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How an app and a message board caused Wall Street chaos

The stock market recently saw a historic, coordinated stock manipulation scheme designed to strike at short-sellers and hedge funds. From the stocks targeted to the method for buying and selling the stock and the fallout, this was one of the wildest day-trading stories in recent memory.

It began on the popular message board site, Redditt. A few users on one “sub-Reddit” suggested a plan to “get back” at hedge funds by turning a short-selling opportunity into a loss. However, despite the many consequences of this action, it is an action from the stock trading app Robinhood that drew the most ire.

Pauses placed on certain trades

For those who do not know, Robinhood is an app marketed to individual consumers to get involved in the stock market by offering free stock trades. This free entry to trading made the app the perfect weapon to manipulate stock prices.

The organized buyers targeted several stocks considered overpriced and about to fall and drove those firm’s prices even higher. The inflated price then caused short sellers of those stocks to take immense losses.

In the fallout, many outlets called for action. The app responded to those calls by halting trades on the affected stocks.

Is it legal to halt stock trades?

It was legal. The trading app company had to take out significant loans to cover the cash requested, and they have every right to protect themselves. However, the step to halt trading of specific stocks drew condemnation from users and congress members on both sides of the aisle in Washington.

That sort of widely unappealing action may lead to restrictions in the future.

What happens to those unable to offload stocks during all this?

In many cases, individual users had substantial losses that will not be recoverable. Losses like this may also find the stock trading platform facing litigation in the future. While something of this scale is unprecedented, it remains to be seen whether regulators will take the opportunity to ensure something like this can never happen again, either to hedge funds or to investors.