Brokerages limit GameStop trading

Robinhood, others put in restrictions after shares soared

Robinhood and other retail brokerages took steps to tamp down the speculative frenzy surrounding companies such as GameStop, but the actions only sparked more volatility in the market and an outcry from users of the platforms and some members of Congress who say small investors are being treated unfairly.

GameStop stock has rocketed from below $20 this month to close around $350 Wednesday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall.

The action was even wilder Thursday: The stock swung between $112 and $483 before closing down 43.2% at $197.44. It then shot back up 60% in after-market trading.

Robinhood said Thursday that investors would be able only to sell their positions and not open new ones in some cases. Robinhood also required investors to put up more of their own money for certain trades instead of using borrowed funds.

Besides GameStop, Robinhood said trading in stocks such as AMC Entertainment, Bed Bath & Beyond, Blackberry, Nokia, Express Inc., Koss Corp., American Airlines, Tootsie Roll, Trivago and Naked Brand Group would be affected by the new restrictions.

After the market closed, Robinhood said it would allow limited buying of those securities starting Friday.

The frenzy surrounding shares of GameStop, AMC and others has drawn in an influx of investors

with little or no experience trading stocks. That poses a challenge for brokerages that cater to small investors, said Andy Nybo, managing director at BurtonTaylor International Consulting.

“The brokers were forced to take action because they would be in the firing line if an unsophisticated investor loses money,” he said.

The surge in the use of stock options fueled by individual investors has some brokerages nervous and explains why some have taken steps to restrict trading.

Brokerages often lend investors money to make their trades and could be exposed to huge losses if many investors are suddenly wiped out and can’t pay back the borrowed funds.

In an interview Thursday on CNBC’s “Closing Bell,” Interactive Brokers chairman and founder Thomas Peterffy laid out some of the concerns that prompted his brokerage to limit trading.

“If our customers are unable to pay for their losses, we have to put up our own money,” he said, adding that Interactive Brokers “doesn’t have a problem,” as it has $9 billion in equity as a cushion.

Robinhood CEO Vlad Tenev also told CNBC that his company does not have a liquidity problem.

He said the steps Thursday were taken “preemptively” to protect the firm and its customers, not at the behest of any hedge fund or market maker.

“I know how Clorox and Lysol felt in the pandemic when they were running out of hand sanitizer and supplies,” Tenev said. “We just haven’t seen this level of concentrated interest marketwide in this small number of names before.”

Robinhood’s stated goal is to “democratize” investing and to bring more regular people into investing. The company has forced huge, ground-shaking changes for the brokerage industry, such as its decision to charge zero commissions for customers trading stocks and exchange-traded funds. That’s why some users took Thursday’s actions as an affront.

Robinhood investor Carlos Amaya said the app’s action Thursday was a disappointment to users like him who prided themselves on being a “different breed of investors.”

Investors upset over the trading portals’ restrictions are getting some sympathy from some members of Congress.

Democratic Sen. Sherrod Brown of Ohio, who is set to become chairman of the Senate Banking Committee, announced he will hold a hearing on the GameStop situation. Rep. Maxine Waters, D-Calif., also announced a hearing in the House Financial Services Committee.

The recent surge in GameStop has been the product of a tug-of-war between small investors and some big institutions. Citron Research and Melvin Capital had placed bets that GameStop shares would fall as the company tries to transform itself from a bricks-and-mortar retailer to a seller of online video games.

But smaller investors rallied to the stock.

By sending GameStop shares soaring higher, they forced the big players to cover their bets by buying the stock, increasing the price even further. But there is some concern that small investors could face significant losses when and if stocks such as GameStop plummet.