• Several brokerages, including Robinhood and Interactive Brokers, have frozen new buying of GameStop, AMC Entertainment Holdings Inc, and other shares.
  • Unilateral moves by intermediaries have a chilling effect on those interested in participating in financial markets.
  • Defending investors’ interests – whether retail traders or hedge funds – should be left to regulators.
  • Access to the free market should be a right everyone enjoys equally.

“Reduce-only mode” is a message that shocked Robinhood traders who attempted to trade in GameStop Inc (NYSE: GME) and other companies such as AMC Entertainment Holdings Inc (NYSE: AMC) on Thursday. New positions could not be opened and existing ones could only be reduced or closed. Interactive Brokers followed suit shortly afterward.

These platforms have stated that they are mitigating risk for clients, but for whom exactly? The move prevents retail traders from stocking up on shares of specific companies and pushing their valuations higher. By banning new buying, brokerages have sided with hedge funds, which have taken short positions.

The “solution” made things worse. In the name of protecting retail traders, brokers harmed them. GME price plummeted from nearly $500 to $112.

Yes, Robinhood is squeezing small traders and bailing out hedge funds.

FXStreet sees these actions not only as misguided but also as a dangerous precedent.

High volatility around GME, AMC, and many other stocks is a result of financial markets’ growing reach – which is a blessed development. Robinhood’s low fees prompted other brokerages to offer competitive commissions even before the pandemic. These changes were critical to making markets accessible to the masses that FXStreet endorses. 

The entry of a new generation of retail traders means many newcomers may potentially lack knowledge. However, this is not a justification to shut all retail traders off.  

First, because among small investors, there are very smart and knowledgeable ones.

Secondly, because financial markets must be for everyone. Anybody is capable of learning and mastering them if given the opportunity.

By banning customers free access to the market, the message is clear: you are a second-class player, you are not allowed to win.

The most worrying aspect of these developments is the brute force in which trading platforms took matters into their hands. Decisions on banning short positions, halting trade via circuit breakers or such “reduce-only” modes should be in the hands of regulators. Authorities are accountable to the public, while brokerages may have conflicts of interest.

FXStreet calls on brokerages to give people efficient access to markets at the best price possible. It is not up to them to decide whether customers can or cannot buy a stock that is publicly floating.

FXStreet also calls on financial supervisors in the US and elsewhere to ban such unilateral action by brokers and set clear rules for dealing with highly volatile situations. That would restore trust in markets, trust that has eroded with retail traders’ kneecapping. 

Finally, FXStreet wants to address retail traders. Financial markets are yours as well. Do not let anybody deny you access.

A free market must be for everyone, or it won’t be.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

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