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Ameritrade, a popular US-based trading platform owned by Charles Schwab, and Robinhood, an American financial service company, have suspended GameStop (GME) trading following the recent controversy.
Simultaneously, the former SEC Chair Jay Clayton said that the traditional financial markets need significant readjustments as they are not functioning in everyone’s best interest.
Ameritrade And Robinhood Halt GME Trading
The saga around a video game company struggling for years to revamp its business to fit the digitalization phase called GameStop. Its shares, which have been gradually declining for quite some time, garnered the attention of Wall Street giants, and they became the most shorted stocks, according to CNBC.
However, retail investors decided to act against the established status-quo. A designated Reddit group with exponentially rising subscribers of millions of people teamed up and used low-cost trading platforms to pump the GME price by triple-digit percentages in days, which started a snowball effect.
Because of the unique way that short positions work, as investors have to borrow the stock, sell it, and then rebuy it to return it to the lender, Wall Street was caught off guard. When investors with sizeable positions had to bail out to cut their losses, they actually needed to buy the stock, which resulted in what’s known as a short squeeze and later even a gamma squeeze.
According to estimations from the financial analytics company S3 Partners, short-sellers lost over $23 billion with GameStop alone. These developments raised further concerns among regulators and exchanges, as Nasdaq’s CEO suggested that they could halt stocks from trading in similar conditions.
Ameritrade actually proceeded with suspending GME trading. The founded in 1975 online trading platform, owned by the Charles Schwab Corporation, claimed that the decision came “out of an abundance of caution amid unprecedented market conditions and other factors.”
Additionally, reports emerged that another online trading giant, Robinhood, has followed Ameritrade’s example with halting trading for several stocks, including GME. Popular trader Dave Portnoy responded by threatening to “burn Robinhood to the ground if they shut down free market trading.”
The WallStreetBets group that started the whole thing also reacted by urging retail investors and followers to delete the Robinhood application from their devices.
Former SEC Chair Approves Retail Interest
All eyes are on GameStop following the craze as various prominent names offered their opinion and possible explanation on what had transpired and how can the system improve.
Jay Clayton, the former Chairman of the Securities and Exchange Commission, the body that needs to protect all investors, said that he “applauds” retail investors’ participation. However, he warned that if regulators and long-time market participants locate any possible behavior of manipulation, they need to “root it out.”
“Anytime there are departures from fundamentals and volatility like this, there’s the opportunity for people to get really hurt, and there’s the opportunity for fraudsters and bad actors to take advantage of it.”
He also addressed the concerns that Wall Street representatives are not obliged to disclose their short positions immediately, unlike their long trades. As such, the lack of clear regulations in both directions could allow shady market behavior, which Clayton believes needs to be dealt with.
“If you are doing one thing and saying another, that’s inappropriate behavior. In many cases, it’s unlawful, and nobody should be doing it, whether it’s traditional pump-and-dump or more sophisticated forms of manipulation. That should be rooted out.”