Later this month, the co-founder of Robinhood is likely to be thrilled by angry lawmakers in Washington, demanding answers about his role in the GameStop trade saga.
Vlad Tenev’s appearance on February 18, which has not yet been formally announced, will come against the backdrop of a wave of populist outrage after his online brokerage was attacked for imposing restrictions on trading in GameStop and other stocks that skyrocketed amid wild enthusiasm from retail investors.
According to Mr. Tenev imposed restrictions on the company after trading clearing houses demanded that it increase its margin, but the curb caused a dirty game among retail investors, claiming that they prefer hedge funds that put large shares against the stock.
Their anger has been picked up by lawmakers across the political spectrum, from Alexandria Ocasio-Cortez, the left-wing Democratic representative from New York, to Ted Cruz, the Republican senator from Texas.
Last week was me. Ocasio-Cortez was one of the first to suggest a need for congressional hearings because she described the restrictions as “unacceptable”.
“We now need to know more about Robinhood’s decision to ban retail investors from buying shares, while hedge funds are free to trade the shares as they see fit,” she said on Thursday.
But politics is complicated. This week, the value of GameStop shares and other stocks favored by the army of retail investors fell, leaving many nursing paper losses.
Legislators’ attention can quickly shift from the question of whether the trade restrictions imposed by Robinhood and others were unfair, or more needed to be done to prevent people from buying shares that have become overvalued after being slammed by social media sites such as Reddit .
“What’s frustrating to me is that too many people are trapped in a man-to-man story, which is admittedly an attractive story,” Jim Himes, the Democratic member of the House of Connecticut, told the Financial Times said. .
“It is used to expose some retail investors to a large risk, and I think they have probably been hurt a lot already,” he added.
The GameStop issue comes in a transition period in Washington, with the new administration of Joe Biden offering a stricter approach to financial regulation compared to Donald Trump.
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 on Thursday to discuss the issues surrounding Robinhood and GameStop. . Gary Gensler, the election of Mr. Praying to become SEC chairman, however, has yet to be confirmed for his post.
“Secretary Yellen believes market integrity is important and called for a discussion of recent volatility in financial markets and whether recent activity is in line with investor protection and fair and efficient markets,” a Treasury spokesman said late Tuesday.
Alexandria Ocasio-Cortez, New York Democratic congressman © AP
Ted Cruz, Republican Senator from Texas © Bloomberg
Any immediate regulatory action taken following the GameStop affair is likely to be limited, including the application of rules against market manipulation, or higher capital requirements for online brokerage such as Robinhood.
But the episode could spark a more intense political debate about policing U.S. stock markets, tax and disclosure requirements related to hedge funds, and even the Federal Reserve’s loose monetary policy, which is blamed for the bubble of assets and the taking risks.
‘If this kind of madness continues, and it spreads to other stocks and larger stocks and just keeps going. . . there will really be a big rumble to do something, but I think we are not there yet, ‘said Ian Katz, an analyst at Capital Alpha Partners.
Members of Congress seized the opportunity to make a flurry of statements about the need to tighten financial rules so that it benefits ordinary Americans.
“The way we do things with the big banks and Wall Street in this country – that system has been broken,” Sherrod Brown, the incoming Democratic chairman of the Senate Banking Committee, said in a TikTok video on Tuesday. “We hear about this and we fight back.”
Although the comments of Mr. Brown points out that it is essential to the fundamental reform of Wall Street regulation that much of the political anger is currently being directed at Robinhood. Elizabeth Warren, the Democratic senator from Massachusetts, sent a letter to the company this week indicating that its ties with certain hedge funds had driven the decision to restrict trade.
“The public deserves a clear account of Robinhood’s relationships with large financial companies and the extent to which these relationships can undermine its obligations to its customers,” she said. Warren wrote.
Robinhood declined to comment.
Brad Sherman, the California Democrat who sits on the House’s financial services committee, said the trial with Robinhood had to be determined to determine whether the platform “acts to bring the price down” or that it was placed in a position that it took too much risk to ‘make transactions’.
But he said the episode raised red flags about excessive risks in the financial system. “If you want to play a video game, you have to go to GameStop and buy it, not go to Robinhood and buy the shares,” he said.
Tony Fratto, a former senior treasury official under George W Bush and founder of Hamilton Place Strategies, an advisory firm, said critics of the existing regulations have poorly defined policy objectives.
“How would you propose to regulate this type of activity? I have not seen any of them tell me what the solution is, ” he said, adding: ‘Do they want the SEC chat rooms? Are we going to enforce disclosure on social media? ”
For mr. Himes is at high risk of a knee-jerk reaction in Washington that it could ultimately be counterproductive, especially if it leads to the lifting of precautionary measures for ordinary investors instead of strengthening it.
“When Ted Cruz says ‘let’s trade’, make no mistake: he says ‘let’s have a libertarian market where people are not protected from the consequences of their decisions,'” Himes said.
“And he also says, ‘Let’s remove things like margin requirements and smart regulation of unscrupulous investors trading in options.'”
Additional Reporting by Lauren Fedor in Washington