The House Financial Services Committee is expected to bring together several of the main players in the GameStop saga following the public outcry against the online trading platform Robinhood and the decisions of other brokers to briefly restrict trading in so-called meme stocks this month. past.
Robinhood executives, market maker Citadel Securities, hedge fund Melvin Capital, social media company Reddit, and Keith Gill, an independent investor who found fame and fortune with his first purchases from GameStop Inc. GME,
actions, will declare all in sight, scheduled for Thursday at noon. Here’s what to expect:
The players
Robin Hood: The popular online broker without commissions has been the favorite tool of a new class of retail investors who have integrated social media into investment decision making.
As the company’s app has exploded in popularity in recent years, it has come under fire for not being direct with customers about how it makes money and for intermittent interruptions that have left its users unable to negotiate. Last month’s decision to restrict GameStop Inc.’s share purchases, just as a social media campaign to increase shares was growing, led to allegations that the company was trying to sabotage the shares to help short sellers.
Robinhood executives, however, have said in a sworn testimony that Robinhood stopped buying stocks because their users made overwhelming and long bets on extremely volatile stocks, often with borrowed money, triggering massive calls for collateral. from the corridor exchange center. . Co-CEO Vlad Tenev will testify on Thursday.
Citadel Values: Founded by billionaire Ken Griffin, who will also testify Thursday, the stock wholesaler is one of Robinhood’s most important sources of revenue, as it pays brokers the privilege of executing their clients ’orders. Market makers like Citadel Securities practice this “pay-as-you-go” because they get a very small profit from every transaction they make (the difference between the purchase and sale price of a security) which is on average slightly higher than they pay to run the trade.
Melvin Capital: A hedge fund that reportedly accumulated huge losses after betting against GameStop by selling the shares in the short term. The fund was bailed out by other Point72 and Citadel hedge funds, according to the Wall Street Journal. The Citadel hedge fund is also owned in part by Ken Griffin, but is not affiliated with Citadel Securities. CEO Gabriel Plotkin will appear before the committee on Thursday.
Reddit: A popular social news platform where GameStop action was heavily promoted. Regulators have been investigating the site to determine if users promoting such memes engage in illegal behavior, such as intentionally lying about a security to manipulate its price. Reddit CEO and co-founder Steve Huffman will testify Thursday.
Keith Gill: An independent investor who often posted about his success in investing in GameStop and other meme stocks.
What questions will be asked?
Lawmakers will be anxious to know if there was any collusion on the part of Robinhood, Citadel Securities and Melvin Capital to stop the concentration on GameStop shares. Citadel Securities and Robinhood have publicly denied that this was the case, but expect committee members to investigate the matter thoroughly.
Ben Koultun, research director at Beacon Policy Advisors, predicted that there could be a wide range of issues raised at the hearing outside of the investigation of what motivated Robinhood to restrict trade.
“What I’m looking for is whether a narrative comes out of audiences that provide a path to normative or legislative changes or whether members are more concerned with maintaining their own political discussion points that they can include in a press release.” he told MarketWatch.
Koulton said it is likely to be the latter, given that several weeks after declining meme volatility, no consistent account has emerged of what the episode tells policymakers about the state of financial markets.
In the past, Democrats exploited Robinhood for features that encouraged frequent use of the app, which observers have labeled gamification, but after GameStop volatility, high-profile Democrats were much more eager to ‘attacking hedge funds, the practice of short selling and Robinhood by blocking new GameStop purchases from what were critical with online brokers to make it too easy and unattractive to speculate on financial stocks.
Republicans, on the other hand, may see the wisdom of attacking Wall Street and Silicon Valley in the abstract, but Koulton predicted that they would work primarily to retaliate against Democratic attacks and calls for stricter regulation of market structure or practices. such as short-term sales.
“There’s been a more populist leaning on the Republican party lately, but I doubt they’re looking forward to going for a Republican megadonant like Ken Griffin,” he said.
What will be the effect of the audience?
Without a bipartisan agreement on what problems the GameStop saga has revealed to U.S. financial markets, audiences are unlikely to serve much more than political theater, according to Brian Gardner, Washington’s chief strategic officer at Stifel.
“The audience will serve for good television, but in terms of figuring out what could be some policy change from the GameStop episode, we would pay more attention to the Senate Banking Committee hearing on Gary’s nomination Gensler to lead the Securities and Exchange Commission, as the SEC will take the lead in making any policy changes, “he wrote in a note to clients Tuesday.
“Congress could turn the SEC into specific changes, but regulatory action rather than legislation is the likely path,” he added, noting that Gensler’s hearing could be scheduled as early as next week.
The most likely issue for the SEC to focus on in its regulatory review is the practice of order flow payment, which critics say creates a conflict of interest between the broker’s clients and market brokers who accept the payment.
However, regulators have conducted an extensive review of this practice in the past, especially after a 2014 Senate investigation. “Payment of the order flow has been litigated in the past and the SEC has decided not to do any important change, ”Koltun said, noting that supporters of the practice say it has allowed brokers to eliminate commissions, which benefits the average investor. “The citadel and payment order flow have too many advocates in the CC atmosphere for it to change.”
Sen. Sherrod Brown, an Ohio Democrat and chairman of the Senate Banking Committee, has said she also intends to hold a hearing “on the current state of the stock market,” but has not yet set a date.