Why would a financial institution prevent their clients from trading a specific security?

Your quoted paragraph says it all. The restrictions are intended to mitigate risk for the brokerage firm and for the clients.

There's a long history of risk mitigation by the SEC as well as brokers. Some examples:

• Before the 1929 crash, margin was 10%. You could buy stocks for 10 cents on the dollar. Reg T was subsequently established, requiring that traders must post at least 50% of the price of shares for a margin purchase.

• The Securities Exchange Act of 1934 created the Uptick Rule for shorting. It was eliminated in 2007 and was reimplemented as the Alternate Uptick Rule in 2010

• Brokers are allowed to require higher margin than Reg T allows

• After the crash of 1987, circuit breakers were implemented to stabilize the financial markets

• About the time that Lehman Brothers went under in 2008, for a few weeks, the SEC banned the shorting of about 800 financial companies (the UK did so as well)

• Higher margin is required for trading leveraged ETFs, Bitcoin, etc.

• Brokers are not required to offer trading in all securities (options, futures, Bitcoin, etc.)

It is not unusual for brokers to limit access to volatile securities to more sophisticated traders who have well funded accounts that can cover potentially higher risk trading.

The reason they stopped is because Citadel and Melvin capital and others are going to lose to a bunch of Reddit posters and Robinhood traders. People who own the market aren't going to allow that to happen.

Like that movie with Eddie Murphy and cornering orange juice, except Eddie Murphy loses in real life cause can't have the little guy winning a rigged game.

There's a whole Wikipedia article on this. To quote:

A trading curb (typically known as a circuit breaker in Wall Street parlance) is a financial regulatory instrument that is in place to prevent stock market crashes from occurring, and is implemented by the relevant stock exchange organization. Since their inception, circuit breakers have been modified to prevent both speculative gains and dramatic losses within a small time frame. When triggered, circuit breakers either stop trading for a small amount of time or close trading early in order to allow accurate information to flow among market makers and for institutional traders to assess their positions and make rational decisions.

In the past, stock market crashes have occurred faster than people can think, which leads to a positive feedback effect not dissimilar to short squeezes. Heavy volatility is usually a sign that the stock's investors are not being rational. Restricting trading is meant to give people time to think on what they actually want to do.