When Brokerages Restrict Retail Investors, Does the Game Stop?

Abstract

We study a set of trading restrictions that limit equity and/or options positions imposed by retail-oriented broker-dealers in 38 stocks, including GameStop. Using brokerages’ capital requirements from the National Securities Clearing Corporation (NSCC) and the exact timing of restrictions, for identification, we find large stock price effects: CARs average -13.54% within two hours following a stock’s first trading restrictions and -51.97% after five trading days. When restrictions are lifted, share prices do not rebound. When traders substitute options for equities, options volume and open interest spike, as do implied volatilities, which rise more than realized volatilities. Options purchasers overpay, creating large transfers to options sellers and market-makers. Margin increases show similarities and differences relative to trading restrictions.