Their consensus came after attention from a growing group of prominent lawmakers, including Sen. Elizabeth Warren (D-Mass.). The GameStop mania even came up repeatedly Wednesday in a press conference by Federal Reserve Chair Jerome Powell, who declined to comment on it. On Thursday, Sen. Sherrod Brown (D-Ohio), the incoming chair of the Senate Banking Committee vowed to hold a hearing on the stock market.
“We need more regulation and equality in the markets,” Rep. Ro Khanna (D-Calif.) said in a statement blasted to the press Thursday morning that criticized what he said was the favorable treatment being given to hedge funds. That followed a tweet by Warren on Wednesday saying it’s “long past time for the SEC and other financial regulators to wake up and do their jobs.”
Lawmakers angered by the brokerages’ move to curb trading said the financial industry was seeking to benefit hedge funds and other sophisticated investors over retail investors. Even as access was cut off, Reddit users were urging each other to buy stock in companies where hedge funds were holding so-called short positions — betting against a stock — in what some users said was a deliberate effort to cause further losses to the wealthy players.
Broker-dealers that offer popular trading apps for retail investors to buy stocks on Thursday temporarily cut off access to shares that have seen frenzied rallies in recent days, including GameStop and movie theater operator AMC, both of whose businesses have been especially hammered by the pandemic.
Both Robinhood Financial and Interactive Brokers said they were limiting access to certain stocks and were taking other steps to curb trading in response to the rallies, which have been driven by users on a stock market-related subcommunity of users on Reddit called “r/WallStreetBets.”
That triggered outrage from Reddit users, one of whom filed a class action lawsuit alleging breach of contract in federal court in the Southern District of New York.
Ocasio-Cortez and Trump Jr., in an unusual meeting of the minds, were among those cheering on the Reddit phenomenon.
“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” Ocasio-Cortez wrote in a tweet.
She said in a subsequent post that Robinhood’s move to cut off retail access “while hedge funds are freely able to trade the stock as they see fit” was “unacceptable.”
Cruz later reposted Ocasio-Cortez’s tweet with the comment: “Fully agree.”
TrumpJr/status/1354793103090212865?s=20″ target=”_blank”>Added Trump Jr.: “It took less than a day for big tech, big government and the corporate media to spring into action and begin colluding to protect their hedge fund buddies on Wall Street. This is what a rigged system looks like, folks!”
“This entire episode has demonstrated the power of technology to democratize access to American financial institutions, ultimately giving far more people a say in our economic structures,” Khanna said. “This also showed how the cards are stacked against the little guy in favor of billionaire Wall Street Traders.”
Other lawmakers soon said they would hold hearings, including Brown and Rep. Maxine Waters (D-Calif.), who chairs the House Financial Services Committee.
The White House and the Securities and Exchange Commission had a more measured response, merely saying they were monitoring the situation.
After years of slumping share prices that dipped below $3 at one point in 2020, GameStop‘s stock began skyrocketing in January after purchases by Reddit users. By Thursday, the price crested to nearly $470 a share when markets opened, only to tumble hours later on news of the clampdown in trading. While prices recovered slightly after noon, the stock fell more than 40 percent on the day even as the Dow Jones Industrial Average rose by 300 points after suffering a steep decline in the previous session.
A lot of damage has already been done to hedge funds. App users celebrated in posts on Reddit after learning that Melvin Capital decided to exit its short position on GameStop as small investors continued to relentlessly buy shares. That was after the fund got a nearly $3 billion loan to pay off the costs of its short position, the Financial Times reported.
Broker-dealers providing the trading apps have the ability to restrict retail investor access to certain stocks and other investment choices such as options or futures. That’s because they are required to follow federal regulations designed to protect retail investors, such as a requirement that brokers must not offer customers investments they don’t understand.
Brokers can also restrict stock activity based on volatility.
The exchanges and the SEC have the power to halt trading in stocks if they suspect illegal activity including market manipulation is taking place. But so far, they have not done so for these stocks.
Robinhood told users in a blog post Thursday that “in light of recent volatility, we are restricting transactions for certain securities to position closing only,” for numerous stocks, including GameStop, AMC, BlackBerry Ltd., Nokia Oyj, Express, as well as home goods retailer Bed, Bath & Beyond. Additionally, Robinhood will also be raising margin requirements for “certain securities,” the popular broker-dealer added, without elaborating on which ones.