Robinhood Market Inc. is under fire after it blocked trading on Gamestop Corp. and other stocks being traded by Reddit users, in an effort to ease a strain on its own finances, but it wasn’t the only retail brokerage to do so.

The online trading app said Thursday that it had to raise more than $1 billion in emergency funding from its investors to maintain a cash balance required for it to operate. It must pay customers owed money from their trades while also adding cash to its clearing facility to protect its trading partners from possible losses.

The story starts with r/wallstreetbets, a “subreddit” forum on Reddit of some 4 million users deciding that they would take on the system by investing heavily in Gamestop stock, causing the company’s share price to surge by nearly 1,000%. They went on to target other companies, most notably cinema chain AMC Entertainment Holdings Inc. but also Nokia Oyj, Blackberry Ltd., Bed Bath & Beyond Inc. and others.

The stocks targeted by r/wallstreetbets shared a common theme: They all had large short sell orders on them by hedge funds. A short sell is a bet that a stock will decline in value; when the stock decreases in value, money is made.

The problem is that when a stock rises, losses are incurred and with Gamestop, AMC and other stocks rapidly increasing in price, so too did hedge fund losses. According to Reuters, the current losses incurred by hedge funds are sitting at an estimated $71 billion.

Enter Robinhood, which is being accused of protecting the rich while stealing from the poor. Robinhood announced this morning that it was blocking users from purchasing the various targeted stocks for excessive “volatility.”

“We continuously monitor the markets and make changes where necessary,” Robinhood said. “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities.”

It was not alone, however. E-Trade Financial Corp., Interactive Brokers Group Inc., Charles Schwab Corp., and TD Ameritrade also blocked retail trading on the same shares. In effect, retail traders we blocked from trading on the stocks on most major platforms while hedge funds were still able to trade the stocks.

That the likes of E-Trade, which is owned by Morgan Stanley, would block the trades doesn’t come as a great surprise. But Robinhood, which pitches itself as a free trading platform for the little guy, did — thus the attention on the company.

Either #Robinhood allows people to trade freely in the market or they will lose millions of users 🚀#ToTheMoon #GME #AMC #NAKD

— El Chelote (@martinezg23_) January 28, 2021

Robinhood canceled stock orders on #gme #amc #NOK etc…. There should be a class action lawsuit. I thought we had a free market. So Wall Street is OK with me losing hundreds of dollars, so that rich investors can’t be called out on their risks…. #wallstreetbets

— Kyle Stafford (@kstafford32) January 28, 2021

In a rare bipartisan showing, both sides of the political spectrum condemned Robinhood’s move. Democrat Alexandria Ocasio-Cortez and Republican Ted Cruz both spoke out against the company. Democratic members of the House Financial Services Committee and Senate Banking Committee were particularly vocal, with Rashida Tlaib calling Robinhood’s move “beyond absurd” and demanding a hearing on “Robinhood’s market manipulation.”

Robinhood, which along with raising billions in venture capital funding has also long been reported to be looking at an initial public offering, has slightly backed down, announcing that it will allow some limited trading on the stocks on Friday. When it comes to its reputation, however, it may be a case of too little, too late.

Photo: Robinhood