We were ‘dangerously close’ to the collapse of the ‘whole system’, says Interactive Brokers founder before GameStop hearing

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“‘What I would like to point out here is that we have come dangerously close to the collapse of the entire system, and the public seems unaware of it, including Congress and regulators.’ ”

That’s Thomas Peterffy, founder and president of Interactive Brokers Group Inc., detailing Wednesday on CNBC the dire situation the market was in at the end of January when individual investors on social media platforms came together to send a handful of stocks very short, including bricks. video game retailer GameStop Corp. GME, -7.21% and movie chain AMC Entertainment Holdings AMC, -1.77%, at sky-high levels, with shockwaves hitting the entire market.

As Peterffy explained to MarketWatch in an interview last month, the so-called short squeeze that ensued shook the clearinghouses and forced several brokers to try to protect themselves by raising margin requirements and limiting trading in select stocks to avoid further chaos. scope. in the markets. Peterffy’s comments come ahead of a much-anticipated hearing at noon Thursday, in which the House Financial Services Committee will question executives at Robinhood Market, Melvin Capital and Kenneth Griffin, owner of hedge fund Citadel. LLC and its securities trading arm Citadel Securities. Social media firm Reddit, and Keith Gill, an independent investor, who rose to prominence during the GameStop affair, will also be questioned about their roles in the frenzy of trade that gripped the public and briefly helped spark a mini-sale in the Dow. Jones Industrial Average DJIA, + 0.29%, the S&P 500 SPX, -0.03% and the Nasdaq Composite COMP, -0.58% indices. Clearing houses play a crucial role in the markets, from stocks to derivatives. They stand between the parties to an exchange to guarantee payment if either defaults. Read: The GameStop frenzy puts clearing houses in the spotlight as investors weigh systemic risk fears. That crucial piece of financial market plumbing was at the heart of the matter, Peterffy said. Peterffy said that existing protocols on shorting can lead to a calamity in the stock market because, in several cases, the company’s shares targeted by short sellers exceed the total number of shares outstanding. “So as the price goes up, shorts don’t charge brokers, brokers must now hedge [and] that drives the price even higher, so the brokers don’t pay the clearing house and you end up with a total disaster that is virtually impossible to solve, “the Interactive Brokers president told CNBC. “So that’s what almost happened.” In testimony prepared before his hearing, Robinhood CEO Vlad Tenev gave his perspective on the January action: “What we experienced last month was extraordinary, and the business limits we set at GameStop and other actions were necessary to enable us to continue to meet the deposit requirements of the clearinghouse that we pay to support clients’ operations on our platform. ”Robinhood’s CEO says the brokerage, which advertises itself as targeting the average investor, said that Its daily value at risk, or VAR, increased nearly 600% from $ 202 million on January 25 to $ 1.4 billion on January 28.

Testimony from Robinhood Markets before the House Financial Services Committee

The increase in its deposit requirements forced Robinhood to raise $ 3.4 billion in additional capital to allow clients to resume normal trading on its platform, the CEO said. Take a look: Reddit millionaire investor is ready to tell Congress ‘I’m as optimistic as ever’ about GameStop’s change. Peterffy said lawmakers and regulators can solve current short-selling issues by asking for more frequent data on short selling and increased margin requirements. or the leverage used, in short stocks.