Wall Street began to close the doors on thousands of retail traders hoping to send stocks like GameStop Corp. "to the moon" Jan. 28, sparking a backlash against the brokerages, who said they moved to restrict trading to curb volatility and manage their own risks.
At least four major brokerages — TD Ameritrade Inc., Robinhood Markets Inc., Charles Schwab Corp. and Interactive Brokers Group Inc. — have restricted trading in the last two days to varying degrees in certain securities championed by retail traders on Reddit's WallStreetBets forum, on StockTwits and on Twitter.
Schwab-owned TD Ameritrade became the first to do so Jan. 27 when it restricted some transactions involving securities like the heavily shorted GameStop and AMC Entertainment Holdings Inc. The next day, Schwab, Robinhood, Interactive Brokers and others all rolled out limitations of their own, ranging from temporarily barring clients from buying the stocks, to raising margin requirements, to outright banning riskier options trades that involved the stocks.
There is a legitimate risk of financial loss for the firms executing these trades, Interactive Brokers Chairman Thomas Peterffy said in an interview with S&P Global Market Intelligence.
"We have a huge concern over the financial viability of the intermediaries," Peterffy said, referring to smaller brokers and clearinghouses. "This could become a domino effect."
Greenwich, Conn.-based Interactive Brokers began putting options trades involving GameStop, AMC, BlackBerry Ltd., Express Inc. and Koss Corp. into liquidation on Jan. 27, "only due to the extraordinary volatility in the markets," according to a statement. The company also began requiring 100% margin for long stock positions and 300% for short stock positions, until further notice.
For Peterffy, the broader risk of the GameStop saga lies in the options markets where brokers have to pay the winners their gains and collect from the losers of the day to pay the clearinghouses. If the broker cannot collect from the losers, Peterffy said, the broker itself will have to put up its own money — raising the threat of bankruptcy if the payments are high enough. Interactive Brokers has talked with the Financial Industry Regulatory Authority about the situation and assured the regulatory body it was in a comfortable position with capital, Peterffy said.
Peterffy told S&P Global Market Intelligence that Interactive Brokers had 27,000 customer positions involved in GameStop, as of Jan. 27, but had since liquidated many.
"A lot of people are losing a lot of money on these crazy stocks," Peterffy said.
Robinhood draws ire
Robinhood, the Silicon Valley unicorn that runs a widely popular trading app, began limiting its clients' ability to buy stocks like GameStop and AMC as a result of its "risk management" protocols, according to a blog post Jan. 28. All but one of the stocks that were included in Robinhood's restrictions ended the trading day down more than 25%. AMC saw the largest decline, with shares plunging 56.63%. Prior to the recent run-up in its share price, AMC had not traded north of $8 since late 2019.
In the blog post, the company said it will begin allowing "limited buys" of the securities that were originally restricted starting Jan. 29. Robinhood added that the decision was "not made on the direction of the market makers we route to," a statement directed at speculation among retail traders that Robinhood was acting to benefit the trading firms that provide most of its revenue in the form of payment for order flow.
The clampdown from Robinhood in particular was met with swift criticisms that hailed from the Redditors who have helped lift stocks like GameStop's higher and lawmakers on both sides of the aisle.
On Reddit's WallStreetBets, the forum where members have encouraged one another to send GameStop's stock "to the moon" for weeks, users zeroed in on Robinhood's restrictions as a reversal of the company's stated mission of democratizing finance. Several commenters on the thread expressed interest to switching their accounts to other brokerages such as Fidelity Investments
Robinhood's shutdown ultimately drove several purported Robinhood customers to file class-action lawsuits against the brokerage.
Massachusetts resident Brendon Nelson alleged in a complaint now before the U.S. District Court of the Southern District of New York that the brokerage "has completely blocked retailer investors from purchasing GME for no legitimate reason, thereby depriving retailer investors from the benefits of Robinhood's services," according to the lawsuit.
"Robinhood's mission is to 'democratize finance for all.' They have failed," Nelson's attorney, Alexander Cabeceiras of the Derek Smith Law Group, wrote in an emailed statement to S&P Global Market Intelligence. "They have purposefully failed this mission and failed their clients in an attempt to — what appears to be — appease their investors and/or potential investors."
A spokesperson for the Menlo Park, Calif.-based company did not respond to a request for comment on the lawsuit.
Lawmakers on Capitol Hill took aim at Robinhood too. Rep. Alexandria Ocasio-Cortez tweeted that Robinhood's move to restrict some transactions was "unacceptable," which Sen. Ted Cruz, R-Texas, retweeted while adding that he "fully" agreed. The New York Democrat added in a subsequent tweet that the inquiry should not be exclusively limited to Robinhood.
Sens. Sherrod Brown, D-Ohio, and Elizabeth Warren, D-Mass., both called out the U.S. Securities and Exchange Commission for its role in overseeing the ramp-up in the stock prices and then the subsequent restrictions. The U.S. Senate Banking Committee plans to hold a hearing on the "current state of the stock market," said Brown, who chairs the committee. Rep. Maxine Waters, the California Democrat who chairs the House Financial Services Committee, similarly announced plans to host a hearing on short selling and online trading platforms.
"For a long time now, the SEC has pulled back and not made sure that we have an honest market," Warren said in an interview on CNBC. "The whole point of having a stock market is so that people across this country [and] around the world can invest in businesses [to] help create that capital accumulation so that businesses have the money they need to grow and to prosper. Instead, what has happened is, it's turned into a casino so that market manipulators come in and they drive markets up or down and make a profit on it."