Senator Elizabeth Warren asked Robinhood on Tuesday in a letter explaining why it was restricting GameStop’s hot stock trading after hedge funds suffered huge losses in the short term.
Warren, Massachusetts, noted that the online brokerage last week abruptly changed trading rules for individual investors in certain shares of its no-commission platform, while hedge funds and Wall Street institutional investors were able 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 provide them with market access under a transparent and consistent set of rules,” Warren wrote in his letter to Robinhood CEO Vladimir Tenev.
“It’s deeply worrying that the company isn’t doing it,” wrote Warren, who is a member of the Senate Banking Committee.
The letter asks Robinhood to reveal what led it to impose strict trade restrictions on Gamestop video game retailer and other stocks, and whether its hedge fund investors or other financial services partners who had a large stake in this trade affected the decision of the application company.
Robinhood had severely limited the purchase of a handful of shares, in some cases only allowing customers to buy only one share. It also increased the margin requirements for certain stocks and options.
“The public deserves a clear explanation of Robinhood’s relationships with large financial companies and the extent to which those relationships may be undermining their obligations to their customers,” Warren wrote.
The senator also wrote that she was “concerned about Robinhood’s inclusion of forced arbitration clauses in its agreement with clients, suggesting that investors will not have enough opportunity to pursue their claims and seek redress.”
Last week at least 18 lawsuits were filed against Robinhood for its trade restrictions.
Warren wrote that forcing these claims into “secret arbitration processes denies clients a fair hearing, undermines public accountability, and hinders efforts to gather a full and complete understanding of events.”
“Investors harmed by Robinhood’s trade restrictions should be able to argue their case in court, rather than closed-door proceedings that all too often appear against plaintiffs,” he wrote.
A Robinhood spokeswoman did not immediately respond to a request for comment on Warren’s letter.
Warren’s letter arrived the same day Robinhood said it would allow customers to buy up to 100 GameStop shares, while raising limits on AMC and Koss and removing restrictions on BlackBerry and Genius Brand.
GameStop’s stock price exploded 400% last week, ending January at more than 1,600%, due to a group of investors in Reddit’s WallStreetBets discussion group that published the actions.
The massive rise in stock prices in turn created little pressure on hedge funds that had bet that the price of GameStop shares would go down, which required those funds to buy stocks to cover the losses of their shares. positions. In turn, these purchases increased pressure on the stock price and aggravated hedge fund losses.
Short sellers lost nearly $ 20 billion in GameStop positions last month due to pressure.
Short sellers bet on stocks by lending shares that then sell. A short-term seller expects the stock price to fall, so that when they later buy stocks to replace the ones they borrowed, the short seller may pocket the price difference.
But when prices rise, a short-term seller has to buy stocks to replace the ones he borrowed at a higher price than he first sold. This situation entails a short-term loss for the seller.
Many individual traders and politicians on both sides of the aisle have criticized Robinhood’s decision to restrict the purchase of certain stocks such as GameStop, which are the center of controversy.
Tenev, the CEO of Robinhood, told CNBC last week that his company had on Wednesday limited 13 shares as a risk management decision to protect the firm and its investors.
Tenev said the decision was based in part on the Securities and Exchange Commission’s net capital rules and the conditions for depositing clearing houses that brokers must comply with.
Last week’s strong trading volumes put pressure on online brokers like Robinhood, which have to pay customers in cash when they close a position.
Brokers also needed additional cash to supply their capital with additional capital compensation to protect trading partners from excessive losses.
GameStop stock prices fell on Tuesday and fell 51% to $ 110 a share as of noon.
This sharp drop follows a drop of more than 30% during the regular market session on Monday.
GameStop stock prices closed at $ 325 a share on Friday.
If GameStop closes at current levels, it would bring its two-day loss to about 66%.