Sen. Elizabeth Warren asked Robinhood in a letter on Tuesday to explain why it is restricting the trading of red-hot shares in GameStop after hedge funds suffered huge losses in a short time.
Warren, D-Mass., Noted that the online brokerage suddenly changed the trading rules for individual investors in certain stocks on its no-fee platform last week, while hedge funds and institutional investors in Wall Street were allowed to play in GameStop, Koss, AMC to trade. Entertainment, Express, Naked Brand Group and other companies.
“Robinhood has the responsibility to treat its investors honestly and fairly and to provide them with access to the market under a transparent and consistent set of rules,” Warren wrote in her letter to Robinhood CEO Vladimir Tenev.
“It is very worrying that the company may not be doing this,” wrote Warren, who is a member of the Senate Banking Committee.
In the letter, Robinhood is asked to disclose what led to the strict strict restrictions on the video game trader Gamestop and the other shares, and whether the investments of the hedge fund or other financial service partners that had a large stake in such trading , influenced the decision of the app company.
Robinhood severely restricted the purchase of a handful of shares, and in some cases, customers could only buy a single share. It also increased the margin requirements for certain stocks and options.
“The public deserves a clear account of Robinhood’s relationships with large financial firms and the extent to which these relationships can undermine its obligations to its clients,” Warren wrote.
The senator also wrote that she was “upset that Robinhood included the forced arbitration clauses in his client agreement, which indicates that investors will not have sufficient opportunity to pursue their claims and seek relief.”
In the past week, at least 18 lawsuits have been filed against Robinhood over its trade restrictions.
Warren writes that forcing these allegations into ‘secret arbitration proceedings becomes a fair trial of clients, undermines public liability and hinders efforts to put together a thorough and complete understanding of the events.’
“Investors disadvantaged by Robinhood’s trade restrictions should be able to argue their case in court, rather than in closed doors that are regularly directed against plaintiffs,” she wrote.
A Robinhood spokesman did not immediately respond to a request for comment on Warren’s letter.
Warren’s letter comes on the same day that Robinhood said it would allow customers to buy up to 100 shares of GameStop, while also increasing limits for AMC and Koss, and removing restrictions on BlackBerry and Genius Brand.
The price of GameStop shares exploded 400% last week and ended at more than 1,600% in January, as a group of investors in Reddit’s WallStreetBets discussion group contemplated the stock.
The large rise in the share price, in turn, created a brief pressure on the hedge funds that indicated that GameStop’s share price would fall, and the funds had to buy shares to cover the losses on their positions. These purchases in turn increased the upward pressure on the price of the shares, further exacerbating the losses of the hedge funds.
Short sellers lost nearly $ 20 billion on GameStop positions last month due to pressure.
Short sellers bet on a stock by borrowing shares which they then sell. A short seller hopes that the price of the shares will then fall so that the short seller can pocket the price difference if they later buy shares to replace the shares.
But when prices rise, a short seller must buy shares to replace those they have borrowed at a higher price than what they first sold with. The situation leads to a loss for the short seller.
Many individual traders and politicians on both sides of the aisle have Robinhood’s decision to restrict the purchase of certain shares such as GameStop which is at the center of the controversy.
Tenev, the CEO of Robinhood, told CNBC last week that his company limited 13 shares on Wednesday as a risk management decision to protect the business and its investors.
Tenev said the decision is based in part on the Securities and Exchange Commission’s net capital rules and the conditions of deposits that brokers must meet.
Last week’s heavy trading volumes put pressure on online brokers such as Robinhood, who have to pay customers cash when they close a post.
The brokers also need additional cash to provide their clearing facility with extra capital to protect trading partners from excessive losses.
GameStop stock prices fell Tuesday, dropping 51% to about $ 110 a share by noon.
That sharp tumble follows a drop of more than 30% during the regular session on Monday.
GameStop’s share price closed at $ 325 a share on Friday.
If GameStop closes at current levels, it will bring its two-day loss to around 66%.