The frantic negotiation of the shares of GameStop and other companies will be the subject of what must be a fiery Congressional hearing on Thursday, when American politicians will have their first chance to question executives from the trading app Robinhood, Reddit and other players from saga.
The Chamber’s financial services committee will hold a midday hearing in a first step to ease the furor around the trade at GameStop, AMC cinemas and other companies whose stock values have skyrocketed as small investors piled up their stocks.
The audience, entitled Game Stopped? Who wins and loses when short sellers, social media and retail investors collide must be turbulent.
Shares in GameStop, a troubled video game store chain, rose 1,600% in January, as an army of small investors, many using the Robinhood trading app, seemed to have bet that Wall Street hedge funds had overstated by betting that the stock price would collapse – a practice known as short selling.
Encouraged by members of the Reddit WallStreetBets forum, investors continued to buy the shares, raising the price and causing huge losses for some hedge funds.
Robinhood briefly suspended trading on GameStop and other major stocks in late January and sparked allegations that hedge funds and others may have pressured Robinhood and other trading platforms to halt the defeat.
The news managed – briefly – to unite Washington’s deeply divided political elite. Both right-wing senator Ted Cruz and progressive representative Alexandria Ocasio-Cortez attacked Robinhood’s decision to stop trading GameStop by small investors.
Ocasio-Cortez is part of the bipartisan financial services committee.
Among those who testify are:
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Robinhood CEO Vlad Tenev.
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Reddit CEO Steve Huffman.
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Gabe Plotkin, founder of the hedge fund Melvin Capital Management, who was forced to bail out after retail traders crushed their bets against GameStop.
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Ken Griffin, billionaire CEO of Citadel, an investment company that does business with Robinhood clients and also helped rescue Melvin.
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Keith Gill, a well-known online marketer like Roaring Kitty and DeepFuckingValue and a longtime GameStop booster.
The hearing marks the first time that key players in the GameStop controversy have been forced to publicly acknowledge the anger that the episode provoked among small investors and across the political spectrum.
Gregg Gelzinis, associate director of economic policy at the Center for American Progress, said: “The GameStop drama raised some public policy issues, but first it is important that members of Congress understand how the events unfolded.”
Gelzinis said there are still doubts about the schedule of events. More broadly, he said, GameStop highlighted many crucial issues for regulators, including the role and regulation of hedge funds, whether or how Wall Street is using social media to drive the investment strategy, “gamification” of investment by trading apps and the economy incentives at stake for trading platforms.
“What would have happened if Robinhood had failed? What would have been the side effects for the financial markets? ” he asked. “These are major investor protection issues.
“I saw someone on Twitter describe it as a Rorschach test for financial regulators,” he added.
The hearing will not be the last inquiry that executives at the center of the controversy will face. Federal prosecutors have started an investigation, according to the Wall Street Journal, and the Securities and Exchange Commission, the United States’ main financial agency, is combing social media posts for signs of potential fraud.
In the meantime, there was evidence that small investors were not the biggest buyers of GameStop and other major companies. According to an analysis by JP Morgan, institutional investors may be behind much of the dramatic rise in share prices.
“Although retail buying was portrayed as the main driver of the extreme price hikes experienced by some stocks, the real picture could be much more nuanced,” JP Morgan analyst Peng Cheng told clients in a note.
Gelzinis said Thursday’s audience is likely to raise as many questions as it answered, but it was a necessary first step to understanding the seismic changes in investments that GameStop highlighted.
“This is just the beginning of the story,” he said. “It is clear that this is not just a well-defined story of small investor versus Wall Street. It is a very confusing picture, but we hope that in the end we can paint a clearer picture and draw some public policy conclusions from it. “