Top Wall Street analyst: Brokers limiting trading was a 'credible and responsible action'

Published Fri, Jan 29 20212:47 PM EST

(This story is for CNBC Pro subscribers only.) A top Wall Street analyst is defending e-brokers' decisions to limit trading in the so-called Reddit stocks amid a "whirlwind" of trading that generated increased risk for brokerages and their clients. Over the past five trading days, the popular tickers, like GameStop and AMC Entertainment, made up between 4.6% and 7.6% of total U.S. equity volumes, compared to the 0.05% of volumes the group comprised prior to the Reddit hysteria, according to the firm. "We suspect the actions of the eBrokers were a credible and responsible action to mitigate a whirlwind of unforeseen trading conditions driven by the recent retail activism in the marketplace," said Piper Sandler analyst Richard Repetto, who has covered the brokers and exchanges for years on Wall Street. Amid "retail activism" in some highly shorted names like GameStop e-brokers were forced to put restrictions on the trading of certain securities on Thursday. The broker's decisions were driven by an increased concentration of risk generated by the outsized volume and volatility in the names. Brokers also cited increased clearinghouse capital and deposit requirements. "These increased capital requirements drove some restrictions of the trading of 'Reddit Stocks' by all the large eBrokers, statements from IBKR Chairman Thomas Peterffy about concerns on the 'integrity of the market' and at least one of the eBrokers (Robinhood) raising capital as a result," said Repetto, who spoke to Robinhood and Interactive Brokers on Thursday. While the broker's decisions were met with customer outrage, Repetto said the actions taken were for "risk management" and were not an effort to "save the customers from themselves." "If they can do another trade for a customer, the will absolutely do it," Repetto said Thursday evening on CNBC's "Fast Money. " "If they can do another trade they're going to get paid for another trade in payment for order flow. They want to see more trading." Repetto also said similar concern over clearinghouse deposit requirements occurred during the height of the pandemic during the retail trading boom. "When you put enough stress on the system you can have some not so good things happen like we did with Lehman Brothers," Repetto added.

In this photo illustration, the Interactive Brokers LLC logo seen displayed on a smartphone.

Igor Golovniov | LightRocket | Getty Images

(This story is for CNBC Pro subscribers only.)

A top Wall Street analyst is defending e-brokers' decisions to limit trading in the so-called Reddit stocks amid a "whirlwind" of trading that generated increased risk for brokerages and their clients.