The affair has caused upheaval in the US financial sector, due to the unusual battle between a cohort of many thousands of small-scaled traders and multi-billion dollar investment houses. Melvin Capital said it had closed out its position, crystallising losses, but several other hedge funds are thought to be yet to take the hit. They also have to “cover” their position – in effect betting on a continued increase in the share price to offset the losses on their previous bets against it. The more the shares go up, the bigger the losses they face. While day-trading investors could lose out, the more immediate result is that hedge funds such as Melvin Capital that bet against GameStop and other companies are caught in a “short squeeze”. Neil Wilson, chief markets analyst for, wrote: “It would appear there is a failure to understand that the only way to realise paper gains after this ramp (pump) is to sell (dump) and in so doing offload your unwanted stock on someone (the greater fool) who thinks it will go even higher.” Pundits have expressed concern that many of the Redditors and small traders who bought stock enthusiastically will lose their money unless they get out quickly. The phenomenon has been fuelled by small investors not just buying shares but also options, a sort of leveraged financial instrument that forces others to also buy, ratcheting up the power of the transaction. “Firms and individuals should also ensure they are familiar with, and abiding by, all regulations including the market abuse and short selling regimes in the jurisdiction they are trading in.” This applies to UK investors trading both US and UK stocks.
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UK investors should take care when trading shares in highly volatile market conditions that they fully understand the risks they are taking. Such is the fresh concern about the potential effect of such platforms on stock markets that the White House and financial regulators have said they are monitoring the situation regarding GameStop and the other stocks in Reddit users’ sights.Ī spokesperson for the UK’s Financial Conduct Authority said: “The FCA is aware of the situation and continues to closely monitor trading in UK markets. The company cancelled its UK launch last year. Robinhood has previously faced criticism after a young trader killed himself in the mistaken belief that he had lost $730,000. As the backlash built, Robinhood said on Thursday evening that it would allow limited trading on the stocks on Friday. One customer has already filed a class action lawsuit in New York, according to reports in the US. Social media lit up with theories about hedge funds with an interest in the Robinhood company and other trading platforms flexing their muscles to quash the Reddit rebellion.
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The trades are offered free of commission charges and the app, which was founded only in 2013, now has more than 13m users.īut the buying ban on the Reddit traders has sparked a furious backlash. Traders joining in the frenzy have flocked to Robinhood, an app which claims to “democratise” finance by letting ordinary people trade shares and more complex financial instruments, such as options.