Later this month, Robinhood’s co-founder will likely be questioned by angry legislators in Washington, who are demanding answers about his company’s role in the GameStop trading saga.
Vlad Tenev’s appearance on February 18, which has not yet been formally announced, would come against the backdrop of a wave of populist outrage after his online brokerage was attacked for imposing limits on GameStop trading and other actions that had triggered amidst the great enthusiasm of retail investors.
Tenev said the company imposed restrictions after the clearing houses that closed the deal demanded that it increase the margin, but the restrictions generated cries of foul play among retail investors, who claim to favor hedge funds that made big bets against the actions.
His anger was absorbed by lawmakers across the political spectrum, from Alexandria Ocasio-Cortez, New York’s left-wing Democratic representative to Ted Cruz, the Republican senator from Texas.
Last week, Ms. Ocasio-Cortez was one of the first to suggest the need for hearings in Congress, describing the restrictions as “unacceptable”.
“Now we need to know more about Robinhood’s decision to prevent retail investors from buying shares while hedge funds can freely trade the shares as they see fit,” she said on Thursday.
But the policy is complex. This week, the value of GameStop shares and other stocks favored by the army of retail investors plummeted, leaving many with significant paper losses.
Lawmakers’ attention could shift quickly from whether the trade restrictions imposed by Robinhood and others were unfair to whether more should have been done to prevent people from buying stocks that had become overvalued after being encouraged by third parties on social media sites like Reddit.
“What is frustrating to me is that many people are being caught up in aggressive narratives, which are admittedly attractive,” Jim Himes, the Democratic member of the Connecticut House, told the Financial Times.
“It is being used to expose some retail investors to huge risks, and I think they have probably already been seriously injured,” he added.
The GameStop case comes at a time of transition in Washington, with Joe Biden’s new administration promising a tougher approach to financial regulation compared to Donald Trump.
On Thursday, Janet Yellen, the US Treasury secretary, is expected to convene a meeting of regulators from the Federal Reserve, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission to discuss the issues in around Robinhood and GameStop. Gary Gensler, Biden’s choice for SEC chairman, has yet to be confirmed for his position.
“Secretary Yellen believes that market integrity is important and called for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets,” said a Treasury spokesman at Tuesday.
Alexandria Ocasio-Cortez, Democratic Congressman from New York © AP
Ted Cruz, Republican Senator from Texas © Bloomberg
Any immediate regulatory action taken in response to the GameStop case is likely to be narrow in scope, including the application of rules against market manipulation or higher capital requirements for online brokers like Robinhood.
But the episode could provoke a more intense political debate over the policing of US stock markets, taxes and disclosure requirements related to hedge funds and even the loose monetary policies of the Federal Reserve, which have been blamed for fomenting asset bubbles. and take risks.
“If that kind of madness continues and spreads to other actions and bigger actions and just continues. . . there will be a real outcry for something to be done, but I think we’re not there yet, ”said Ian Katz, an analyst at Capital Alpha Partners.
Members of Congress took the opportunity to make a barrage of statements about the need to tighten financial rules to benefit ordinary Americans.
“The way we do things with the big banks and Wall Street in this country – that system is broken,” Sherrod Brown, the next Democratic chairman of the Senate banking committee, said in a TikTok video on Tuesday. “We hold hearings on this and we fight.”
While Brown’s comments suggest the need for fundamental reform of Wall Street regulation, for the moment much of the political ire is focusing directly on Robinhood. Elizabeth Warren, a Democratic senator from Massachusetts, sent a letter to the company this week suggesting that her ties to certain hedge funds had driven her decision to restrict negotiations.
“The public deserves clear accountability about Robinhood’s relationships with major financial companies and the extent to which these relationships may be undermining its obligations to customers,” wrote Warren.
Robinhood declined to comment.
Brad Sherman, the California Democrat who sits on the House’s financial services committee, said the hearing with Robinhood should serve to determine whether the platform “acted to lower the price” or was placed in a position where it took a lot of risk for “make transactions”.
But he said the episode raised red flags about excessive risk in the financial system. “If you want to play a video game, you should go to GameStop and buy it, not Robinhood and buy the stock,” he said.
Tony Fratto, a former senior Treasury official under George W. Bush and founder of Hamilton Place Strategies, a consultancy, said critics of the existing regulation had ill-defined political goals.
“How do you propose to eliminate this type of activity? I haven’t seen any of them tell me what that solution is, ”he said, adding,“ Do they want the SEC’s chat rooms for policing? Shall we force disclosure on social networks? “
For Himes, the big risk of an automatic reaction in Washington is that it could end up being counterproductive, especially if it results in the elimination of safeguards for ordinary investors, rather than reinforcing them.
“When Ted Cruz says ‘let them negotiate’, make no mistake: he is saying ‘we are going to have a libertarian market where people are not protected from the consequences of their decisions,'” says Himes.
“And he is also saying, ‘We are going to remove things like margin requirements and smart regulation about unsophisticated investors who go into options trading.'”
Additional reporting by Lauren Fedor in Washington