Online brokers are clamping down on retail investors’ bets on some highly popular but volatile stocks in an effort to protect customers and preserve their own stability during a surge in trading.
The new trading limits for shares including GameStop and AMC suggest many of the biggest brokerages and apps for retail trading have begun to creak under the pressure of a battle between day traders and professional short-sellers that has generated record trading volumes in the US. On Wednesday, more than 24bn shares changed hands and 57m share options were traded, also a one-day record, as investors piled into companies such as Nokia, GameStop and Palantir.
“This is an extreme game that has gotten out of control . . . The best defense is simply trade size,” said Tom Sosnoff, co-chief executive of retail exchange Tastytrade, which has agreed to be bought by the UK’s IG Group.
Interactive Brokers, which has more than 1m customers, restricted investors from new trades in GameStop and raised margin requirements for taking out options on several shares, including AMC and BlackBerry.
“We’ve had discussions as to how to manage our risks as brokers. We have to be cognisant of our customers’ risk, particularly those who are using margin,” said Steve Sosnick, chief strategist at Interactive Brokers. “We are having conversations about this now.”
Robinhood, the online app synonymous with the rise of the retail trader, doubled the amount of money that customers must stump up to extend their trades in GameStop, AMC, Bed Bath & Beyond and Koss. It also restricted investors from taking out new positions in a small group of shares. In a blog post on Thursday, the company directed customers towards its educational materials on investing and understanding market volatility.
IG Group also raised margin requirements for GameStop shares.
Broker eToro notified clients after the market close on Wednesday that it would not accept orders to trade the game company, among other shares it considered “low liquidity”, while TD Ameritrade and its new owner Charles Schwab both placed restrictions on new purchases of GameStop and AMC stock, as well raising margin requirements for certain trades. The move reflected “an abundance of caution”, the companies said.
“It is not uncommon . . . to place restrictions on some transactions in certain securities in the interest of helping mitigate risks for our clients,” Schwab said.
Some retail investors reacted angrily. “You sell, the short sellers get their profits, lol. Coincidental that the apps will only let you sell and not buy?” asked one message board user, RedditTrading.
“This was always how it was going to play out. They can change the rules any time they want. They don’t lose,” said another.
Platforms have urged their users to be cautious. “Whether or not we are in bubble territory . . . we have been urging our users to stick to the basics of investing: diversify, avoid leverage, and only invest in markets and instruments with which you are familiar,” said Gil Shapira, chief investment officer of eToro.
But retail enthusiasm shows no signs of slowing down. On January 27, Robinhood recorded its highest ever number of downloads from the US iOS app store, with 120,000 new downloads, according to data tracker AppTopia.
“We simply don’t know when this will end,” said Rich Repetto, an analyst at Piper Sandler. While volumes may fall back, “we also feel that zero commissions are here to stay and it appears an entire generation has been introduced to retail trading”, he added.