On Thursday, Jan 28, the popular stock trading platform Robinhood controversially halted trading of GameStop (GME) and other scripts after retail traders drove up the price of the shares by "short-squeezing" Wall Street's biggest players.
Robinhood announced that retail traders would only be able to close or sell their positions on the platform. This has led to accusations of market manipulation and speculation that Robinhood is owned by capital firm Citadel, which also owns Melvin Capital – one of the hedge funds that was short-selling GME.
How Did AMC, GME Stocks Rally?
A few weeks ago, a group of Reddit users on a sub-Reddit called 'WallStreetBets' discovered that hedge funds including Melvin Capital and Citron Research held short positions – a trade in which you expect the stock to fall and benefit from the transaction – in GameStop and the popular brick and mortar video game store was about meet its financial end.
However, the Reddit group's 2-million strong army was not going to let that happen. The Redditors bet against the Wall Street hedge fund and other short sellers of GameStop, pumping up the price of GameStop from $20 earlier this month to more than $460 on Thursday. Besides GameStop, the social media users also drove up the price of other stocks including AMC Cinemas, Bed Bath & Beyond, Nokia etc in what is referred to as a "short squeeze."
What Did Robinhood Do?
On Thursday, Robinhood announced that it was restricting trading for the stocks that were being "short-squeezed" and investors would only be able to close their positions. This meant that traders would only be able to sell the stocks and not be able to purchase additional shares, causing the stocks to nosedive (the price of GME has halved today, dropping from $462.42 to $193.60 as of the time of publication).
Robinhood CEO Vlad Tenev said the company's decision to restrict trading in the stocks was "to protect the firm and protect our customers we had to limit buying in these stocks."
Does Citadel Own Robinhood and Melvin Capital?
This led to outrage among retail traders who accused Robinhood of "manipulating the market" and even led Ted Cruz and Alexandria Ocasio-Cortez to agree on something. Amid the outcry, Twitter users pushed the claim that Robinhood was owned by Citadel and that it also owns Melvin Capital, which would benefit from a fall in GME's price.
On Monday, Melvin Capital announced that it received an investment to the tune of 2.75 billion from Citadel and Point72 Asset Management, which according to the Wall Street Journal was an "emergency influx of cash" to "stabilize" the "hard-hit" firm. Therefore, Citadel does have a stake in the investment management company.
However, as far as the claim of ownership of Robinhood is concerned, we can confirm that Citadel does not own the trading platform. According to a June Financial Times report, $39 million of Robinhood's revenues from equities and options order flow came from Citadel Securities, a subsidiary of Citadel. This made up more than 35% of the platform's trading revenues at the time.
According to Investopedia, Robinhood is a discount brokerage that offers commission-free trading through its website and mobile app and generates its income from payments for order flow. In simpler terms, Citadel is one of the trading platform's biggest customers. Therefore, the claim that the company founded by billionaire Ken Griffin owns Robinhood can be flagged as "untrue."
Citadel Issues Statement Refuting Rumors
Citadel also released a statement saying it had nothing to do with Robinhood's suspension of trading on the stocks. "Citadel is not involved in, or responsible for, any retail brokers' decision to stop trading in any way," a spokesperson for the hedge fund said in a statement obtained by Fox News.
"Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business," the statement added. "Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions."