Reddit-fueled trading could increase risk in the system, but Congress should not pick winners and losers, House Democrat says

• Massachusetts Rep. Stephen Lynch told CNBC that Reddit fueled trading could pose "systemic risk."
• Lynch said he's not sure Congress has given "the SEC tools that would allow them to deal with something like this."
• Lynch added, "I don't think it's wise for Congress to pick winners and losers here in this trade."

Massachusetts Democratic representative Stephen Lynch said Reddit-fueled trading could lead to "systemic risk" in an interview with CNBC on Monday. He added, however, that Congress shouldn't pick winners and losers in the battle between institutional short-sellers and Reddit's Wall Street Bets.

"I do worry about systemic risk in the longer term," Lynch said. "When we get 20 times the volume on options and this whole convergence with social media, fintech, the democratization that Robinhood brings. We didn't anticipate this. This is sort of an abrupt and manic development."

House Democrat Stephen Lynch told CNBC's Morgan Brennan he believes the financial system isn't "fair" or "particularly orderly" these days and that Congress should take a look at the situation.

Lynch said the "democratization" of the markets was a good thing, but it has already led to systemic issues, referring to Robinhood and other brokerage firms being forced to limit trading in certain equities.

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"Robinhood had explained they were curtailing trading was because of the requirements that we had put in, and that I voted for, where there are reserves necessary in trading volume. There are clearing requirements and posting collateral," Lynch said. "That type of discussion leads me to believe there was some systemic risk present."

The Securities and Exchange Commission requires clearinghouses and brokerages to have a certain percentage of reserves and collateral in place in order to continue operations. The regulation has led Robinhood and other trading platforms to look for liquidity amid a run on popular stocks.

"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets," Robinhood said in a blog post.

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When asked by CNBC's David Faber if he thought the regulations in place had done their job, Lynch responded by saying that the regulations were "helpful," but he's not sure "we have given the SEC tools that would allow them to deal with something like this."

Still, Lynch concluded by saying, "so many people have piled into this trade at this point, I don't think it's wise for Congress to pick winners and losers here in this trade, but I do think it's more important that we look at the integrity of the markets, that we look at the original mission of the SEC, and make sure that they are able to try to maintain those fair, orderly markets."