The last couple of weeks have been rough for the retail trading app Robinhood, which was at the center of a stock market controversy in the wake of several memestocks that went viral in late January. Now Jordan Belfort, author of The Wolf of Wall Street and subject of the movie of the same name, is chiming in to say that the app may not recover from the publicity crisis that came with its decision to stop trading on several of the most popular stocks on the stock market in 2021.
When retail traders organized on Reddit under the sub r/WallStreetBets to purchase shares in GameStop (NYSE: GME) and AMC Theaters (NYSE: AMC) in late January to create a short squeeze, the price of the stocks saw an exponential rise in a matter of just a few days. Robinhood, which allows users to instantly access their funds before their money has transferred from their bank, operates by paying for the instant access trades itself while it waits for reimbursement from the bank transfers.
To combat the massive influx of new users on Robinhood that wanted to get in on the short squeezes, the company had no choice but to shut down trading on the stocks in order to pay for the $3 billion dollar bill that it was facing to cover the instant access orders that were being sent in. The decision, which other trading platforms also followed suit on, sent a message to retail traders that the apps were favoring the hedge funds that were losing billions of dollars in the short squeeze. While those allegations remain speculative, the clear liquidity issue left Robinhood traders feeling unsure that the company could be trusted with their investment portfolios.
In an interview with Yahoo Finance, Belfort said that the future of the trading app looks “bleak” with the loss of consumer trust and the likely litigation that will come out of the scandal. “Originally, I understood it because they do have liability for sure,” Belfort said in the interview. “But what they did by completely eliminating buying, that was a bit of a red flag to me that there might be some other more nefarious things involved, like getting pressure from the people who are short,” he said.
Belfort went on to explain that the company’s decision to halt trading on the securities was alarming, and that it signaled that there could have been a more nefarious explanation for it because there were likely other options. “And, you know, at first, I understood it, but now as I look more deeply, it is very strange that we’re just not raise the margin up because that would have accomplished the same thing without shutting it down. And meanwhile, the bigger problem I think for Robinhood, is that now they’re going to be getting sued by everybody. And whatever side you’re on, you’ll say, I lost money because of the decision Robinhood made. And it’s going to be very, very hard for them to stay in business, I believe,” Belfort said.
Meanwhile lawsuits against Robinhood have begun pouring in throughout the last week, and the company has had to resort to paying for sponsored social media ads to promote its explanation for why it halted trading on GameStop and AMC stock. Customers, however, are closing their accounts and transferring holdings to new brokerage firms like Fidelity in response.
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