A GameStop retail location is seen in Los Angeles, Calif., on January 31, after a ragtag group of amateur investors, video gamers and Internet trolls effectively brought some Wall Street investors to their knees. Photo by Jim Ruymen/UPI | License Photo
Feb. 18 (UPI) -- Vlad Tenev, the CEO of Robinhood, an app that allows commission-free trades of stocks, defended the company's decision to halt trading during the run on GameStop in January, saying the "historic volatility" of trading left him no choice.
Tenev made the comments during a hearing of the House financial services committee, which is investigating the late January short squeeze that targeted shares of GameStop, AMC Entertainment and other companies.
"The buying surge that occurred during the last week of January in stocks like GameStop was unprecedented, and it highlighted a number of issues that are worthy of deep analysis and discussion," Tenev told Congress.
"Preventing customers from selling is a very difficult and painful experience where customers are unable to access their money," he added. "We don't want to impose that type of experience on our customers unless we have no other choice."
Tenev also address the suicide of one of Robinhood's traders, Alex Kearns. The 20-year-old college student killed himself after misunderstanding information on the app, mistakenly believing he owed $730,000. His family is suing Robinhood.
"First of all, I'm sorry to the family of Mr. Kearns for your loss," Tenev said. "The passing of Mr. Kearns was deeply troubling to me and the entire family."
He said the company is taking steps he believes will prevent future misunderstandings, including changing the app's interface; providing live, phone-based support; and hiring an education specialist.
Reddit CEO Steve Huffman and Keith Gill, one the Reddit investors who led the GameStop surge, also testified.
Last month, members of the Reddit group WallStreetBets bought shares in GameStop, a national video game retailer, AMC Entertainment and other companies in a coordinated squeeze that sent their values soaring -- and sacked investors who were betting against, or "shorting," those stocks.
The effects of the squeeze on Wall Street was substantial. Losses for short sellers are estimated in the billions and the total net effect for thousands of financial firms nationwide who were hurt by their short positions is said to run in the tens of billions.
Robinhood ultimately restricted trading of those shares out of fear that it couldn't cover the losses, raised hundreds of millions or dollars in new capital and then lifted the restrictions.
The run on certain stocks subsequently drew praise and claims of hypocrisy from some who said the short sellers and hedge funds who took the losses finally got a taste of their own medicine. The movement led to closer scrutiny from lawmakers and even Treasury Secretary Janet Yellen.
"Initially, this squeeze led to heavy losses for some short sellers, particularly hedge funds, and led to substantial financial gain for some retail investors," the committee said in a statement. "Eventually, the stock prices started to decline and many investors were faced with steep financial losses."
Congressional Democrats and Republicans agreed that the issue needed looking into and Thursday's hearing could lead to new legislation to rein in some underregulated practices on Wall Street.
In his testimony, Gill told the committee he is not part of any hedge fund, didn't organize the run on GameStop stock and is just an occasional investor who sometimes posts market activities online.
"Like many people, sometimes I post on social media my thoughts and analysis about individual stocks and whether they are correctly valued," he said in his opening remarks. "I did that with GameStop. I believed the company was dramatically undervalued by the market. The prevailing analysis about GameStop's impending doom was simply wrong.
"Hedge funds and other Wall Street firms have teams of analysts working together to compile research and critique investment ideas, while individual investors have not had that advantage," he added. "Social media platforms like YouTube, Twitter, and WallStreetBets on Reddit are leveling the playing field.
"And in a year of quarantines and [COVID-19], engaging with other investors on social media was a safe way to socialize. We had fun."
While the GameStop incident last month has united Congress in seeking answers, some experts say it's unlikely to result in any new laws.
"Sweeping legislation is pretty unlikely given the divide in Congress," analyst Daniel Smith, a partner at ACA Compliance Group, told USA Today.
"But there could be some rulemaking that comes out of this from the regulatory agencies.
"The January short squeeze raises questions regarding whether legislators and regulators should take a closer look at existing rules governing short sales and related disclosures," the committee said. "It also raises important questions about the efficacy of anti-market manipulation laws and whether technology and social media have outpaced regulation in a manner that leaves investors and the markets exposed to unnecessary risks."