GameStop Trading Restrictions Explained

What Happened

In late January 2021, GameStop (GME) stock exploded from ~$20 to nearly $500 in days, driven by Reddit's r/WallStreetBets community. The "meme stock" frenzy was on.

Then on January 28, 2021, Robinhood and several other brokers restricted buying of GameStop and other volatile stocks. Users could only sell—not buy. The stock plummeted from $483 to $112 that day.

Outrage was immediate and bipartisan. Congressional hearings followed. Conspiracy theories flourished.

Why Restrictions Happened

The real reason was boring but important: collateral requirements.

How Trade Settlement Works

When you buy stock, settlement takes time (then T+2, now T+1). During settlement, clearinghouses (like DTCC) require brokers to post collateral to cover potential losses.

Normally this is routine. But during the GME frenzy:

• Trading volume exploded (millions of orders)
• Stock volatility was extreme (50%+ daily swings)
• Collateral requirements spiked exponentially
• Robinhood received a $3 billion collateral demand from DTCC

Robinhood's Problem

Robinhood didn't have $3 billion in cash. They negotiated it down and raised emergency funding, but had to restrict buying to reduce collateral requirements. Allowing only selling meant fewer new positions requiring settlement.

Was It a Conspiracy?

The popular theory: Robinhood colluded with hedge funds (especially Citadel, who both pays for Robinhood's order flow and invested in Melvin Capital, which was short GME) to protect their losses.

Evidence Against Conspiracy

• Multiple brokers restricted trading, not just Robinhood
• Congressional investigation found no evidence of collusion
• The collateral/capital issue was real and documented
• Fidelity (no PFOF relationship with Citadel) didn't restrict because they had sufficient capital

What Was Problematic

• Robinhood's communication was poor—they didn't explain why initially
• The restrictions benefited short sellers regardless of intent
• Robinhood's capital position was inadequate for their user base
• Trust was shattered, whether justified or not

Which Brokers Restricted Trading

What Changed After

T+1 Settlement

Partially due to this event, the SEC moved to T+1 settlement (effective May 2024). Faster settlement means less collateral required, reducing the risk of similar restrictions.

Broker Capital Requirements

Robinhood raised billions in capital post-crisis. They're now better positioned to handle volatility.

Customer Awareness

Investors now understand that broker choice matters. Fidelity's handling of the situation (no restrictions) drove significant account inflows.

Lessons for Investors

1. Broker Capital Matters

Well-capitalized brokers (Fidelity, Schwab, Vanguard) didn't need to restrict trading. Size and stability have value.

2. Diversify Brokers

Having accounts at multiple brokers means you're not locked out if one restricts trading.

3. Understand Clearing

The boring mechanics of trade settlement can matter in extreme situations.

The Bottom Line

The GameStop restrictions were likely caused by capital/collateral requirements, not conspiracy. But that doesn't excuse Robinhood's inadequate preparation for their own user base, or their poor communication during the crisis.

The event highlighted a real benefit of using well-capitalized brokers. When volatility spiked, Fidelity and Vanguard customers could trade freely. That's worth something.