Robinhood, Interactive Brokers, Webull and others closed GameStop’s (GME) stock purchase feature Thursday, drawing bipartisan attacks from politicians, as well as criticism from customers who wanted the same freedom to trade as hedge funds betting the shares would fall.
The animus was especially pronounced in relation to Robinhood, due to his mission to “democratize finances”, which users accused him of abandoning.
According to former SEC chief economist and professor at the Tepper School of Business (Carnegie Mellon) Chester Spatt, these actions were simply companies and commercial infrastructure doing what they were supposed to do. This, he said, is an example of how regulations work.
“[The mainstream] is attacking Robinhood saying ‘they changed the rules’. No, they haven’t changed the rules, ”said Spatt. “First of all, their contracts allow them a lot of flexibility to intervene in terms of protecting their company.”
The contracts with its users in terms of service and in its back-end device that compensates and settles the negotiations allow for changes depending on the situation, explained Spatt.
“You have a situation where the old margin requirements were not good enough and that may have exposed Robinhood to significant risk if customers disappear, because his portion is under water,” he said. “It is a question of risk management, and there is a problem for clearing entities because they obviously do not want the risks to be passed on to them.”
‘They don’t really understand the dynamics that happen after a negotiation’
The CEOs of Robinhood and Webull told Yahoo Finance that the suspension of purchase orders and leveraged trading had nothing to do with any behind-the-scenes conspiracy or restrictions on freedom.
“It was entirely about the dynamics of the market and the requirements of the clearing house,” said Vlad Tenev at Yahoo Finance to live, echoing the comments made by Anthony Denier, CEO of Webull, the previous day.
“Our decision to temporarily restrict customers from buying certain securities had nothing to do with a market maker … or anyone who pressured us,” @RobinhoodApp CEO @vladtenev says. “It was entirely about market dynamics and the clearinghouse’s deposit requirements.” pic.twitter.com/Pb2iZpu3Bh
– Yahoo Finance (@YahooFinance) January 29, 2021
On Friday, Tenev de Robinhood told Yahoo Finance that “obviously, [the situation is] highly technical and involves settlement mechanics ”, which will represent an interesting path for those involved in explaining what happened.
The day before, Denier de Webull said: “There is a clamor because a lot of retail [investors], they don’t really understand the dynamics that happen after a negotiation. “
“It has nothing to do with the decision or some kind of closed room full of cigars from Wall Street firms meeting to the dismay of the retailer. This has to do with the market’s settlement mechanics, ”he added.
This will not stop the conspiracies, which Tenev once again vehemently denied on Friday while doing damage control amid boycott requests from angry users and politicians calling them.
The Securities and Exchange Commission (SEC), for its part, issued a joint statement from senior officials saying that the agency was “aware of and actively monitoring” market volatility.
Spatt said the SEC and regulators are more than capable of handling complexity, but that many politicians appeared to be playing “Monday morning quarterback”.
Poor publicity prompted the former SEC chief economist to contrast the situation with the 2008 financial crisis, where institutions did not really intervene to contain volatility in the markets.
“Here we have a situation in which a company, under its contractual structures, intervenes,” he said of the movements of the brokers to interrupt the purchase.
There will be investigations into what happened this week, but even a favorable discovery may not do much to placate the collective anger of online brokers and short sellers.
As Spatt pointed out, there is no public understanding of the plumbing behind the screen when a user presses the purchase button, “even if regulators do it” know what’s going on. For brokers, having ducks in a row, from a legal point of view, may not be good enough for the public.
When Robinhood announced that it had gone from an “introductory broker” to the ability to self-clear trades, getting a back office and a new plumbing system for trading, it said users who did not want to participate could take their shares and go, without resentments.
There is a lot of language in terms of service that shows that the beacons have always been there, if we read them.
“Most of us don’t read the terms of service. Think of the typical Internet contract we received. If you want the service, you just need to say OK, ”said Spatt. “… I don’t think it’s fair to say, ‘oh, they are changing the rules, how outrageous – now we must bring them down. This is part of what it means to protect a financial system. “
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Ethan Wolff-Mann is a writer for Yahoo Finance with a focus on consumer issues, personal finance, retail, airlines and more. Follow him on Twitter @ewolffmann.