Shares of AMC (NYSE:AMC) are surging higher by over 12% after the results of a year-long investigation by the House Financial Services Committee was released. Meanwhile, Unusual Whales reports that AMC stock currently carries a high short interest of 28%.
The investigation concluded that trading in AMC and GameStop (NYSE:GME) created significant problems for Robinhood (NASDAQ:HOOD) and its market makers, like Citadel Securities.
Before trading restrictions were enacted on Jan. 28, 2021, Robinhood users collectively held $1.3 billion in AMC stock. After the trading restrictions, the value of AMC stock held declined to $411 million.
According to the committee, the rise of meme stocks, called the Meme Stock Market Event (MSME) in the report, revealed systemic issues in Robinhood’s infrastructure. In addition, the rise of meme stocks raised concerns in the payment for order flow (PFOF) business model. PFOF involves routing customer trading orders to a market maker in exchange for a fee. Companies like Robinhood can benefit from volatile prices, as increased trading activity can generate more PFOF rebates.
The reports include communication between top Robinhood executives concerning a liquidity shortage. For example, on Jan. 27 2021, Robinhood securities president Jim Swartwout texted COO Gretchen Howard that the company had a “Huge liquidity issue.”
AMC Stock: House Committee Releases MSME Report
Still, Robinhood’s head of government affairs Lucas Moskowitz believes that the report addresses “nothing new.” He explained:
The report corroborates that the decisions and requests Robinhood made and waivers granted were generally the same decisions, requests and waivers made and granted by others in the industry.
The Committee report concluded that Robinhood’s PFOF strategy “strained several market makers” and created risks for the stock market. It also suggests that Robinhood lied to the public when the company stated that it had necessary liquidity.
Meanwhile, the report mentions that Robinhood relied on “incomplete statistical models” when calculating its collateral obligations before the MSME. If the company had not received a waiver from the Depository Trust and Clearing Corporation (DTCC), then it would have defaulted on its collateral obligations. On Jan. 28 2021, the DTCC waived $9.7 billion of six of its member firms’ collateral deposit requirements, including Robinhood.
All in all, the report concluded that the rise of retail trading created “novel issues” for market stability. In addition, regulators were unprepared for the issues that occurred as a result.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
