- Robinhood and other brokerages have limited trading of volatile stocks like GameStop and AMC.
- New Constructs CEO David Trainer told Insider that such restrictions could cause a market sell-off.
- The S&P 500 dropped more than 2.5% this week amid the volatility.
- Visit Business Insider’s homepage for more stories.
As an army of Reddit traders bid up share prices of several of Wall Street’s most shorted stocks, brokerages including Robinhood and TD Ameritrade restricted trading of the targeted securities.
The moves sparked ire from many on the argument that markets and price discovery ought to be free.
But according to the CEO of a Wall Street research firm, the brokerages may trigger something else in the coming days: a massive market crash.
David Trainer, who heads New Constructs, told Insider on Friday that he thinks brokerages’ actions to halt certain trades this week will sow widespread distrust in the markets among retail investors, leading them to pull their money from accounts.
This, combined with the “new normal” narrative that he says is propping up current sky-high valuations, could bring about a steep drop, he said. The S&P 500 was rocked this week by a 3.6% decline, its worst since October, amid the retail-trading frenzy and after a rapid rise that had many experts worried about a market bubble.
“The new normal depends on the trust of the individuals – they hold a lot of power right here, as they are starting to exercise as we’re seeing in individual names. They hold similar power over the overall market. If they say ‘to hell with it, I’m out,’ we could see a significant and prolonged decline,” Trainer said.
“What would you do if you had a bunch of money in a stock and it had done really well and TD Ameritrade or Robinhood said, ‘oh by the way, we’re not letting you trade this today,’ when you know everyone else is trading it,” he added.
While Trainer did not want to provide a specific percentage the market could fall by, he said he had in mind a sell-off similar to last year’s 35% crash, and added that “it could be maybe one of the worst ever.”
Most investors no longer care that equities are extremely expensive. But speculative excess plus an expensive market make for a particularly volatile cocktail.
In addition to his bearish warning, Trainer also criticized what he thinks is a double standard from major Wall Street players in that larger entities are allowed to play by a different set of rules than retail traders.
He argued that hedge funds and brokerages being able to see trader flows before the market opens and then acting on this information is no different than what retail traders have been doing this week.
Trainer also refuted the statements made by brokerages that they restricted trades due to issues related to their clearinghouses and not to protect hedge fund clients, who had shorted the stocks.
“Absolutely they’re trying to protect their big clients,” he said. “Look, how much of the order flow from Robinhood goes to Citadel, who had multiple short positions in GameStop. These are not conspiracy theories, these are true.”
Citadel and other hedge funds like Point 72 have denied accusations of conspiracy with brokerages to halt the trading of certain stocks.
Yet while Trainer sides with retail investors’ right to trade freely, he said he sees GameStop’s stock falling to $40-50 and urged traders to exit positions before such a drop occurs.
Other perspectives on how Reddit-driven mania will affect the broader market
Others on Wall Street in recent days have contradicted Trainer’s view that a broader market sell-off will result from the rampant speculation and trade halting from brokerages this week.
“While these developments could be another sign of excessive optimism in certain segments of the equity markets, we do not believe they represent a sign of a broader market bubble or indicate a major correction is forthcoming,” Ryan Detrick, chief market strategist at LPL Financial, said in a statement. “Don’t forget, overall market breadth is extremely healthy and the credit markets are functioning just fine – we don’t see a repeat of 1999 like some are claiming.”
Nigel Greene, CEO of deVere Group, which manages $10 billion, said in a recent note that, “in today’s landscape, it is not the macro-bubble of which investors should be wary. Any potential bursting of bubbles is likely to be within specific stocks, so unlikely to rock the global financial markets as has happened previously.”
Wall Street’s major investment banks also remain bullish in the mid-to-long term.
However some have begun to caution that heightened investor sentiment and some technical measures of exhaustion could lead to a brief period of underperformance in the weeks ahead.