The chiefs of Robinhood, Reddit, Citadel and Melvin Savings, are headed to Washington for Thursday’s highly anticipated GameStop hearing at the U.S. Congress.
Lawmakers will get their chance to grill the CEOs, as expertly as the Reddit trading star known as Roaring Kitty, about last month’s GameStop trading turmoil.
Robinhood CEO Vlad Tenev, Melvin Chief CEO Gabriel Plotkin, Reddit CEO and co-founder Steve Huffman, Citadel CEO Kenneth Griffin and Keith Gill, also comprehended as Roaring Kitty, will testify to the U.S. House Financial Services Committee testimony on Thursday at 12 p.m. ET, according to a disseminate from Chairwoman Maxine Waters, D-Calif.
“We think the congressional hearing will focus on understanding exactly what occurred during the week of work disruptions, making sure that all activity was appropriate and also determining how to avoid a similar event in the future,” JMP Pledges analyst Devin Ryan told CNBC.
Last month, an epic short squeeze in GameStop’s stock bankrupted Wall Street and drew attention to an emerging class of retail investors on social media platforms. GameStop’s stake price sky-rocketed to $483 per share, and subsequently lost 90% of its value.
The prevailing narrative was that a band of Reddit-inspired trifling traders rose up against Wall Street by buying GameStop, forcing a short squeeze by professional hedge endow managers, who were forced to cover their negative bets or risk catastrophic losses. However, some text show that institutional investors were the drivers of the upward price action.
“We think some of the initial deliberation, on social media, around the reasons behind limited access has been proven as misinformation,” Ryan of JMP Securities go on increased.
The mania shone a light on the millennial-favored stock trading app Robinhood, which made the unpopular decision to restrict career of certain securities, including GameStop, during the trading fiasco.
“What we experienced last month was extraordinary, and the marketing limits we put in place on GameStop and other stocks were necessary to allow us to continue to meet the clearinghouse deposit prerequisites that we pay to support customer trading on our platform,” Tenev said in testimony he will give that was released on Wednesday.
Tenev cites in his information increased capital requirements from the Depository Trust and Clearing Corp., an entity responsible for settling and clearing swaps, for the trading restrictions. The brokerage raised more than $3.4 billion in a few days to shore up its balance sheet and pinch some of the restrictions.
Hedge fund Melvin Capital closed out its short position in GameStop after taking mammoth losses as a target of the army of retail investors. Plotkin said the short position in GameStop was rooted in the thesis that the incarnate video game retailer was being overtaken by digital downloads through the internet.
The Hedge fund arm of Citadel, as reasonably as Point72, infused close to $3 billion into Melvin to backstop its finances. Citadel the hedge resources is not to be confused with Citadel Securities, which works with Robinhood to execute trades.
“I want to make prominently at the outset that Melvin Capital played absolutely no role in those trading platforms’ decisions,” Melvin Major CEO Gabriel Plotkin said in a testimony released Wednesday. “Melvin closed out all of its positions in GameStop days before party lines put those limitations in place.”
The hearing’s topics are expected to include Citadel’s relationship with Robinhood and Melvin Choice, why brokerages shut down trading and how to protect retail investors.
What to expect from Robinhood
Thursday’s get wind of is a big moment for Robinhood chief Tenev, who is expected to be at the helm during the company’s initial public offering sometime this year.
“I in need of to be clear at the outset: any allegation that Robinhood acted to help hedge funds or other special interests to the injury of our customers is absolutely false and market-distorting rhetoric,” Tenev said in the testimony.
Tenev blamed the two-day trade adjustment, known as T+2, for some of the clearinghouse deposit issues during the GameStop mania. For most retail stock buys that go through a broker and then a clearinghouse, settlement occurs two business days after the day the order executes.
“The enduring two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev’s declaration said. “The clearinghouse deposit requirements are designed to mitigate risk, but last week’s wild market activity showed that these requisites, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks.
JMP’s Ryan phrased T+2 is viewed by many as antiquated and a substantial driver of the increased capital pressure faced by the industry.
Michael Dyson, quondam senior counsel to Financial Industry Regulatory Authority, told CNBC T+2 is “low hanging fruit” for Tenev on Thursday. Finra is a self-regulatory conglomerate that oversees brokerage firms and their registered representatives.
“Robinhood seeks to level the playing field that Enclosure Street dominates,” said Dyson, now partner at Sullivan & Worcester. “If transforming the brokerage industry to offer commission-free occupation is any indication, Robinhood isn’t finished yet.”
While Tenev may deflect blame amid his crusade for real-time settlement during the Q&A cut up of the hearing, the CEO has already admitted some fault during the trading mania.
Tenev said on the “All-In” podcast on Friday that Robinhood could oblige communicated better to its customers during the chaos. The podcast comments were first reported by Reuters.
“As soon as those emails admired out, the conspiracy theories started coming, so my phone was blowing up with, ‘how could you do this, how could you be on the side of the hedge means?’,” Tenev said.
Tenev, 33, is reportedly being coached for the hearing by Robinhood’s chief legal gendarme Dan Gallagher, a former SEC commissioner, according to Punchbowl News.
The brokerage firm also reportedly hired veteran congressional discovery procedure lawyer Reginald Brown, who prepped Facebook CEO and founder Mark Zuckerberg for his Congressional testimony, Punchbowl reported.
Robinhood did not reciprocate to CNBC’s request for comment.
What to expect from legislators
The GameStop controversy was met by widespread criticism from Washington.
Still, it is unclear exactly what members of Congress are intending to regulate: brokerages like Robinhood and Charles Schwab, retail investors on community media, market makers like Citadel or hedge funds.
Sen. Elizabeth Warren (D-Mass.), a longstanding critic of Embankment Street, is calling for a ban of forced arbitration, which essentially prevents consumers from going to court if they are go to the bad by a company or product because they agreed to the terms of service.
“Robinhood promised to democratize trading, but hid information wide its prerogative to change the rules by cutting off trades without notice – and about customers’ inability to access the courts if they be convinced of they’ve been cheated – behind dozens of pages of legalese,” Warren said in a statement.
“What’s still not sensitive from Robinhood’s response to my questions is the full extent of Robinhood’s ties to giant hedge funds and market makers. I’m flourishing to keep pushing regulators to use the full range of their regulatory tools to ensure the fair operation of our markets, only for small investors,” said Warren.
Rep. Ro Khanna, D-Calif., said the GameStop controversy “put the over-financialization of Wall Street on the governmental stage.”
“It proved that these hedge funds are more like casino high-rollers than they are chief investors, while retail investors are constrained by a different set of rules that explicitly favor the ultra-wealthy. The era of unregulated wagering needs to end,” Khanna said in a statement.
Rep. James Comer (R-Ky.) told CNBC he has been proud to see a company twin Robinhood emerge, leveling the playing field for retail investors. However, Comer was disappointed at the decision to halt clientele.
Rep. French Hill (R-Ark.) told CNBC’s “The Exchange” he wants to get to the bottom of why Robinhood had a capitalization problem during the GameStop confusion.
“I’m not a fan of day trading…I believe investing should be boring,” Rep. Brad Sherman (D-Calif.) said on CNBC’s “The Exchange” on Wednesday. “I’m a bit vexed that Robinhood may be a glorification of the gamification of investments. If you want an exciting video interface you should go to GameStop and buy a video prepared, don’t go to Robinhood and buy GameStop.”
Dyson warned of a “knee-jerk overcorrection” from legislator that could be more harm than obedient.
Piper Sandler analyst Richard Repetto told clients he expects plenty of headlines to come out of the hearing, but he doesn’t envisage any substantive market structure discussions or conclusions, especially since the witness list doesn’t consist of market arrange experts. Repetto said he would buy Interactive Brokers on any weakness.
JMP Securities expects there to be questions about the provocative, yet legal way that Robinhood and other brokers make money through trades despite dropping commissions: payment for degree flow.
“Robinhood is not unique in receiving payment for order flow,” Tenev said in his prepared remarks. “Annual report in investigates show that Charles Schwab, E*Trade, and TD Ameritrade all received significant payment for order flow revenues in 2019. It is leading to note that Robinhood’s payment for order flow relationships are with market-makers and not with hedge funds. Robinhood Securities regularly rates its counterparties and routes customer orders to those market-makers that can provide the best execution quality on those non-sequentials.”
Waters told CNBC on Wednesday there will be three hearings, the first regarding the role each side played, the second with experts and a third to try to come to some conclusions.
Reddit & Roaring Kitty
Reddit’s CEO purpose likely face questions about the possibility of market manipulation and hate speech on its page WallStreetBets, which was inundated with posts close by GameStop during the short squeeze.
SEC regulators reportedly combed through Reddit posts to identify if there were any bad actors tiresome to manipulate the market last week, according to Bloomberg News. The regulatory agency is also investigating the possibility of bots monkey business a role in the mob.
Gill — who goes by DeepF——Value on Reddit and Roaring Kitty on YouTube — defended his social media posts that helped atom a mania in GameStop shares last month in testimony released on Wednesday, saying he was an individual investor acting one on publicly-available information.
“My investment in GameStop and my posts on social media were entirely my own,” Gill’s testimony said. “I did not ask for anyone to buy or sell the stock for my own profit. I did not belong to any groups trying to create movements in the stock price. I never had a economic relationship with any hedge fund.”
Gill, who’s, latest post on Reddit showed he made $7.8 million off of GameStop, understudied down on his investing thesis for GameStop in the testimony.
“GameStop’s stock price may have gotten a bit ahead of itself go the distance month, but I’m as bullish as I’ve ever been on a potential turnaround. In short, I like the stock,” Gill said in the comments.
A assort action lawsuit was brought against Gill on Wednesday, filed at federal court in Massachusetts, alleging that he fictitious to be a novice trader despite being a licensed professional. Gill’s testimony stated while he worked as a marketing and fiscal education employee at MassMutual, he said he never sold securities for the firm, nor was he a financial advisor.
House Financial Helps Committee event will be livestreamed here.