Robinhood outlines safeguards to prevent a ‘memestock’ repeat

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City Editor

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Shares in trading platform Robinhood dropped sharply this afternoon, suggesting that this week's four-day stock rally might have reached its end.
The offering will not initially include UK stocks or derivatives, it is understood

Retail trading app Robinhood has outlined a series of safeguards it has put in place to prevent a repeat of the “memestock” trading craze which crippled hedge funds and sent share prices soaring last year.

The US-firm was at the centre of the “memestock” surge in which retail investors coordinated online before piling into low-priced stocks and sending share prices in struggling firms to record highs.

Games retailer Gamestop saw its share price soar 1,500 per cent at the height of the craze.

But in a blog on its website, Robinhood says it has now put in place a number of  measures to prevent the “extraordinary market activity” seen last year, including bolstering a financial literacy programme to “help people learn the basics of investing”.

The firm said it had “strengthened the foundation of the compliance and risk infrastructure”, as well introducing a 24/7 phone support for all issues. 

Robinhood has also bolstered its net capital position to $2.7 billion, more than 25 times what is currently required by the U.S. Securities and Exchange Commission.

Bosses faced fierce criticism from retail investors last year when they clamped down on access to the platform, and the firm said “we never want our customers to be surprised with trading restrictions again.”

Hedge funds Melvin Capital, Light Street and White Square all suffered heavy losses when their short positions against firms like Gamestop took a hammering from the wave of retail investors. Melvin Capital lost 53 per cent of its value last January.

Institutions have been exploring ways to fight off a repeat of last year’s damage, and JPMorgan launched a tool in December to help its institutional clients keep abreast of retail movements and get ahead of the next potential memestock targets. 

The “Through the Retail Lens” tool launched in September and is now being used by about 30 asset and quant fund managers, Bloomberg reported. 

JPMorgan told Bloomberg that without a keen eye on retail, investors may feel like they’re “driving partially blind.”