When Brokerages Restrict Retail Investors, Does the Game Stop?

79 Pages Posted: 17 Mar 2021 Last revised: 22 Nov 2021

See all articles by Charles M. Jones

Charles M. Jones

Columbia University

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

William Waller

Tulane University - Finance & Economics

Date Written: November 18, 2021

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.

Keywords: GameStop, retail investors, trading restrictions, abnormal returns, equity and options bid-ask spreads, open interest, implied volatilities, realized volatilities

JEL Classification: G12, G14, G24

Suggested Citation

Jones, Charles M. and Reed, Adam V. and Waller, William, When Brokerages Restrict Retail Investors, Does the Game Stop? (November 18, 2021). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3804446 or http://dx.doi.org/10.2139/ssrn.3804446

Charles M. Jones (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

William Waller

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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