Vladimir Tenev, noted scumbag and co-CEO of the online broker Robinhood, appeared before the House Financial Services Committee on Thursday in hopes of defending his company’s decision in late January to restrict trading in Reddit stocks, including GameStop [$GME], Nokia [$NOK], and AMC [$AMC]. He sought to clear up allegations that the app’s features encourage investors to trade stocks too frequently or invest in often sketchy options plays.
The Depository Trust & Clearing Company and its subsidiaries operate as the single clearinghouse for all public stock trades in the U.S. It’s the institution that actually carries out the exchange of stocks for cash, where securities are deposited for guardianship as trades are being executed, and it permits instant buying and selling of stocks even when the actual settlement of the trade takes up to 48 hours. Mr. Jim Rogers Likes Agriculture, Japan, and Russia More Than U.S. Stocks, Is He Right?
In order to oversee the blatant risk in guaranteeing a trade before it actually settles, the DTCC requires brokers to post collateral. As Robinhood customers piled into a one-way bet on GameStop and other stocks’ rise, the firm’s collateral requirements skyrocketed, forcing the company to halt buy orders and raise billions in cash from investors, according to Tenev.
The Robinhood executive will assert that while these deposit requirements were implemented to minimize risk, they “can have unintended consequences that introduce risk,” and he will call for regulators to push for a system of real-time settlement.
Tenev addressed allegations that the Robinhood smartphone app has features that encourage investors to trade too frequently and using risky instruments. “Even though we have made investing easier, we recognize it is not a game,” he will say. “While I am not aware of any agreed-upon definition of gamification, I do know that Robinhood designed its app to appeal to a new generation of investors who are more comfortable trading on smartphones than speaking with a broker.”
Gabe Plotkin, founder and CEO of the hedge fund Melvin Capital Management, also appeared before the committee Thursday to discuss his role in the January events as a short seller of GameStop stock. Plotkin argued that the act of short selling a company’s stock does not “artificially depress or manipulate the price of the stock,” and that “nothing about our short position prevents a company from achieving its objectives.”
One factor that drove investors to GameStop, as well as other meme stocks such as AMC [$AMC] and Express [$EXPR], was the unusual amount of short interest in those stocks, with some investors describing their purchase of shares in these companies as an act of protest against Wall Street insiders who sell companies short, and in their view, hurt those companies’ chance of survival.
Plotkin told Congress that some of these investors, many of whom organized on social-media platforms such as Reddit, YouTube and Twitter, began to harass him with “profane and racist text messages,” that referenced his Jewish faith.
“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,” Plotkin will say. “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.”