Major brokers restrict trading on GameStop and AMC amid ‘short squeeze’


Major stock brokerages temporarily restricted trading on GameStop shares as retail investors, spurred by advice on the Reddit thread r/WallStreetBets, send previously undesirable stocks through the roof — catching both brokerages and institutional investors off guard by massive unexpected losses.

Robinhood, TD Ameritrade, and Charles Schwab, which purchased Ameritrade in 2020, all placed restrictions on certain trades regarding GameStop. Retail investors on Robinhood were temporarily barred from completing certain transactions involving GameStop at all on Thursday.

Both TD Ameritrade and Charles Schwab confirmed to the Washington Examiner that they had “placed restriction on some transactions in $GME and other securities.”

“We have been adjusting our requirements for several days as we continued to see trends indicating unusual volume in an unprecedented market environment, which appear to be divorced from traditional market fundamentals,” a TD Ameritrade spokesperson said. “We have made what we believe to be prudent and appropriate decisions to place some limits on certain transactions for certain securities.”

“It is not uncommon for us to make such decisions, which we consider on an individual basis, in the interest of mitigating risk,” the spokesperson added.

A Schwabb spokesperson emphasized that “clients are still able to trade in GME, but we’ve put some restrictions on certain types of transactions in the interest of helping mitigate risk for our clients.”

“For example, we are not allowing clients to sell naked call options in order to mitigate an unlimited risk situation,” the spokesperson said. “These decisions are based on risk and volatility and are made on an individual basis.”

Some of Schwab's restrictions have been in place since Jan. 13.

Robinhood issued a statement on its blog emphasizing its goal of “democratiz[ing] finance for all” but cautioned that “recent volatility” prompted the broker to introduce certain restrictions.

“We continuously monitor the markets and make changes where necessary, the company wrote. “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR, and $TRVG. We also raised margin requirements for certain securities.”

GameStop's meteoric rise from $18 on Dec. 31, 2020, to closing at $345 on Wednesday is not the result of a sudden improvement in the company's fundamentals — the company isn't expected to turn an annual profit until at least 2023, and in November of last year, major stakeholder Ryan Cohen, a co-founder of online pet products seller Chewy, wrote a letter to GameStop's board urging it to take dramatic steps to turn the company around.

Instead, day traders on r/WallStreetBets turned GameStop into a “meme stock,” driving up the value of GameStop's shares, creating a massive short squeeze, in which investors are forced to buy stocks on something that they were betting against in an attempt to recoup losses — driving the price of the stock up even further.

As the stock gained popularity on Reddit, share value grew, drawing more Reddit users to the stock, which in turn, make the value of the stock increase even more.

That cycle was devastating to institutional investors who relied on shorting GameStop for profit. When an investor shorts a stock, he or she borrows the stock from a broker and sells the borrowed stocks to a third party — with an assurance that the investor will return the same number of stocks to the broker that were borrowed for the sale. Since the investor is betting on the stocks' price decreasing (as has been the case with GameStop for years), the investor can buy shares at a price lower than he or she sold them for to return to the broker and pocket the difference.

GameStop is one of the most shorted stocks on any stock exchange, with technically more shorts sold than total shares available, according to Popular Information. When its stock shot up, firms that rely on risky bets for big payoffs, including Melvin Capital Management, tanked — MCM's value slid 15% in the first three weeks of the year, according to the Wall Street Journal.

As more restrictions were placed on trades involving GameStop, the price plummeted. After hitting an intra-day high of $468, the share price slumped to just $126, indicating that the measures taken by brokerages to mitigate risk and address volatility ended up introducing more volatility than before.

The whipsawing share prices have led to speculation that the Securities and Exchange Commission might start an investigation into r/WallStreetBets regarding allegations of market manipulation, specifically “pump and dump” schemes — when investors attempt to boost the price of a stock using “false, misleading, or greatly exaggerated statements” to turn a quick profit, according to Investopedia. The SEC declined to comment.

The drama surrounding the David and Goliath story of retail investors versus establishment Wall Street has temporarily brought together unlikely allies — with both liberal New York Rep. Alexandria Ocasio-Cortez and Donald Trump Jr. both tweeting in defense of the Reddit traders.

“Gotta admit it's really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of poster also treating the market as a casino,” Ocasio-Cortez quipped.

“It took less than a day for big tech, big government and the corporate media to spring into action and begin colluding to protect their hedge fund buddies on Wall Street,” said Trump Jr., himself being connected to at least a half-dozen investment firms. “This is what a rigged system looks like, folks!”

Shortly after Robinhood introduced its trading restrictions, a class action lawsuit was filed against the company, alleging negligence and a “breach of the implied covenant of good faith and fair dealing.”

“Robinhood breached its fiduciary duties to Plaintiff and Class members by, among other things, failing to disclose that its platform was going to remove GME purchases in a timely manner … removing GME for its own pecuniary benefits … and that Robinhood failed to exercise trades and actions requested by customers in a complete and timely manner,” the lawsuit reads.

View original Post


Please enter your comment!
Please enter your name here