January 29, 2021 Reading Time: 5 minutes

Last month I wrote about a lawsuit filed against the popular self-guided investing app Robinhood by Massachusetts regulators and how it was the epitome of the nanny state. Essentially the regulators took issue with Robinhood’s consumer appeal, citing things like digital confetti, shiny buttons, and ease of access as serious hazards to inexperienced investors. They alleged that Robinhood wasn’t doing enough to act in the “best interests of their clients,” essentially calling for stricter regulations. The only problem is that Robinhood is a self-guided investing service and the freedom to invest was the whole reason that people were flocking to it. Not only that, but Robinhood users and other young self-guided retail investors have collectively outperformed professional investors and even fundamentally changed the market.

If self-guided investing was so dangerous and harmful then the number of investors would be decreasing not increasing by the millions as it is now. So either these regulators are ignorant and behind the times, which many regulatory bodies are, or perhaps they are doing the bidding of the financial establishment under the veil of public safety. This brings us to the topic of the day.

Robinhood beats the regulators to the punch 

Over the past few weeks, self-guided investors have been investing heavily in unusual stocks in numbers so great that they lift the value to tremendous heights leading to large gains for bullish investors and sharp losses for bearish ones. GameStop, AMC, Nokia, and other stocks gained national attention on Wednesday, January 27, 2021, as shares rocketed in value, causing even more investors to pile in. 

This activity was largely coordinated on a Reddit channel known as WallStreetBets which has over 3 million members. Part of the rationale included upending the investment positions of large financial institutions that had a stake in seeing the stock prices fall. This, in turn, creates a short squeeze where all these institutions would be incentivized to purchase the stock, sending the value upward. AIER’s Pete Earle offers an in-depth explanation and the deeper forces at play here.

In a shocking turn of events, Robinhood blocked the trading of all the aforementioned stocks on Thursday, January 28, 2021 and Discord banned the WallStreetBets channel. Robinhood made some sort of attempt to justify the decision along the lines of investor safety and controlling volatility and Discord stated their decision had to do with “hate speech.” Though the more likely answer was that Discord did not want to deal with the liability of maintaining the channel. At worst potentially colluding with Wall Street to shut down what is essentially a populist retail investor uprising.

The decision on Robinhood’s behalf came as a shock given its mission to democratize the financial industry, which it was doing a pretty good job at until now. Prior to the decision to ban the trading of the aforementioned stocks, the WallStreetBets Reddit channel was ballooning in size as new users poured in to get in on the action. Countless people were sharing thank you notes as they noted how the massive stock price move they generated was making normal people money. One person even posted a screenshot of how he paid off his student loans with the gains from the activity. 

Robinhood’s abrupt action to “protect” its investors ended this party and more than likely upended the plans of millions of users who use the app. The value of all the affected stocks sharply declined, but not by much compared to how much the stocks have risen. However, for the countless people who invested in the stock on Wednesday with realistic expectations that the stock would rise were met with an unpleasant and artificial surprise. Many users are still determined to hold the line on the stocks, hoping that some relief will come and the cycle could very much continue. At the time of this writing, cryptocurrencies such as Dogecoin, named after a popular meme, have soared in value, likely as a result of the ban on purchasing stocks like GameStop. This occurrence is representative of how certain things cannot be controlled or stopped. When alcohol was banned, the desire for it did not magically go away; people still drank and resorted to more extreme alternatives such as moonshine. Prohibitions do not work. All the stock trading ban did was make millions of investors angry and tarnish the reputation of Robinhood. 

The obvious speculation now is that Robinhood was engaging in market manipulation to protect large institutional investors. At the moment there are bipartisan calls in Congress for a probe in Robinhood as well as other financial companies. A class-action lawsuit has also been filed against Robinhood for the very plausible accusation that they were engaging in market manipulation. Robinhood issued a statement earlier on Thursday stating that the stock trading halt was to protect users against volatility. It sent out another email stating that trading on the restricted stocks will resume the next day but will be “monitored.” However, many speculate this was only to cover up the fact that they halted trading so large financial institutions that had short positions could close out their positions. It would seem they sided with the Wall Street establishment acting as a member of a cartel that seeks to control the market. Of course, it is very possible that if Robinhood continues this behavior other alternative platforms would take their place, as the incentive to offer such a service is too great. Regardless, it should be readily apparent that such policies are not productive and such acts of collusion, be it with other companies or the government, should be condemned. 

Key Takeaways

Whatever is the case with Robinhood, be it ill-sighted paternalism or market manipulation, the outcome was terrible, to say the least. Robinhood has fundamentally changed the landscape of the financial market and for the most part, that means that more people than ever have been able to invest. They have truly succeeded at their mission of democratizing the market, which overall should be viewed as a good thing. 

We have now seen firsthand what happens when actions are taken to disrupt the freedom of individuals to make transactions of their own free will. It seriously disrupts society and people get hurt in ways that are not their own doing. Of course, if the stock price was allowed to run rampant, plenty of investors would have likely lost money when the price eventually comes down but that’s always been the case. Smart people can plan for that, but most people could not plan for an abrupt and arbitrary intervention in the market. The situation will have likely sorted itself out, plenty of people would have made substantial earnings, and those who didn’t will have learned a lesson. Many of the investors were simply running up the price of the stocks as a joke, to make money, or because they liked the companies. It’s disruptive but it’s not the end of the world by any means and people should be in their right to do so. Perhaps if this is allowed to play out it might even be a net positive for society. Either way, society functions best when people are given the agency to make their own decisions. 

It is likely that some sort of change or regulation may come out of this incident. Robinhood and other self-directed apps like it have fundamentally disrupted the market in a good way. Many entrenched interests, be it private firms or the government, are not comfortable with this change. Hopefully, our leaders have seen firsthand the disruption that such abrupt and restrictive actions have on society. 

Ethan Yang

Ethan Yang

Ethan Yang is an Adjunct Research Fellow at AIER as well as the host of the AIER Authors Corner Podcast.

He holds a BA in Political Science with a concentration in International Relations with minors in legal studies and formal organizations from Trinity College in Hartford Connecticut. He is currently pursuing a JD from the Antonin Scalia Law School at George Mason University.

Ethan also serves as the director of the Mark Twain Center for the Study of Human Freedom at Trinity College and is also involved with Students for Liberty. He has also held research positions at the Cato Institute, the Connecticut State Senate, Cause of Action Institute and other organizations.

Ethan is currently based in Washington D.C and is a recipient of the 13th Annual International Vernon Smith Prize from the European Center of Austrian Economics Foundation. His work has been featured and cited in a variety of outlets from online media to radio broadcast.

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