Why did Interactive Brokers restrict trading in GameStop and other companies?

Restrictions have been placed on trading GameStop shares along with shares in some other companies. We take a look at what is going on.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Note paper with question mark on orange background

Image source: Getty Images

There has been a lot of drama and noise recently around GameStop shares. The latest turn in this tale has involved restrictions around trading. A number of platforms, like Interactive Brokers, have decided to restrict trades of these shares along with shares in a few other companies.

Here’s everything you need to know about what’s going on and why it’s happening.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

What is happening to GameStop shares?

GameStop shares have been hitting the news quite a lot recently. At first, it was simply due to their astronomical rise in value. Then people started looking into why the price was rising so much. After all, GameStop is a video game retailer that has been hit hard by the coronavirus pandemic and downloadable games.

Because of all the bad luck surrounding the company, they were one of the most shorted companies in the market. Short selling is when traders buy a company’s shares and then sell them, believing that their price will go down before they buy them back for a profit.

Many Reddit users were of the opinion that there was an undervaluation of GameStop. Because so many traders had made bets that the GameStop share price would go down, this opened the opportunity for a short squeeze (which may potentially lead to a gamma squeeze).

Which shares are facing restrictions?

GameStop (GME) is not the only stock on Interactive Brokers with trading restrictions. Some of the other businesses include:

  • AMC Entertainment Holdings Inc. (AMC)
  • BlackBerry Ltd. (BB)
  • Express, Inc. (EXPR)
  • Koss Corporation (KOSS)

Some platforms have placed restrictions on even more companies than those listed above.

What are the restrictions?

The main restrictions by Interactive Brokers have been to do with derivatives trading in options using leverage (borrowed money).

Interactive Brokers have also made the decision to increase margin requirements. This just means that investors trading in derivatives or borrowing money to make trades need a larger amount of money in their accounts.

Other brokers, mostly in America, have gone even further. Some made the decision to completely stop all trading in volatile stocks like GameStop. Whilst others, like Robinhood, allowed users to sell their shares but not to buy any more.

Some restrictions seem reasonable, but others are raising questions about whether it truly is a free market.

Why are there restrictions?

The reasons for the restrictions vary. Interactive Brokers have said their restrictions were created in order to protect the market and make sure there was enough liquidity.

Another concern they have is that they’ll be left to pick up the bill if their customers end up with big losses. That is why they’re increasing the minimum requirements people must meet in order to borrow money to trade.

If these shares all spiral down at the same time, their fear is that many traders won’t be able to pay back the money they’re borrowing for trading.

Other platforms have said they are using restrictions to:

  • Stop their service becoming overloaded
  • Provide some breathing room to maintain everything and look after other customers
  • Prevent investors losing lots of money during unusual volatility
  • Make sure they meet any regulatory requirements in their country

However, some argue that limiting people’s ability to trade shares like GameStop freely is effectively market manipulation because:

  • Many traders accept the volatility risk
  • Brokers are potentially limiting trading because of their own liquidity issues
  • Investors are not being allowed full control over their investments

What should investors do about GameStop?

Avoiding this type of manic situation is the kind of thing we talk about a lot here. It’s events like these that show the benefits of having a solid investing strategy built for the long-term and sticking with it.

Using one of our top-rated share dealing accounts to pick reliable companies or funds is a good way to avoid the madness of stocks caught up in public battles.

It will be interesting to see how it all plays out. I’m sure there will be some investigations and potentially some new regulations around investing and short selling. Whilst many in the market are distracted by the latest crazy thing to happen, those with sensible plans should feel reassured.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »