Lawmakers call for regulation after Robinhood halts trading

The trading app Robinhood restricted trading Thursday in GameStop, AMC, Nokia, BlackBerry and a few other ’90s favorite brands that have been targeted for boosting by the Reddit forum WallStreetBets. It’s allowing users to buy limited quantities again Friday. Other brokers limited trades as well. But at least one retail investor sued Robinhood, saying the company manipulated the market to protect the hedge funds that have lost a lot of money placing short bets on GameStop over the past several months.

Those funds, of course, are able to keep trading where and whenever they like. A number of Democratic lawmakers are also calling for regulation, including U.S. Rep. Ro Khanna, D-Calif., who represents Silicon Valley. The following is an edited transcript of our conversation.

Ro Khanna: The biggest challenge, in my view, has less to do with technology and more to do with the financial regulations. I mean, the fact that we have hedge funds that can go short stock and then go on television and tell people to sell is appalling. And we need regulations on that and a financial transaction tax. Now, what technology did is it gave ordinary people the ability to stand up because we don’t have the regulations. They said, “Well, we’re going to do something to beat the hedge funds.” And it did give individuals the opportunity to do that. But what we really need is a regulatory framework.

Molly Wood: Robinhood has restricted trading on certain stocks for certain traders, and that does seem to upset the narrative that this app has come along and decentralized and democratized trading for all.

Khanna: Exactly, I mean, that was the hope. But then, when you first see the retail traders winning, which is such a rarity, the next day, they come out and they say that they’re going to stop trading for ordinary individuals, but hedge funds can still trade off hours. That’s inexcusable. And that’s why I’ve called, along with Rep. [Alexandria] Ocasio-Cortez and several others, for a hearing in the Financial Services Committee to investigate why Robinhood made that decision [and] whether they had any institutional investors influence that decision. So there should be rules about what can trigger a site like Robinhood, an app like Robinhood, to stop trading. It shouldn’t just be at their discretion, and it should apply equally to everyone.

Wood: There’s no question, though, that absent regulation, we have seen pretty profound changes in the financial industry because of fintech and because of an app like Robinhood coming along and forcing everybody else to make trading free and easy. This is disruption, right? This is the kind of disruption that your district has produced over and over.

Khanna: Yes, and I think to the extent that there’s disruption that is healthy, is to be applauded. I’m glad that ordinary people actually got to stand up to hedge fund shorting. But technology is not sufficient without proper regulations. And the big miss here is what hedge funds are doing on a daily basis that gives them comparative advantage. And these apps, apparently, are not being fair, I mean, they’re not giving equal access. And that’s the role for regulation.

Wood: You have written that we need to have a system that incentivizes crowdsourcing for making things and building things as opposed to driving up stocks that aren’t actually worth hundreds of dollars. What are your plans to do that?

Khanna: Well, one of the things I’ve been looking at is that the Treasury Department has an institution called a Federal Financing Bank. They ought to be lending and having debt in building factories across this country, have electric vehicle factories, have new auto factories, have solar plants, where you lend hundreds of millions of dollars in conjunction with the private sector to reindustrialize America. That would be a productive investment. And we’ve seen that when the government partners with the private sector in that kind of investment, it actually initiates and incentivizes private investment and crowdsourcing. I think we’ve had an over-financialization of our economy, and we need to think about how we’re going to have productive capacity that leads to good jobs.

Wood: I will say, though, a lot of the people who are on this WallStreetBets forum, who are participating in this movement, I guess, are saying, “This is crowdsourcing that actually gets us paid in a way that we can’t in our economy, because wages are stagnant or we’ve lost our jobs.” That’s certainly not everybody, but is there value in crowdsourcing that makes up for gaps in the American economy?

Khanna: There’s definitely value that these folks have made money. And my concern is that that shouldn’t be the alternative to structural economic reform — a higher minimum wage, actually good-paying jobs. I mean, it would be sad to me if this is the only way that working-class and middle-class Americans can make money. So I support, I’m on the side of the Reddit traders in this dispute. But I think that we need regulations for their fairness, we need to make sure that they’re not being taken advantage of in the future. A lot of people, the more people trade, the economic studies show that they actually lose money if you trade a lot. And so we need to have regulations on that, and we have to have structural reform in the economy so people have options for getting good jobs and don’t feel that this is the only way they can make ends meet.

Related links: More insight from Molly Wood

Robinhood denied that any hedge fund pressured it to limit trades.

Here’s Robinhood’s blog post, where it announced it was keeping customers informed through this market volatility — aka not letting customers buy certain stocks and limiting others’ ability to buy them using credit. Here are a couple of stories about the backlash, which is not limited to just Robinhood, by the way. Interactive Brokers and TD Ameritrade did the same and nobody was happy.

Now, one thing several people online pointed out is the hard realities of terms of service. Nilay Patel over at the Verge noted that Robinhood’s terms specifically say it can restrict or prohibit trading. And any platform can restrict trading when things are really volatile, especially the margin buying, which is basically people borrowing to buy stock. In theory, these platforms restricted buying to protect their customers, which is what the founder of Interactive Brokers said on CNBC. It’s a dangerous game for all, for sure. But it’s pretty clear that no one feels protected since somehow the only ones not getting protected are the ones making all the money.

And really, what Robinhood and other platforms are likely doing is protecting themselves, because if you buy on credit and you lose big or you can’t cover your own losses, they’re left with the bill. Robinhood apparently took out several hundred millions of dollars in lines of credit on Thursday in case of major losses.