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The House Financial Services Committee is set to grill several of the principal actors in the GameStop saga following public outcry against online trading platform Robinhood and other brokers’ decisions to briefly restrict trading in so-called meme stocks last month.
Executives at Robinhood, market maker Citadel Securities, hedge fund Melvin Capital, social media firm Reddit, and Keith Gill, an independent investor who found fame and riches with his early purchases of GameStop Inc. GME, -5.52% shares, will all testify at the hearing, scheduled for noon on Thursday. Here’s what to expect:
The Players
Robinhood: The popular no-commission online broker has been a favorite tool of a new class of retail investors who have integrated social media into their investment decision making.
As the firm’s app has exploded in popularity in recent years, it has come under fire for not being straightforward with customers about how it makes money and for intermittent outages that have left its users unable to trade. Last month’s decision to restrict purchases of shares of GameStop Inc. just as a social-media campaign to pump up the stock was cresting led to accusations that the firm was attempting to sabotage the stock to aid short sellers.
Robinhood executives, however, have said in sworn testimony that Robinhood halted purchases of the stock because its users were overwhelmingly placing one-way, long bets on the extremely volatile stock, often with borrowed money, which triggered massive calls for collateral from the broker’s clearinghouse. Co-CEO Vlad Tenev will testify on Thursday.
Citadel Securities: Founded by billionaire Ken Griffin, who will also testify Thursday, the securities wholesaler is one of Robinhood’s largest sources of revenue, as it pays brokers for the privilege of executing their customers’ orders. Market makers like Citadel Securities practice this “payment for order flow” because they earn a very small profit from each trade they execute — the spread between the buying and selling price of a security — that is on average slightly larger than what they pay to execute the trade.
Melvin Capital: A hedge fund that reportedly racked up huge losses after betting against GameStop by selling the stock short. The fund was bailed out by fellow hedge funds Point72 and Citadel, according to the Wall Street Journal. The hedge fund Citadel is also owned in part by Ken Griffin, but is otherwise unaffiliated with Citadel Securities. CEO Gabriel Plotkin will appear before the committee Thursday.
Reddit: A popular social news platform where GameStop stock was heavily promoted. Regulators have been investigating the site to determine whether users promoting such meme stocks engaged in any illegal behavior, like intentionally lying about a security in order to manipulate its price. CEO and co-founder of Reddit Steve Huffman will testify Thursday.
Keith Gill: An independent investor who frequently posted about his success in investing in GameStop and other meme stocks.
What questions will be asked?
Lawmakers will be eager to learn if there was any collusion on the part of Robinhood, Citadel Securities and Melvin Capital to stop the rally in GameStop shares. Citadel Securities and Robinhood have publicly denied this to be the case, but expect committee members to probe the question thoroughly.
Ben Koultun, director of research at Beacon Policy Advisors, predicted there could be a very wide range of issues raised at the hearing outside of probing what motivated Robinhood to restrict trading.
“What I’m looking for is whether a narrative comes out of the hearings that provide a path forward for regulatory or legislative changes, or whether members more concerned about keeping with their own political talking points that they can package into a press release,” he told MarketWatch.
Koulton said that it’s likely to be the latter, given that several weeks after the meme-stock volatility has subsided, no coherent narrative has emerged as to what the episode tells policy makers about the state of financial markets.
Democrats have in the past blasted Robinhood for features that encourage frequent use of the app, which observers have labeled gamification, but following the GameStop volatility, high profile Democrats were much more eager to attack hedge funds, the practice of short selling, and Robinhood for blocking new purchases of GameStop than they were critical of online brokers for making it too easy and appealing to speculate in financial securities.
Republicans, on the other hand, may see the wisdom in attacking Wall Street and Silicon Valley in the abstract, but Koulton predicted that they would mostly work to push back against Democrats’ attacks and calls for stricter regulation of market structure or practices like short selling.
“There has been a more populist bent to the Republican Party lately, but I doubt they’ll be eager to go after a Republican mega-donor like Ken Griffin,” he said.
What will the effect of the hearing be?
Without bipartisan agreement on what problems the GameStop saga has revealed in U.S. financial markets, it’s unlikely the hearings will serve as much more than political theater, according to Brian Gardner, chief Washington Policy Strategist at Stifel.
“The hearing will make for good TV but in terms of figuring out what if any policy changes might result from the GameStop episode, we would pay more attention to the Senate Banking Committee’s hearing on the nomination of Gary Gensler to run the Securities and Exchange Commission, since the SEC will take the lead in making any policy changes,” he wrote in a Tuesday note to clients.
“Congress might jawbone the SEC into specific changes, but regulatory action rather than legislation is the likely path forward,” he added, noting that the Gensler hearing could be scheduled as soon as next week.
The most likely issue for the SEC to focus on in its regulatory review is the practice of payment for order flow, which critics say create a conflict of interest between broker’s customers and the market makers brokers accept payment from.
Regulators, however, have done extensive reviews of this practice in the past, notably following a 2014 investigation by the Senate. “Payment for order flow has been litigated in the past and the SEC has decided not to make any major changes,” Koltun said, noting that supporters of the practice say it has enabled brokers to eliminate commissions, benefitting the average investor. “Citadel and payment for order flow have too many strong advocates within the DC atmosphere for it to be changed.”
Sen. Sherrod Brown, Democrat from Ohio and Chairman of the Senate Banking Committee has said he also intends to hold a hearing “on the current state of the stock market,” but has yet to set a date.
