The House Financial Services Committee will place several of the main players in the GameStop saga following public protests against the online trading platform Robinhood and the decisions of other brokers to briefly restrict trading in so-called meme stocks last month.
Executives from Robinhood, market maker Citadel Securities, hedge fund Melvin Capital, social network Reddit and Keith Gill, an independent investor who gained fame and wealth through his early acquisitions of GameStop Inc. GME,
actions, all will testify at the meeting, scheduled for Thursday for lunch. Here’s what to expect:
Players
Robinhood: The popular online broker without commission has been a 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 the intermittent interruptions that have left users unable to trade. Last month’s decision to restrict the acquisition of shares of GameStop Inc., just as a social media campaign to pump up the stock, led to accusations that the company is trying to sabotage the shares to help missing sellers.
Robinhood executives, however, testified by affidavit that Robinhood stopped stock purchases because its users overwhelmingly place long one-way bets on highly volatile stock, often with borrowed money, which sparked calls. massive guarantee from the broker’s clearing house. Co-CEO Vlad Tenev will testify on Thursday.
Citadel Securities: Founded by billionaire Ken Griffin, who will testify on Thursday, the securities wholesaler is one of Robinhood’s biggest sources of revenue, as it pays brokers the privilege to execute their clients’ orders. Market makers such as Citadel Securities practice this “order flow payment” because they earn 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 that. who pay for the execution of the trade.
Melvin Capital: A hedge fund that would have accumulated huge losses after betting against GameStop by selling the short stock. The fund was saved by Point72 and Citadel hedge funds, 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 commission on Thursday.
Reddit: A popular social news platform where the GameStop stock has been heavily promoted. Regulators have been investigating the site to determine whether users promoting such meme stocks have engaged in illegal behavior, such as intentional lying about a warranty to manipulate its price. Reddit CEO and co-founder Steve Huffman will testify on Thursday.
Keith Gill: An independent investor who has frequently posted about his success in investing in GameStop and other meme stocks.
What questions will be asked?
Lawmakers will be keen to know if there has been any collusion from Robinhood, Citadel Securities and Melvin Capital to stop the rally in GameStop shares. Citadel Securities and Robinhood have publicly denied this, but committee members are expected to thoroughly examine the issue.
Ben Koultun, director of research at Beacon Policy Advisors, predicted that there could be a wide range of issues raised at the meeting, in addition to testing what motivated Robinhood to restrict trading.
“What I’m looking for is whether a narrative comes out of hearings that paves the way for regulatory or legislative changes, or whether members are more concerned with keeping their own political discussion points that they can wrap in a press release,” he said. for MarketWatch.
Koulton said it is likely the latter, given that a few weeks after the volatility of meme stocks declined, no coherent narrative emerged on what the episode says to policy makers about the state of financial markets.
Democrats have thrown Robinhood in the past for features that encourage frequent use of the app, which observers have labeled as gamification, but following GameStop volatility, Democrats have been more willing to attack hedge funds, short selling and Robinhood. for blocking new GameStop purchases than online brokers have criticized for making speculation with financial securities too easy and appealing.
Republicans, on the other hand, might see the wisdom of the attack on Wall Street and Silicon Valley in the abstract, but Koulton predicted they would work primarily to prevent Democratic attacks and called for stricter regulation of market structure or practices such as selling in missing.
“Lately, the Republican party has had a more populist tendency, but I doubt they will be willing to go after a Republican mega-donor like Ken Griffin,” he said.
What will be the effect of the hearing?
Without a bipartisan agreement on the issues revealed by the GameStop saga in US financial markets, the hearings are unlikely to serve as much more than political theater, according to Brian Gardner, chief Washington Policy Strategist at Stifel.
“The meeting will lead to a good TV, but in terms of determining what could result if there were policy changes in the GameStop episode, we would pay more attention to the hearing of the Senate Banking Committee on the nomination of Gary Gensler to the leadership of the Securities and Exchange Commission, as the SEC will take the lead in making any policy changes, “he wrote in a note to clients on Tuesday.
“Congress could put the SEC in specific changes, but regulatory action, rather than legislation, is the likely path,” he added, noting that the Gensler 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 the market makers from whom brokers accept payment.
However, regulators have conducted extensive analyzes of this practice in the past, particularly following a 2014 Senate inquiry. “Payment for the order flow has been in dispute in the past and the SEC has decided not to make major changes,” Koltun said, noting that proponents of the practice say it allowed brokers to eliminate commissions, benefiting the average investor. “The city and the payment for the flow of orders have too many strong lawyers in the DC atmosphere for it to be changed.”
Senator Sherrod Brown, an Ohio Democrat 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 not yet set a date.