May 28, 2023

Democratic Presidential Candidate Sen. Elizabeth Warren (D-MA) speaks during a town hall event at Weeks Middle School on January 19, 2020 in Des Moines, Iowa.

Spencer Platt | Getty Images

Senator Elizabeth Warren wrote to Robinhood Tuesday to explain why trading in glowing GameStop stocks was restricted after hedge funds suffered huge losses in a short period of time.

Warren, D-Mass., Noted that last week the online broker abruptly changed the trading rules for individual investors in certain stocks on its fee-free platform, while hedge funds and institutional investors on Wall Street continue to operate in GameStop, Koss , AMC, Entertainment, Express, Naked Brand Group and other companies.

“Robinhood has a responsibility to treat its investors honestly and fairly and to provide them with access to the market according to a transparent and uniform set of rules,” Warren wrote in her letter.

“It is deeply disturbing that the company may not do this,” wrote Warren, a member of the Senate Banking Committee.

The letter asked Robinhood to disclose what resulted in strict trading restrictions on video game retailer Gamestop and other stocks, and whether its hedge fund investors or other financial services partners who had large stakes in such trading made the decision of the app company.

“The public deserves a clear account of Robinhood’s relationships with major financial corporations and the extent to which those relationships could undermine their commitments to their customers,” Warren wrote.

Robinhood had severely restricted purchases of a handful of stocks, and in some cases only allowed customers to buy a single stock. In addition, the margin requirements for certain stocks and options have been increased.

Warren’s letter came the same day Robinhood said it would allow customers to buy up to 100 GameStop shares while increasing restrictions on AMC and Koss and removing restrictions on BlackBerry and Genius Brand.

GameStop stock rose 400% last week and rose more than 1,600% through January, as a group of investors on Reddit’s WallStreetBets discussion group hyped the stock.

The massive surge in the share price, in turn, put brief pressure on hedge funds who had bet that GameStop’s share price would fall, so these funds had to buy shares to cover the losses on their positions. These purchases, in turn, added upward pressure on the share price and further exacerbated hedge fund losses.

Short sellers lost nearly $ 20 billion in GameStop positions last month due to the shortage.

Short sellers bet on a stock by borrowing stocks and then selling them. A short seller hopes that the price of the shares will then fall so that the short seller can pocket the price difference when buying shares later to replace the shares he has borrowed.

However, when prices go up, a short seller must buy stocks to replace the borrowed stocks at a higher price than they initially sold. This situation results in a loss for the short seller.

Many individual traders and politicians on both sides of the aisle have criticized Robinhood’s decision to restrict purchases of certain stocks, such as GameStop, that are at the center of the controversy.

Robinhood CEO Vlad Tenev told CNBC last week that his company restricted 13 stocks on Wednesday as a risk management decision to protect the company and its investors.

Tenev said the decision was based in part on the Securities and Exchange Commission’s net capital rules and clearinghouse deposit requirements that brokers must adhere to.

Last week’s high trading volume put pressure on online brokers like Robinhood, which clients have to pay cash when closing a position.

The brokers also needed additional cash to provide their clearing facility with additional capital and to protect trading partners from excessive losses.

GameStop stock prices fell Tuesday, falling 51% to about $ 110 per share from noon.

This sharp drop follows a drop of more than 30% during Monday’s regular market session.

GameStop’s share price closed at $ 325 per share on Friday.

If GameStop closes at its current level, the two-day loss would be roughly 66%.