GAMESTOP – Illegal Trading by Hedge Funds? or by WallStreetBets?

Youtuber LegalEagle breaks down the Gamestop situation and determines if the accusations of illegal trading by hedge funds or anyone else would hold up in court.

Key Takeaways if you already know the basics about stocks

Robinhood allows people to trade on high margin accounts, even with a small amount of funds, which LegalEagle compares to giving dynamite to children to play with

WallStreetBets now has over 7million subscribers. If they all buy the stock, they could definitely affect the price, and they did. The stock went from less than $20 to over $350 in a matter of days

-Market manipulation itself is illegal, but it is a grey area.

Is it illegal for an internet community to talk about and band together to buy a stock they like?

You cannot infer that the community of WallStreetBets was working illegally just because they all bought stock. They could all feel that the company is worth a greater price and absolutely have the right to buy.

There isn’t really any concrete evidence that redditors were specifically trying to “pump and dump” to make a quick buck.

Was it illegal for Robinhood to prevent people from trading in the way they want?

Allegations of Robinhood agreeing to stop allowing buys of GME seem like more conspiracy theories than fact.

The greater likelihood, which has been reported in other reports around the internet, is due to margins. Robinhood does not have the same capital as a bank. When they sell shares to customers who all start using up a large sum of their margins, Robinhood can face liquidity issues. This also doesn’t mean there wasn’t more going on behind the scenes.

There were also reported cases where Robinhood actually took people’s shares and sold them without the person acting upon the trade. This was likely use to margin calls due to new investors no longer meeting the minimum requirement for their margin account. The brokerage is then allowed to sell stock to maintain the client’s margin – this is agreed upon when signing up for an account.

It is very likely the lawsuits that redditors have began will not be successful due to the terms and conditions that are signed when opening the account with Robinhood.

Is it illegal trading by hedge funds to have a massive short position and try to drive the price down with shorting?

It is not illegal to short a stock above 100%.

Shorting stocks in the market is not illegal, it is a normal tool in investing. If hedge funds were specifically trying to release negative news to dump the stock and then cover their shorts, then there may be illegal activity.

If you want to know more about some basics of technical analysis and stocks, check out our Learning Center area to get started.

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