Investing.com — The U.S. stock market was set for another showdown between retail traders and hedge funds on Friday, as an army of small-scale investors prepared to resume the squeeze on short positions held by Wall Street professionals.
The tug-of-war has generated extreme high trading volumes all week, culminating in the decision of various online brokerages to restrict trading in a handful of particularly hot stocks – notably video games and hardware retailer GameStop (NYSE:) and movie theater operator AMC Entertainment (NYSE:) – on Thursday.
The restrictions triggered intense anger among retail traders, many of whom interpreted them as evidence of a system rigged against them by high finance. The brokerages responded mainly by citing margin and capital requirements from their clearing houses. Many of this week’s movements have been amplified by the use of options and other forms of leverage; the high volatility has triggered big and frequent adjustments to margin requirements from clearing houses.
The brokerage attracting the most censure was Robinhood, whose commission-free trading platform has become synonymous with the retail day-trader community. It was accused of putting the interests of its hedge fund backer and trading partner Citadel ahead of those of its customers. Citadel – which helped rescue Melvin Capital, a hedge fund squeezed out of its short position on GameStop, earlier this week – denied any impropriety. according to reports.
“It is a remarkable activity in the market this week, and one which is yet to be determined as healthy or otherwise,” said Jonathan Squires, chief executive of Capital.com, a London-based brokerage which didn’t impose any trading restrictions on Thursday. Squires said Capital has no plans to impose any on Friday either. He said the week had been an emphatic demonstration of how brokerages such as his are disrupting the U.S. financial market.
Robinhood had said on Thursday evening that it will lift most restrictions on Friday. However, it is keeping some in place for trading in partial stocks, which are popular with small investors. An advisory issued on Thursday by TD Ameritrade (NASDAQ:) (bought last year by Charles Schwab (NYSE:)) remained in place on Friday morning. It banned short put positions and all margin-based trading in some 19 stocks but said normal buy and sell orders could still be processed.
The short-squeeze in GameStop stock was particularly acute, largely because more shares were sold short than were actually available in the company’s free float. Citron Research, one of the short-sellers stung by the move in GameStop, now intends to stop publishing short reports, its founder Andrew Left said on Friday.
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