System collapse threatened: Founders of Interactive Brokers: The GameStop trade has uncovered a huge hole in the system | message


?? Interactive Brokers founder Thomas Peterffy: GameStop has brought us close to system breakdown
?? Rules for shorting stocks under criticism
?? Peterffy asks SEC to fix it immediately© The  steep rise and subsequent fall in GameStop shares have resulted in losses for both hedge funds and many private investors. Thomas Peterffy is also certain that the events almost caused a system breakdown. © The  founder of Interactive Brokers told “MarketWatch” at the end of January, at the height of the GameStop hype, that a short squeeze “could theoretically bring the whole system to collapse” and added it again in an interview with “CNBC” last week . He also sharply criticized the regulatory authorities because, in his opinion, short selling could only get this far because of the current rules.

More GameStop shares shortened than exist in the market

“I would like to point out here that we are dangerously close to a collapse of the entire system and that the public, including Congress and the regulators, seems to be completely unaware,” said Peterffy in an interview with “CNBC” last Wednesday Look at the development of the GameStop share at the end of January. In his opinion, however, nobody can be blamed for the almost complete system collapse, rather there is a “hole in the system” that was first uncovered by the event and “that we have to fix immediately,” said the Interactive Brokers founder.

Part of the problem, according to Peterffy, is that it is allowed to sell short more shares in the market than are actually in circulation. For example, on January 28, the day of the first huge price jump at GameStop, there would have been 50 million registered outstanding shares in the game retailer, while the short interest – i.e. the number of shares sold short that have not yet been closed out – would have been 70 million was, the expert told “CNBC”. Such a situation can arise because when buying shares on credit, many brokers get the right to lend the shares to short sellers. If they then sell the paper to an investor who financed the purchase with credit, this process can be repeated. “As soon as one securities loan is lined up after the other, a chain of transactions arises that can ultimately lead to such a situation,” explained Peterffy to the “Neue Züricher Zeitung”.

If the actual owners of the short-sold GameStop shares now pay their securities loans, the brokers are obliged in return to book the shares into their custody account as well. If the shortsellers are unable to deliver these stocks, then the broker “must go into the market according to the rules of the system and buy the stocks, regardless of the price,” said the expert in the “CNBC” interview. In such a case, the brokers at GameStop would have had to deliver more shares than actually exist and, according to Peterffy, that would have pushed their price into the region of thousands of dollars.

“Total chaos” and a bad domino effect would have been possible

© The  whole thing is made even more complicated by the fact that not only share buyers and sellers as well as brokers are involved in a trade, but also clearing houses are involved, which stand between the two trading partners and guarantee payment if a trading partner cannot make this. © The se clearinghouses typically require the banks and brokers that are part of their members to be well capitalized, to deposit loan collateral, and to pay into a fund that will step in in the event of default.

If a broker cannot collect money from the losers, in this case the short sellers, he must have sufficient capital himself to cover the losses against the clearing house, Peterffy told “MarketWatch”. If the broker does not have sufficient capital for this, he will be in arrears with the clearing house. In this case, it will procure the money it lacks from its other members, which, according to the founder of Interactive Brokers, can lead to a domino effect of insolvency. “So while the price [für die GameStop-Aktie] goes up, the shorts get in arrears with the brokers, the brokers now have to cover themselves and that drives the price up further, so the brokers get in arrears with the clearing house and in the end you have total chaos, which is practically impossible again is to be resolved. That’s what almost happened “, Peterffy summed up the situation to” CNBC “.

Some brokers such as Robinhood and Peterffy’s Interactive Brokers reacted to this impending disaster by increasing the requirements for security deposits and restricting trading in certain stocks such as GameStop – under severe criticism. For example, Interactive Brokers only allowed positions to be liquidated or closed and also required a security of 100 percent for long positions and a security of 300 percent for short positions, as “MarketWatch” reported.

Peterffy: That way the SEC could avoid such problems in the future

An increase in the legally required security for short selling and more frequent publication of data on short sales are then also the central requirements that Thomas Peterffy places on legislators and regulators in order to avoid similar situations in the future. Because the main problem is that the required collateral for shorts does not increase if the short interest – that is, the number of short sales – increases, he told “CNBC”. But that is also because nobody knows the actual short interest, as the SEC only publishes corresponding data twice a month. Peterffy therefore requests a daily report of the current short sale data. In addition, it would be up to the SEC “to adjust the requirement for margin requirements for short sellers – from previously 50 percent deposited equity to 100 percent plus 1 percent of each additional 1% share of the already ‘shorted’ papers,” he told the Neue Zürcher Zeitung “. © The n “there would always be enough collateral and nobody would end up in a mess”. editorial team

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Image sources: Ken Wolter /, Casimiro PT /

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System collapse threatened Founders Interactive Brokers GameStop trade uncovered huge hole system message


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