SEC Puts Robinhood on Notice Over Gamestop Ban

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Well guys, we have an update on the Gamestop situation. The SEC, the Securities and Exchange Commission, which is basically like the stock market police over in America, have released a statement recently on the whole Gamestop situation and what they're looking at, what they're gonna do about it.

Now, if you haven't been following my coverage of the Gamestop situation, please do check out my two previous videos. They will really bring you up to speed on what's been going on in depth.

But as a quick recap, Gamestop was a stock that was heavily shorted by hedge funds. Basically, that meant that the hedge funds were betting that the stock price was going to go down, and aka they'd get screwed if the stock price started going up a lot.

Now, a couple of redditors over on the subreddit Wall Street Bets banded together and started buying into Gamestop. They caused an uptick in the share price, which triggered a chain reaction called a short squeeze, where essentially the hedge funds were forced to close their short positions at a loss. This triggered even more hedge funds to do the same thing, which drives the share price up very quickly.

So much so that it caused this... do you see that down day in the middle there? That is because, on that day, Robinhood and a few other brokerage sites decided to block investors from buying shares in Gamestop and select few other stocks that were also heavily shorted. This has caused absolute outrage, and fair enough too, because if you're a trader using Robinhood, you should be able to do whatever you want with your money. You shouldn't have to conform to what Robinhood tells you you can and can't do.

But there are actually two explanations or two rumored possibilities for why this happened, one nefarious and one legit.

So the legit reason is that Robinhood might have been facing a liquidity issue with the complication of increased deposits at various clearing houses. So instead, they decided to stop the trading of these problematic stocks for the time being to protect their own business and thus protect all their customers that use their business, essentially limiting trading so that they didn't go bust. That’s the story that Robinhood is saying.

Then the more nefarious possibility is that when you think about Robinhood, it is a no-brokerage platform. They don't make money from their users because they don't charge brokerage fees. In fact, a main way that Robinhood makes money is through selling the order flow to hedge funds.

So it actually turns out that hedge funds provide a substantial amount of revenue to Robinhood, which is problematic because Robinhood users were using the platform to attack hedge funds. So that's a pretty awkward situation.

It’s rumored that Robinhood was limiting the trading on these particular stocks in order to protect their own customer relationships with these hedge funds. Now, it is going to take some time before the whole truth comes out is revealed, but have a look at this: the SEC has now stepped in. On Friday, they released a statement essentially saying that they are watching everyone involved very, very closely.

So have a listen to this: they say, "The commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days. Our core market infrastructure has proven resilient under the weight of this week's extraordinary trading volumes. The commission is working closely with our regulatory partners, both across the government and at FINRA and other self-regulatory organizations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing."

So this part of the statement goes back to that first point I was talking about, the more legitimate reason why Robinhood would have stopped trading on Gamestop, and that is to protect their own business and in doing so, protect all of their users that use their platform every day to buy and sell stocks.

So while many investors are clearly very angry at Robinhood for stopping trading on Gamestop stock, that would obviously be a better outcome still than the brokerage site just going bust and affecting trading on all stocks for all users.

So that's the first part of the warning in the SEC statement. The SEC are watching to ensure regulated entities uphold their obligations to protect investors. But then the next part of the statement here is very much a warning to the brokerage sites, like Robinhood, to not throw the retail investors under the bus for their own potential gain.

So have a listen to this: "The commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities. In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity."

So Robinhood, E-Trade, Charles Schwab, and TD Ameritrade all restricted trading of a few different securities but namely Gamestop. This part of the Securities and Exchange Commission statement is very much just a warning: them standing up and saying, "Look guys, you better not be doing anything dodgy and throwing those retail investors that use your platform. You better not be throwing them under the bus and somehow making a gain from it."

So overall, this is kind of a weird statement from the SEC because it's really just them standing up and saying, "Hey guys, we're watching you. You know we're watching you. Retail investors, we're watching the brokerage sites, we're watching everything that's going on. So you better make sure that you're not doing anything wrong or we'll come and get you."

So they're not actually saying that they are investigating something specifically. They're not saying, "Yes, we have opened up an investigation into Robinhood for blah blah blah." They're just saying, "Yeah, we're here, and we are watching."

So we will have to wait and see if the SEC decides to pursue anything further and actually launch like any sort of full-blown investigation. But I think from this statement, one thing that's for certain is that retail investors can kind of take a little bit more comfort in knowing, in hearing those words from the SEC, that they are definitely keeping a close eye on any dodgy dealings from some of these brokerage sites that may be throwing their retail investors under the bus.

So if you had to take this SEC statement and just like boil it down into one sentence, like a summary sentence, it's basically saying, "Hey look, brokerage sites, the actions that you're taking better be in the best interest of protecting your business and thus protecting the users that use your platform every day. And if that is not the case, then we are going to show up and start asking you some questions."

So overall, that is the latest with the kind of Robinhood Gamestop saga. I mean, the one thing I just hope—I hope that this one day gets a movie because I think that would just be such a good movie. Get the guys that made The Big Short back to make another movie, call it The Big Short Squeeze. You could even get Christian Bale to come back and play Michael Burry again because Scion Capital's largest investment at the current time is Gamestop. So I want to see that happen! I think that would make for an awesome movie once we actually understand all that happened.

But overall, that is it for this video. Guys, I'd love to hear your opinions. So what do you think of this statement? Leave that stuff down in the comment section below. Do you think it will change anything? Do you think that the SEC gonna start some full-blown investigation? I'd love to hear your thoughts on the whole matter, the whole saga, so leave that stuff down in the comments section below.

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So thank you guys very much for watching! If you're interested in learning about how I go about my investing, either passive investing or active investing, and you want a full walkthrough of either of those strategies with examples, then check out Profitful links down in the description below.

But that will do me for today, guys. Thank you very much for watching, and I'll see you all in the next video.

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