Robinhood Restricts GameStop Trading - Market Volatility

Update: Robinhood has officially announced adjustments to its platform, explaining that “due to recent market volatility” it is “limiting transactions for specific securities to closing positions only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK.” The company also stated it has “increased margin requirements for select securities.”

Robinhood, a widely used trading application for individual investors, has placed restrictions on its users’ ability to invest in and trade certain popular assets, according to public reports. Numerous Robinhood customers have shared on social media that they are now unable to trade specific securities, and the company reportedly issued a notification yesterday indicating it was “implementing certain limitations for options trading on GME [GameStop] and AMC [the theater chain].”

TechCrunch has sent multiple inquiries to the company seeking further details regarding the specific trades and securities affected by these restrictions, as well as the rationale behind the decision, but has not yet received a response as of this publication. Initial user reactions to Robinhood’s actions have been largely critical.

Robinhood’s decision follows a period where platforms offering commission-free trading became central to an unusual market event. A large number of individual investors drove up the prices of heavily shorted stocks in an effort to challenge the positions of professional traders; however, the exact identities of those making these bets, and the proportion of new trades originating from individual versus larger investment groups, remains unclear.

Yesterday, after observing that some established online brokers had limited user access to certain securities due to their volatility, TechCrunch questioned Robinhood and other similar companies about whether they were implementing comparable safeguards.

One firm implemented some protective measures, while most emphasized their focus on long-term investing rather than frequent day trading. This stance, however, appears inconsistent with the fact that most free-trading applications generate income from the volume of customer trades. Furthermore, options and other complex trades typically provide neo-brokers with greater revenue than trades in established stocks.

Consequently, Robinhood’s recent actions are likely to reduce its revenue, as it is now restricting trading in several highly popular securities and other market-based investments.

This is not the first instance of neo-brokers facing a conflict between their business model and user access to more complex investments. Following a tragic incident where a Robinhood user died by suicide after trading options without fully understanding the risks, Robinhood took steps to make options trading more difficult to access. This was a prudent decision, but likely had a negative impact on revenue in the short term, considering the historical profitability of those trades for the company.

Options trading volume is currently at record levels. Overall trading volume is exceptionally high. And as of this writing, GameStop shares are expected to increase in value again when the market opens today. The situation continues to develop.