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Ameritrade restricts trading of Gamestop:

"In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME [GameStop], $AMC [AMC Theaters] and other securities," reads the TD Ameritrade message.

Why would a financial institution prevent their clients from trading a specific security?

It would out of place for the financial institution to forcefully obligate their clients to follow some risk mitigation guideline, so I'm surprised that "mitigating risk for our clients" is one of the two given reasons. Regarding the second given reason, how does that mitigate the risk for the company? Too many customers getting margin called at once?

Bob Baerker
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Franck Dernoncourt
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    "It would out of place for the financial institution to forcefully obligate their clients to follow some risk mitigation guideline," - and I am quite sure noone in the USA would ever sue their broker fbecause he got f**** in a market like that one we had here. Hm, did happen, does happen, so institutions DO have a responsibility. – TomTom Jan 28 '21 at 10:18
  • Consider the possibility that the current trading in GameStop &c might be a criminal conspiracy. See e.g. stock kiting. – jamesqf Jan 28 '21 at 17:40
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    Currently trending answer: the large companies which hold GameStop short positions paid them a large amount of money to do so. – user253751 Jan 28 '21 at 18:28
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    @jamesqf So you're saying if I see a GME meme and buy it for the lols, I'm suddently part of a criminal conspiracy? – Azor Ahai -him- Jan 28 '21 at 19:42
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    Looks like Fidelity still lets you trade $GME. Goes to show which brokers are truly trustworthy. – JonathanReez Jan 28 '21 at 20:14
  • @JonathanReez yes what surprises me the most is the discrepancy between brokers – Franck Dernoncourt Jan 28 '21 at 20:18
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    If you cannot buy, the price will go down, definitely a market manipulation if you can control the popular trading apps like robinhood... I'd like to have that manipulaton power! – Marcelo Ruiz Camauër Jan 28 '21 at 22:21
  • @Azor Ahai -him-: No, I'm suggesting that the people who started the whole thing were quite possibly engaged in a stock-kiting scheme. You are just one of their gullible victims. – jamesqf Jan 28 '21 at 23:09
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    @jamesqf Lol, I don't have any. – Azor Ahai -him- Jan 28 '21 at 23:31
  • @MarceloRuizCamauër that's definitely incorrect. If you cannot buy, someone somewhere also cannot sell, and therefore the price does not move. It's the same as the market being closed. The price does not change in that situation. – Allure Jan 28 '21 at 23:59
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    @Allure except not all market agents are equal. RobinHood and TDAmeritrade blocked out retail traders. Institutional traders were free to trade. The market was not closed at all. By blocking one class of traders, the market was no longer free – Dancrumb Jan 29 '21 at 00:09
  • @JS Lavertu: It's arguably kiting because some people persuaded a bunch of gullible people to buy the stock for reasons that have nothing to do with its actual or presumed value. They did so in order to make a profit, or perhaps to cause financial losses to other people (or perhaps both). I'm not a lawyer, but it appears to me that there are reasonable grounds to suspect a criminal conspiracy. – jamesqf Jan 29 '21 at 06:09

3 Answers3

12

Your quoted paragraph says it all. The restrictions are intended to mitigate risk for the brokerage firm and for the clients.

There's a long history of risk mitigation by the SEC as well as brokers. Some examples:

  • Before the 1929 crash, margin was 10%. You could buy stocks for 10 cents on the dollar. Reg T was subsequently established, requiring that traders must post at least 50% of the price of shares for a margin purchase.

  • The Securities Exchange Act of 1934 created the Uptick Rule for shorting. It was eliminated in 2007 and was reimplemented as the Alternate Uptick Rule in 2010

  • Brokers are allowed to require higher margin than Reg T allows

  • After the crash of 1987, circuit breakers were implemented to stabilize the financial markets

  • About the time that Lehman Brothers went under in 2008, for a few weeks, the SEC banned the shorting of about 800 financial companies (the UK did so as well)

  • Higher margin is required for trading leveraged ETFs, Bitcoin, etc.

  • Brokers are not required to offer trading in all securities (options, futures, Bitcoin, etc.)

It is not unusual for brokers to limit access to volatile securities to more sophisticated traders who have well funded accounts that can cover potentially higher risk trading.

Bob Baerker
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    What's the risk for the broker? – user253751 Jan 28 '21 at 18:28
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    @user253751 - If a trader blows up his account and it goes into negative equity, the broker is on the hook for that money. The broker can just say to the counterparty on the other side, "Hey mate, my customer blew up his account so I can't deliver or pay you for the security that you just bought (or sold). IMHO, I think that margin requirements are designed ore for the protection of the broker than for the protection of the account holder. – Bob Baerker Jan 28 '21 at 19:20
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    @BobBaerker We're talking about plain stock purchases here though. You can't go into negative equity just by owning stocks. If I give RH $300 or whatever the current price is, and tell them to buy 1 stock, there should zero risk in it for them. (My risk is $300, and they may choose to warn me about it) – user253751 Jan 28 '21 at 19:28
  • The majority discussion for the past week has been about the GME short squeeze. You can blow up an account if you are on margin and in order to short GME, you need a margin account. Theoretically, shorting has unlimited loss potential and that has blown up many accounts this week. – Bob Baerker Jan 28 '21 at 19:39
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    @BobBaerker Okay... But the brokers have stopped you from even buying some of these stocks with cash. No margin involved. The problem is the brokers seems to be trying to stop the short squeeze, not trying to prevent people from getting squeezed. – Matt Jan 28 '21 at 20:27
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    I read that certain brokers just stopped allowing buy orders, period, for certain stocks like GME today. We're not talking about margin risk. You couldn't even buy them with 100% cash. There is no risk to a broker if someone wants to buy with 100% cash. Obviously there's risk to the buyer, but still, all stocks have risk. – 7529 Jan 28 '21 at 20:41
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    @user253751 there is risk to the broker if they are financially tied to the hedge funds who are shorting the stock, which, in this case, they are. – BlackThorn Jan 28 '21 at 21:15
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    RobinHood is being reported to have force-sold fully paid-up shares coincidentally at the low point of the day. It's not their customers' risk they're managing. – chrylis -cautiouslyoptimistic- Jan 28 '21 at 22:17
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    Their cost model is very sensitive to volatility, that is, they operate at a profit in low volatility conditions and a loss in high volatility conditions. They're protecting their own bottom line. Read this – David Schwartz Jan 28 '21 at 23:03
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    All of this is about margins and risk mitigation, but RobinHood was preventing simple buys and force selling fully paid up positions. This answer is misleading and borderline irrelevant – Dancrumb Jan 28 '21 at 23:59
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The reason they stopped is because Citadel and Melvin capital and others are going to lose to a bunch of Reddit posters and Robinhood traders. People who own the market aren't going to allow that to happen.

Like that movie with Eddie Murphy and cornering orange juice, except Eddie Murphy loses in real life cause can't have the little guy winning a rigged game.

Bob Baerker
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paulj
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    Yep, most likely Citadel and Melvin called-in some favors with their golf buddies at the SEC, who then pressured Robinhood and the like to stop the trades. We'll probably see a movie about this in the next few years. – JonathanReez Jan 28 '21 at 18:29
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    Can you elaborate on how this happened in practice? What did Citadel do to cause RobinHood to even care? – user253751 Jan 28 '21 at 18:29
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    This is a dangerous supposition that, if proven true, would be illegal. I am not naive enough to think that every injustice in the world is resolved, but this is very much in the spotlight, far increasing the risk of impropriety. The notion as well that 'the people who own the market' would act outside their own self-interest [Citadel, to my understanding, holds no short positions on GME as a result of the backstop provided to Melvin Capital], is silly conspiracy stuff. – Grade 'Eh' Bacon Jan 28 '21 at 18:58
  • @Grade'Eh'Bacon surely they have exposure to Melvin Capital's failure as a result of the backstop agreement, whatever it was? Therefore they would seek to prevent it – user253751 Jan 28 '21 at 19:30
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    Downvoted for lack of evidence. Will rescind if you add a substantive citation. – RonJohn Jan 28 '21 at 19:45
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    It's a conspiracy whenever the authorities step in to regulate, enslaving the average Joe in order to protect the corporacracy. Free the Redditors !!! ;->) – Bob Baerker Jan 28 '21 at 19:46
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    @BobBaerker this is what happens when you give free money to sophomores. Imagine the chaos with universal basic income. – RonJohn Jan 28 '21 at 20:09
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    Robinhood already had an arrangement with Citadel. – 7529 Jan 28 '21 at 20:31
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    My hypothesis: Melvin was in trouble. Everyone knew that. Citadel just happened to be processing these orders that were putting Melvin in trouble. Citadel saw a really easy way to get some money: just bail out Melvin, then stop the orders, then let Melvin repay with interest. (Or they bought equity in Melvin, idk) - not necessarily any prior or systemic collusion, just this one instance of ad hoc collusion. – user253751 Jan 28 '21 at 22:45
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    @Grade 'Eh' Bacon: Re "every injustice in the world", where's the injustice in this situation? Yes, a certain number of gullible "investors" are going to lose their money, since they'll be left holding overpriced GameStop stock when the bubble finally bursts. But they chose to be gullible (or driven by really stupid socio-economic ideas, which amounts to the same thing), so at worst it's merely Darwinian. – jamesqf Jan 28 '21 at 23:15
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    I thought Stack Exchange had standards for answers. What is this? "People who own the market"? This answer is basically: "Because the man wants to put you down". Surely that's not acceptable here. – Clay07g Jan 28 '21 at 23:19
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    @Clay07g Just wait till you make the mistake of following a Politics HNQ. – chrylis -cautiouslyoptimistic- Jan 29 '21 at 03:25
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    This answer is junk - I'm the world's biggest conspiracy theorist, and hater of the government-banking complex, but the issues at hand just have nothing to do with this. – Fattie Jan 29 '21 at 03:32
  • @jamesqf to be clear - I do not currently see evidence that Robinhood and other brokers closed the option to buy shares of GME out of a conspiracy; to me, what makes the most sense is HFT not allowing shares to be bought when they believed a price drop was imminent, which would have caused them massive losses, with the add-on that Robinhood may have felt some duty or other benefit in helping retail investors from losing their money. The injustice I'm referring to is that, in the hypothetical where Robinhood was effectively bribed or acting out of self-interest against retail investors... – Grade 'Eh' Bacon Jan 29 '21 at 14:21
  • ... then that would be an injustice which I truly hope that will be thoroughly investigated given the spotlight on the situation. – Grade 'Eh' Bacon Jan 29 '21 at 14:21
-1

There's a whole Wikipedia article on this. To quote:

A trading curb (typically known as a circuit breaker in Wall Street parlance) is a financial regulatory instrument that is in place to prevent stock market crashes from occurring, and is implemented by the relevant stock exchange organization. Since their inception, circuit breakers have been modified to prevent both speculative gains and dramatic losses within a small time frame. When triggered, circuit breakers either stop trading for a small amount of time or close trading early in order to allow accurate information to flow among market makers and for institutional traders to assess their positions and make rational decisions.

In the past, stock market crashes have occurred faster than people can think, which leads to a positive feedback effect not dissimilar to short squeezes. Heavy volatility is usually a sign that the stock's investors are not being rational. Restricting trading is meant to give people time to think on what they actually want to do.

Allure
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    It's not the exchanges that stopped buying, it's some retail brokers that stopped cash buying of certain equities. – Bill Jan 29 '21 at 00:21