Robinhood, Interactive Brokers, Webull, and others shut down the buying feature for GameStop (GME) stock Thursday, drawing bipartisan attacks from politicians as well as criticism from customers who wanted the same freedom to trade as hedge funds betting the stock would fall.
The animus was especially pronounced towards Robinhood, due to its mission of “democratizing finance,” which users accused it of abandoning.
According to former SEC chief economist and Tepper School of Business (Carnegie Mellon) professor Chester Spatt, these actions were simply the companies and the trading infrastructure doing what they were supposed to do. This, he said, was an example of regulations working.
“[The mainstream] is coming down on Robinhood saying ‘they changed the rules.’ No, they didn’t change the rules,” Spatt said. “First of all, their contracts allow them a lot of flexibility to intervene in terms of protecting their firm.”
The contracts with their users in terms of service and in their back-end apparatus that clears and settles trading allow for changes depending on the situation, Spatt explained.
“You have a situation where the old margin requirements weren’t good enough and it may have exposed Robinhood to significant risk if the customers disappear, because their portion is underwater,” he said. “It’s a risk management issue, and there’s an issue to the clearing entities because they obviously don’t want the risks being passed through to them.”
‘They don’t actually understand the dynamics that happen after a trade’
Robinhood and Webull CEOs both told Yahoo Finance that the halting of buy orders and leveraged trading had nothing to do with any backroom conspiracy or restrictions on freedom.
“It was entirely about market dynamics and clearinghouse requirements,” Vlad Tenev said on Yahoo Finance live, echoing comments made by Anthony Denier, Webull’s CEO, the day before.
“Our decision to temporarily restrict customers from buying certain securities had nothing to do with a market maker… or anyone like that putting pressure on us,” @RobinhoodApp CEO @vladtenev says. “It was entirely about market dynamics and clearinghouse deposit requirements.” pic.twitter.com/Pb2iZpu3Bh
— Yahoo Finance (@YahooFinance) January 29, 2021
On Friday, Robinhood’s Tenev told Yahoo Finance that “obviously, [the situation is] highly technical and involves settlement mechanics,” which will represent an interesting path forward for those involved in explaining what happened.
The day before, Webull’s Denier said, “There is an outcry because a lot of the retail [investors], they don’t actually understand the dynamics that happen after a trade.”
“It has nothing to do with the decision or some sort of closed room smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market,” he added.
This won’t stop the conspiracies, which Tenev once again denied strongly Friday as he did damage control amid calls for boycotting from users and angry politicians calling them out.
The Securities and Exchange Commission (SEC), for its part, issued a joint statement from top officials saying the agency was “aware of and actively monitoring” the market volatility.
Spatt said the SEC and regulators are more than capable to deal with the complexity, but that many politicians seemed to be playing “Monday morning quarterback.”
The bad publicity prompted the former SEC chief economist to contrast the situation with the 2008 financial crisis, where institutions actually did not step in to stop volatility in the markets.
“Here we have a situation where a firm, under its contractual structures, steps in,” he said of the brokerages’ moves to halt buying.
There will be investigations about what happened this week, but even a favorable finding might not do much to assuage the collective anger at the online brokerages and short sellers.
As Spatt pointed out, there’s not a good public understanding of the plumbing behind the screen as a user pushes the buy button, “even if regulators do” know what’s going on. For the brokerages, having ducks in a row legally speaking may not be good enough for the public.
Back when Robinhood announced that it had moved from being an “introducing broker” to being able to self-clear trades, getting a back office and a new plumbing system for trading, it said that users who didn’t want to participate could take their stocks and go, no hard feelings.
There’s a lot of language like this in terms of service that shows the goalposts were always there, if we read them.
“Most of us don’t read terms of service. Think about the typical internet contract we get. If you want the service, you figure you just have to say OK,” Spatt said. “… I don’t think it’s fair to say, ‘oh they’re changing the rules, how outrageous — now we should take them down. This is part of what it means to protect a financial system.”
Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
This article is auto-generated by Algorithm Source: finance.yahoo.com