Interactive Brokers chairman: There’s a hole in the system that we immediately have to stop

18 Feb, 2021 10:39
source: Singularity Financial

Singularity Financial Hong Kong February 18, 2020 – Interactive Brokers chairman Thomas Peterffy told CNBC Wednesday that the U.S. financial system “have come dangerously close to the collapse of the entire system and the public seems to be completely unaware of that, including Congress and the regulators.”

“Nobody is to blame” for what happened in the GameStop frenzy, Peterffy said. “There’s a hole in the system that we immediately have to stop.”

In the case of GameStop, there was upward momentum from both the short sellers trying to cover plus Reddit traders buying the stock outright or call options in the name. These forces combined helped push GameStop’s stock from less than $20 in early January to an intraday high of $483 on Jan. 28. The stock is now less than $50 as the short squeeze came to an end.

Without restrictions that limited upside pressure on GameStop shares, Peterffy said the situation could have gotten to a point where both short-sellers and the market makers who serve as middlemen in options transactions could not have fulfilled their various obligations.

There were particular risks for market makers being able to meet their options-contract requirements, if all the contracts would have been exercised, Peterffy said. That creates the possibility for “the brokers default on the clearinghouses, so you end up with a complete mess that is practically impossible to sort out, so that’s what almost happened,” he said.

Clearinghouses play a crucial role in markets

Clearinghouses play a crucial role in markets from equities to derivatives. They stand between the parties to a trade to guarantee payment if either reneges. That crucial piece of financial-market plumbing was at the center of the matter, Peterffy said.

Peterffy said existing protocols around shorting can lead to calamity in the stock market because, in a number of instances, the shares of the company targeted by short sellers exceed the total shares outstanding.

“So as the price goes higher, the shorts default on the brokers, the brokers now must cover themselves, [and] that puts the price further up, so the brokers default on the clearinghouse, and you end up with a complete mess that is practically impossible to sort out,” the Interactive Brokers chairman told CNBC. “So that’s what almost happened.”

In prepared testimony ahead of his hearing, Robinhood CEO Vlad Tenev gave his perspective on the January action: “What we experienced last month was extraordinary, and the trading limits we put in place on GameStop and other stocks were necessary to allow us to continue to meet the clearinghouse deposit requirements that we pay to support customer trading on our platform.”

The Robinhood CEO says that the brokerage, which bills itself as catering to the average investor, said its daily value at risk, or VAR, surged by nearly 600% from $202 million on Jan. 25 to $1.4 billion by Jan. 28.

Robinhood Markets testimony to House Financial Services Committee

Peterffy said that lawmakers and regulators can solve the current problems surrounding short selling by calling for more frequent data on short selling and increasing margin requirements, or the leverage used, on shorted stocks.