GameStop and Robinhood: The market is free but not for all

Jennifer Flannery

A day in late January saw Wall Street professionals lose nearly eight billion dollars. Retail investors are buying up GameStop shares in a bid to beat hedge funds at their own game and they are winning. But does this mean that the trade market is free after all?

With companies such as Robinhood that are opening up the stock market, to some extent it is a free market. Robinhood is a free trading platform whose mission is to ‘democratize finance for all’.

The company has gathered more than 13 million users and allows small companies and retail traders to buy stock without being charged extra fees. It is extremely popular with small investors who recently decided to drive the GameStop stocks into a growing bubble.

Hedge funds have been shorting GameStop. But what does this mean? Hedge funds have been betting the share prices will go down and have in turn, been borrowing stocks and selling them on. Once the stock prices go down, they will buy them back and make a profit.

However, users on Reddit spotted this and instead drove the stock prices up by continuously buying shares in GameStop. Eventually, the hedge funds were forced to get rid of their borrowed stock and ended up losing out big time.

However, amid the buying frenzy, Robinhood was forced to freeze purchasing of a number of stocks including GameStop due to a financial strain.

Robinhood tweeted, “In light of the current market volatility, we are restricting transactions for certain securities”.

With a simple freeze implemented by one company, small companies and retail traders were suddenly locked out of the market raising the question: is it a free market after all?

With small investors locked out, having the economic means, hedge funds could continue to buy and trade the stocks on more expensive platforms as they wanted.

Most smaller investors cannot afford to lose the money that Wall Street professionals can. People that don’t have the income, generally don’t have the knowledge to know what a bad and good investment is and the GameStop bubble can be seen as an example.

The GameStop company is mostly made up of physical stores selling game consoles, games, and accessories. Due to having very little e-commerce presence they were not doing so well in the current climate. This adds up to make them a bad company to invest in, hence the hedge fund interest.

The comradery of the Reddit investors works well when the stock prices are rising and the bubble is growing, but once these investors start to pull their money out for fear of the stock prices dropping, the bubble might pop.

The small investors still with their money caught up in the stocks might not have the financial stability to cushion this possible economic blow. The fear of the instability in stock investment stops a lot of people from tying their limited
income up in them.

So in turn, yes the market is free but within it, some can get hurt more than others.

Jennifer Flannery

Image Credit: Sophie Backes Unsplash