Two billionaire hedge fund managers, the 34-year-old co-founder and CEO of the initial trading app Robinhood and a YouTube investment streamer called “Roaring Kitty” expressed their defense on Wednesday, before a hearing by lawmakers about the rally last month’s roller coaster ride on GameStop and other underperforming stocks.
During the wave, online retailers came together on a Reddit forum to buy short shares, like video game retailer GameStop and movie operator AMC, primarily through the commission-free trading app Robinhood. The ensuing recovery pushed stock prices into the stratosphere, forcing some short sellers to buy billions of dollars in shares to cover their losses – causing stock prices to skyrocket further.
But during market chaos, Robinhood and other trading platforms had to temporarily limit activity on volatile stocks, which worried bipartisan lawmakers about the damage to investors who were unable to participate fully in the market. Other investors had stocks that lost value sharply as the rise eased and prices returned to normal.
To learn more about this story, watch NBC Nightly News with Lester Holt on Thursday at 6:30 pm ET
Although the rise was initially portrayed as an overcoming of the Wall Street Goliaths by an army of anonymous and irreverent Reddit and Robinhood users, data released by JPMorgan shows that institutional investors were the drivers of the race, raising questions about whether funds hedge funders had found a new way to play on the market.
The House’s Financial Services Committee, led by President Maxine Waters, D-Calif., Will certainly take a tough stance on hedge funds and the relationship between Robinhood and his Wall Street business partners.
“We must deal with hedge funds whose unethical conduct has directly led to recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit while others pay the price,” Waters said. in a statement.
Robinhood has had several class action lawsuits brought against him by angry customers.
“I never prosecuted anyone,” one complainant, Kevin Kelley, a 51-year-old football coach in Little Rock, Arkansas, told NBC Nightly News. “This is right and wrong.”
Kelley has been buying and selling shares for 20 years, he said. He used the Robinhood app to buy stocks and options on GameStop, but when the bullish peak peaked and he was ready to sell, he found that the button he needed to press was grayed out after Robinhood restricted his and other traders’ ability to make transactions during volatility. Meanwhile, market liquidation was in full swing.
When he managed to trade again, instead of going up about $ 20,000, he lost about $ 3,000.
Now, he and his 24-year-old son have filed a lawsuit against Robinhood. “I would like the powers to be able to establish and re-establish that it would be safe for small traders like me to have their platform to trade,” said Kelley.
Robinhood has attracted the ire of regulators in the past. In December, the trading platform settled a $ 65 million fine with the Securities and Exchange Commission for failing to route customer orders to the broker that best serves them, and was insufficiently transparent about the deal. This week, the online platform missed an IRS deadline to provide customers with the necessary tax reporting forms.
Testimony released before the hearing showed witnesses refuting arguments they hoped to face on Thursday.
“The idea that I used social media to promote GameStop shares to unconscious investors is absurd,” said Keith Gill, the online investor known as “RoaringKitty” whose strategy formed the basis for Reddit’s initial recovery, in a statement released Wednesday. by the Committee. “I was very clear that my channel was for educational purposes only and that my aggressive investment style would hardly be suitable for most people who access the channel.”
Vlad Tenev, the Bulgarian-American co-founder and CEO of Robinhood, will argue that every step the company has taken has been to protect its customers and follow all the rules.
“In view of this unprecedented volatility and volume, which was cited as a five sigma event, Robinhood Securities imposed temporary restrictions on certain securities to facilitate compliance with the clearinghouse’s deposit requirements,” said Tenev in a statement released by the Committee earlier of the audience “, thus allowing Robinhood to continue to serve our customers and to comply with all commercial regulations.
Gabe Plotkin, CEO of Melvin Capital – the hedge fund at the center of the ire of some Redditors – defended his company’s strategies.
“Absolutely none of Melvin’s short positions is part of any effort to artificially lower or manipulate the price of a stock down,” he said in a written statement. “In the January frenzy, GameStop’s stock rose from $ 17 to a peak of $ 483. I don’t think anyone would say that price has anything to do with the company’s intrinsic value. “
While Thursday’s audience may include prominent moments in headlines and heated discussions, don’t expect too much in terms of detailed policy recommendations to be followed, said Joshua Mitts, professor of corporate and securities law at Columbia Law School.
“Congressional hearings are not suitable for detailed fact-finding and evidence collection,” he told NBC News by email.
“There are a number of political solutions that have been put forward, including increasing the spread of social media campaigns that move the market,” as Mitts and other securities law professors proposed in a SEC regulatory petition, “but I predict that the questioning will focus primarily on industry behavior rather than regulatory reform, ”said Mitts.
Under President Joe Biden, regulators may be looking for enforcement action if necessary. However, the timeframe for these changes is often measured in years, said Ben Koltun, director of research at Beacon Policy Advisors, an independent policy research firm for institutional investors.
“The SEC is still working on the Consolidated Audit Trail that was in response to Flash Crash in May 2010,” said Koltun.
Michela Moscufo contributed.