The financial system came close to collapse with the GameStop case, according to a broker By Investing.com

The financial system came close to collapse with the GameStop case, according to a broker By Investing.com

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Actions7 hours ago (18/02/2021 14:16)

Investing.com – As the US Senate will today hear from the main protagonists in the GameStop Corp (NYSE:) case, including the bosses of Robinhood and Reddit, the president of one of the world’s largest brokers has stressed how close to disaster the situation has come.

« What I would like to point out here is that we have come dangerously close to a collapse of the entire system, and the public seems to be completely unaware of it, including Congress and the regulators. »

That’s what Thomas Peterffy, founder and president of Interactive Brokers Group Inc. said today on CNBC, describing the dire situation the market was in in late January when individual investors rallied on Reddit to send a handful of heavily short sold stocks, including GameStop, to very high levels, with consequences for the entire market.

As Peterffy explained to MarketWatch in an interview last month, the « short squeeze » that occurred shook the clearinghouses and forced a number of brokerage firms to try to protect themselves by increasing margin requirements and capping trades in certain stocks to prevent a broader market meltdown.

It should be noted that clearing houses play a crucial role in markets from equities to derivatives by positioning themselves between the parties to a transaction to guarantee payment if one of them waives its right.

This cornerstone of the functioning of financial markets was at the heart of the issue, Mr. Peterffy said.

In his view, existing protocols around short selling can lead to a stock market calamity because, in a number of cases, the shares of the target company by short sellers exceed the total number of shares outstanding.

« So when the price goes up, the short sellers default on the brokers, so the brokers have to cover themselves, it increases the price again, so the brokers default on the clearing house, and you end up with a complete mess that is virtually impossible to fix. So that’s what almost happened, » he explained.

Finally, Peterffy said that legislators and regulators can address the current problems associated with short selling by requiring more frequent data on short selling and increasing the margin requirements, or leverage used, on short selling stocks.

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The financial system came close to collapse with the GameStop case, according to a broker By Investing.com
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