After purchase ban: Trade Republic reaps shitstorm

On Thursday, the Berlin-based broker app temporarily blocked heavily traded shares such as those of Gamestop and Blackberry. After fierce criticism, it has now reversed course.

The battle between private investors and hedge funds in the USA reached the Berlin broker app Trade Republic on Thursday evening at the latest. For days, retail investors have been betting massively on shares in Gamestop, among others, and have at times driven prices up sharply. In doing so, they are going against professional investors who had bet on falling share prices for the ailing group.

The reason for the hedge funds' speculation: Gamestop's turnover has plummeted by 40 percent in the last three years alone , as reported by Wirtschaftswoche . A net loss of 140 million dollars is also expected for the 2020/21 financial year, which runs until January 31.

The small investors, who have organized themselves in various online groups on Reddit, apparently want to punish the hedge funds for betting on falling prices. Because if share prices rise, professional investors lose money. The hedge funds have bought individual shares short. They borrow shares from another investor for a certain period of time and sell them at the current market price, for example for 100 euros. If the price subsequently falls for this period, they buy them back at a lower price, for example for 60 euros. The resulting difference of 40 euros per share is their profit, minus borrowing fees. However, if they are wrong and the price per share rises, they make a loss - which is exactly what the community is trying to achieve. The problem with the community's tactics is that as soon as the small investors want to sell their shares again, the prices are also likely to fall. So anyone who bet too late on expensive Gamestop shares could make a loss and the hedge funds could win.

It is thanks to an unusual situation that things got this far in the first place. Hedge funds had previously sold individual shares heavily short. In such a short sale, investor A borrows a share from investor B for a certain period of time. During this time, he sells the share for EUR 100, for example, and buys it back before the end of his loan period, ideally for less than EUR 100. He is therefore betting on a fall in the share price. If the deal goes through, he collects the difference and the lender collects a small fee.

The founders of Trade Republic decided on Thursday evening to stop the purchase of shares such as those of Gamestop. "Due to the risks associated with extreme price volatility, we are temporarily blocking GameStop, AMC Entertainment, BlackBerry, Nokia, Express Inc. and Bed Bath & Beyond from further purchases. Existing options can still be reduced or sold," said a message from Neo-Broker to its customers.

The app was already experiencing technical problems on Thursday morning due to the high demand for share deals. Orders did not go through or could not be changed, even for stocks that fluctuated in value within a very short time due to the fight. Users shared screenshots of their error messages on Twitter and elsewhere.

Many customers did not take kindly to the blocking decided in the evening. Trade Republic is currently experiencing a veritable shtistorm. Some are even talking about market manipulation. "Any tips for a proper platform that doesn't manipulate the market and try to bleed private investors dry for hedges? Would love to move my portfolio completely," posted the well-known German Youtuber "Gronkh" on Twitter on Thursday. More than 10,000 users favorited this message alone within a few hours.

Niels Nauhauser from the Baden-Württemberg consumer advice center tweeted on Friday that he had already received dozens of complaints about Trade Republic, Comdirect and Deutsche Bank due to trading restrictions. In his opinion, such a performance promise by brokers in the manner of a landlord is unacceptable. "The argument that they want to protect customers from risks is a lie, because trading with risk is part of the business model."

In an interview with Finance Forward , Trade Republic co-founder Christian Hecker justifies this measure. "Due to the hype surrounding these US small caps and the extraordinary volatility, we have come to the conclusion that a temporary adjustment of the offer is necessary," he said there. He went on to say: "The current hype surrounding these mostly US small caps is an unprecedented case that we have not seen on the market before and which also entails considerable risk of loss."

On Friday morning, Trade Republic made a U-turn. In an email to its customers, the provider announced that it was lifting the restrictions again. "We have lifted this restriction. We expressly apologize for the temporary restriction of your freedom to trade," it says. The app justified the temporary block as follows: "In order to ensure the stability of trading for the majority of the market, we have decided to stop accepting buy orders for certain stocks for the time being."