The House’s Financial Services Committee is set to question several of the key players in the GameStop saga after public protests against the online trading platform Robinhood and decisions by other brokers to briefly restrict negotiations on so-called meme stocks last month.
Executives from Robinhood, market maker Citadel Securities, hedge fund Melvin Capital, social media company Reddit and Keith Gill, an independent investor who found fame and wealth with his first purchases of GameStop Inc. GME,
actions, they will all testify at the hearing, scheduled for noon on Thursday. Here’s what to expect:
The players
Robinhood: The popular commission-free online broker has been the favorite tool of a new class of retail investors who have integrated social media into their investment decisions.
As the company’s app has exploded in popularity in recent years, it has been criticized for not being direct with customers about making money and for intermittent interruptions that prevented its users from trading. Last month’s decision to restrict stock purchases from GameStop Inc. at a time when a social media campaign to increase inventory led to accusations that the company was trying to sabotage stocks to help short sellers.
Robinhood executives, however, said in a sworn statement that Robinhood suspended stock purchases because its users were placing unilateral and long bets on extremely volatile stocks, often with borrowed money, which triggered massive requests for guarantees from the broker compensation. Co-CEO Vlad Tenev will testify on Thursday.
Citadel Securities: Founded by billionaire Ken Griffin, who will also testify on Thursday, the securities wholesaler is one of Robinhood’s biggest sources of revenue, as he pays brokers for the privilege of executing their clients’ orders. Market makers like Citadel Securities practice this “pay-per-order flow” because they earn a very small profit from each trade they execute – the spread between the buy and sell price of a security – which is on average slightly higher than what they pay to run the trade.
Melvin Capital: A hedge fund that allegedly accumulated huge losses after betting against GameStop by selling the shares short. The fund was redeemed by other hedge funds Point72 and Citadel, according to the Wall Street Journal. The Citadel hedge fund is also partly owned 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’s actions have been widely promoted. Regulators have been investigating the site to determine whether users who promote these stockpiles of memes have engaged in any 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 frequently posted about his success in investing in GameStop and other memes.
What questions will be asked?
Lawmakers will be eager to know if there has been any collusion on the part of Robinhood, Citadel Securities and Melvin Capital to prevent the rise in GameStop shares. Citadel Securities and Robinhood have publicly denied that this is the case, but they expect committee members to investigate the issue fully.
Ben Koultun, research director at Beacon Policy Advisors, predicted that there could be a wide range of issues raised at the hearing in addition to probing what motivated Robinhood to restrict negotiations.
“What I’m looking for is whether a narrative leaves audiences that provide a path for regulatory or legislative changes, or if members are more concerned with maintaining their own political talking points that they can package in a press release,” he told the MarketWatch.
Koulton said it is likely to be the last, given that several weeks after the volatility of the meme’s stock has waned, no coherent narrative has emerged about what the episode tells policymakers about the state of the financial markets.
In the past, Democrats have criticized Robinhood for resources that encourage frequent use of the app, which observers have labeled gamification, but after GameStop’s volatility, high-profile Democrats were much more eager to attack hedge funds, the practice short sales and Robinhood blocking new purchases from GameStop than criticizing online brokers for making it very easy and attractive to speculate on financial securities.
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 resist attacks by Democrats and calls for stricter regulation of market structure or practices such as sales. uncovered.
“There has been a more populist tendency towards the Republican Party lately, but I doubt that they are eager to go after a Republican mega-finisher like Ken Griffin,” he said.
What will be the effect of the audience?
Without a bipartisan agreement on the problems the GameStop saga has revealed in the US financial markets, audiences are unlikely to serve as much more than political theater, according to Brian Gardner, Washington’s chief policy strategist at Stifel.
“The audience will be good for TV, but in terms of finding out if any policy changes could result from the GameStop episode, we would pay more attention to the Senate Banking Committee hearing on Gary Gensler’s appointment to head the Securities and Exchange Commission, since the SEC will take the lead in policy changes, ”he wrote in a note to clients on Tuesday.
“Congress can order the SEC to make specific changes, but regulatory action, rather than legislation, is the likely way forward,” he added, noting that Gensler’s hearing could be scheduled for next week.
The most likely issue for the SEC to focus on its regulatory review is the practice of payment by order flow, which critics say creates a conflict of interest between the broker’s clients and the market makers from whom the brokers accept payment.
Regulators, however, have made extensive reviews of this practice in the past, mainly after a 2014 investigation by the Senate. “Payment for order flow has been disputed in the past and the SEC has decided not to make any major changes,” said Koltun, noting that advocates of the practice say it has allowed brokers to eliminate commissions, benefiting the average investor. “Citadel and the order payment flow have many strong advocates in the DC atmosphere for them to be changed.”
Senator Sherrod Brown, a Democrat from Ohio and chairman of the Senate Banking Committee, said he also plans to hold a hearing “on the current state of the stock market”, but has yet to set a date.