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“What I would like to point out here is that we have come dangerously close to the collapse of the entire system, and the public seems to be completely oblivious to this, including Congress and regulators.”
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Thomas Peterffy, founder and president of Interactive Brokers Group Inc., detailing on Wednesday on CNBC the dire situation the market was in late January, when individual investors on social media platforms came together to send a handful of shares heavily short, including bricks. – video game and mortar retailer GameStop Corp. GME,
and the AMC Entertainment Holdings AMC cinema chain,
at very high levels, with shock waves registering throughout the market.
As Peterffy explained to MarketWatch in an interview last month, the so-called short squeeze that occurred was rocking the clearinghouses and forcing a number of brokers to try to protect themselves by increasing margin requirements and limiting trading in selected stocks to avoid chaos broader in the markets.
Peterffy’s comments come before a highly anticipated midday hearing on Thursday, where the House’s Financial Services Committee is set to question executives from Robinhood Market, Melvin Capital and Kenneth Griffin, who owns the hedge fund Citadel LLC and its bond trading arm Citadel Securities. Social media company Reddit and Keith Gill, an independent investor, who rose to fame during the GameStop affair, will also be asked about their roles in the frantic negotiations that won over the public and that briefly helped trigger a mini-sale at Dow. Jones Industrial Average DJIA,
the S&P 500 SPX,
and the Nasdaq Composite COMP,
indexes.
Clearing houses play a crucial role in the markets, from equities to derivatives. They stand between the parties to a negotiation to guarantee payment if any of them disagree.
Reading: GameStop frenzy puts clearing houses in the spotlight as investors assess systemic risk fears
This crucial piece of financial market plumbing was at the heart of the issue, said Peterffy.
Peterffy said existing short selling protocols could lead to calamity in the stock market because, in several cases, the company’s shares targeted by short sellers exceed the total outstanding shares.
“So, as the price goes up, the short positions default by the brokers, the brokers must now protect themselves, [and] this raises the price even more, so brokers default in the clearinghouse and you end up with a complete mess that is practically impossible to resolve, ”Interactive Brokers president told CNBC. “So that’s what almost happened.”
In a testimony prepared before his hearing, Robinhood CEO Vlad Tenev gave his perspective on the January action: “What we experienced last month was extraordinary, and the trading limits we set on GameStop and other actions were necessary to allow us to continue to meet the clearinghouse deposit requirements that we pay to support client trading on our platform. “
Robinhood’s CEO says the brokerage, which calls itself to serve the average investor, said its daily value at risk, or VAR, increased almost 600%, from $ 202 million on January 25 to $ 1.4 billion on 28 of January.
Robinhood Markets’ testimony to the House Financial Services Committee
The increase in depository requirements has forced Robinhood to raise $ 3.4 billion in additional capital to allow customers to resume normal trading on its platform, said the CEO.
Output check: Millionaire Reddit investor ready to tell Congress ‘I’m optimistic as always’ in GameStop’s turnaround
Peterffy said lawmakers and regulators can resolve current problems around short selling by requesting more frequent data on short selling and increasing margin requirements, or the leverage used, in short selling stocks.