After purchase ban: Trade Republic reaps shitstorm

On Thursday, the broker app from Berlin temporarily blocked heavily traded stocks such as those of Gamestop and Blackberry. After heavy criticism, there has now been a U-turn.

The battle between private investors and hedge funds in the U.S. reached the Berlin-based brokerage app Trade Republic on Thursday night at the latest. For days, small camps have been betting massively on shares of Gamestop, among others, and have thus driven prices up sharply at times. In doing so, they are going against professional investors who had bet on falling prices of the ailing group.

Reason for the speculation of the hedge funds: The sales of Gamestop have fallen alone within the past three years by 40 percent as the Wirtschaftswoche

reports. It is also expected a net loss of 140 million dollars for the year 2020/21, which still goes to 31 January.

The small investors, who have organized themselves into various online groups on Reddit, apparently want to punish the hedge funds for betting on falling prices. After all, if prices go up, the professional investors lose money. That's because the hedge funds have been shorting individual stocks. In doing so, 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 then falls for this period, they buy them back again at a lower price, for example 60 euros. The resulting difference of 40 euros per share is their profit, minus lending fees. If they are wrong, however, and the price per share rises, they make a loss - which is exactly what Community is trying to do. The problem with the Community's tactics: as soon as the small investors want to sell their shares again, the prices are likely to fall as well. So those who bet too late on expensive Gamestop stock could lose, and the hedge funds win.

The fact that it got this far in the first place is thanks to an unusual situation. Hedge funds had been heavily shorting stocks individually beforehand. 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, say, 100 euros and buys it back before the end of his loan period, in the best case for less than 100 euros. In other words, he is betting on a fall in the share price. If the deal goes through, he collects the difference, and the lender a small fee.

Trade Republic's founders decided Thursday night to stop buying stocks like Gamestop's. "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 may continue to be reduced or sold," a message from the neo-broker to its clients said.

As early as Thursday morning, the app was experiencing technical problems due to high demand for stock deals. Accordingly, orders did not go through or could not be changed and that even with the values that fluctuated in value within a very short time due to the fight. Users shared screenshots of their error messages on Twitter, among other places.

For many customers, the suspension decided in the evening did not go down well. Trade Republic is currently experiencing a real shtistorm. Some even speak of market manipulation. "Anyone have tips for a decent platform that doesn't engage in market manipulation and tries to bleed private investors for hedges? Would love to move my portfolio completely," posted, for example, the well-known German Youtuber "Gronkh" on Twitter on Thursday

. More than 10,000 users favorited that message alone within a few hours.

Niels Nauhauser of the consumer watchdog Verbraucherzentrale Baden-Württemberg tweeted on Friday

that he had already received dozens of complaints about Trade Republic, Comdirect and Deutsche Bank over trading restrictions. In his estimation, such a performance promise by the brokers in the manner of a lord of the manor is unacceptable. "The argument that you want to protect customers from risk is mendacious, because trading risk is part of the business model."

In an interview with Finance Forward , Trade Republic co-founder Christian Hecker justifies the move. "Due to the hype of these U.S. small-cap stocks and the extraordinary volatility, we have concluded that a temporary adjustment to the offering is necessary," he said there. He went on to say, "The current hype in the aforementioned largely U.S. small-cap stocks is an unprecedented case that we have not seen before in the market and also poses significant downside risks."

Then on Friday morning, Trade Republic did an about-face. In an email to its customers, the provider has now announced that it is lifting the restrictions again. "We have lifted this restriction. We expressly apologize for the temporary restriction of your freedom to trade," it says. In it, the app gave the following reason for the temporary block: "In order to ensure trading stability for the majority of the market, we have decided to stop accepting buy orders of certain stocks for the time being."