NEW! Our Hero’s Journey tool can help you with your next step towards financial freedom - click here to try now.
Advertiser Disclosure

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

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

Compare stocks and shares ISAs

If you’re planning to open a stocks and shares ISA, choosing the right platform is important. To help you narrow down the choices, we’ve created a list of some of the top stocks and shares ISAs.

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

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.

Are you making these 3 common investing mistakes?

These all-too-common investing errors can cause you to miss out on the long-term wealth-building power that shares can hold….

To help you side-step these pitfalls, and move forward on your path to wealth-building, we’ve created a free report, “The 3 Worst Mistakes New Investors Make”.

Just enter you best email below for instant access to your free copy.

By checking this box and submitting your email address, you agree to MyWalletHero sending you emails with money tips, along with details of products and services that we think might interest you. You can unsubscribe from future emails at any time. You also consent to us processing your personal data in line with our privacy policy, and our cookie statement. For more information, including how we collect, store, and handle personal data, please read our Privacy Statement and Terms & Conditions.

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.

Was this article helpful?

Reviewed and rated 4 stars out of 5 by MyWalletHero

Need investment advice? Get a free initial review lasting up to 1 hour, plus £50 off any follow-up advice.

MyWalletHero has sourced you a £50 discount off the cost of advice when you find an independent or whole-of-market financial adviser through*. All advisers are FCA-regulated, qualified and give fully unbiased advice. To find yourself an adviser fast and for free – use the Unbiased matching tool.

*This is an offer from one of our affiliate partners. For more information on why and how we work with partners, click here.

Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.