(ATF) US online brokers such as Robinhood and Interactive restricted trading on Thursday in stocks that surged on the back of retail buying coordinated on Reddit. The move sparked controversy in the US, and came as it emerged South Korean fund MUST closed a long GameStop position.
GameStop, the company whose stock has been at the heart of the surge in retail buying designed to punish hedge fund short positions, disclosed in a filing to the Securities and Exchange Commission that Korean fund MUST had sold a holding that was 4.7% of the firm's stock last year.
When that stake was disclosed in March 2020 it was worth just under $14 million. During the peak of the Reddit board-inspired retail buying on Wednesday a 4.7% stake would have been worth around $1.15 billion.
The move by brokers such as Robinhood to restrict trading in some of the stocks that have seen frenzied buying, and to increase margins for customers, sparked outrage among many of the retail investors who had driven the success of the commission-free online platform.
Some retail traders speculated online that the limits were put in place to help hedge funds and the banks that provide financing to them via prime brokerages from suffering losses.
This view drew support from a surprising cross-section of politicians in the US.
Representative Alexandria Ocasio-Cortez, one of the leaders of the progressive wing of the Democratic party, tweeted: “This is unacceptable. We now need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Committee, I’d support a hearing if necessary.”
She had unlikely backing from Republican Senator Ted Cruz who tweeted: “Fully agree”.
Ocasio-Cortez reacted disdainfully to support from Cruz, who has continued to back conspiracy theories that the US presidential election was rigged. But the Senate banking committee announced late on Thursday that it will hold hearings on the recent market volatility, and extensive political and regulatory input is now likely.
GameStop stock fell by 44% on Thursday by the official close of US trading, but was still up by close to 900% over the last two weeks. And it started to move back up in after-hours trading when Robinhood said it would allow resumed buying of the stocks that have seen the greatest volatility starting on Friday.
“Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed. To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” Robinhood said in a statement.
“We stand in support of our customers and the freedom of retail investors to shape their own financial future. Democratizing finance has been our guiding star since our earliest days. We will continue to build products that give more people — not fewer — access to our financial system. We’ll keep monitoring market conditions as we look to restore full trading for these securities.”
Robinhood was claiming it was not acting on behalf of market makers such as Citadel Securities, whose payment for flows is used by the platform to fund its commission free trades for retail investors.
In one of the many twists in the current saga, Citadel Securities is related by ownership to billionaire Ken Griffin – though run separately from – the Citadel hedge fund group, which stepped in to support fellow hedge fund Melvin Capital this week after it suffered from the attacks on its short holdings in GameStop and other names.
The GameStop effect has spread to multiple other stocks that had been shorted by hedge funds, including European and Asian names as well as US companies.
Shares in Australian nickel and cobalt explorer GME Resources jumped on Thursday, apparently driven purely by the similarity of its stock ticker to GameStop’s (GME).
Stocks with exposure to metals of different types might see buying from retail investors for slightly more logical reasons soon.
Online forums such as Reddit started to see discussion of a concerted attempt to push up the price of silver related stocks, another sector that previously saw shorting by institutional investors, for example.
Canadian mining firm First Majestic Silver saw an early 40% price rise before its share trading was temporarily suspended.
The potential for market manipulation at the moment is obvious, but even as regulatory investigations get underway they seem unlikely to put an early end to the astonishing surge in online retail trading volumes.