High-flying stocks crash to earth as trading platforms hit the brakes

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The unprecedented battle between small investors and big-money pros took a sharp turn Thursday, as Wall Street hit back.

Small investors that had been cheering their remarkable success in driving up the share prices of a motley group of companies into the stratosphere over the past month met stiff resistance in their quest to perpetuate the buying campaign and force hedge funds and short sellers to back down from their financial bets against those same companies.

A number of popular online trading platforms in the United States and Canada imposed strict limits on stock trades, ostensibly to save unsophisticated investors from making rash moves. As a result, a number of high-flying names came crashing downward.

GameStop Corp. (GME-N), the videogame retailer that has emerged as the central character in this brazen conflict between amateurs and professionals, rose as high as US$483 in early trading on Thursday, marking a bizarre 2,300-per-cent increase since Jan. 12. The gains crushed a number of short-selling investors who bet that the share price would fall.

But GameStop shares ended the day down 44 per cent, or nearly 60 per cent below its intraday high point. BlackBerry Ltd. (BB-T), another stock that had gained tremendous popularity in recent trading sessions, fell nearly 42 per cent in New York and AMC Entertainment Holdings Inc. (AMC-N) fell 57 per cent.

These stocks had rocketed higher earlier this week, driven by bullish enthusiasm among large groups of amateur investors in online chat rooms, who often pitted themselves against more established investors.

Rising concern over the extraordinary surge in volatility and the role of vocal investors prowling chat rooms had already drawn the attention of the White House and the Securities and Exchange Commission. But it spread further Thursday, drawing the likes of Congresswoman Alexandria Ocasio-Cortez and federal NDP Leader Jagmeet Singh into a battle that is gaining political overtones.

A number of observers had been pointing out that the stunning gains over the past couple of weeks, prior to Thursday’s rout, were out of touch with fundamental underpinnings tied to, say, profitability or valuations. Small investors simply piled on to what they saw as a strike against the establishment, in some cases also scoring big returns on modest-sized bets.

But the equally stunning setbacks on Thursday had little to do with a newfound interest in valuation ratios or corporate growth prospects.

Instead, a number of trading platforms limited the ability of investors to buy some particularly volatile shares and financial instruments known as stock options. Some also raised margin requirements, or the amount of money investors can borrow to invest, amid concerns that volatility among a select group of stocks could spread to the broader stock market.

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Robinhood Markets, the popular trading platform that recently ushered in an era of free stock trading in the United States, limited trades on eight stocks, including GameStop, AMC, BlackBerry and Nokia Corp.

Similarly, Interactive Brokers pointed to “extraordinary volatility in the markets” in its decision to impose limits. And WeBull Financial said it would restrict its clients from taking new positions in some stocks, and allow only existing shareholders to liquidate (or sell) their current holdings. In Canada, Toronto-Dominion Bank followed suit.

“In the interests of our clients and the bank, we are actively monitoring the ongoing market activity and have put into place precautionary measures to restrict short selling and options trading for some securities like several brokerages and trading platforms across North America have done,” Paolo Pasquini, a spokesman for TD Direct Investing, said in an e-mail to the Globe.

TD did not confirm which stocks were being monitored.

Independent discount brokerage Wealthsimple Trade has seen trading volumes double over the past four days. While the company has not restricted any trades specifically, it has placed alerts on a number of stocks – including GameStop, AMC, Blackberry and Nokia (NOK-N)– to remind clients that buying these names is risky.

“Ultimately it’s the role of stock exchanges and regulators to determine if market activity should trigger a trading halt,” Rachael Factor, a spokesperson at Wealthsimple, said.

The limitations and intense focus on the role of small investors struck some observers as odd, though, given that the conflict between investors with different opinions on stocks has always existed, though usually between well-heeled hedge funds.

“In this case, all it is is hedge funds on one side and individual investors on the other side,” said Daniel Schlaepfer, chief executive of Select Vantage Inc., a Toronto-based proprietary trading firm that employs day traders.

“This is just the first time that this is getting so much coverage because of how loud everybody on these social-media channels is,” Mr. Schlaepfer said.

Nonetheless, the battle is drawing the attention of at least two U.S. politicians who usually share little affiliation.

Ms. Ocasio-Cortez, a Democrat, tweeted: “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”

Senator Ted Cruz, a Republican and a vocal supporter of former U.S. president Donald Trump, responded: “Fully agree.”

In Canada, Mr. Singh added to the notion that this was a battle between small investors and entitled pros: “Folks that are trading ... they are not the problem. The problem that we’ve seen historically has been a lack of regulation of folks on Wall Street who have taken advantage of workers,” he said, according to Global News.

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