Interactive Brokers President Thomas Peterffy told CNBC on Wednesday that the U.S. financial system faced greater stress during the GameStop commercial frenzy than is generally recognized.
“We have come dangerously close to the collapse of the entire system and the public seems to be completely unaware of this, including Congress and regulators,” said Peterffy in an interview with “Closing Bell”.
Peterffy’s comments were made the day before the House Financial Services Committee held a hearing to examine the epic tightening of GameStop in late January. Among those who will testify are the main executives of the stock trading application Robinhood and the hedge fund Melvin Capital, which sold GameStop shares.
Interactive Brokers representatives are not expected to be part of Thursday’s hearing.
At the height of the trading craze, Robinhood, along with other brokers, including Interactive Brokers, imposed different levels of temporary restrictions on GameStop and other speculative actions, which have become favored by users of forums like Reddit’s WallStreetBets. The measures were met with strong criticism by retail investors, who argued that they placed them at a disadvantage for institutional investors.
But those affiliated with brokerage firms, like Robinhood’s CEO, Vlad Tenev and Peterffy, have repeatedly defended decisions as necessary to meet various capital requirements and protect the financial system in the face of volatile trading activity.
Peterffy, who founded Interactive Brokers more than four decades ago, said on Wednesday that market vulnerabilities stem from the fact that there is a lot of interest in GameStop combined with large amounts of options activities.
Short selling is a bearish strategy in which an investor borrows shares of a stock and sells them promptly, with the hope of repurchasing the shares at a lower price later. They then return the borrowed shares and profit from the difference. When the opposite happens, as with GameStop, short sellers may try to repurchase the shares at their current highest price in an attempt to minimize losses.
A call option gives investors the right – but not the obligation – to buy shares at a predetermined strike price. It is essentially a bet that a particular stock will go up, while short selling is a bet that a stock will go down. Retail traders during the Reddit frenzy bought options from GameStop aggressively, which can have the effect of pushing the underlying stock up when it happens in highly speculative situations.
In the case of GameStop, there was an upward momentum both from short sellers trying to cover, and from Reddit brokers who bought the stock or call options in the name. These combined forces helped to push GameStop’s shares from under $ 20 in early January to a $ 483 intraday high on January 28. Shares are now below $ 50 when the short-term tightening has ended.
But without restrictions that limit the upward pressure on GameStop’s stock, Peterffy said the situation could have reached a point where both short sellers and market makers who act as intermediaries in options trading could not meet their obligations. various obligations.
There were specific risks for market makers to be able to meet their options contract requirements, if all contracts had been exercised, said Peterffy. This creates the possibility that “brokers will default on clearing houses, so you end up with a complete mess that is practically impossible to solve, so that’s what almost happened,” he said.
He added that regulatory corrections must be implemented to reduce the likelihood of something similar happening in the future. For example, Peterffy said that companies should report overdraft interest on a stock daily, instead of the twice-per-month requirement currently in effect. He also said, “I think they should increase the sales margin requirements by 1% for each person who is selling [a stock]. “
“No one is to blame” for what happened in the GameStop frenzy, said Peterffy. “There is a hole in the system that we have to stop immediately.”