Retail brokerage firms restricted trading on Thursday to GameStop and other actions taken in a frenzy that captivated Wall Street and caused big losses for hedge funds.
Free stock trading pioneer Robinhood and Interactive Brokers have said that in some cases investors will only be able to sell their positions and not open new ones. Both brokerages have increased margin requirements on certain securities.
Robinhood told clients in a blog post that it would automatically close certain positions if the client risked not having the necessary collateral. The Menlo-Park, Calif., Company said it plans to allow limited purchases of those titles on Friday.
After the announcement, GameStop shares initially reversed their gains, quickly sliding into negative territory. The stock, which traded above $ 500 at one point pre-market, closed 44% lower on Thursday.
“We are constantly monitoring the markets and making changes if necessary. In light of recent volatility, we limit trading for certain securities to position close only, including $ AAL, $ AMC, $ BB, $ BBBY, $ CTRM, $ EXPR, $ GME, $ KOSS, $ NAKD, $ NOK, $ SNDL, $ TR and $ TRVG. We have also increased the margin requirements for certain securities “, Robin Hood said in a statement.
Increasing margin requirements increases the amount of money an investor using leverage and derivatives must have in their brokerage account after a stock purchase.
“As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearing house deposits. Some of these requirements fluctuate with market volatility and can be significant in today’s environment. These requirements exist to protect investors and the markets, ”Robinhhood said in a blog post.
Interactive Brokers said: “Yesterday at noon Interactive Brokers liquidated trading in AMC, BB, EXPR, GME and KOSS options solely because of the extraordinary volatility in the markets. short positions in equities will require a margin of 300% until further notice. We do not believe this situation will abate until stock exchanges and regulators stop or liquidate only certain symbols. We will continue to monitor market conditions and may add or remove symbols as appropriate. guaranteed.”
Interactive Brokers Chairman Thomas Peterffy told CNBC on Thursday that the broker’s decision was to protect the market and the clearing house, the body responsible for the reliable transfer of securities and funds between buyer and seller. Robinhood, however, has its own compensation system.
“We are concerned about the ability of the market and clearing systems, through the onslaught of orders, to continue to provide liquidity. And we are concerned about the financial viability of intermediaries and clearing houses,” said Peterffy .
GameStop shares have swelled nearly 200% this week and nearly 930% this year thanks to emboldened retail investors in Reddit chat rooms trying to stick with the pros on Wall Street. Rookies are cramming in names heavily shorted by hedge funds, squeezing stocks higher as institutions rushed to cover losses. AMC Entertainment shares have risen nearly 150% this week.
The actions taken by Robinhood and Interactive Brokers on Thursday were more drastic than what the brokerages did earlier in the week. TD Ameritrade and Charles Schwab raised margin requirements on Wednesday.
Robinhood clients took to Twitter to express their outrage at the decision. Robinhood has made a name for itself through its mission to democratize investing for all. The Silicon-Valley start-up with more than 13 million users pioneered free trading, forcing the entire brokerage industry to cut commissions at the end of 2019.
“Either #Robinhood allows people to trade freely in the market or they will lose millions of users #ToTheMoon #GME #AMC #NAKD,” wrote one Twitter user.
“Robinhood has canceled orders to buy stocks on #gme #amc #NOK etc … There should be a class action lawsuit. I thought we had a free market. So Wall Street is okay with me is losing hundreds of dollars, so wealthy investors can’t be warned about their risks … #wallstreetbets, ”another user said.
Atom Finance told CNBC that 10.96% of its clients on Robinhood traded in GameStop shares on Monday when the gyrations took off. The research firm said 11% of Interactive Broker customers trade GameStop.
The Reddit team is rallying to rally some action in what some say is a setback against the Wall Street establishment.
Melvin Capital Hedge Fund closed his short position in GameStop on Tuesday after suffering huge losses as a target of the army of retail investors. Citadel and Point72 have injected nearly $ 3 billion into Gabe Plotkin’s hedge fund to consolidate its finances.
“This is a big deal on the part of online brokers because they are so beholden to their payment for order flow overlords and shows the real fragility of the commission-free business model,” said Timothy Welsh, Founder and CEO of wealth management consulting. the company’s Nexus strategy.
Accepting payments for order flow from Wall Street businesses is a controversial, yet legal, practice practiced by most electronic brokers. For Robinhood, it is the greatest source of income.
There has been speculation that brokers are receiving pressure from other entities to stop trading in certain stocks.
“Citadel Securities has not instructed any brokerage firm to stop, suspend or limit its trading or otherwise refuse to do business. Citadel Securities remains focused on the continued provision of liquidity to our clients under all market conditions, ”the company told CNBC.
Peterffy also confirmed that there was no constraint from market makers.
“High-frequency traders and hedge funds who might trade predictably against the ‘dumb’ Robinhood traders’ money and pay Robinhood for that information now realize that the flow of orders they are buying is not. more predictable or secure for them. In fact, it now includes thermonuclear bombs in the form of GameStop and AMC, ”Welsh said.
Representative Alexandria Ocasio-Cortez weighed in on Twitter, calling Robinhood’s new settings “unacceptable.”
“Now we need to know more about @RobinhoodAppprevent retail investors from buying stocks while hedge funds can freely trade stocks as they see fit, ”she tweeted.
Republican Senator Ted Cruz tweeted “Strongly Agree” in response to Ocasio-Cortez.
Amid Twitter threats of a class action lawsuit against Robinhood, the law firm ChapmanAlbin LLC announced Thursday that it is “investigating the claims on behalf of Robinhood users who have been affected and suffered losses due to the ‘investment in Gamestop or AMC through the Robinhood brokerage platform “.