Robinhood Posts Explanation About Its Decision To Restrict Stock Purchases

Robinhood has posted a defense over its decision on Thursday to restrict stock purchases.

What Happened: The trading platform drew a lot of heat when it restricted purchases of certain stocks, fueling conspiracy theories of being in cahoots with hedge funds that had shorted the stocks.

Late on Friday, Robinhood put out an explanation in a blog post.

The company said it did not want to prevent people from buying stocks, but that backend market-settlement complexities left it with no choice. Robinhood's required deposits to cover its settlements over two days, a formal period known as T+2, had grown too large — rising 10-fold in the week amid the frenzy of buying. It had to stop purchases of the volatile securities in question in order to meet its contractual obligations with clearinghouses.  

In the blog, Robinhood said it stands with its customers and will continue to provide them with the resources to become strong investors.

Why It Matters: The restrictions included allowing traders to only buy one share of GameStop Corp GME, the hottest stock at the center of the Reddit rally. It later expanded to include many more stock restrictions.

Robinhood drew criticism not only from affected traders but also from a strikingly wide swathe of American figures after it put the restrictions in place — including politicians. 

Democratic US Congresswoman Rashida Tlaib criticized the move and called for a hearing by the House Committee on Financial Services.

Democrat Alexandria Ocasio-Cortez, also a member of the US House of Representatives and an influential figure on the left, wrote on Twitter that the restriction was unacceptable and said Congress needs to know more about the move "to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit." 

Far on the other side of the political spectrum, Sen. Ted Cruz, a Texas Republican, also expressed criticism of Robinhood on Twitter.

Dayton Young, product director at Fight for the Future, a nonprofit advocacy group, called on lawmakers to investigate Robinhood and other online brokerages.

There also is increasing talk of traders taking legal action, such as through class-action lawsuits.