Brokerages limit trading in GameStop, sparking outcry

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 earlier 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.

Robinhood said Thursday that investors would only be able 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 Burton-Taylor 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. The potential issue centers on the possibility that a brokerage that isn’t capitalized well enough could run into trouble if a large number of investors suddenly lose money on options trades that don’t go their way.

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’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 exchangetraded funds. That’s why some users took Thursday’s actions as an affront.