Lawmakers rip Robinhood’s decision on GameStop

Lawmakers on both sides of the aisle erupted in anger Thursday after online stock trading platforms barred users from buying skyrocketing shares of companies targeted by a Reddit forum.

The decisions allowed hedge funds and other well-established investors to continue buying the stocks, spurring charges of hypocrisy across the political spectrum from such figures as Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Ted Cruz (R-Texas.)

The Democratic leaders of the Senate Banking and House Financial Services committees announced they would each convene hearings on the state of the stock market, online trading platforms and how Congress should bolster financial rules meant to protect amateur investors.

“People on Wall Street only care about the rules when they’re the ones getting hurt. American workers have known for years the Wall Street system is broken – they’ve been paying the price. It’s time for the SEC and Congress to make the economy work for everyone, not just Wall Street,” said Sen. Sherrod Brown (D-Ohio), who will soon become chairman of the Senate Banking Committee.

House Financial Services Committee chair Maxine Waters (D-Calif.) announced soon after that she would “convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.”

Robinhood joined other platforms in temporarily barring users from acquiring Gamestop stock Thursday morning after a volatile month where its value has gone up nearly 2,000 percent.

“We continuously monitor the markets and make changes where necessary,” the trading app wrote in a blog post announcing the decision to stop users from buying a baker’s dozen of stocks including Gamestop, Nokia and AMC.

The stock purchases had been popularized by the Reddit forum r/WallStreetBets, which had targeted hedge funds shorting the stocks.

“In light of recent volatility, we are restricting transactions for certain securities to position closing only,” Robinhood said.

Users will be able to make “limited buys” of the stocks starting Friday morning, the company said in a blog post Thursday evening.

“To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” it added.

Sen. Pat Toomey (R-Pa.) called Robinhood’s move “disturbing.”

“[R]etail investors should be free to purchase even highly-speculative stocks, just as hedge funds should be free to short them,” he tweeted.

Cruz (R-Texas) was one of the first to express skepticism about the move, while Sen. Mike Lee (R-Utah) retweeted a post from conservative commentator Ben Shapiro adding that an investigation is needed.

Rep. Ken Buck (R-Colo.) took a different approach, suggesting that Robinhood should be hit with an antitrust investigation.

“There is nothing more fundamentally anti-competitive than blocking consumers from the marketplace,” tweeted Buck, the top-ranking Republican on the House Judiciary subcommittee tasked with antitrust issues.

Democrats said Robinhood should be forced to explain why it slammed the brakes on purchases of those stocks and how it plans to make it up to customers slighted by the decision.

“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,” tweeted Ocasio-Cortez, who call the initial decision “unacceptable.”

Sen. Elizabeth Warren (D-Mass.) also criticized Robinhood for forcing customers to sign a clause forfeiting their right to sue the company and instead handle disputes through arbitration.

Even so, Warren put most of the blame on the SEC for failing to curb what she condemned as decades of market manipulation and failing to effectively enforce financial rules.

“The bigger issue for me is the SEC’s inability and unwillingness to deal with market manipulation. It’s not just what’s happened in the last couple of weeks,” she said in an interview with CNBC. 

“What we need is a healthy stock market and to have a healthy stock market, you gotta have a cop on the beat. That should be the SEC. They need to step up and do their job.”

Rep. Ro Khanna (D-Calif.) struck a similar tone, saying that lack of regulation had stacked the deck against day traders.

Robinhood will likely face pressure from all sides during the upcoming congressional hearings, which have not yet been scheduled. Brown and Waters could also call Robinhood executives to testify, giving both parties and chambers a chance to unload their rage.

Congressional grillings rarely bode well for companies in the hot seat, and both big tech and the financial sector are useful foils for lawmakers. But the lack of consensus among lawmakers over who is at fault has put the onus on the SEC.

The SEC is likely to be inundated with complaints from Robinhood users, but may also face pressure to investigate whether the Reddit-inspired trades that fueled Thursday’s meltdown violated the law.

Chester Spatt, a finance professor at Carnegie Mellon University and former SEC chief economist, said Robinhood likely faced serious risks regardless of the decision it made Thursday morning.

“I think the problem is they can screw up their business model either way,” Spatt said.

“On the one hand, they need to protect themselves against regulatory action that they weren’t properly handling these customer accounts…and they need to be able to ensure that they can perform on the contracts that are taken out of the hands of its investors.”

The backlash to Robinhood Thursday wasn’t limited to Washington.

Angry day traders filed a class action lawsuit in the Southern District of New York almost immediately, accusing the app of manipulating the market and demanding an award for plaintiffs. A subreddit dedicated to suing Robinhood launched earlier Thursday already has 30,000 members.

Dozens of celebrities also weighed in, urging investors to hold their GameStop stock and bashing Robinhood.

Robinhood declined to comment when asked about Congressional hearings and the class-action lawsuit.