GameStop’s Stock Surges Even as Robinhood Halts Trading

Last week’s historic roller-coaster trade saw GameStop Corp. encounter record volatility, multiple trading halts, and a boom in the market value. Let’s take a closer look at the record-breaking numbers that shook the U.S. stock market.

Over the past few days, there has been a lot of chatter about GameStop Corp. The primary reason behind this has been a wild surge in the company’s stock despite negative growth for years. On Friday, the stock market witnessed a significant surge in GameStop, AMC, and other heavily shorted stocks. Robinhood, on the other hand, had plans to resume limited trading of previously restricted securitiesOpens a new window . Late Thursday, Robinhood clearly stated its stand on limiting buys of stocks as it was willing to monitor the situation and make adjustments as and when the need arises. 

GameStop’s Wild Week (Market Close on Friday, January 29)
Source: FactSetOpens a new window

However, as Friday’s session progressed, the stocks gave back a significant chunk of their gains as Robinhood decided to impose heavy trading limits on the stocks. The position of Robinhood was hard to decipher as its help center said that users were allowed to increase their position in GameStop just by one share. However, until this point, users had been able to purchase five shares.

GameStop Shares Soar to Record Highs

Talking about GameStop, its shares closed 68% higher on Friday, thereby bringing their gain for the wild week to 400%. However, the stock had previously been up 113% to hit a session high of $413.98 during a volatile session. It’s been a topsy-turvy ride for GameStop, as sometimes shares have traded as low as $250.

On January 29, 2021, GameStop closed at $193.60 on the New York Stock Exchange, where a high for the week was $483. 

Shares Traded
Source: BloombergOpens a new window

Robinhood Limits GameStop Trading

Although Robinhood’s statement to restrict trading angered many users, it was necessary to comply with capital requirements mandated by the SEC for broker dealers. “These requirements exist to protect investors and the markets, and we take our responsibilities to comply with them seriously, including through the measures we have taken today,” the company saidOpens a new window .

Robinhood, an online brokerage company, is expectedOpens a new window to go public in 2021. It has also tapped some of its credit lines amid the trading frenzy, according to sources.

As retail investors were well prepared in the market, Robinhood and other retail brokerages restricted trading in several stocks that had been previously targeted by short-sellers. The company said that in some cases, investors would be able to only sell their positions and not open new ones.

Besides, these restrictions in trading forced the shares of AMC Entertainment to drop 56% on Thursday. However, AMC shares rebounded 53% on Friday.

In order to withstand this restricted trading move, brokers raised margin requirements on certain securities. Raising margin requirements increases the amount of money that an investor using leverage and derivatives must have in their brokerage account after purchasing a stock. Two brokerage behemoths, TD Ameritrade and Charles Schwab were successful in raising margin requirements on Wednesday.

Yet, most users were baffled by the move to restrict trading as it seemed extreme to many.

In a bid to cover their losses, individual investors are creating short squeezes by piling into names that hedge funds are betting against. This further aids in pushing the shares even higher. On the other hand, retail investors are promoting their activity on the WallStreetBets Reddit board, which saw more than one million new members rushing to join r/wallstreetbets overnight after the Reddit forum briefly went dark Wednesday evening. Some are looking at it as small investors pushing back against the Wall Street establishment.

Lawmakers Call for Investigation into Trading Activity

The Democratic leaders of the House Financial Services Committee and the Senate Banking Committee said they would hold hearings as some lawmakers are eager to call for an investigation on the trading activity.

Some liberal lawmakers in Congress, including U.S. Representative Alexandria Ocasio-Cortez, D-N.Y., took to Twitter to show the disagreement with the way trading activity was being conducted. 

This is unacceptable.

We now need to know more about @RobinhoodAppOpens a new window ‘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 Cmte, I’d support a hearing if necessary.

— Alexandria Ocasio-Cortez (@AOC) January 28, 2021Opens a new window

Ted Cruz, who represents Texas in the U.S. Senate, showed support to Ocasio-Cortez’s tweet.

Fully agree. 👇

— Ted Cruz (@tedcruz) January 28, 2021Opens a new window

The mission of Robinhood is to democratize investing for all, and it has seen its user numbers surge amid the COVID-19 outbreak. Their app has about 13+ million users now. This expansion and popularity of the online brokerage company have come with some growing pains, including several outages on key market days. This has also grabbed the eyeballs of the lawmakers.

SEC Responds, Says “Closely Monitoring” the Situation

Senator. Elizabeth Warren, D-Mass., opined that the chaotic trading in the market was due to the failure of the Securities and Exchange Commission (SEC). “We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules,” she toldOpens a new window CNBC. “To have a healthy stock market, you’ve got to have a cop on the beat.” 

On Friday, Sen. Elizabeth Warren sent a letterOpens a new window  to the SEC, to which the regulator said it would keep an eye on the situation. In a statement, the agency said, “The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days. Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes.”

On the other hand, the agency also accepted that extreme stock price volatility could expose investors to rapid and severe losses, thereby undermining the market confidence.

In conclusion

The past week saw a surge in shares of GameStop, AMC, and other heavily shorted stocks. That being said, Robinhood’s decision to block retail investors from trading GameStop Corp., AMC Entertainment Holdings Inc., and other shorted stocks was met with extreme outrage from customers and political leaders. Robinhood’s troubles didn’t seem to wear down as lawmakers have called for hearings, and consumer lawsuits against Robinhood have already been started by the angry investors.

It remains to be seen how Robinhood turns the tables around and weathers the storm to gain the trust of its investors and consumers, as the free-trading app continues to face accusations about its platform being manipulative. 

Do you think the current stock market volatility will continue to upset the investors in the days to come? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We’d love to hear from you!