Congress has interrogated the chief executive of Robinhood and questioned why retail investors piled into GME as it attempts to get to the bottom of January’s market volatility.
Appearing before Congress, Robinhood CEO Vlad Tenev defended the trading platform’s sudden decision to restrict trading of GameStop shares on 25 January, saying demands from its clearing house to post hundreds of millions in collateral made it necessary.
“The events of the week of January 25, 2021 and the related NSCC depository requirements were unprecedented. In response, Robinhood took swift action to ensure that our customers could continue trading in the thousands of other stocks available on our platform that day and in the days ahead,” Mr Tenev said.
The sudden decision to restrict trading in GME and several other stocks was met with suspicion from thousands of users of reddit forum WallStreetBets, who quickly developed a conspiracy theory that a backroom deal with hedge fund Melvin Capital – which was hit hardest by the so-called “short squeeze” that saw GME shares skyrocket – was the cause. Melvin Capital founder and CIO Gabriel Plotkin told Congress that the fund had been short of GME since its inception in 2014 and that it had closed out its position in the face of “unprecedented” market movements.
“In the frenzy during January, GameStop’s stock rose from $17 to a peak of $483. I do not think anyone would claim that that price had any relationship to the intrinsic value of the company. The unfortunate part of this episode is that ordinary investors who were convinced by a misleading frenzy to buy GameStop at $100, $200, or even $483 have now lost significant amounts,” Mr Plotkin said.
Some members of Congress attributed the frenzy in part to burgeoning inequality and the lingering impacts of the global financial crisis, where Wall Street was perceived to have gotten off lightly despite reckless risk-taking.
“Many Americans feel that the system is stacked against them, and no matter what, Wall Street always wins. In this instance, many retail investors appeared motivated by a desire to beat Wall Street at its own game,” said Congresswoman Maxine Waters.
“And, given the losses that many retail investors have sustained as a result of volatility in the system, there are many whose belief that the system is rigged against them has been reinforced.”