Interactive Brokers Chairman: More Short Squeezing Against Investment Firms Can Take Down Entire System

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Written by Dana Sanchez
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Interactive Brokers Chairman: More Short Squeezing Against Investment Firms Can Take Down Entire System. Photo by: STRF/STAR MAX/IPx 2020 7/22/20

Users of the Reddit board r/WallStreetBets are credited with helping raise stock prices of struggling companies such as GameStop to counter established short-selling investment strategies.

Some Wall Street investment firms are freaking out.

Shares of GameStop skyrocketed more than 400 percent this week and 1,750 percent this year thanks to the activity of retail investors. 

The GameStop frenzy has been described as a “bottom-up revolution” that shifts power to the people — to small investors.

Robinhood wasn’t the only broker that blocked or restricted GameStop purchases. Interactive Brokers and TD Ameritrade also imposed unprecedented restrictions on trading in GME, AMC and other huge short squeezes on Wednesday. Charles Schwab raised margin requirements.

After GameStop trading was temporarily stopped on the New York Stock Exchange and brokers including Robinhood blocked purchases on Thursday, millions of day traders watched as the stock’s price went from $263 at opening to a high of $492 and then down to close at $193.

For many of these traders, it isn’t just about the money, Jose Antonio Lanz wrote for Decrypt. “It’s about a collective effort to give Wall Street the finger and hit hedge funds, specifically those who took out short positions on GameStop, where it hurts: their pocketbooks.”

Thomas Peterffy, the founder and billionaire chairman of Interactive Brokers, is considered a Wall Street pioneer. He cited systemic risk as one of his main reasons for restricting investments in companies like GameStop.

A short squeeze has the potential to ripple throughout the market, Peterffy said Thursday in an interview with MarketWatch.

“It can take down the entire system, theoretically,” Peterffy said.

Robinhood, which on Thursday prevented customers from buying more shares of GameStop and other companies, said it would allow “limited buys” starting Friday. This sent heavily shorted stocks soaring “as an army of social-media rallying retail investors sought to take on established Wall Street firms,” MarketWatch reported.

“Robinhood shut it down because the wrong people were making money and the wrong people were losing money,” Irami Osei-Frimpong tweeted.

Peterffy said he was concerned that Robinhood on Thursday is allowing “limited buys” of GameStop, AMC and others.

“There is no reason why a short squeeze cannot go on indefinitely,” Peterffy said.

Peterffy told CNBC in an interview on Thursday that he is worried about Interactive Brokers and the soundness and safety of the market.

“We are worried about the integrity of the marketplace and the clearing system,” he said on CNBC’s “Closing Bell.

“The authorities are trying to stop the RUN,” The Moguldom Nation CEO Jamarlin Martin tweeted. “you start ‘squeezing & squeezing’ and other things start breaking brown, CONTAGION. Trillions of dollars of value could go GHOST. The financial system is too fragile with too many vulnerabilities for them not to try to stop this.”

Clearinghouses are at the center of these short trades, where investors use borrowed money to bet that a stock’s value will fall, Peterffy told MarketWatch. They stand between two parties in a trade to guarantee payment if either side reneges. If short squeezes go on too long, they can take out other brokerage platforms in a domino effect, he said.

To protect against default, clearinghouses require their members — banks and brokers — to be well-capitalized, to deposit collateral and to pay into a default fund. If a broker can’t collect from the losers in short bets, then they must have enough capital to cover losses to the clearinghouse, which could lead to further liquidation, Peterffy told MarketWatch.

“The broker may not have sufficient capital to make up for the losses, then they have to default on the clearinghouse,” he said. “I’m not comfortable with the current situation because if the brokers go, the clearinghouse has to collect from other members…and it is a domino effect.”  

After imposing trading restrictions, Robinhood announced that it received a cash infusion of more than $1 billion, Bloomberg reported. The Securities and Exchange Commission said it will look into potential misconduct and decisions by brokerages to curtail transactions on certain stocks.

In an interview with CNBC’s Andrew Ross Sorkin, Robinhood CEO Vlad Tenev denied Robinhood had a liquidity problem and said Robinhood had tapped into credit lines as a proactive measure.

“We want to put ourselves in a position to allow our customers to be as unrestricted as possible in accordance with the requirements and the regulations,” Tenev said. “So we pulled those credit lines so that we could maximize within reason the funds we have to deposit at the clearinghouses.”

On Twitter, Ross Gerber commented: “It seems that Robinhood margined out. They had to shut trading down or it was going to explode. They’ve drawn all their credit. They need a huge capital infusion. It’s possible that retail beat Robinhood, not just the shorts.”

Here’s a short history of GameStop, courtesy of Decrypt: GameStop sold physical copies of video games in retails stores, mainly in malls. As digital content distribution boomed, online retailers beat out mall-based businesses and business declined.

Several institutional traders started short-selling GameStop stocks with huge leveraged positions. The stock went from about $45 a share to less than $5 in 2020. Then people on the Reddit board r/WallStreetBets decided to take on some of the brokers who opened shorts, such as Melvin Capital and Citron Research.

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Decrypt described the traders as a “self-organized army” that started buying up huge amounts of shares, driving up their price in a matter of hours. (The investors have also been described as rookies.) The hedge funds, backed by millions of dollars in capital, held out at first, but they were no match for the millions of united retailers, Decrypt reported: “At least two major funds had to close their positions with huge losses—although one of them, Melvin Capital, received a $2.8 billion bailout shortly after that.”

One Reddit user, u/Ssauronn, directed a comment to Melvin Capital, saying it is “a firm who makes money off of exploiting a company and manipulating markets and media to your advantage. Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ’08 crisis were not punished.” 

“This is personal for me,” u/Ssauronn continued, “and millions of others. You can drop the price of GME after hours $120, I’m not going anywhere. You can pay for thousands of reddit bots, I’m holding. You can get every mainstream media outlet to demonize us, I don’t care. I’m making this as painful as I can for you.”

Read more: ‘F**k Robinhood’: Traders File Class Action Lawsuit Against Robinhood for Selectively Removing GameStop And Other Securities