Watch Live: GameStop Hearing On Market Manipulation

Topline

A Congressional hearing into the GameStop mania that triggered the largest weekly selloff since late October is underway, with some of the key players in the saga—billionaire Citadel CEO Kenneth Griffin, Robinhood CEO Vladimir Tenev, Reddit Cofounder Steve Huffman and the 34-year-old securities broker behind the Roaring Kitty online persona—all set to testify.

Key Facts

Committee Chair Maxine Waters (D-Mo.) kicked off the hearing by asking Tenev whether he misled investors on January 28 when he denied that Robinhood had a liquidity problem despite raising more than $3 billion in the following days to meet reserve requirements from the Securities & Exchange Commission.

“We always felt comfortable with our liquidity,” Tenev responded, dodging requests from Waters and other committee members for a simple yes-or-no answer. 

Griffin, meanwhile, said he learned of Robinhood’s trading restrictions on meme stocks only after they were first imposed, throwing cold water on online speculation that Robinhood and Citadel coordinated on the decision beforehand.

“We simply play by the rules of the road,” Griffin said of the payment-for-order-flow business model that allows Robinhood to make money by directing its orders to market-makers like Citadel Securities, which then helps execute the trade between buyers and sellers.

Asked about whether Elon Musk drove up the price of GameStop shares with a simple “Gamestonk!!” tweet on January 26, Melvin Capital CEO Gabriel Plotkin, whose hedge fund lost billions on its GameStop shorts, said he did not “want to speculate” on the price movement.

Referencing the SEC’s pending investigation on the matter, Jennifer Schulp, the Cato Institute’s director of financial regulation studies, said there’s “been little evidence” that Reddit traders engaged in false or deceptive behavior, which would be required to conclude that they manipulated the market.

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Key Background

Late last month, retail investors on Reddit’s r/WallStreetBets discussion board mounted an effort to prop up the prices of heavily shorted stocks such as GameStop, AMC and Naked Group. The move led to near-1,000% gains for the so-called meme stocks and forced hedge funds such as Melvin Capital to cede their bearish short positions at massive losses. The resulting uncertainty, volatility and investor demand (largely fueled by margin debt) led online brokerages like Robinhood to restrict trading in such stocks in order to meet stringent cash reserve requirements, further fueling price volatility and fervor among the Reddit crowd. Though it’s since bounced back, the market ultimately posted its worst weekly decline since late October.

Surprising Fact

On January 27, the day GameStop prices surged 135% to a meteoric record high, Citadel Securities executed 7.4 billion shares on behalf of retail investors–more than the average daily volume of the entire U.S. equities market in 2019, Griffin said in prepared remarks Thursday. The next day, Tenev says its excess cash requirement surged to about $1.4 billion, nearly seven times the requirement just three days earlier and more than Robinhood had on hand. The SEC then levied a charge of $2.2 billion on Robinhood, forcing it to raise more than $3 billion as a result of the volatility-induced requirements.

Chief Critic

The hearing on Capitol Hill is “mostly political theater,” David Trainer, the CEO of investment research firm New Constructs and a Forbes contributor, said Friday, noting that the hearing doesn’t have any impact on the broader stock market and that it’s “highly unlikely” to yield any meaningful regulatory changes. “Individual investors will continue to bypass institutions as new technologies provide more transparency and tools to empower them,” Trainer added, echoing comments from Ranking Member Patrick McHenry (R-N.C.) who said at Thursday’s hearing that “Congress cannot put technology back in the box.”

Tangent

In December 2020, Robinhood agreed to pay $65 million to settle allegations from the SEC that it failed to tell customers between 2015 and 2018 that its largest revenue source was derived from the trading firms–including Citadel Securities–to which it routed customer orders. The practice ultimately deprived Robinhood investors from about $34.1 million they could’ve generated from other online brokerages–even after accounting for the platform’s no-fee trading.

What To Watch For

A slew of litigation has abounded as a result of the GameStop mayhem. Robinhood is reportedly facing about 90 lawsuits, largely from angry retail investors, for its decision to halt trading in meme stocks. And on Tuesday, Keith Gill, known as Roaring Kitty on Reddit, was named in a proposed class-action lawsuit alleging the 34-year-old securities broker committed securities fraud for misrepresenting himself as an amateur trader while pumping up GameStop stock prices online.

Further Reading

Reddit Trader Roaring Kitty Accused Of Fraud In The Latest Wild Lawsuit Coming Out Of GameStop Saga (Forbes)

How GameStop And An Army Of Reddit Traders Exposed The Riskiest Market In Decades (Forbes)

GameStop Short Seller Says He’s Been Targeted With Anti-Semitic Harassment By Reddit Trolls (Forbes)

Published at Thu, 18 Feb 2021 18:51:12 +0000

By Editor