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GameStop Resumes Surge As Robinhood Lifts Buying Restrictions And Reddit Retail Army Returns

The heavyweight battle between 'Wall Street' and 'Main Street' looks set to resume Friday as online brokers like Robinhood lift trading restrictions on heavily-shorted stocks such as GameStop and AMC Entertainment.

GameStop Corp.  (GME) - Get GameStop Corporation Report shares resumed their meteoric rise Friday, with recently popular stocks such as AMC Entertainment  (AMC) - Get AMC Entertainment Holdings Inc. Class A Report and Bed, Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report following suit, as online brokerage firms lifted trading restrictions and the battle with establishment Wall Street rumbled on.

The limited return to trading appears to have quelled, for the moment at least, a chorus of outcry on social media platforms yesterday that accused the owners of Robinhood, as well as other commission-free brokerage firms such as Interactive Brokers  (IBKR) - Get Interactive Brokers Group Inc. Report, of blocking purchases on active stocks in order to protect damage hedge funds.

Robinhood CEO Vlad Tenev told CNBC that the decision was taken on the basis of group-level funding linked to deposit requirements at clearing house and regulations set out by the Securities & Exchange Commission.

Irrespective of the reasons for the shutdown, even limited returns for the retail trading force has rattled Wall Street Friday, boosting the market's key volatility gauge to the highest levels in three months and pulling stocks lower in major economies around the world. In fact, yesterday's action on Wall Street trigged an overall market volume of 19.5 million shares, well ahead of the 20-day average of 14.8 million.

“The market action has been a wakeup call and retail traders are likely to continue to be a force to be reckoned with, which will likely permanently affect the business models of institutional investors," analysts at Barclays noted Friday. 

GameStop shares were marked 83% higher in early trading Friday to change hands at $354.30 each, with AMC rising 53.5% to $13.25 and Bed Bath & Beyond jumping 11.3% to $37.44 each.

The 'Wall Street v Main Street' dynamic has also shifted to Washington, with U.S. lawmakers planning to hold public hearings into the week's events, with a focus on the brokerage firms that restricted trading in certain stocks during the peak of the market's power early Thursday morning.

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"People on Wall Street only care about the rules when they're the ones getting hurt," said Senator Sherrod Brown, a Democrat who will chair the upper chamber's Banking Committee.

The Securities & Exchange Commission issued a statement Friday vowing to "protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws."

"Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities," the statement added.

Commonwealth Financial Network's chief investment officer, Brad McMillan, isn't so sure the rules need any major changes, arguing instead that the Reddit investors "found a way to hack the system by generating more buying demand than their actual investments" through the purchase of call options. 

A call option buyer has the right, but not the obligation, to own shares of a company at a certain price at some specified point in the future. He or she might think owning a call option on GameStop with a $350 strike price, when shares are trading at $300, is a better way to play the stock's momentum. But it can also lead to steep loses if the share price falls and the options expire worthless.

Furthermore, options sellers will often buy the underlying stock in the open market as its price moves higher, in order to hedge their risk, creating a virtuous, but potentially ephemeral, circle of ever-higher prices. 

"Until now, the risk of a melt-up (from options buying) seemed entirely theoretical, so market makers did not include them in their pricing," he added. "That practice will very likely change, making it much costlier for investors to use options to hack prices."