Yesterday and this morning, TD Ameritrade, Robinhood, and other firms restricted trading in GameStop, AMC, and other heavily shorted stocks that have been undergoing tremendous short squeezes over the past few weeks.
Regulatory Halts v. Trading Restrictions
For clarification there is a difference between a Regulatory Halt, which can be issued by FINRA or the SEC, and a broker-dealer ("BD") restricting trading in a security. The former is common and happens every day, usually due to a large move (up or down) in a stock. The regulator typically contacts the issuer to see if there is news that needs be be disclosed and will remove the halt after their questions have been answered. (Frequently, there is no news from the company.)
A BD-initiated trading restriction is much less common. When they do happen, they are usually for clients a firm wants to fire. They ask the client to leave and tell them they will only accept closing orders, i.e. sales of securities held long, or purchases of securities held short.
This morning, Robinhood announced it would accept only closing orders for GameStop, AMC, and other securities. They had already raised the margin requirements for these securities.
Robinhood Customer Agreement
The Robinhood Customer Agreement explicitly allows for the firm to "prohibit or restrict" trading in securities, without notice.
Robinhood Customer Agreement Extract
While Robinhood, and most likely all BDs, have the ability to restrict client trading in securities, doing so raises a host of issues. Some of those include:
- Was the implementation of the trading restriction commercially reasonable?
- If the BD allowed the clients to buy the security and then only allowed sales of the same security, are they engineering a decline in the security? That is, if owners can only sell a security and no one can buy, there is only one way for the security to trade - down.
- If all BDs implement closing-only restrictions, they themselves are engaging in market manipulation, guaranteeing a price decline and losses for investors.
- If a client has an open options position, is the BD preventing the client from hedging their position via an opening transaction in the underlying or another option?
- It is likely that FINRA has been in consultation with the BDs about these restrictions, which would seemingly raise the same liability issues for the regulator.
- Are these restrictions being applied to institutional investors as well as retail investors? For instance, are the options market makers able to trade in these names freely? What about hedge funds and other institutions?
- If the restrictions have not been implemented uniformly, it raises serious self-dealing issues. FINRA's members are BDs and are heavily connected to institutional investors such as hedge funds. If the regulator coordinated a member-wide closing trade only restriction for retail investors, it would benefit the hedge funds (who have been short) at the expense of the retail investors.
As I was writing this, it would appear that the trading restrictions have negatively affected the GameStop stock price. It has declined by 67 percent from the peak today (from roughly $450 to about $126).
GameStop Intraday Chart
I'll have more on this as developments continue.
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