As the Wall Street panics over video game retailer GameStop and numerous other heavily shorted stock’s exploding stock, free trading services Robinhood and Interactive Brokers have issued heavy restrictions on trading.
Traders can no longer initiate new positions in shares of those companies and can only sell existing holdings, with the added security blanket of raised margin requirements.
On top of GameStop’s stock, AMC Entertainment, Naked Brand, Blackberry, Bed Bath & Beyond Inc, Nokia, and Koss, has similarly been restricted.
“We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR and $TRVG. We also raised margin requirements for certain securities,” Robinhood defended themselves in a statement.
Interactive Broker also released a statement, saying “As of midday yesterday, (1/27/2021) Interactive Brokers has put AMC, BB, EXPR, GME, and KOSS option trading into liquidation only due to the extraordinary volatility in the markets. In addition, long stock positions will require 100% margin and short stock positions will require 300% margin until further notice. We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only. We will continue to monitor market conditions and may add or remove symbols as may be warranted.”
For those new to the stock market, “shorting” a stock refers to the action of borrowing stock for a certain amount of time that was expected to decline in value and selling off the stock at the price when it was borrowed., only to buy it back to return the stock after the time but at, ideally, the lowered price that was expected.
Obviously, shorting brings an elevated risk if the stock rises in value since the borrower has to buy back the stock at a higher price. For those who buy a shorted stock, it can be an absolute jackpot if the stock rises in price.
GameStop, in particular, had a massive proportion of shorted stock and, in fact, had more shorted stock than what was available on the market, fostering a unique and incredible opportunity. A group of Redditors from WallStreetBets took notice, realizing that, if they bought a ton of GameStop stock at the shorted price and artificially boost the price of GameStop’s stock, they could swipe billions from Wall Street Investors who all predicted GameStop’s stock to decline.
So they did exactly that. As hedge funds crumble and Wall Street investors lose billions, GameStop shares soared 1,642% from January 12th to Wednesday and Redditors became millionaires overnight. But, waking up Thursday morning, investors realized they no longer could buy the shorted stock, a blatant attempt to cover for Wall Street and stop the bleeding.
Obviously, Robinhood and Interactive Broker’s decision didn’t come without immediate backlash, with Barstool Sports President Dave Portnoy threatening to “burn @RobinhoodApp to the ground if they shut down free market trading.”
The decision even united polar opposites as Senator Ted (R-TX) and Representative Alexandria Ocasio-Cortez (D-NY) saw eye-to-eye on the rights of retail traders.