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Robinhood and other retail brokerages are taking steps to tamp down the speculative frenzy surrounding companies such as GameStop, but the actions only sparked more volatility in the market and an outcry from users of the platforms and some members of Congress who say small investors are being treated unfairly.
GameStop stock has rocketed from below $20 earlier this month to close around $350 Wednesday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall.
The action was even wilder Thursday: The stock swung between $112 and $483 before closing down 43.2% at $197.44.
Robinhood said Thursday that investors would only be able to sell their positions and not open new ones in some cases. Robinhood will also require investors to put up more of their own money for certain trades instead of using borrowed funds.
Besides GameStop, Robinhood said trading in stocks such as AMC Entertainment, Bed Bath & Beyond, Blackberry, Nokia, Express Inc., Koss Corp., American Airlines, Tootsie Roll, Trivago and Naked Brand Group would be affected by the new restrictions.
Interactive Brokers also limited options trading in AMC, BlackBerry, Express, GameStop and Koss. Clients can close out positions, but not buy more options, a move the company said was due to extraordinary volatility in the markets. It also tightened margin requirements indefinitely on “short stock positions."
Charles Schwab and TD Ameritrade took similar steps to restrict trading on their platforms Wednesday.
The frenzy surrounding shares of GameStop, AMC and others has drawn in an influx of investors with little or no experience trading stocks. That poses a challenge for brokerages that cater to small investors, said Andy Nybo, managing director at Burton-Taylor International Consulting.
“The brokers were forced to take action because they would be in the firing line if an unsophisticated investor loses money,” he said.
Robinhood’s stated goal is to “democratize” investing and to bring more regular people into investing. The company has forced huge, ground-shaking changes for the brokerage industry, such as its decision to charge zero commissions for customers trading stocks and exchange-traded funds. That's why some users took Thursday's actions as an affront.
At least one lawsuit was filed Thursday in U.S. District Court in New York claiming Robinhood manipulated the market by restricting investors' access to trading GameStop.
Robinhood investor Carlos Amaya said the app’s action Thursday was a disappointment to users like him who prided themselves on being a “different breed of investors.”
The 28-year-old school operations manager in Washington, D.C., said his parents immigrated from El Salvador and he was the first person in his family to buy stocks when he started using the app in 2017. He’s since made several thousand dollars.
“We pride ourselves in the name Robinhood because we’re trying to make more money and be the next people at the top,” he said. “You would expect Robinhood to let us do our thing instead of blocking us and saying it’s for our protection."
Ziad Cohen, another Robinhood user, said he'll ditch the trading portal once he sells his GameStop shares. He bought 85 shares last week, and says he is ahead by $20,000, even with the stock's decline Thursday. The 19-year-old college student from Los Angeles plans to use that money to pay rent and his student loans.
“I feel pretty good about it," Cohen said.
Investors upset over the trading portals' restrictions are getting some sympathy from some members of Congress.
Democratic Sen. Sherrod Brown of Ohio, who is set to become chairman of the Senate Banking Committee, announced that he will hold a hearing on the GameStop situation. Rep. Maxine Waters, D-Calif., also announced a hearing in the House Financial Services Committee.
Rep. Alexandria Ocasio-Cortez, D-N,Y., called Robinhood's actions “unacceptable,” and said she would suppo...