‘Let them trade’: Washington struggles with Robinhood politics

Later this month, the Robinhood co-founder is at risk of being grilled by angry lawmakers in Washington, who demand answers about his company’s role in the GameStop business saga.

Vlad Tenev’s appearance on February 18, which has yet to be officially announced, is said to come amid a wave of populist outrage after his online brokerage came under attack for placing limits on trading of GameStop and other stocks that had skyrocketed amid wild enthusiasm from retail investors.

Mr Tenev said the company imposed restrictions after clearing houses that settled trades demanded more margin from it, but the brakes sparked howls of disloyalty among retail investors, who say they favored the hedge funds that had placed big bets against stocks.

Their anger has been echoed by lawmakers from all walks of life, from Alexandria Ocasio-Cortez, the left-wing Democratic representative from New York, to Ted Cruz, the Republican senator from Texas.

Last week, Ms. Ocasio-Cortez was one of the first to suggest the need for congressional hearings, as she called the restrictions “unacceptable”.

“We now need to know more about Robinhood’s decision to prevent retail investors from buying stocks while hedge funds can freely trade stocks as they see fit,” she said Thursday.

How would you propose to regulate this kind of activity? I haven’t seen a single one of them tell me what this solution is

But politics are complex. This week, the value of GameStop shares and other preferred stocks by the army of retail investors fell, leaving many large paper losses.

The attention of lawmakers could quickly shift from the unfairness of the trade restrictions imposed by Robinhood and others to whether more should have been done to prevent people from buying stocks that had become overvalued after being pushed. by others on social media sites such as Reddit.

“What’s frustrating to me is that too many people get caught up in a sticky-to-man narrative, which is admittedly an engaging narrative,” Jim Himes, Democratic MP for Connecticut told the Financial Times. .

“It’s used to put some retail investors at huge risk, and I think they’ve probably been very badly injured already,” he added.

The GameStop affair comes at a time of transition in Washington, with Joe Biden’s new administration promising a tougher approach to financial regulation than Donald Trump.

As early as Thursday, Janet Yellen, Secretary of the US Treasury, is expected to call a meeting of regulators from the Federal Reserve, Federal Reserve Bank of New York, Securities and Exchange Commission and Commodity Futures Trading Commission to discuss the issues. surrounding Robinhood and GameStop. Gary Gensler, Mr Biden’s choice to be SEC chairman, has yet to be confirmed for his post, however.

“Secretary Yellen believes that the integrity of the markets is important and has called for a discussion of the recent volatility in the financial markets and whether recent activities are consistent with protecting investors and fair and efficient markets,” a door said on Tuesday. – word of the Treasury.

Any immediate regulatory action taken in response to the GameStop matter is likely to be of limited scope, including the enforcement of rules against market manipulation or higher capital requirements for online brokers such as Robinhood.

But this episode could fuel a more intense political debate over policing U.S. stock markets, the tax and disclosure requirements associated with hedge funds, and even the loose monetary policies of the Federal Reserve, which have been blamed. to fuel asset bubbles and risk taking.

“If this kind of madness continues, and spreads to other actions and bigger actions, and continues. . . there’s going to be a real demand for something to be done, but I think we’re not there yet, ”said Ian Katz, analyst at Capital Alpha Partners.

Members of Congress took the opportunity to make a wave of statements about the need to tighten financial rules so that they benefit ordinary Americans.

“The way we do things with the big banks and Wall Street in this country – this system is broken,” Sherrod Brown, the new Democratic chair of the Senate banking committee, said Tuesday in a TikTok video. “We are holding hearings on this and we are fighting back.”

When Ted Cruz says “ let them trade ”, make no mistake about it: he says “ let’s have a libertarian market where people are not protected from the consequences of their decisions ”

While Mr Brown’s comments suggest the need for fundamental Wall Street regulatory reform, at the moment much of the political anger is squarely focused on Robinhood. Elizabeth Warren, the Democratic Senator from Massachusetts, sent a letter to the company this week suggesting that its ties to certain hedge funds had motivated its decision to limit trading.

“The public deserves a clear account of Robinhood’s relationships with major financial firms and the extent to which these relationships can undermine its obligations to its clients,” Ms. Warren wrote.

Robinhood declined to comment.

Brad Sherman, the California Democrat who sits on the House financial services committee, said the hearing with Robinhood should be used to determine whether the platform “acted to lower the price” or whether it was placed in a position where she had taken too many risks to “trade”.

But he said the episode raised red flags about excessive risk-taking in the financial system. “If you want to play a video game, you should go to GameStop and buy it, not go to Robinhood and buy the stock,” he said.

Tony Fratto, a former senior treasury official under George W. Bush and founder of Hamilton Place Strategies, a consultancy firm, said critics of existing regulations have ill-defined political goals.

“How would you propose to regulate this kind of activity outside of existence?” I haven’t seen a single one of them tell me what that solution is, ”he said, adding,“ Do they want the SEC police chat rooms? Are we going to force disclosure on social media? “

For Mr Himes, the great risk of a knee-jerk reaction in Washington is that it could end up being counterproductive, especially if it results in the removal of guarantees for ordinary investors instead of strengthening them.

“When Ted Cruz says ‘let them do business’, make no mistake about it: he says ‘let’s have a libertarian market where people are not protected from the consequences of their decisions,’” ​​says Himes.

“And it also says, ‘Let’s remove things like margin requirements and smart regulation for unsophisticated investors who get into options trading.’

Additional reporting by Lauren Fedor in Washington