Reddit market mania fuelled by short sellers
A group of Reddit-inspired retail investors have shown little fear during their recent stock market buying frenzy.
And after trampling billionaire hedge fund players on Wall Street, some have turned on the app that served as their gateway.
Robinhood, which has long championed the democratization of finance, set off a bomb online this week when it told its social media-savvy users they could temporarily no longer buy some of their beloved misfit stocks.
The Reddit crew cried fowl, as did high-profile supporters, such as Elon Musk.
Was Robinhood siding with hedge funds that complained? Was it being instructed by its Silicon Valley investors or Washington insiders to restrict trading?
The company says no. It’s blaming an arcane market mechanism known as the clearing house.
A clearing house stands between the two sides of a deal to manage market risk. And stocks that Reddit-inspired Robinhood users have wanted to buy are viewed by clearing houses as some of the riskiest on the market.
Things got even more complicated as investors, lured in by the appeal of zero-commission trading, embraced margin investing and the use of options.
The clearing house needs to make sure Robinhood — or any brokerage — has enough money on hand to cover the volatility during the period when trades are settling.
That has forced Robinhood to put up more collateral because of the rising risk associated with the trades that are settling.
In an interview with Bloomberg Television Thursday, Robinhood’s CEO sympathized with companies such as The Clorox Co., which found itself overwhelmed in the early days of the pandemic.
Indeed, we are living through an unprecedented marriage between the worlds of social media and finance. Stay tuned for the next chapter!