The Spread: Game Over

Matt Raebel

Matt Raebel

Editor

CORRECTION: Robinhood temporarily halted the buying of certain securities, not the sale of those securities.

Welcome to The Spread, I’m Matt Raebel.

This week, one company’s stocks skyrocketed due to the coordinated trading of retail investors – and for once, I’m not talking about Tesla.

Momentum trading is when investors buy stocks whose prices are actively rising, and sell them when they think the stocks have peaked. This happened with Tesla’s stock more often than not last year. The most recent case of runaway momentum trading is GameStop, a large entertainment retailer that makes most of its money selling used video games and preorders for upcoming games. This week users in investment communities on Reddit, like WallStreetBets, bought shares and tons of options on struggling companies like GameStop, causing GameStop’s stock value to skyrocket and post year-to-date gains exceeding more than seventeen hundred percent. This resulted in market volatility that caused major losses across the board for a lot of hedge funds who had been short sellers of the stocks.

The flood of orders triggered 44 circuit-breaker halts on Wednesday morning, and things got so crazy that on Thursday, Robinhood temporarily blocked its retail customers from purchasing certain securities, including GameStop, and also raised margin requirements for those securities. Later that day, a class-action lawsuit was filed against Robinhood for restricting trading by some of its users for “depriving them of investing in the open market in the midst of an unprecedented stock rise.”

This was the biggest story of the week for a lot of reasons – from a regulatory perspective, for example, it poses interesting questions, like, “should securities regulators step in when stocks like GameStop inflate to potentially problematic levels?” The long and short of it is, events like this make a lot of waves and rocky markets. A little volatility is good now and then, but this is a horse — or should I say bull — of a different color.

As exciting, horrifying, hilarious, or whatever your reaction to this story was, it wasn’t the only important story to come out of the options trading world this week. On January 27, the E.U. released a statement declaring a recognition of equivalence for U.S. CCPs, – that’s central counterparty clearinghouses. Basically, this means that clearing houses on Wall Street and throughout the U.S. will be able to operate throughout the E.U. Good news for the U.S. and the E.U. As for the U.K., whose clearing houses are only approved to operate in the E.U. until June of next year – not so much.

That’s it for The Spread this week. We’ve published new content on John Lothian News dot com, including new articles by Thom Thompson and Suzanne Cosgrove, as well as a new edition of our “Open Outcry Traders History Project,” so check out our site for all of those and more. Until next time – stay safe and happy trading.

Sources:

How GameStop’s Reddit- and Options-Fueled Stock Rally Happened
Alexander Osipovich – WSJ
http://on.wsj.com/39m59x8

How Reddit day traders are using the platform to upend the stock market and make money in the process
Ben Winck – Business Insider
http://bit.ly/3ouTNv9

‘Weaponised’ options trading turbocharges GameStop’s dizzying rally
Robin Wigglesworth – FT
http://on.ft.com/3cmWXyV

Hedge funds retreat in face of day-trader onslaught
Ortenca Aliaj, Colby Smith, Eric Platt and Michael Mackenzie – FT
http://on.ft.com/2NyGOf9

Reddit-Fueled Traders Trigger Volatility Halts Across Market
Bailey Lipschultz – Bloomberg
http://bloom.bg/3cm7pX5

Robinhood Blocks Buying in GameStop, AMC, and Other Stocks. Other Brokers Also Add Guardrails.
Avi Salzman – Barron’s
http://bit.ly/3sZuSDD

Class-action lawsuit filed against Robinhood for restricting trading
Chris Mills Rodrigo – The Hill
http://bit.ly/2YrMHwM 

EU opens up to US clearing houses in blow to City of London
Stefan Boscia – City A.M.
http://bit.ly/2YqW3ZU

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