But brokerages catering to those same people, including Robinhood, Interactive Brokers, TD Ameritrade and others, began restricting users’ ability to trade certain stocks Thursday amid the extreme volatility. Robinhood and Interactive Brokers also raised margin requirements on certain securities, which increases the amount of money an investor using leverage and derivatives is required to have in their brokerage account after a stock purchase.
“We continuously monitor the markets and make changes where necessary,” Robinhood said on its blog. “In light of recent volatility, we are restricting transactions for certain securities,” including AMC, GameStop, Nokia and others. In an update late Thursday, the company further explained its decision and said that the app planned to allow “limited buys” of the securities on Friday.
Interactive Brokers chairman Thomas Peterffy offered a similar explanation, saying the company curbed trading to help “safeguard the marketplace,” as well as the brokerages themselves. When investors buy and sell using leverage, their trades are only backed by a fraction of the total cost, so it’s possible they will incur losses greater than they’re able to cover. If this happens, the brokerage can be on the hook to cover the loss.
The extreme volatility means prices are changing dramatically from one moment to the next, says Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business.
“Robinhood caters to individual investors, so you can certainly imagine a situation where they want to offer some protection,” says Routledge. “On the other side of that, annoying your client base is a business cost.”
And the decision did enrage many retail investors, who view the situation as Wall Street not playing by its own rules once it started losing. Not only are the brokerages costing them money, they say, but, in the case of Robinhood specifically, they are reneging on their explicit promise to “democratize” investing.
Robinhood’s decision underscores some people’s belief that the deck is stacked against them, says Zach Abraham, founder and chief investment officer of Bulwark Capital Management, where he advises retail investors.
Abraham characterizes platforms restricting trades for retail investors as “an absolute travesty,” noting that many of the Redditors’ moves weren’t just some “troll,” but calculated based on their own research. The hedge funds made “bad calls,” he says, and retail investors caught them on it.
“This is only going to perpetuate the wealth gap, and that the rich play by different rules,” says Abraham, whose firm sold its positions in GameStop last week. “If the roles were reversed, nobody would be saying a thing.”
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