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

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

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.

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