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Senator Elizabeth Warren requested Robinhood to clarify why GameStop buying and selling was restricted after hedge funds misplaced

Democratic Presidential Candidate Sen. Elizabeth Warren (D-MA) speaks during a town hall event at Weeks Middle School on January 19, 2020 in Des Moines, Iowa.

Spencer Platt | Getty Images

Senator Elizabeth Warren wrote in a letter to Robinhood Tuesday to explain why GameStop's red-hot stock trading was restricted after hedge funds suffered huge losses in a short period of time.

Warren, D-Mass., Noted that the online broker abruptly changed the trading rules for individual investors in certain stocks on its fee-free platform last week, while hedge funds and institutional investors on Wall Street continue to operate in GameStop, Koss, AMC, Entertainment, Express, Naked Brand Group and other companies.

"Robinhood has a responsibility to treat its investors honestly and fairly and to provide them with access to the market according to a transparent and uniform set of rules," Warren wrote in her letter to Robinhood CEO Vladimir Tenev.

"It is deeply worrying that the company may not do this," wrote Warren, a member of the Senate Banking Committee.

The letter asked Robinhood to disclose what resulted in severe trading restrictions being imposed on video game retailer GameStop and the rest of the stocks, and whether its hedge fund investors or other financial services partners who had large stakes in such trading supported the decision of the App companies influenced.

Robinhood had severely restricted purchases of a handful of stocks so that in some cases customers could only buy a single stock. In addition, the margin requirements for certain stocks and options have been increased.

"The public deserves a clear account of Robinhood's relationships with major financial firms and the extent to which those relationships could undermine its commitments to its customers," Warren wrote.

The Senator also wrote that she was "concerned that Robinhood had included compulsory arbitration clauses in its client agreement, suggesting that investors will not have sufficient opportunity to pursue their claims and seek relief."

At least 18 trade restriction lawsuits have been filed against Robinhood in the past week.

Warren wrote that forcing these allegations into "secret arbitration denies customers a fair hearing, undermines public accountability, and hinders efforts to have a thorough and complete understanding of what happened".

"Investors harmed by Robinhood's trading restrictions should be able to argue their case in court rather than in closed camera proceedings too often directed against claimants," she wrote.

A Robinhood spokeswoman did not immediately respond to a request for comment on Warren's letter.

Warren's letter came the same day Robinhood said it would allow customers to buy up to 100 GameStop shares while lifting restrictions on AMC and Koss and lifting restrictions on BlackBerry and Genius Brand.

The price of GameStop stock rose 400% last week and rose more than 1,600% through January, as a group of investors in RedStit discussion group WallStreetBets had hyped the stock.

The massive surge in the share price, in turn, put brief pressure on hedge funds that had bet that GameStop's share price would fall, so these funds had to buy shares to cover the losses on their positions. These purchases, in turn, added upward pressure on the share price and further exacerbated hedge fund losses.

Short sellers lost nearly $ 20 billion in GameStop positions last month due to the shortage.

Short sellers bet on a stock by borrowing stocks and then selling them. A short seller hopes that the price of the stocks will then fall so that the short seller can pocket the price difference when they later buy stocks to replace those they borrow.

However, when prices go up, a short seller must buy stocks to replace the borrowed stocks at a higher price than they initially sold. This situation results in a loss for the short seller.

Many individual traders and politicians on both sides of the aisle have criticized Robinhood's decision to restrict purchases of certain stocks like GameStop, which are at the center of the controversy.

Tenev, the CEO of Robinhood, told CNBC last week that his company capped 13 stocks on Wednesday as a risk management decision to protect the company and its investors.

Tenev said the decision was based in part on the Securities and Exchange Commission's net capital rules and clearinghouse deposit requirements that brokers must adhere to.

Last week's high trading volume put pressure on online brokers like Robinhood, which clients have to pay cash when closing a position.

The brokers also needed additional cash to provide their clearing facility with additional capital and to protect trading partners from excessive losses.

GameStop stock prices fell Tuesday, falling 51% to about $ 110 per share from noon.

This sharp drop follows a drop of more than 30% during Monday's regular market session.

GameStop's share price closed Friday at $ 325 per share.

If GameStop closes at its current level, the two day loss would be around 66%.

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