Interactive Brokers President Thomas Peterffy told CNBC on Wednesday that the U.S. financial system faced greater tension during the GameStop trading frenzy than is generally acknowledged.
“We have come dangerously close to the collapse of the entire system and it seems the public is completely unaware of this, including Congress and regulators,” Peterffy said in an interview with Closing Bell.
Peterffy’s statements came a day before the House Financial Services Committee held a hearing to examine GameStop’s epic narrowness that transpired in late January. Among those who have to testify are the chief executives of the Robinhood app and the Melvin Capital hedge fund, which had been short shares of GameStop.
Representatives of Interactive Brokers are not scheduled to be part of Thursday’s hearing.
At the height of the trading craze, Robinhood, along with other brokers, including interactive brokers, set different levels of temporary restrictions on GameStop and other speculative actions, which had been favored by forum users like Reddit’s WallStreetBets. The moves were met with fierce criticism from retail investors, who claimed it put them at a disadvantage for institutional investors.
But brokerage affiliates, such as Robinhood CEO Vlad Tenev and Peterffy, have repeatedly argued that decisions are necessary to meet various capital requirements and protect the financial system from volatile business activity.
Peterffy, who founded Interactive Brokers more than four decades ago, said Wednesday that market vulnerabilities stemmed from the fact that there was so much short-term interest in GameStop combined with a plethora of options activities.
Short-term selling is a bearish strategy in which an investor borrows shares of a stock and sells them immediately, hoping to buy shares later at a lower price. They then return the shares borrowed and reap the benefits of the difference. When the opposite happens, as with GameStop, short sellers may try to recoup the shares at their current highest price in an attempt to minimize losses.
A call option offers investors the right, but not an obligation, to buy a share at a predetermined strike price. It is basically a bet that certain stocks will increase, while short selling is a bet for which the shares will fall. Retailers during the Reddit frenzy bought GameStop call options aggressively, which can have the effect of increasing the underlying stocks when it happens in highly speculative situations.
In the case of GameStop, there was upward momentum from short sellers trying to hedge, in addition to Reddit traders buying stocks directly or buying options on behalf of. These combined forces helped push GameStop shares down from less than $ 20 in early January to an intraday high of $ 483 on January 28th. Shares are now below $ 50 as the short budget ran out.
But without restrictions limiting upward pressure on GameStop shares, Peterffy said the situation could have reached a point where both short sellers and market makers who act as intermediaries in options transactions should not have was able to fulfill his various obligations.
There were particular risks for market makers to be able to meet their options contract requirements, if all contracts had been exercised, Peterffy said. This creates the possibility that “runners breach the clearing centers, so you’ll end up with a complete mess that is virtually impossible to fix, so that’s what almost happened,” he said.
He added that regulatory corrections need to be implemented to reduce the likelihood that something similar will transpire in the future. For example, Peterffy said companies should have to report short-term interest on a stock on a daily basis rather than the two-per-month requirement currently in place. He also said: “I think they should increase the margin requirements for shorts by 1% for all people who are in shorts. [a stock]. “
“No one is to blame” for what happened in the GameStop frenzy, Peterffy said. “There’s a hole in the system that we need to stop immediately.”