Online brokers clamped down on retail investors’ bets on several highly popular but volatile stocks on Thursday, locking traders out of the market and drawing sharp criticism from some users and politicians.
Large US brokers, including Schwab and Robinhood, curbed trading in shares including the video game retailer GameStop, cinema chain AMC and tech pioneer BlackBerry, sending them all sharply lower. GameStop was down 44 per cent, for example, and AMC closed down 57 per cent.
After the market closed, Robinhood, the online app synonymous with the rise of the retail trader, wrote on its website: “We made a tough decision today to temporarily limit buying for certain securities. As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits.”
It said limited trading would be allowed to resume on Friday.
The developments were the latest in a dramatic week for the US market, in which the biggest brokerages and apps for retail trading faced intense demand from users in a battle between day traders and professional short sellers that has generated record trading volumes on Wall Street.
The brokers’ trading curbs triggered a furious backlash from some customers. Within hours, a Robinhood customer filed a class-action lawsuit against the group in federal court. The legal action claimed Robinhood “has completely blocked retailer investors from purchasing [GameStop] for no legitimate reason”, alleging that the user “like so many others, lost out on all earning opportunities”.
The dispute also united rival politicians, the Democratic New York congresswoman Alexandria Ocasio-Cortez and Republican senator Ted Cruz.
“This is unacceptable. 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,” Ms Ocasio-Cortez said on Twitter, to which Mr Cruz replied, “totally agree”.
Robinhood declined to comment both on the lawsuit and Ms Ocasio-Cortez’s remarks.
Robinhood doubled the amount of money that customers must stump up to extend their trades in GameStop, AMC, Bed Bath & Beyond and Koss. It also restricted investors from taking out new positions in a small group of shares. IG Group also raised margin requirements for GameStop shares.
Interactive Brokers, which has more than 1m customers, restricted investors from new trades in GameStop and raised margin requirements for taking out options on several shares, including AMC and BlackBerry.
“We’ve had discussions as to how to manage our risks as brokers. We have to be cognisant of our customers’ risk, particularly those who are using margin,” said Steve Sosnick, chief strategist at Interactive Brokers. “We are having conversations about this now.”
Broker eToro notified clients after the market close on Wednesday that it would not accept orders to trade the game company, among other shares it considered “low liquidity”, while TD Ameritrade and its new owner Charles Schwab both placed restrictions on new purchases of GameStop and AMC stock, as well raising margin requirements for certain trades. The move reflected “an abundance of caution”, the companies said.
“It is not uncommon . . . to place restrictions on some transactions in certain securities in the interest of helping mitigate risks for our clients,” Schwab said.
Some retail investors reacted angrily. “You sell, the short sellers get their profits . . . Coincidental that the apps will only let you sell and not buy?” asked one message board user, RedditTrading.
“This was always how it was going to play out. They can change the rules any time they want. They don’t lose,” said another.
Platforms have urged their users to be cautious. “Whether or not we are in bubble territory . . . we have been urging our users to stick to the basics of investing: diversify, avoid leverage, and only invest in markets and instruments with which you are familiar,” said Gil Shapira, chief investment officer of eToro.
But retail enthusiasm shows no signs of slowing down. On January 27, Robinhood recorded its highest ever number of downloads from the US iOS app store, with 120,000 downloads, according to data tracker AppTopia.
“We simply don’t know when this will end,” said Rich Repetto, an analyst at Piper Sandler. While volumes may fall back, “we also feel that zero commissions are here to stay and it appears an entire generation has been introduced to retail trading”, he added.