US regulators on Friday said they would review trading curbs imposed by online brokerages and act on any evidence of market manipulation, as Robinhood again tightened restrictions on purchases of hot stocks including GameStop.
GameStop shares made another huge move on Friday, rebounding to close up 68 per cent, a day after Robinhood had stopped clients buying more stock, sparking a user outcry. After shoring up its own finances with a $1bn fundraising overnight, the broker had allowed clients to resume purchases on Friday morning.
Midway through the trading day, Robinhood started limiting users to buying one additional share in GameStop and other hot stocks including AMC and BlackBerry. The previous cap had been five shares in GameStop and more in other stocks. “Limits may be subject to change throughout the day,” Robinhood said.
The US Securities and Exchange Commission weighed in earlier on Friday to say it would review restrictions imposed by Robinhood and others to see if they may “disadvantage investors or otherwise unduly inhibit their ability to trade certain securities”.
It added it was working with other regulators and exchanges “to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing”.
GameStop, a video games retailer, is one of a handful of stocks targeted by users of Reddit message boards in the hope of inflicting losses on hedge funds that had bet heavily against the company. After having recouped all Thursday’s losses, GameStop shares are again up more than 1,500 per cent since the start of the year.
Shares in AMC, the cinema chain, snapped back 54 per cent on Friday.
The frenzied trading of the past week has fuelled concerns that a speculative bubble in equities could trigger a sharp market pullback, and the volatile trading conditions prompted several important market players to act to protect themselves. Online brokers increased margin requirements for customers — meaning they needed more money in their accounts to trade — and clearing houses made similar demands of the brokers themselves.
Clearing houses are central organisations that sit between different players and manage the risk to the market if one side defaults.
The Depository Trust and Clearing Corporation, which runs the main equities clearing house, raised the total margin it needed from the industry on Thursday from $26bn to $33.5bn, noting that outsized trading volumes in shares like GameStop and AMC “generated substantial risk exposures at firms that clear these trades . . . particularly if the clearing member or its clients are predominantly on one side of the market”.
Robinhood raised $1bn in the form of debt that its investors can convert into equity, explaining that it wanted to increase the amount of cash it had to deposit with clearing houses. Ribbit Capital led the investment with Iconiq Capital, the two groups together putting in more than $500m, the people said. Other existing investors were expected to commit the rest of the capital by the end of Friday, they said.
The SEC said market infrastructure had proven resilient during this week’s huge trading volumes, but it warned “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence”.
Tal Cohen, head of North American markets at Nasdaq, said the exchange was in “close dialogue” with the SEC and the Financial Industry Regulatory Authority, the organisation that governs US broker-dealers, to piece together recent trading data.
“All investors, whether you’re a hedge fund or retail, have a right to invest and the right to express your opinions in the market. But it has to be done in a way that is not manipulated and is not harmful to the market,” said Mr Cohen. “I think what everybody’s trying to do is balance the desire to continue to democratise our markets and protect investors.”
Day traders were celebrated claiming one scalp on Friday after Citron Research said it would stop publishing short-selling analysis after two decades of pointing out overvalued companies. Andrew Left, founder of Citron, had been one of the most outspoken short-sellers of GameStop.
Meanwhile, American Airlines, whose shares have been pushed higher by day traders trying to squeeze out short-sellers, took advantage of being caught up in the frenzy. It raised $1.1bn by selling new shares to help cover losses from the pandemic-induced downturn in air travel.
Additional reporting by Philip Stafford, Mamta Badkar and Claire Bushey