Reddit GameStop Squeeze Is a Game Changer

William Galvin, Massachusetts' top securities regulator, is investigating Keith Patrick Gill, the person behind the Roaring Kitty YouTube streams that, combined with a string of posts by Reddit user DeepF***ingValue, drove a sudden increase in GameStop stock trading, slamming hedge funds that had bet against the struggling retailer.

The Massachusetts Securities Division "is looking into whether or not MassMutual should have been aware of Mr. Gill's activities," a spokesperson for Galvin's office said.

Tenev's Take

Vlad Tenev, co-founder and CEO of Robinhood Markets, told Bloomberg Technology's Emily Chang in a Jan. 28 interview that Robinhood "to be clear, didn't restrict trading; we restricted buying on about 13 securities on the platform. Customers that held securities could sell them and customers were also able to trade the thousands of other securities on Robinhood without restriction."

Tenev went on to say that "there's been an unprecedented market environment the past couple of weeks, where there's been concentrated investing around stocks that have been very, very popular on social media; so you're seeing kind of an intersection of social media and finance and individual retail investors participating in the markets like they've never before."

Robinhood's decision "was a technical and operational decision that we made because Robinhood as a brokerage has financial requirements, including clearinghouse deposits that we have to make to various clearinghouses, some of these requirements fluctuate based on volatility in the markets, and in this current unprecedented environment can be substantial."

Schwab insisted in a statement that neither it nor TD Ameritrade "halted buying or selling ANY stocks" the week of Jan. 25. "Neither firm restricted buying or selling basic options."

Both firms did, though, "adjust margin requirements on select stocks to ensure clients had sufficient assets to pay for stock purchases … and also restricted certain advanced options strategies," Schwab explained.

Moving to T+1?

Jennifer Schulp, director of Financial Regulation Studies at The Cato's Institute's Center for Monetary and Financial Alternatives, noted on an early February podcast held by Cato that while "it's completely understandable" that investors would be upset by not being able to make the trades, "it's not at all unusual for brokerage platforms to have to restrict trading in certain securities or under certain circumstances when situations are unusual."

However, "that's not to say that investigations won't turn up facts that we don't know right now. Robinhood's decision, or about Schwab's decision. … But this idea of restricting the trading is not unusual," Schulp said.

With the rapid increase in GameStop's price and the volatility in the price, "the clearing company … required a significant amount more capital from these brokerage platforms in order to make the clearing process work."

During the two days it takes to clear a stock trade, "the risk and the liability for that trade stays on the books of that brokers and as the stock prices increases and gets a little bit wild, it costs more to keep that liability for the brokerage platform," Schulp explained.

Toes, who interviewed former SEC Commissioner Michael Piwowar during the STA podcast, said the current T+2 "settlement process does appear to be antiquated."

While serving as acting SEC chairman in 2017, Piwowar finalized a rule to change the settlement date for securities transactions to T+2 from T+3. "That was the easiest regulatory layup in the history of the commission," said Piwowar, now executive director of the Milken Institute Center for Financial Markets. "We had been at T+3 for 22 years; we were behind the rest of the world," he said. It was a "win, win, win to shorten the settlement cycle."

With the changes in technology four years later, "is it appropriate to look at shortening the settlement cycle now" to T+1? Piwowar asked rhetorically. "Of course it is. This should be one of the more high priority things the commission works on."

Washington Bureau Chief Melanie Waddell can be reached at [email protected].