Class-action lawsuit filed against Robinhood over outrage on GameStop trading restriction

Robinhood said Thursday investors would only be able to sell their positions and not open new ones in some cases, and Robinhood will try to slow the amount of trading using borrowed money. However, after the outcry, it took back its decision.

GameStop stock has rocketed from below $20 earlier to close around $350 Wednesday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall. The action was even wilder Thursday: The stock swung between $112 and $483. At midday it was down 27 percent at $255.

However, the shares rebounded in after-hours trading, resuming their advances after Robinhood Markets Inc and Interactive Brokers said they planned to lift the restrictions on Friday.

Retail investors, celebrities and policymakers had denounced Thursday's restrictions and participants in online forums seethed, accusing the trading platforms of seeking to protect Wall Street's interests at the expense of smaller investors.

"Robin Hood: a parable about stealing from the rich to give to the poor. Robinhood: an app about protecting the rich from being short squeezed by the poor," Jake Chervinsky, a lawyer for fintech company Compound, wrote on Twitter.

Robinhood reversed course by the end of the day and said limited buying in the stocks would resume on Friday.

Charles Schwab and TD Ameritrade took similar steps to restrict trading on their platforms Wednesday.

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Robinhood's stated goal is to democratize investing and to bring more regular people into investing. The company has forced huge, ground-shaking changes for the brokerage industry, such as its decision to charge zero commissions for customers trading stocks and exchange-traded funds. That's why some users took Thursday's actions as an affront.

Robinhood investor Carlos Amaya said the app's action Thursday was a disappointment to users like him who prided themselves on being a different breed of investors.

The recent surge in GameStop has been the product of a tug-of-war between small investors and some big institutions. Citron Research and Melvin Capital had placed bets that GameStop shares would fall as the company tries to transform itself from a brick- and-mortar retailer to a seller of online video games.

But smaller investors rallied to the stock. By sending GameStop shares soaring higher, they forced the big players to cover their bets by buying the stock, increasing the stock even further. But there is some concern that small investors could face significant losses when and if stocks like GameStop plummet.

The Securities and Exchange Commission said Wednesday that it is monitoring the stock and options markets. Protecting investors is one of the jobs of the SEC, but it's not clear what the agency can do in a case like GameStop, said Chester Spatt, a former chief economist at the SEC and a finance professor at Carnegie Mellon University.

There's not necessarily the obvious coordination here that one thinks of in a case of manipulation, Spatt said. But regulators may view this as a mechanism for manipulation.