being bombarded with requests rights right now. It may simply be unable to handle them all.
Meanwhile, Wall Street and the U.S. government might take action against traders. On Wednesday, Nasdaq CEO Adena Friedman said the exchange might stop trading of certain stocks because prices were being manipulated by internet users. This would allow investors to “recalibrate” their position.
And on Thursday, Rep. Alexandria Ocasio-Cortez said she would support a congressional investigation into Robinhood’s blocked trades.
“This is unacceptable,” Ocasio-Cortez said on Twitter. “We now need to know more about @RobinhoodApp’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, I’d support a hearing if necessary.”
Amid the market-roiling turmoil, frustrated Robinhood users review-bombed the app because of the halted trading and other service disruptions. On Android, disgruntled users placed 100,000 1-star reviews in a single hour. Some users on Twitter report having difficulty leaving reviews on the iOS version.
Expect to see plenty more craziness as relates to this story as it unfolds Thursday. There’s going to be a lot more here before things start to settle down.