GameStop Stock Plunges as Robinhood Restricts Trading
GameStop’s roller coaster ride continued on Thursday, and the company’s stocks rebounded late in the day after the stock trading app Robinhood announced it would allow its customers to resume trading with the company.
The stock, which closed the regular trading session 44 percent, rose 34 percent after trading closed. The decline had occurred earlier in the day when Robinhood and other trading platforms said they were restricting the ability to buy certain securities.
It marks the last turning point in a week of frenzied trading in shares of GameStop and other companies offered by small investors in frenzied activity. These include AMC Entertainment, which rose 22 percent in over-the-counter trading, even after previously suffering a heavy loss, and BlackBerry, which rose roughly 8 percent after a 41 percent decline.
“Starting tomorrow, we plan to allow limited purchases of these securities. We will continue to monitor the situation and make adjustments if necessary, ”said Robinhood on Thursday afternoon in a blog post that explained why trading was restricted earlier in the day – for example that its users are only allowed to sell stocks.
“To be clear, this was a risk management decision and was not made on the direction of the market makers we go to,” the company said, referring to the major trading companies that pay Robinhood to run the app’s business.
Other brokerage firms have restricted trading in some of the same stocks as well.
The run on GameStop this month – the stock was up 1,700 percent through Wednesday, giving the company a staggering $ 24 billion market valuation – means it has broken away from the factors that traditionally contribute to value of a company for investors such as growth potential or earnings.
But the traders that piled up were part of a frenzy that arose on a Reddit message board, WallStreetBets, a community known for disrespectful market discussions, and on messaging platforms like Discord.
Encouraged by the message boards, these traders had rushed to buy options contracts that would benefit from a surge in the share price. This trading can create a feedback loop that drives underlying stock prices higher as brokerage firms selling the options need to buy stocks as a hedge.
That surge hit hedge funds that had bet against the stock. These funds have closed the so-called short positions with sometimes large losses. It has also increased control over trading platforms, with the Securities and Exchange Commission saying on Wednesday it had “actively monitored” volatile trading.