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Popular online brokerages restricted trading in highflying stocks including GameStopCorp. and AMC Entertainment Holdings Inc., sapping some ofthe euphoria around shares of companies that individual investors have sent skyrocketingin recent days.
The restrictions, from brokerages including Robinhood Markets Inc., Webull FinancialLLC, E*Trade Financial Corp. and Interactive Brokers Group Inc., left traders hoping tocapitalize on this week’s eye-popping gains with only two options: hold or sell. They alsofueled a firestorm of criticism among users and even some members of Congress whohave called for hearings on the matter.
The rally in the shares fizzled Thursday: GameStop dropped 44%, and AMC lost 57%. Other popular stocks among individual investors including BlackBerry Ltd. , BedBath & Beyond Inc. and headphone-maker Koss Corp. lost 28% or more. All five are still up89% or more year-to-date. Thursday’s losses came amid an otherwise upbeat day formarkets, with the S&P 500 rising 1%.
In a week on Wall Street that has pitted individual investors against seasoned
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https://www.wsj.com/articles/online-brokerages-restrict-trading-on-gamestop-amc-amid-frenetic-trading-11611849934
MARKETS | STOCKS
Robinhood, Other Brokerages RestrictTrading on GameStop, AMCMove comes amid extreme volatility this week as once-unpopular stocks have soared
AMC Entertainment’s shares finished up 301% on Wednesday.
PHOTO: CARLO ALLEGRI/REUTERS
By Updated Jan. 28, 2021 9:05 pm ET
Caitlin McCabe
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professionals, the trading restrictions wereinterpreted by many as the latest sign thatfinancial markets are stacked againstindividuals. Gathering on social media platformslike Reddit, Discord, Facebook and Twitter,individual investors have piled into stocks likeGameStop and AMC that were once left for deadand banded together to intensify losses amongprofessional traders betting against the stocks.
At least three brokerages said the tradingrestrictions stemmed from mandates from theirclearing firm, which process the securities onthe back end after a user executes a trade with
their brokerage. Webull Chief Executive Anthony Denier said his platform’s clearing firm,Apex Clearing Corp., notified him Thursday morning that Webull needed to shut off theability to open new positions in certain stocks. Otherwise, Apex wouldn’t be able to settlethe trades, he said.
The clash between short sellers and individual investors, frenzied trading in shares talkedup on social media platforms and trading restrictions swiftly put in place left manyfinancial professionals stunned.
“It’s a domino effect,” Mr. Denier said, adding the industry was likely reckoning with thequestion of whether “customers could pay for the stocks they had to buy to cover theirshort positions.”
“If [they] are not able to pay to cover their short positions, someone else is going to haveto pay for that purchase,” he said. “And if their clearing firm fails and there’s not enoughcollateral in the account to cover the purchase, that trade fails and will cascade intomultiple trades with multiple customers.”
Apex didn’t respond to a request for comment.
Webull later reopened trading in the three stocks it restricted: GameStop, AMC and Koss.Robinhood also said it would allow limited purchases starting Friday of the at least 13stocks it restricted. The company said its initial decision to curtail trading in the stockswas based on its capital obligations and clearinghouse deposits, which fluctuate based onvolatility in the markets. It added the decision wasn’t made on the direction of any marketmaker to which it routes orders, noting it was a “risk-management decision.”
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An E*Trade spokeswoman said the company had imposed restrictions to “ensure that wecould continue to serve our broader client base,” and that it expected to resume normaltrading operations Friday.
Criticism of the restrictions was swift.
A group of individual investors filed a purported class action complaint againstRobinhood on Thursday, alleging that the popular brokerage “deprived their customers ofthe ability to use their service” as well as potential gains from trading for “no legitimatereason.”
Among others rebuking the moves by the brokerages were Rep. Alexandria Ocasio-Cortez(D., N.Y.), Sen. Ted Cruz (R., Texas), billionaire Mark Cuban and Dave Portnoy, the founderof the popular digital media company Barstool Sports Inc. Mr. Portnoy was one ofcountless individual investors who dove into the markets this year, often streaming histrades to his followers on Twitter.
Ms. Ocasio-Cortez tweeted: “We now need to know more about @RobinhoodApp’sdecision to block retail investors from purchasing stock while hedge funds are freely ableto trade the stock as they see fit.”
She continued: “As a member of the Financial Services [Committee], I’d support a hearingif necessary.”
Mr. Denier at Webull said the restrictions originated Thursday morning when theDepository Trust & Clearing Corp. instructed his clearing firm, Apex, that it wasincreasing the collateral it needed to put up to help settle the trades for stocks likeGameStop. In turn, Apex told Webull to restrict the ability to open new positions in orderto prevent trades from failing, Mr. Denier said.
DTCC, which operates the clearinghouses for U.S. stock and bond trades, is a key part ofthe plumbing of financial markets. Usually drawing little notice, it facilitates themovement of stocks and bonds among buyers and sellers and provides data and analyticsservices.
In a statement, DTCC said the volatility in stocks like GameStop and AMC has “generatedsubstantial risk exposures at firms that clear these trades” at its clearinghouse for stock
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trades. Those risks were especially pronounced for firms whose clients were”predominantly on one side of the market,” a reference to brokers whose customers wereheavily betting for stocks to rise or fall, rather than having a mix of positions.
The statement added that when volatility increases, it increases margin that DTCCcollects from the banks and brokers that use its clearing services. “Margin requirementsprotect the entire industry against defaults and systemic risk in volatile markets,” it said.
Other brokerages including Ally Financial Inc. and Public Holdings Inc., which runs socialinvesting network Public.com, also said Apex Clearing halted all opening transactions onGameStop, AMC and Koss.
“While we cannot speak to the specifics behind Apex’s decision, these types ofrestrictions are typically put in place due to increased volatility, when securitiestransactions introduce systemic risk to trading platforms, customers, and the market at-large,” a spokeswoman for Ally said.
Ultimately, trading in all three stocks was restored on Ally and Public.com as well.
Retail trading platforms, including Robinhood in particular, have been facing increasedscrutiny from regulators. Massachusetts securities regulators filed a complaint againstthe company in December alleging it aggressively markets to inexperienced investors andfailed to implement controls to protect them.
Robinhood has disputed those allegations andsays it prides itself on “democratizing” themarkets for investors, including for first-timetraders. It reiterated that mission Thursday in ablog post, saying it is committed to helpingcustomers navigate the current uncertainty inthe market.
—Akane Otani and Alexander Osipovichcontributed to this article.
Write to Caitlin McCabe at [email protected]
Appeared in the January 29, 2021, print edition as 'Brokers Cool Off Highflying Stocks.'
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