Robinhood CEO Denies Collusion with Hedge Funds in GameStop SagaFebruary 18, 2021
Robinhood CEO Vlad Tenev has testified today before a House committee as lawmakers dig into the no-fee app’s role in the GameStop mania.
The CEO of millennium-geared brokerage has denied speculation that he was pressured by hedge funds to halt trading in GameStop and other stocks. In a prepared testimony, Tenev explained that Robinhood limited trading to meet financial obligations triggered by the spike in trading.
“Once again, I want to be clear. The action we took was for one reason and one reason only: to allow us to continue to meet our regulatory deposit requirements. Any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric,” Tenev said.
Robinhood critics, however, claim that its business model has an inherent conflict because the startup generates revenue by selling customers’ orders to hedge funds and other trading firms.
The no-commission app’s head called its initial decision ‘tough’ amid the meme stock craze but said it was inevitable after clearing houses hiked deposit requirements for equities ten-fold. This situation forced his company to raise $1 billion in emergency funds from investors to meet clearinghouse deposit requirements aimed at preserving their net capital positions.
Similar questions have been also raised against other brokerages that restricted buying shares of high-flying stocks as the Congressmen wanted to investigate what role hedge funds may have played in the move to halt trading.
The meteoric rise in the share price forced Wall Street institutions and other short betters to buy back the stocks at a higher price, effectively sitting on billions of dollars in losses.
It’s Time for Real-Time Settlement
Robinhood CEO also told lawmakers grilling him that after many brokers suffered immense financial strain from the retail trading frenzy, it’s time to consider real-time settlement in equities trading.
He added that clearinghouse deposit requirements are designed to mitigate risk, but recent wild market activity shows that these requirements, coupled with an unnecessarily long settlement cycle, had “unintended consequences” that introduce new risks.
“There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time. Doing so would greatly mitigate the risk that such processing poses,” Tenev explained before in a blog post.
The US Securities and Exchange Commission is also probing recent dramatic price run-ups in heavily shorted stocks, promoted by retail investors’ groups on Reddit’s boards.
The SEC is parsing the activity to uncover market instability and see if there is deliberate manipulation or fraudulent intent more broadly on stock markets.
Furthermore, the agency is investigating restrictions introduced by stock apps and online platforms, which sparked allegations involving conspiracy theories, political intervention, and that the hedge funds influenced trading platforms to stop the rout.
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