Clearing houses are the financial muscle behind brokerage firms and trading apps, with specific mechanisms in place to protect funds and investors in times of high volatility. But after a slew of online brokers, including Robinhood, placed trading restrictions on hot “meme stocks” like GameStop and AMC — inciting fury among a highly vocal crowd of day traders — regulators are set to review what led to the market volatility.
Treasury Secretary Janet Yellen convened a meeting Thursday with the nation’s top financial regulators, including the Securities and Exchange Commission, the Federal Reserve and the Commodity Futures Trading Commission, Treasury officials confirmed to NBC News on Wednesday.
In an interview with ABC’s Good Morning America that aired Thursday, Yellen said that meeting would include discussions on “recent developments,” and “whether or not the recent events warrant further action.”
Retail investors and day traders are drawn to fee-free trading platforms because of their simplicity and low cost. But the rising popularity in online trading has led to an internal crisis in the financial markets and renewed scrutiny of their engine rooms.
The pandemic, a recent pause in sports betting, a shaky economy, and fractional trading have all drawn a new generation of investors who can trade from their phone, flooding a market traditionally dominated by institutional investors.
Robinhood declined to comment to NBC News. But in a blog post on Tuesday, Vlad Tenev, CEO and co-founder of Robinhood, wrote, “Millions of new investors have entered the market for the first time as technology transforms the world” and said it is “time for the financial system to catch up.”
In restricting trades, Robinhood is not the only brokerage firm to find itself squeezed by capital needed to cover the flood of trade activity. WeBull and TradeZero said they were told by their clearing house, Apex, that they would need to increase their deposits or be forced to restrict trading on GameStop, AMC and other hot stocks. TradeZero chose the former option, and is now responsible for a deposit that “nears seven figures,” CEO Dan Pipitone told NBC News.
“We’re happy to be [in the penalty box] as long as we continue to do what we do and let our customers know we have their back,” Pipitone said. “This is a speed bump for us, but we’re happy to do it.”
Anthony Denier, CEO of trading app WeBull, told NBC News Tuesday that Apex had asked his company to restrict trading for about an hour last Thursday.
“I didn’t make the decision, the decision was made for us,” Denier said. “I hope there is an investigation. I want complete transparency” about why trading on some stocks had to be halted temporarily, he said.
“The power a clearing firm has — it’s really up to them if they want to extend leverage to your company so they have that ability to shut leverage off and shut margin off,” Pipitone said. “If that happens, it would be like shutting us off.”
Apex declined NBC News’ request for comment.
Regulators may also review the controversial practice of payment for order flow, which enables trading firms to pay brokerages in order to execute trades by small-time investors.
The current regulations were designed to mitigate a financial domino effect across financial markets should an investor take a risky bet, and were created in response to the 2008 financial crisis, said Joshua Mitts, a securities law professor at Columbia Law School.
The federal regulators who designed these rules “didn’t think that in the event of high volatility, you can just be frozen out of the retail market,” he said. “That is the real innovation they are going to have to grapple with.”