Stocks in Asia closed down, while those in Europe have also been hit by rising volatility, with the US following suit © FT montage

Shares on Wall Street followed European bourses lower on Friday, as an intensifying battle between retail traders and brokers over a handful of closely followed stocks drove up market measures of volatility.

The S&P 500 was down 1.9 per cent at the closing bell in New York, ending the blue-chip benchmark’s worst week since October. The tech-heavy Nasdaq Composite sank 2 per cent.

A rise in volatility typically encourages investors to reduce risk, helping to explain the decline from record highs earlier in January.

Line chart of Cboe Vix volatility index showing GameStop saga sends Wall Street's fear gauge soaring

The Cboe Vix — a measure of expected volatility known as Wall Street’s “fear gauge” — ended at 32.4, well above its long-term average of just below 20, as another hectic session propelled recent day-trader favourites such as GameStop and AMC Entertainment higher.

Column chart of S&P 500 index weekly performance (%) showing Wall Street suffers worst week since October

Robinhood, which was among the US brokers on Thursday to restrict trading in companies such as GameStop, eased its curbs on some of these securities on Friday. The online broker raised $1bn from investors and tapped credit lines to meet its capital and clearing requirements.

Pressured to respond by frustrated retail investors and lawmakers, the US Securities and Exchange Commission said on Friday that it would review the trading restrictions imposed by Robinhood and others.

“It probably did come down to a technical factor where they needed to have sufficient reserves in place,” said Mona Mahajan, US investment strategist and portfolio manager at Allianz Global Investors, on Robinhood’s temporary trading freeze.

“But that being said, I think it’s interesting to see the rise of the retail investor and what a driving force it’s been . . . the new Robinhood crowd — they’ve only seen a one way market to some extent, so they’ve been emboldened,” she added.

“The retail horde are not going anywhere, and may have no day jobs,” said Michael Every, a global strategist at Rabobank, an investment bank. They “can pile into any stock or asset they choose, forcing brokers or regulators to shut down trading”.

Europe’s benchmark Stoxx 600 index closed 1.9 per cent lower, while London’s FTSE 100 benchmark slid 1.8 per cent and Frankfurt’s Xetra Dax sank 1.7 per cent.

The uptick in volatility triggered by the trading tussle added to worries among European investors about the economic damage being caused by the pandemic and shortages in some vaccines whose rollout is deemed crucial to a recovery from the crisis.

“I think the volatility in the US will have some effect on European markets,” said Arnab Das, global market strategist at Invesco. “But the bigger picture here is still monetary policy, fiscal policy and the pandemic.”

The Vstoxx index, the European gauge of market volatility, climbed to its highest level since early November.

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Asia’s big stock markets closed down across the board as investor jitters grew. Japan’s Topix fell 1.6 per cent, South Korea’s Kospi dropped 3 per cent, and the Hang Seng in Hong Kong ended its session 0.9 per cent lower.

China’s CSI 300 index of Shanghai and Shenzhen-listed shares fell 0.5 per cent.

The day-trading frenzy spread to Malaysia, where the Kuala Lumpur-listed Top Glove, the world’s biggest maker of rubber gloves, jumped as much as 14 per cent on Friday after Reddit users called on retail investors to buy the stock. The “BursaBets” subreddit has signed up more than 6,000 members since it was set up on Thursday. Top Glove has been targeted by short sellers who profit when a company’s share price falls.

Additional reporting by Stefania Palma in Singapore

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