Investing

GameStop Short Squeeze Hit From Unexpected Angle, Not Regulators But Brokerages

It may not seem like it, but the GameStop short squeeze saga is just a few weeks old. Still, perhaps the wild price swings may be fading. Despite multiple comments from regulators, it may prove to be the brokerages that ended it.

Robinhood users can’t purchase GameStop stock as of this morning. This extreme measure from an unexpected source might tame the activity we’ve seen in recent weeks.

Robinhood Blocks Purchases

Free online brokerage Robinhood sent a “A note on market conditions” last night to clients offering education them on high volatility, sharing content such as this article.

Then this morning they took far more aggressive action, Robinhood blocked purchases on 13 popular stocks including Gamestop and various others. This is what Robinhood wrote:

“We are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR, and $TRVG.”

Clearly, if stocks cannot be purchased, only sold, then they are unlikely to rise in value. Margin requirements have been increased too. Interactive Brokers have also put in place similar measures. Of course, other brokerages can be used to trade too, and don’t appear to have restrictions in place currently, but Robinhood is often used by the sort of trader found on wallstreetbets.

Price Action

For context, several weeks ago, a Reddit message board, wallstreetbets identified extremely high short interest in the name of around 160%. They proceeded to advocate for buying the shares.

This short squeeze then pressures those who are short the stock such as hedge funds, some of which have needed cash injections to cover the moves against them. The trend has spread to other stocks beyond GameStop with similar characteristics, familiar brands with large short interest, over time. Hence the broader restrictions from Robinhood beyond GameStop.

Regulatory Comments

Multiple regulators have taken note, yet taken no action. The Secretary of State of Massachusetts, Bill Galvin, called for a 30-day suspension of GameStop trading and the NASDAQ CEO also supported the idea of a trading halt. The White House and Treasury said yesterday they were “monitoring the situation”.

However, while regulators have not taken action, brokerages now have. Customers may hold their positions or use alternate platforms. Still if the ability to buy shares is gone from a key platform, then the short squeeze may be entering its closing phase.

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