Later this month, the co-founder of Robinhood is likely to find himself being grilled by angry lawmakers in Washington, who are demanding answers over his company’s role in the GameStop trading saga.
Vlad Tenev’s appearance on February 18, which has not yet been formally announced, would come against the backdrop of a wave of populist outrage, after his online brokerage was attacked for imposing limits on trading in GameStop and other stocks that had soared amid wild enthusiasm from retail investors.
Mr Tenev has said the company imposed restrictions after the clearing houses that settle trades demanded it stump up more margin, but the curbs prompted howls of foul play among retail investors, who claim they favoured hedge funds that had placed large bets against the stocks.
Their anger has been taken up by lawmakers across the political spectrum, from Alexandria Ocasio-Cortez, the leftwing Democratic representative from New York, to Ted Cruz, the Republican senator from Texas.
Last week Ms Ocasio-Cortez was one of the first to suggest a need for congressional hearings as she described the restrictions as “unacceptable”.
“We now need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” she said on Thursday.
But the politics are complex. This week, the value of GameStop shares and other stocks favoured by the army of retail investors have plunged, leaving many nursing significant paper losses.
The attention from lawmakers could quickly shift from whether the trading restrictions imposed by Robinhood and others were unfair to whether more should have been done to prevent people buying stocks that had become overvalued after being egged on by others on social media sites such as Reddit.
“What’s frustrating to me is that too many people are getting caught up in stick-it-to-the-man narrative, which admittedly is an attractive narrative,” Jim Himes, the Democratic member of the House from Connecticut, told the Financial Times.
“It’s being used in the service of exposing some retail investors to huge risk, and I think they’ve probably already been very badly hurt,” he added.
The GameStop affair comes at a time of transition in Washington, with Joe Biden’s new administration vowing a tougher approach to financial regulation compared with Donald Trump.
As early as Thursday, 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 to discuss the issues surrounding Robinhood and GameStop. Gary Gensler, Mr Biden’s pick to be SEC chairman, has however yet to be confirmed for his post.
“Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets,” a Treasury spokesperson said late on Tuesday.
Any immediate regulatory action taken in response to the GameStop affair is likely to be narrow in scope, including the enforcement of rules against market manipulation, or higher capital requirements for online brokerages such as Robinhood.
But the episode could stoke a more intense political debate about the policing of US equity markets, taxation and disclosure requirements related to hedge funds, and even the Federal Reserve’s loose monetary policies, which have been blamed for fuelling asset bubbles and risk-taking.
“If this sort of craziness continues, and it spreads to other stocks and bigger stocks and just keeps going . . . there’s going to be a real clamouring for something to be done, but I think we’re not there yet,” said Ian Katz, an analyst at Capital Alpha Partners.
Members of Congress have seized the opportunity to make a flurry of declarations about the need to tighten financial rules so they benefit ordinary Americans.
“The way we do things with the big banks and Wall Street in this country — that system is broken,” Sherrod Brown, the incoming Democratic chair of the Senate banking committee, said in a TikTok video on Tuesday. “We do hearings on this, and we fight back.”
Although Mr Brown’s comments suggest the need for fundamental reform of Wall Street regulation, for now much of the political ire is being focused squarely on Robinhood. Elizabeth Warren, the Democratic senator from Massachusetts, this week sent a letter to the company suggesting its ties to certain hedge funds had driven its decision to curb trades.
“The public deserves a clear accounting of Robinhood’s relationships with large financial firms and the extent to which those relationships may be undermining its obligations to its customers,” Ms Warren wrote.
Robinhood declined to comment.
Brad Sherman, the California Democrat who sits on the House financial services committee, said the hearing with Robinhood should serve to determine whether the platform “acted to depress the price” or was put in a position where it had taken on too much risk to “effectuate transactions”.
But he said the episode had raised red flags about excessive risk-taking in the financial system. “If you want to play a video game you should go to GameStop and buy it, not go to Robinhood and buy the stock,” he said.
Tony Fratto, a former senior Treasury official under George W Bush and founder of Hamilton Place Strategies, a consultancy, said critics of existing regulation had ill-defined policy goals.
“How would you propose to regulate this kind of activity out of existence? I haven’t seen a single one of them tell me what that solution is,” he said, adding: “Do they want the SEC policing chat rooms? Are we going to force disclosure on social media?”
For Mr Himes, the big risk of a knee-jerk reaction in Washington is that it could end up being counterproductive, especially if it results in the scrapping of safeguards for ordinary investors instead of bolstering them.
“When Ted Cruz says ‘let them trade’, make no mistake: he’s saying ‘let’s have a libertarian market where people are not protected from the consequences of their decisions’,” Mr Himes says.
“And he’s also saying, ‘let’s remove things like margin requirements and smart regulation around unsophisticated investors getting into options trading’.”
Additional reporting by Lauren Fedor in Washington
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