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“What I would like to emphasize here is that we have come dangerously close to the collapse of the entire system, and the public does not seem to be fully aware of that, including Congress and regulators.”
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This is Thomas Peterffy, founder and president of Interactive Brokers Group Inc., who details on Wednesday at CNBC the serious situation of the market at the end of January, while individual investors on social media platforms came together to send a handful of heavily shortened stocks, including video game retail bricks and mortar GameStop Corp. GME,
and AMC Entertainment Holdings AMC movie chain,
to high levels, with shock waves on the market.
As Peterffy explained to MarketWatch in an interview last month, the so-called short squeeze that took place was a clearing service and forced a number of brokerages to try to protect themselves by increasing margin requirements and limiting trading. in actions selected to prevent chaos on a larger scale. in the markets.
Peterffy’s comments come ahead of a much-anticipated hearing at noon on Thursday when the House Financial Services Committee is ready to bring in Robinhood Market executives Melvin Capital and Kenneth Griffin, who owns the Citadel LLC hedge fund and his arm. Citadel Securities securities trading. The social media company Reddit and Keith Gill, an independent investor who suddenly gained fame during the GameStop business, will also be asked about their roles in the frantic transaction that engulfed the public and briefly helped trigger a mini-selloff in the Dow. Jones Industrial Average DJIA,
S&P 500 SPX,
and Nasdaq Composite COMP,
clues.
Clearing houses play a crucial role in markets, from stocks to derivatives. They are between the parties to a transaction to guarantee payment if they give up.
Read: GameStop frenzy focuses on clearing centers as investors weigh systemic fears
This crucial piece of plumbing on the financial market was at the heart of the problem, Peterffy said.
Peterffy said that the existing protocols regarding the short circuit can lead to calamity on the stock market, because, in a number of cases, the shares of the company targeted by the missing sellers exceed the total of the outstanding shares.
“So as the price goes up, shorts involve brokers, they need to cover themselves now, [and] this makes the price go up more, so that the brokers engage implicitly in the clearing house and you will reach a complete mess, which is practically impossible to solve “, the president of Interactive Brokers declared for CNBC. “So it almost happened.”
In a testimony prepared before his hearing, Robinhood CEO Vlad Tenev presented his perspective on the January action: “What I experienced last month was extraordinary, and the trading limits I set on GameStop and other actions were necessary to enable us to continue to meet the clearing house deposit requirements we pay to support customer trading on our platform. ”
Robinhood’s chief executive said the brokerage, which is billed to the average investor, said its daily value at risk, or VAR, had risen nearly 600 percent from $ 202 million on Jan. 25 to $ 1.4 billion. dollars until January 28.
Robinhood Markets testimony to the House Financial Services Committee
The increase in its warehousing requirements has forced Robinhood to raise $ 3.4 billion in additional capital to allow customers to resume normal trading across its entire platform, the CEO said.
Check it out: Reddit millionaire investor to tell Congress “I’m as bullish as ever” when GameStop returns
Peterffy said lawmakers and regulators can address current short selling issues by requesting more frequent short selling data and increasing margin requirements, or the leverage used, for short stocks.