WASHINGTON (Pakistan Point News / Sputnik - 19th February, 2021) The chief executive of Robinhood Markets apologized on Thursday to retail investors who felt let down by the trading application in the GameStop shares debacle that triggered one of Wall Street's biggest market upheavals in a decade.
"I'm sorry for what happened," Vlad Tenev, a Bulgarian native who migrated to the United States at the age of five and became a billionaire after setting up Robinhood in 2013, told a Congressional hearing held to investigate the GameStop controversy. "Despite the unprecedented market conditions in January, at the end of the day, what happened is unacceptable to us, and to our customers. I'm sorry, and I apologize. Please know that we are doing everything we can to make sure this won't happen again."
Shares of GameStop suddenly surged last month, from around $20 to over $400, after retail stock buyers on social media site Reddit pushed the video-gaming retailer's shares higher in an apparent organized bid to frustrate hedge funds "shorting" those shares in a move to drive their price down.
Shorting is essentially selling shares one does not already own at a higher price and buying them back lower to pocket a profit. It's a strategy that can make huge profits when done well. But in the case of GameStop, some of the hedge funds on the other side of the retail investors on Redditors lost billions of Dollars as the shares rose heavily in price after they were shorted.
Even as retail investors appeared to have won the day, those on Reddit were� furious with Robinhood for restricting them from buying more GameStop shares at the height of the stock's rally that could have added to their profit, accusing it of protecting its hedge fund customers from further losses. Robinhood's restrictions eventually caused GameStop shares to fall from their highs.
The trading app later said it was acting to meet the capital requirements placed on the firm by the clearing house for US equity transactions. But the Reddit crowd was not pacified, and has filed multiple class-action lawsuits against the brokerage.
Retail investors also accuse Robinhood of colluding with at least one hedge fund � Citadel � to stop them out of GameStop. Citadel is one of Robinhood's main clients in providing "order flow" for the brokerage's trades.
Order flow, a legitimate but controversial practice, is where major market makers like hedge funds pay apps like Robinhood a fee for executing their other customers' trades with them. Critics say payment for order flow creates a conflict of interest that allows market makers to trade ahead of retail investors.
Tenev told Thursday's hearing that the decision to restrict purchases of GameStop was "purely driven" by surging deposit and collateral requirements imposed upon his firm, and that he was not acting at the behest of hedge funds.
"We don't answer to hedge funds," Tenev told the lawmakers who questioned him in Congress. "We serve the millions of small investors who use our platform every day to invest. Robin Hood immediately secured additional funds all together through capital raising and other measures. We've increased our liquidity by more than three billion dollars to cushion ourselves against increased collateral requirements and related markets' stress in the future."
The GameStop debacle caused one of the biggest disruptions on Wall Street since the markets meltdown presaging the 2008/09 financial crisis, and could prompt the Securities and Exchange Commission to come up with laws demanding greater transparency on short selling and other trading practices.
