Are Brokerage Restrictions on GameStop and Other Stocks Illegal?

It might be frustrating for some of you to see what’s happening right now with GameStop (GME), but are broker restrictions really illegal?

Here’s my take, then I want to hear yours.

Right or wrong, the restrictions being placed on GME and other stocks right now are allowed by SEC/FINRA - the entities that regulate and enforce securities trading rules - and are spelled out in the ‘Terms of Service’ every brokerage customer signs when they open their account.

But the real reason these brokerages are enacting trade restrictions has more to do with their survival due to the brokerage’s role in transacting stock buys and sells.

The brokerage stands between the retail investor and the exchanges and helps facilitate transactions between the two.

The exchanges don’t see “Bill Smith’s” account, they only see the TD Ameritrade, E*Trade, Schwab, etc. account, meaning they see the broker as holding “X” shares of a stock, $GME for example, not how it’s distributed among brokerage’s clients.

In fact, when the exchange receives an order from a broker it doesn’t know – or care – if it is an opening or closing trading, only if it is a buy or a sell.

The brokers are responsible for submitting the correct orders (buy or sells) - and in the correct share sizes - to the exchange on the behalf of their clients.

Once order confirmations come back from the exchange they then “allocate” them in real-time to individual client accounts.

At the end of the day, after the close, they reconcile all the buys and sells to make sure they balance out on their reconciliation reports. And if they overbought – or oversold – they, not the exchange, are on the hook.

This is why in fast markets, with insane volatility around stocks like $GME, they will put in restrictions to slow or even halt trading in a stock. Because any mistakes are on them. And a big one could blow them up.

So that’s my take. I’d love for you to weigh in below and tell me yours - but please keep it civil, we’re all friends here, or should be.

-B