Robinhood ‘didn’t change the rules’ on users in market chaos, says former SEC economist

Robinhood, Interactive Brokers, Webull and others shut down the GameStop (GME) share buy function on Thursday, prompting bipartisan attacks from politicians as well as criticism from clients who wanted the same trading freedom as hedge funds betting that the stock would fall.

Animosity was particularly 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, those stocks were just companies and business infrastructure doing what they were supposed to do. This, he said, was an example of an effective settlement.

“[The mainstream] is going down on Robinhood saying ‘they changed the rules’. No, they haven’t changed the rules, ”Spatt said. “First of all, their contracts allow them great flexibility to intervene in terms of protecting their business.”

Contracts with their users in terms of service and in their back-end device that clears and settles trades allow for changes depending on the situation, Spatt explained.

“You have a situation where the old margin requirements weren’t good enough and that may have put Robinhood at significant risk if customers go missing because their portion is underwater,” he said. . “It’s a risk management problem, and there is a problem for clearing entities because they obviously don’t want the risks passed on to them.”

“ They don’t really understand the dynamic that occurs after an exchange ”

The CEOs of Robinhood and Webull both told Yahoo Finance that stopping buy orders and leveraged trading had nothing to do with a behind-the-scenes conspiracy or restrictions on freedom.

“It was all about the dynamics of the market and the demands of the clearing house,” Vlad Tenev told Yahoo Finance live, echoing the words of Anthony Denier, CEO of Webull, the day before.

Robinhood’s Tenev told Yahoo Finance on Friday that “obviously, [the situation is] highly technical and involves settlement mechanisms ”, which will represent an interesting avenue for those who are involved in explaining what happened.

The story continues

The day before, Webull’s Denier said: “There is an outcry because a large part of the retail business [investors], they don’t really understand the dynamics that occur after a trade. “

“It has nothing to do with the decision or some sort of smoke-filled cigar room of Wall Street companies coming together to the dismay of the retail trader. It has to do with market settlement mechanisms, ”he added.

That won’t stop the conspiracies, which Tenev once again firmly denied on Friday, as he controlled the damage amid calls to boycott users and angry politicians calling them out.

The Securities and Exchange Commission (SEC), for its part, issued a joint statement from senior officials saying the agency was “aware of and actively monitoring” market volatility.

Spatt said the SEC and regulators were more than capable of dealing with the complexity, but many politicians appeared to be playing the “Monday morning quarterback.”

The bad publicity prompted the former SEC chief economist to compare the situation with the 2008 financial crisis, where institutions did not intervene to stop market volatility.

“Here we have a situation where a company, as part of its contractual structures, comes in,” he said of the actions taken by brokerages to suspend purchases.

There will be inquiries into what happened this week, but even a favorable conclusion may not do much to allay the collective anger against online brokers and short sellers.

As Spatt pointed out, the public does not fully understand the plumbing behind the screen when a user hits the buy button, “even though regulators know” what is going on. For brokerage houses, having ducks in a row legally may not be good enough for the public.

Back when Robinhood announced that it had gone from being an ‘introductory broker’ to being able to auto-clear trades, get a back office and a new plumbing system for trading, he said that users who didn’t want to participate could take their actions and go, no hard feelings.

There is a lot of language like this in terms of service that shows the goals were still there, if we read them.

“Most of us don’t read the terms of service. Think about the typical internet contract we get. If you want the service, you think 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 out. It is part of what it means to protect a financial system. “

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Ethan Wolff-Mann is a writer at Yahoo Finance specializing in consumer issues, personal finance, retail, airlines and more. Follow him on twitter @ewolffmann.