On Tuesday, Senator Elizabeth Warren asked Robinhood in a letter explaining why he restricted GameStop’s red-hot stock trading after hedge funds suffered huge losses in a short tightening.
Warren, D-Mass., Noted that the online brokerage last week abruptly changed the trading rules for individual investors in certain shares on its free platform, while hedge funds and institutional investors on Wall Street were allowed to continue trading on GameStop, Koss, AMC Entertainment, Express, Naked Brand Group and other companies.
“Robinhood has a responsibility to treat its investors honestly and fairly and provide them with access to the market under a set of transparent and consistent rules,” Warren wrote in his letter to Robinhood CEO Vladimir Tenev.
“It is deeply worrying that the company is not doing this,” wrote Warren, who is a member of the Senate Banking Committee.
The letter asks Robinhood to disclose what led him to impose strict commercial restrictions on video game retailer Gamestop and other stocks, and whether his hedge fund investors or other financial services partners who had large stakes in such negotiations affected the company’s decision applications.
Robinhood had drastically limited the purchase of a handful of shares, in some cases allowing customers to buy only one share. It also increased the margin requirements on certain stocks and options.
“The public deserves a clear account of Robinhood’s relationships with major financial companies and the extent to which these relationships may be undermining its obligations to customers,” wrote Warren.
The senator also wrote that she was “concerned about Robinhood’s inclusion of forced arbitration clauses in its contract with the client, which suggests that investors will not have enough opportunity to pursue their claims and seek redress.”
At least 18 lawsuits were filed against Robinhood last week because of his trade restrictions.
Warren wrote that forcing these claims into “secret arbitration proceedings denies clients a fair hearing, undermines public accountability and hinders efforts to gather a complete and complete understanding of events.”
“Investors harmed by Robinhood’s trade restrictions should be able to argue in court, instead of closed-door procedures that are often manipulated against claimants,” she wrote.
A Robinhood spokeswoman did not immediately respond to a request for comment on Warren’s letter.
Warren’s letter came on the same day that Robinhood said he would allow customers to buy up to 100 GameStop shares, while increasing the limits of AMC and Koss, and removing BlackBerry and Genius brand restrictions.
GameStop’s share price exploded by 400% last week, ending January with an increase of more than 1,600%, due to a group of investors in Reddit’s WallStreetBets discussion group publicizing the shares.
The huge increase in share prices, in turn, created a slight pressure on hedge funds that bet GameStop’s share price would fall, requiring these funds to buy shares to cover losses on their positions. These purchases, in turn, increased pressure on stock prices and further exacerbated hedge fund losses.
Short sellers lost nearly $ 20 billion in GameStop positions last month because of the tightening.
Short sellers bet on a stock by borrowing shares that they then sell. A short seller expects the stock price to then fall, so that when he buys shares to replace the borrowed ones, the short seller can pocket the price difference.
But when prices go up, a short seller must buy shares to replace the ones they borrowed for a higher price than initially sold. This situation results in loss to the short seller.
Many individual traders and politicians on both sides of the aisle criticized Robinhood’s decision to restrict the purchase of certain shares like GameStop, which are at the heart of the controversy.
Tenev, Robinhood’s CEO, told CNBC last week that his company had limited 13 shares on Wednesday as a risk management decision to protect the company and its investors.
Tenev said the decision was partly based on the Securities and Exchange Commission’s net capital rules and the clearinghouse’s deposit conditions that brokers must comply with.
Last week’s heavy trading volumes put pressure on online brokers like Robinhood, who are forced to pay cash customers when they close a position.
Brokers also needed additional money to provide their clearinghouse with additional capital to protect trading partners from exaggerated losses.
GameStop’s share prices fell on Tuesday, falling 51%, to about $ 110 a share at noon.
This sharp drop follows a drop of more than 30% during Monday’s regular market session.
GameStop’s stock price closed at $ 325 per share on Friday.
If GameStop closes at current levels, that would bring its two-day loss to around 66%.