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Cruz Calls For Scrutiny of Platforms That Halted GameStop Trading

A GameStop store in California / Getty Images
January 29, 2021

Senator Ted Cruz (R., Texas) called for congressional hearings to determine what role, if any, federal regulators played in pressuring online brokers like Robinhood to suspend the buying of buzzy stocks that skyrocketed following discussions on Internet platforms for retail investors.

Cruz's call marks a surprisingly bipartisan moment, as legislators on both sides of the aisle call for hearings to investigate whether those retail investors were unfairly disadvantaged by the halt in trades.

Referring to the trading halt of GameStop, AMC, Nokia, and other stocks yesterday, Cruz said, "On the face of it, it seems to favor a handful of rich influential players at the expense of ordinary citizens and ordinary traders."

"I expect there will be considerable scrutiny directed to any platforms that halted trading as to why they did it, who asked them to do it, and what did the regulators say," Cruz told the Washington Free Beacon. "I hope it's not the case that government regulators were somehow encouraging this step."

In a Thursday statement, Robinhood insisted the halt was due to SEC-imposed financial requirements that were triggered by market volatility. Public, another trading app that stopped trading for three hours on Thursday, blamed its clearing firm, Apex Holdings, for halting purchases of certain stocks.

Bloomberg reported that Robinhood "tapped at least several hundred million dollars" in bank credit lines on Thursday, which many commentators interpreted as a move to meet SEC liquidity requirements to continue offering trades. The broker opened trading on the hot stocks today but only allowed purchases of full shares of GameStop, which at the time of writing trades at $278 a share. Robinhood allows purchasing fractional shares of other stocks.

Certain to be under congressional scrutiny is the hedge fund Citadel, which has adamantly denied allegations of market meddling but which purchases a large percentage of Robinhood's order flow. Rather than sending orders directly to the stock exchange, Robinhood sends them to market makers, firms that stand ready to buy or sell stock at quoted prices. Those market makers pay for the order flow as they make a fractional profit on every trade.

Citadel and its partners also poured $2 billion into Melvin Capital, the hedge fund whose short positions on GameStop suffered most from the trading frenzy on Monday. On Wednesday, Melvin announced that it had closed out its position on GameStop and was no longer shorting the stock.

Politicians as far apart as Sens. Mike Lee (R., Utah) and Sherrod Brown (D., Ohio) and Reps. Alexandria Ocasio-Cortez (D., N.Y.), and Patrick McHenry (R., Va.), the ranking member of the House Banking Committee, joined in calls for congressional hearings.

In a sign of the strangely bipartisan moment, AOC hosted an online Twitch stream and nodded along as a caller railed against the government regulations that restrict individuals with less than $25,000 in their accounts from certain kinds of trading.

By contrast, Sen. Elizabeth Warren (D., Mass.) released a letter to the SEC, asking it to explain whether "social media amplification" violated existing securities laws.