Schwab, TD Ameritrade Tighten Margin Requirements for AMC, GME
Robinhood, TD Ameritrade and Charles Schwab have all restricted stock trading during January’s short squeeze. With volatility lessons under the belt, TD Ameritrade and Schwab announced beforehand they will not restrict either buying or selling of AMC and GME—but there are some restrictions to take into account.
Hedge Funds Lost at Least $12 Billion for Betting Against GME and AMC
Animus toward Wall Street hedge funds is a powerful force that both AMC Entertainment (AMC) and GameStop (GME) have put to good use. At the beginning of June, retail traders gained 80% of AMC shares resulting in the movie theater chain developing AMC Investor Connect to further fortify the relationship. Altogether, this quarter alone, AMC raised $1.2 billion in capital.
Likewise, GameStop raised $1.13 billion last week, still enjoying over 900% valued shares since the beginning of the year. However, it is anyone’s guess if both AMC and GME will maintain their existing valuations in a few years time as they clash with their mortal enemy – a transition from physical to digital content delivery.
The digital space is filled with the likes of Steam, Amazon, Disney, and Epic Games, to just name the few high-powered e-commerce veterans. Others claim there’s no experience like physically going to a cinema, or visiting the local GameStop to join fellow gamers. After over a year of economic lockdowns in several regions, many say it’s hard to argue with the latter.
In the meantime, AMC and GME are holding relatively steady for the last month, with only GME suffering a severe 27% dip from June 9th to June 10th after revealing its at-the-market equity offering program.
Nonetheless, such a price dip was no comfort for short-sellers, who have thus far accumulated at least $12 billion in losses – about $7.3 billion from betting against GME and $4.5 billion against AMC – according to data from S3 Partners. Last week, the first hedge fund kicked the proverbial bucket – London-based White Square Capital – shutting down operations because of “oversupply of capital”, meaning adamant retail traders.
Schwab and TD Ameritrade Follow Up on NSCC’s Risk-Shoring Rule
This summer, everyone is tightening loose ends and preparing for the fallout of the big short-squeeze. There are other so-called meme stocks in play, but the focus is primarily on GME and AMC, just like it was from the beginning of the showdown. Last week marked the regulatory culmination of this prep, with the NSCC (subsidiary of DTCC) implementing a new rule – SR-NSCC-2021-002 – to check members’ deposits on an intra-day basis instead of monthly.
It was predictable that stock brokerages would follow suit, trying to minimize their risk by tweaking margin requirements for both GME and AMC. Interestingly, Charles Schwab Investment Management is ranked fourth as the institutional stakeholder in GME, but only at 1.41%. The first rank belongs to none other than BlackRock at 12.02%.
Schwab and TD Ameritrade’s Updated Margin Rules Explained
- 100% margin requirement for long positions.
- 200% margin requirement for short positions.
- Long calls, long puts, covered calls, selling naked calls, and selling short put options are all permitted provided you have sufficient funds for margin requirements.
- 100% margin requirement for long positions.
- 300% margin requirement for short positions.
- Selling naked calls is prohibited.
TD Ameritrade is more generous with 100% margin requirement for all stocks, but is also prohibiting short selling on GME stock alongside prohibiting custom spreads. Standard spread orders that are allowed are:
“Verticals, Back/Ratio, Calendar, Diagonal, Straddle, Strangle, Covered Stock, Collar, Butterfly, Combo, Condor, Iron Condor, Vertical Roll, Collar with Stock, Double Diagonal and Double Calendar.”
TD Ameritrade leaves itself with an open room to change rules on the fly, noting it may put in place more requirements on both AMC and GME that expire on July 2nd.
These heightened requirements and guarded language clearly suggest that short selling these stocks poses an extreme risk. Keep in mind that with margin trading, traders buy stocks they can’t afford at the moment. Instead, the broker lends them the money for the shares while keeping them as collateral.
Hedge funds would love to divert retail traders’ attention from the two focal stocks – GME and AMC. Have you participated in the short squeeze of any other stocks? Let us know in the comments below.