“What I want to emphasize here is that we have come dangerously close to the collapse of the whole system, and the public seems to be completely unaware of it, including Congress and regulators.”
That’s Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc., who on Wednesday on CNBC describes the dire situation the market faced in late January when individual investors on social media platforms banded together to send a handful of strong short-short stocks. including bricks. -and-mortar video game store GameStop Corp. GME,
and film chain AMC Entertainment Holdings AMC,
to sky-high levels, with shock waves registered all over the market.
As Peterffy explained in an interview to MarketWatch last month, the so-called short squeeze that occurred turned clearing houses upside down and forced a number of brokers to protect themselves by increasing margin requirements and hedging selected stock trading to prevent further chaos. in markets.
Peterffy’s comments come ahead of a highly anticipated Thursday afternoon hearing, where the House Financial Services Committee will be grilling executives from Robinhood Market, Melvin Capital and Kenneth Griffin, who owns the hedge fund Citadel LLC and its securities trading arm Citadel Securities. Social media company Reddit and Keith Gill, an independent investor who suddenly shot to fame during the GameStop affair, will also be questioned about their role in the frenzied trading that gripped the public and briefly helped bring about a mini-sale in to cause the Dow. Jones Industrial Average DJIA,
the S&P 500 SPX,
and the Nasdaq Composite COMP,
indexes.
Clearinghouses play a vital role in markets, from stocks to derivatives. They stand between the parties to a transaction to guarantee payment if either one is neglected.
Read: GameStop frenzy puts clearinghouses in the spotlight as investors weigh up fears of systemic risk
That crucial piece of plumbing in the financial market was central to the case, Peterffy said.
Peterffy said existing protocols around shorting could lead to stock market calamities because in a number of cases the company’s stocks targeted by short sellers exceed the total number of shares outstanding.
“So as the price goes up, the shorts default to the brokers, the brokers now have to cover themselves,” [and] that pushes the price up further so that the brokers default at the clearing house, and you end up with a complete mess that is practically impossible to fix, ”the Interactive Brokers chairman told CNBC. “So that’s what almost happened.”
In a prepared testimony ahead of his hearing, Robinhood CEO Vlad Tenev gave his thoughts on the action in January: “What we experienced last month was extraordinary, and the trading limits we had set on GameStop and other stocks were necessary to allow us to meet the clearinghouse deposit requirements that we pay to support client trading on our platform. “
Robinhood’s CEO says the brokerage, which bills itself as catering to the average investor, said the daily risky value, or VAR, is up nearly 600% from $ 202 million on Jan. 25 to $ 1.4 billion on Jan. 28 January.
Robinhood Markets Testimony to House Financial Services Committee
The surge in custodian requirements forced Robinhood to raise $ 3.4 billion in additional capital to allow clients to resume normal trading on its platform, the CEO said.
Checking out: Reddit’s millionaire investor set to tell Congress ‘I’m as optimistic as ever’ about GameStop’s turnaround
Peterffy said legislators and regulators can solve the current short selling problems by requesting more frequent data on short selling and increasing margin requirements, or the leverage used on short selling.