Due to recent events in the stock market with GameStop, AMC, Nokia and many more heavily shorted stocks, many people blame Robinhood for price manipulation and violating free trade by preventing traders on their platform from buying GameStop and AMC. The popular broker is even facing a class-action lawsuit and pressure from both ends of the political spectrum.
I understand how many people are very upset about the way Robinhood handled the situation. However, to put the blame solely on Robinhood might be jumping to conclusions. In reality, we don’t know the full truth yet, and there is a lot of information we are still missing from the equation to make a rational decision on who we should blame.
Now I know what you’re thinking. But before you go getting your pitchforks and torches, hear me out. I am in no way saying what Robinhood did was good, and I believe that the broker could have handled the situation better. It’s a free market, and anyone should be allowed to buy and sell stocks. But, before you go destroying these apps, this is something very important to consider.
The root of the problem is so much deeper.
This is still speculation, but some people believe that the issue is not with Robinhood but with their market maker, Citadel. Many people don’t know this, but Robinhood and other fintech apps don’t actually make the purchase for their users. Robinhood and many other brokerages are only the middlemen.
Citadel, which is partnered with Robinhood, recently lent $2.75 billion to Melvin Capital, which heavily shorted GameStop and is now losing billions of dollars. So, let’s look at cause and effect. Robinhood’s retail investors caused Melvin Capital to lose a lot of money. Citadel lent money to Melvin Capital. Robinhood protected Citadel, so people are arguing that this is potentially a conflict of interest and price manipulation.
It wasn’t just Robinhood.
However, the root of the problem might go way deeper than people think. Robinhood wasn’t the only broker to prevent traders from trading these stocks. We Bull, TD Ameritrade, Charles Schwab, and even the NASDAQ halted trading for these stocks. They all claimed to have halted trading for different reasons such as liquidity and volatility issues.
Keep an open mind about the situation.
Now, I’m not saying that brokers like Robinhood aren’t at fault, I’m simply saying that it’s a lot more complicated than people realize. It’s important to keep an open mind and not make irrational conclusions based on the little information we have. It’s important to pay attention to new information that comes out about the situation and make proper decisions once we have all of the facts.