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Robinhood blocks purchase of Game Stop stock, Colorado lawmaker calling for investigation

game stop.jpg
Posted at 9:29 PM, Jan 28, 2021
and last updated 2021-01-29 00:47:07-05

AURORA, Colo. — It was almost game over for Game Stop, until a group of investors on the social media platform Reddit band together to put the squeeze on Wall Street.

"I would really tell people not to buy GameStop or anything that is surged as much as it has for any reason," Allan Roth said.

Roth started Wealth Logic, an hourly based financial investment firm. He cautions possible investors not to buy into the hype.

"Emotions are your biggest enemy, emotions and expenses, when it comes to investing," Roth explains.

Emotion is what played a part as to why a small subgroup of Reddit users began buying up the stock of some struggling companies like Game Stop, AMC and Nokia. The group's creator spoke to CNN this week saying even he was surprised how quickly this took off.

That Reddit group of investors bought a lot of stock of those companies because Wall Street bet against them.

Large investors sometimes borrow shares in hopes of selling high back to the lender and then buy it back in the future at a lower price. It's called short selling.

"What many hedge firms have had to do is buy it back at a much higher price resulting in massive losses for many people who are investors in these hedge funds," said Chris Hughen, associate professor of finance at Denver University.

Hughen calls this act from the Reddit group symbolic of what's going on in society during the pandemic.

"A lot of high net worth individuals have had much invested in the stock market, and they’ve been able to work from home. They haven’t suffered as much from the pandemic as many people in lower income brackets," Hughen said.

The meteoric rise in stock prices caused trading apps like Robinhood to press the pause button.

Alex Kelley tried to buy a modest $150 worth of stock Wednesday night on Robinhood's app. Thursday morning he found out the transaction didn't go through.

"Honestly, when I got denied I was like, 'oh well, I guess I don’t get to be in on the fun,'" Kelley said.

Hughen said it's not the first time trading companies have halted the ability to buy stocks.

"I think Robinhood is probably doing what they need to do in order to keep their investors and their clients safe. While this particular case is getting a lot of press, it’s not unusual for a brokerage firm to restrict trade when borrowing money," Hughen said.

Robinhood's co-founder tweeted Thursday it will allow some stocks of Game Stop to be purchased on Friday, but state representative Dave Williams is already calling on an investigation into Robinhood's action. Williams wrote a letter to Colorado Attorney General Phil Weiser calling Robinhood's actions market manipulation.

U.S. Rep. Lauren Boebert also released a statement saying she and 11 other members of Congress have called on the U.S. Securities and Exchange Commission (SEC) to investigate the legality of what transpired. The statement said, in part:

"Today, hard-working Americans lost their investments after Robinhood and other financial institutions engaged in unprecedented market manipulation and halted the purchase of GameStop stock and other securities to prevent further financial losses for their hedge fund buddies on Wall Street."