Robinhood, the stock trading and investing app, suspended trades of GameStop on Thursday after about a week of online groups drastically driving up share prices of the failing electronic games shop chain.
Class action lawsuits against Robinhood, which is advertised as "democratising finance", were filed in the US states of New York and Illinois for not letting users trade the stock during market hours on Thursday.
The legal challenges, along with swift backlash on social media and from US politicians, were submitted before Robinhood said it would now allow "limited buys", starting on Friday of this week.
"Robinhood purposefully, wilfully and knowingly removing the stock GME from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market," reads the class-action lawsuit filed in New York.
The activity, inspired by Reddit users on an r/WallStreetBets forum, boosted GameStop shares by more than 350 per cent and cost hedge funds billions of dollars, as many were "short selling".
This is where hedge funds bet against a stock's success hoping it will decrease in price. With people driving the stock price up, hedge funds are losing the bet.
Before markets opened Thursday, Robinhood blocked trades on GameStop and several other stocks Redditors bought, including the cinema chain AMC and other struggling retailers such as Best Buy and Bed Bath and Beyond.
They are also "dead stocks" hedge funds have moved to short sell.
Robinhood, after markets closed, said it would allow trading activity Friday.
"Starting tomorrow, we plan to allow limited buys of these securities," it said in a new blog post. "We’ll continue to monitor the situation and may make adjustments as needed."
A second lawsuit was filed in Chicago, which said the company's decision was against financial trading rules and breached its customer agreement.
“The halt of retail trading for these stocks has caused irreparable harm and will continue to do so,” the suit read.
"If the stocks are not allowed to be trading, it is likely that the plaintiff will take a financial loss solely due to the defendant’s behavior and manipulation of their trading platform.”
The move by Robinhood has drawn fierce responses from US politicians.
Sherrod Brown, a Democratic senator from Ohio, announced he would hold a hearing as the incoming chair of the Senate banking committee on developments in the stock market.
“People on Wall Street only care about the rules when they’re the ones getting hurt," Mr Brown said.
"American workers have known for years the Wall Street system is broken. They’ve been paying the price.
"It’s time for the [Securities and Exchange Commission] and Congress to make the economy work for everyone, not just Wall Street."
There will also be a hearing in the House of Representatives after an announcement by Maxine Waters, a representative from California, who is the chair of the House financial services committee.
"As a first step in reining in these abusive practices [by hedge funds], I will convene a hearing to examine the recent activity around GameStop stock and other affected stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors," Ms Waters said.
Before Mr Brown and Ms Waters announced the hearings, Alexandria Ocasio-Cortez, a Democratic representative from New York, and Ted Cruz, a Republican senator, made an unlikely bipartisan show of support.
"This is unacceptable," tweeted Ms Ocasio-Cortez. "We now need to know more about [Robinhood's] decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit."
Mr Cruz tweeted in response, "Fully agree."
The White House is aware of the activity, and press secretary Jen Psaki on Thursday referred all media questions to the Securities and Exchange Commission.
The commission said on Wednesday: "We are aware of and actively monitoring the ongoing market volatility in the options and equities markets.
"And, consistent with our mission to protect investors and maintain fair, orderly and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries and other market participants."
Other trading platforms took steps similar to Robinhood's. TD Ameritrade confirmed to CNET that it had restricted trades of GameStop.
Webull allowed users to trade GameStop after blocking activity for some time on Thursday.
"We stand in support of our customers and the freedom of retail investors to shape their own financial future," Robinhood said.
"Democratising finance has been our guiding star since our earliest days.
"We will continue to build products that give more people, not fewer, access to our financial system."
