Senator Elizabeth Warren on Tuesday asked Robinhood in a letter to explain why it restricted trading in GameStop’s hot shares after hedge funds suffered huge losses in a short period of time.
Warren, D-Mass., Noted that online brokerage has abruptly changed trading rules for individual investors in certain shares on its duty-free platform, while Wall Street hedge funds and institutional investors were allowed to continue trading on GameStop , Koss, AMC Entertainment, Express, Naked Brand Group and other companies.
“Robinhood has a responsibility to treat its investors with honesty and fairness and to provide them with market access based on a transparent and consistent set of rules,” Warren wrote in a letter to Robinhood CEO Vladimir Tenev.
“It’s deeply worrying that the company may not do it,” wrote Warren, who is a member of the Senate Banking Committee.
The letter asks Robinhood to disclose what led it to impose tight trading restrictions on the Gamestop video game retailer and other stocks and whether its hedge fund investors or other financial services partners have had high stakes in such transactions affected the decision of the application company.
Robinhood abruptly limited the purchase of a handful of shares, in some cases allowing customers to buy only one share. It has 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 those relationships could undermine its obligations to its customers,” Warren wrote.
The senator also wrote that she is “disturbed by Robinhood’s inclusion of forced arbitration clauses in its agreement with clients, which suggests that investors will not have sufficient opportunity to continue their claims and seek exemption.”
At least 18 lawsuits have been filed against Robinhood in the past week for its trade restrictions.
Warren wrote that forcing these claims into “secret arbitration proceedings denies clients a fair hearing, undermines public accountability and impedes efforts to gather a full and complete understanding of events.”
“Investors affected by Robinhood’s trading restrictions should be able to argue their case in court, rather than in closed-door proceedings, which are often rigged against plaintiffs,” she wrote.
A Robinhood spokeswoman did not immediately respond to a request for comment on Warren’s letter.
Warren’s letter came on the same day that Robinhood said it would allow customers to purchase up to 100 GameStop shares, while raising AMC and Koss limits and removing restrictions on BlackBerry and Genius Brand.
The price of the GameStop stock exploded 400% last week, ending in January at more than 1,600%, due to a group of investors in Reddit’s WallStreetBets discussion group, which backed the shares.
In turn, the massive rise in stock prices created a brief reduction in hedge funds that bet that the price of GameStop shares would fall, asking those funds to buy shares to cover losses on their positions. These acquisitions, in turn, increased upward pressure on stock prices and further aggravated hedge fund losses.
Missing sellers lost nearly $ 20 billion on GameStop positions last month due to stress.
Short sellers make bets on a stock by borrowing shares which they then sell. A short seller hopes that the share price will fall, so that when they later buy shares to replace the ones they borrowed, the short seller might see the price difference.
But when prices rise, a short seller has to buy stocks to replace those they borrowed at a higher price than they first sold. This situation results in a loss for the short seller.
Many traders and individual politicians on both sides of the aisle have criticized Robinhood’s decision to restrict the purchase of certain shares, such as GameStop, which are at the center of 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 company and its investors.
Tenev said the decision was based in part on the Securities and Exchange Commission’s net capital rules and clearing house deposit conditions that brokers must comply with.
Last week’s high trading volume put pressure on online brokerages such as Robinhood, which are forced to pay clients cash when they close a position.
Brokerages also needed additional cash to provide the clearing facility with additional capital to protect trading partners from oversized losses.
GameStop stock prices fell on Tuesday, slowing 51% to about $ 110 per share since noon.
That sharp drop follows a drop of more than 30% during Monday’s regular market session.
GameStop stock closed at $ 325 a share on Friday.
If GameStop closes at current levels, this would result in a two-day loss of about 66%.