The move has been roundly bashed by politicians on the left and right and caused a wave of anger towards Wall Street for supposedly rigging the system against individual retail investors, and specifically Robinhood for abandoning its core beliefs of “democratizing finance.”
But in an interview with Yahoo Finance, Webull CEO Anthony Denier explained that the situation was not an unsavory conspiracy against traders who had made money from the so-called short squeeze on GameStop.
“There is an outcry because a lot of the retail, they don't actually understand the dynamics that happen after a trade,” Denier said. “It has nothing to do with the decision or some sort of closed room smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.”
The market for GameStop became unsettled this month after activist investor Ryan Cohen, the founder of Chewy, secured a seat on the retailer’s board of directors. GameStop’s stock soared as he stepped up his efforts to transform the company, and soon members of a Reddit group called Wall Street Bets began buying up shares in the game retailer.
Soon, investors betting against the stock — which had faced trouble amid a shift to digital video games — had to buy the stock too, to cover their losses. The stock went from $65 a share at market close on Friday, Jan. 22 to close at $347.51 the following Wednesday.
That’s when the three online brokerages stepped in to put the brakes on the buying. For Webull, this was not a nanny move to protect investors from buying at the top and then getting mad nor was it a move to save the hedge funds that were shorting GameStop, Denier said.
“Our clearing firm simply cannot afford the cost to settle those trades,” he said.
During moments of volatility, the transaction costs can spike due to risk and a variety of factors.
“We cannot use customer funds to front that cost due to regulation,” Denier said. “So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost.”