Social-fueled stock surges mean uncharted territory for the modern market

Friday, January 29, 2021 by Robinhood Snacks | Disclosures

Quick recap... Over the past few weeks, some “underdog” stocks have seen meteoric rises thanks to mass buying campaigns stoked through social media (mainly Reddit, via the subreddit r/wallstreetbets). Example: from January 11th to January 27th, GameStop shares surged 1,600%, and AMC stock soared 800%. Nokia, BlackBerry, Tootsie Roll, and others also skyrocketed on the unprecedented social momentum.

  • On Wednesday, the New York Stock Exchange temporarily paused trading of GameStop, BlackBerry, and AMC, citing volatility.
  • Also Wednesday: Schwab’s TD Ameritrade limited certain transactions of some high-flying stocks. But the stocks still finished the day up significantly.

And then, yesterday happened... Some brokerages, including Robinhood, E-Trade, and Webull, temporarily restricted certain trading activity in symbols like GME. Investors of the restricted companies were only allowed to hold or sell shares (not buy more). Meanwhile, some brokers increased margin requirements (the percentage of the purchase investors need to fund themselves rather than borrow). Then...

  • The stocks that were paused plunged. GameStop fell 44% yesterday, while AMC dropped 57%. Brokers cited financial and regulatory reasons for these moves. Some investors lost money, and many were angry (disclosure: Robinhood, which owns Robinhood Snacks, made a public statement).
  • TLDR: Brokerages need to meet certain regulatory net capital and clearinghouse deposit requirements to remain compliant and ensure that trades go through properly. These requirements can rise as certain stocks become more volatile/risky.

This is an unprecedented moment in the market... From the rise of commission-free retail investing, to the surge of social-driven buying campaigns targeting hedge funds, we're moving into new territory for how the stock market operates. There's still a lot we don't know about this new reality and how it’ll unfold – including if structures, rules, or regulations will change to adapt to it.