If you wanted to buy a stock before Robinhood was invented, you would have needed to use a brokerage firm to place that order. You would have also needed to pay that firm a fee to place that order; let’s say $5 to purchase and $5 if you sold. That’s how the firm would make its money.
Robinhood changed the game by making it free to buy and sell stocks, so how do they make money? Robinhood takes your order and gives it to another brokerage firm that places that order. Think of Robinhood as a middleman. The brokerage firm Robinhood gives the trade to pays Robinhood for that order. The firm Robinhood works with is Citadel.
How does Citadel make money?
Say you purchased a stock for $10. When Robinhood gives the order to Citadel, Citadel actually places that order for $9.99 and sells it back to you for $10; they make $0.01; this is called “the spread”. The spread is the difference between what they pay and what you pay for the stock. Even though they only profit a penny, when this occurs millions of times a day, that penny adds up. Last year, Citadel’s trade revenue was $7 billion.
Where does GameStop come in?
People went to Robinhood to buy GameStop stock (a lot of it)
Robinhood sent the orders to Citadel (a lot of them)
Citadel made money on those trades (a lot of money)
Hedge-funds shorted the stock and lost money (a lot of money)
Hedge-funds needed more money to keep up with their short status and turned to…you guessed it, Citadel.
Citadel bailed out the Hedge-funds.
Then what happened?
Robinhood halted trade orders placed for GameStop. So the question is, did a Hedge-fund have a role in Robinhood halting those orders? This is why there are a lot of investigations going on.
Did Reddit users on ‘WallStreetBets’ commit investment fraud?
As we know, this group came together on an online message board and agreed to buy GameStop stock, but is that illegal? It is to The Securities Exchange Act of 1934. This act makes it illegal to induce the purchase or sale of any security by claiming that the price of the security is likely to rise or fall because of market operations when you’re conducting all this for the purpose of raising or depressing the price of such security. Lament terms, you cant get together, conclude with friends, and say let’s all go buy the stock so we can get the price of the stock to rise; this is illegal market manipulation.
What happens to Reddit now?
Since Wallstreet knows this is going on, they are now using electronic data, artificial intelligence, to scrape the data off Reddit message boards and listening to the conversations online so they don’t get caught off-guard again.
Source: Ric Edelman