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Interactive Brokers Chairman Thomas Peterffy told CNBC on Wednesday that the U.S. financial system faces more stress during the GameStop trading frenzy than is generally accepted.
“We have come dangerously close to the collapse of the whole system and the public seems to be completely ignoring it, including Congress and regulators,” Peterffy said in an interview on “Closing Bell”.
Peterffy’s remarks came a day before the House Financial Services Committee was set to hold a hearing on GameStop’s epic short squeeze that happened in late January. Among those expected to testify are the managing directors of stock trading app Robinhood and hedge fund Melvin Capital, which had been exposed on GameStop.
Representatives from Interactive Brokers are not expected to be part of Thursday’s hearing.
During the height of the trading mania, Robinhood, along with other brokers, including Interactive Brokers, imposed varying levels of temporary restrictions on GameStop and other speculative actions, which had become favored by users of forums such as WallStreetBets from Reddit. These measures have been the subject of strong criticism from retail investors, who have argued that it puts them at a disadvantage to institutional investors.
But those affiliated with brokerage houses, such as Robinhood CEO Vlad Tenev and Peterffy, have repeatedly defended the decisions as being necessary to comply with various capital requirements and protect the financial system in the face of activity. volatile business.
Peterffy, who founded Interactive Brokers more than four decades ago, said Wednesday that the market vulnerabilities stem from the fact that there is so much interest in GameStop combined with large options business.
Short selling is a bearish strategy in which an investor borrows shares of a stock and then sells them quickly, hoping to buy back shares later at a lower price. They then return the borrowed shares and profit from the difference. When the opposite happens, as with GameStop, short sellers may seek to buy back the stock at its current higher price in order to minimize losses.
A call option gives investors the right – but not an obligation – to buy a stock at a predetermined strike price. It is essentially a bet that a certain stock will rise, while short selling is a bet that a stock will fall. During the Reddit frenzy, retail traders aggressively bought GameStop call options, which can have the effect of pushing the underlying stock higher when this occurs in highly speculative situations.
In the case of GameStop, there has been an upward momentum from short sellers trying to hedge and Reddit traders directly buying the stock or calling options on behalf of it. These combined forces helped push GameStop’s stock from under $ 20 in early January to an intraday high of $ 483 on January 28. The action is now below $ 50 as the short squeeze has ended.
But without restrictions that limit the upward pressure on GameStop stocks, Peterffy said the situation could have gotten to a point where short sellers and market makers who act as middlemen in options trades don’t could not have fulfilled their various obligations.
There were particular risks for market makers in being able to meet their options contract requirements, if all contracts had been exercised, Peterffy said. This creates the possibility for “brokers to default on clearing houses, so you end up with a complete mess that is practically impossible to sort out, so that’s what almost happened,” he said. .
He added that regulatory fixes need to be implemented to reduce the likelihood of something similar happening in the future. For example, Peterffy said companies should have to report short interest on a stock daily, instead of the twice-per-month requirement currently in place. He also said: “I think they should increase the margin requirements on shorts by 1% for each person who bypasses. [a stock]. “
“No one is to blame” for what happened in the GameStop frenzy, said Peterffy. “There is a hole in the system that we must immediately stop.”
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