By Caitlin McCabe
Popular online brokerages restricted trading in highflying
stocks including GameStop Corp. and AMC Entertainment Holdings
Inc., sapping some of the euphoria around shares of companies that
individual investors have sent skyrocketing in recent days.
The restrictions, from brokerages including Robinhood Markets
Inc., Webull Financial LLC, E*Trade Financial Corp. and Interactive
Brokers Group Inc., left traders hoping to capitalize on this
week's eye-popping gains with only two options: hold or sell. They
also fueled a firestorm of criticism among users and even some
members of Congress who have 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., Bed Bath & Beyond Inc. and
headphone-maker Koss Corp. lost 28% or more. All five are still up
89% or more year-to-date. Thursday's losses came amid an otherwise
upbeat day for markets, with the S&P 500 rising 1%.
In a week on Wall Street that has pitted retail investors
against seasoned professionals, the trading restrictions were
interpreted by many as the latest sign that financial markets are
stacked against individuals. Gathering on social media platforms
like Reddit, Discord, Facebook and Twitter, individual investors
have piled into stocks like GameStop and AMC that were once left
for dead and banded together to intensify losses among professional
traders betting against the stocks.
At least three brokerages said the trading restrictions stemmed
from mandates from their clearing firms, which process the
securities on the 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 the ability to open
new positions in certain stocks. Otherwise, Apex wouldn't be able
to settle the trades.
The clash between short sellers and individual investors,
frenzied trading in shares talked up on social media platforms and
trading restrictions swiftly put in place left many financial
professionals stunned.
"It's a domino effect," Mr. Denier said, adding the industry was
likely reckoning with the question of whether "customers could pay
for the stocks they had to buy to cover their short positions."
"If [they] are not able to pay to cover their short positions,
someone else is going to have to pay for that purchase," he said.
"And if their clearing firm fails and there's not enough collateral
in the account to cover the purchase, that trade fails and will
cascade into multiple 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 13 stocks it restricted.
The company said its initial decision to curtail trading in the
stocks was based on its capital obligations and clearinghouse
deposits, which fluctuate based on volatility in the markets. It
added the decision wasn't made on the direction of any market maker
or other market participants.
An E*Trade spokeswoman said the company had imposed restrictions
to "ensure that we could continue to serve our broader client
base," and that it expected to resume normal trading operations
Friday.
Criticism of the restrictions was swift.
A group of individual investors filed a purported class action
complaint against Robinhood on Thursday, alleging that the popular
brokerage "deprived their customers of the ability to use their
service" as well as potential gains from trading for "no legitimate
reason."
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 founder of the popular
digital media company Barstool Sports Inc. Mr. Portnoy was one of
countless individual investors who dove into the markets this year,
often streaming his trades to his followers on Twitter.
Ms. Ocasio-Cortez tweeted: "We now need to know more about
@RobinhoodApp's decision to block retail investors from purchasing
stock while hedge funds are freely able to trade the stock as they
see fit."
She continued: "As a member of the Financial Services
[Committee], I'd support a hearing if necessary."
Mr. Denier at Webull said the restrictions originated Thursday
morning when the Depository Trust & Clearing Corp. instructed
his clearing firm, Apex, that it was increasing the collateral it
needed to put up to help settle the trades for stocks like
GameStop. In turn, Apex told Webull to restrict the ability to open
new positions in order to prevent trades from failing.
DTCC, which operates the clearinghouses for U.S. stock and bond
trades, is a key part of the plumbing of financial markets. Usually
drawing little notice, it facilitates the movement of stocks and
bonds among buyers and sellers and provides data and analytics
services.
In a statement, DTCC said the volatility in stocks like GameStop
and AMC has "generated substantial risk exposures at firms that
clear these trades" at its clearinghouse for stock trades. Those
risks were especially pronounced for firms whose clients were
"predominantly on one side of the market," a reference to brokers
whose customers were heavily betting for stocks to rise or fall,
rather than having a mix of positions.
The statement added that when volatility increases, it increases
margin, or collateral, that DTCC collects from the banks and
brokers that use its clearing services. "Margin requirements
protect 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 social investing network Public.com, also
said Apex Clearing halted all opening transactions on GameStop, AMC
and Koss.
"While we cannot speak to the specifics behind Apex's decision,
these types of restrictions are typically put in place due to
increased volatility, when securities transactions 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 increased scrutiny from regulators. Massachusetts
securities regulators filed a complaint against the company in
December alleging it aggressively markets to inexperienced
investors and failed to implement controls to protect them.
Robinhood has disputed those allegations and says it prides
itself on "democratizing" the markets for investors, including for
first-time traders. It reiterated that mission Thursday in a blog
post, saying it is committed to helping customers navigate the
current uncertainty in the market.
--Akane Otani and Alexander Osipovich contributed to this
article.
Write to Caitlin McCabe at caitlin.mccabe@wsj.com
(END) Dow Jones Newswires
January 28, 2021 18:30 ET (23:30 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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