A showdown on Capitol Hill akin to the final boss battle in a video game – key players in the GameStop saga, which saw the video game retailer's stock soar 1,600% in January before falling back to Earth, are set to testify before the House Financial Services Committee in a hearing Thursday.
The episode has been portrayed as a victory of the little guy over Wall Street titans, but not everyone is buying it. Lawmakers from both parties are among the skeptics.
Entangled in the drama are huge short-selling hedge funds, a social media message board and ordinary investors wanting in on the hottest new trade.
The head of the House Financial Services Committee, Rep. Maxine Waters (D-CA), grilled Robinhood CEO Vlad Tenev on Robinhood’s restricting its customers ability to trade GameStop stock. She also asked Tenev about Robinhood’s close relationship with Citadel Securities, which she maintains poses a conflict of interest.
In his opening testimony, Tenev defended Robinhood against allegations that trading restrictions it put in place disadvantaged those smaller investors in favor of bigger institutional clients.
With short-selling, investors bet a stock’s price will drop. Defenders of the practice say it’s a tool for uncovering a stock’s true value and due-diligence investigating of companies.
Both Tenev and Ken Griffin, the CEO of Citadel, denied that Citadel had any role in Robinhood’s decision to restrict trading in GameStop and some other volatile stocks.
Tenev said Robinhood imposed the trading restrictions solely to meet capital requirements set by regulators. Still, he apologized to Robinhood customers.
“Despite the unprecedented market conditions in January, at the end of the day, what happened is unacceptable to us. To our customers, I apologize, and please know we are doing everything we can to make sure this can’t happen again.”
Here's a list of who was expected to testify Thursday:
- Robinhood CEO Vlad Tenev, an early-thirties entrepreneur who started Robinhood in 2013 with a fellow Stanford University math student. Claiming 13 million users, the mobile app’s popularity has grown, fueled by a simplified trading format and first-stock-for-free inducement appealing to millennials. The Silicon Valley company is said to be looking to go public this year; the GameStop debacle has brought unwanted attention.
- Ken Griffin, Citadel CEO. One of the wealthiest hedge fund managers in an industry full of multi-billionaires. Hedge funds, which cater to the uber-rich, command trillions in assets and are known by their penchant for risk and prolific use of short-selling. Griffin is politically plugged in and has been a heavy donor to Republican politicians.
- Keith Gill, AKA Roaring Kitty. The most visible protagonist and GameStop booster on the WallStreetBets subreddit with his R-rated energy, bright red headband and colorful T-shirts. The 34-year-old operating out of the basement of his home in a Boston suburb drew legions of investors into his orbit as they joined his livestream chats on YouTube.
- Steve Huffman, Reddit CEO and co-founder. A major force in social media, Reddit claims some 430 million “Redditors” worldwide. Its WallStreetBets forum is at the center of the GameStop drama.
Tenev is denying speculation from some lawmakers that Robinhood acted to favor its big Wall Street clients when it blocked customers on Jan. 28 from buying shares of GameStop and a dozen other companies. The restrictions lasted in some form for days.
With its mission “to democratize finance for all,” Robinhood offers commission-free trading. Critics say its users pay in another, more hidden way, because Robinhood provides the data on stocks they’re buying and selling to big Wall Street firms. And the firms pay companies like Robinhood to send their customers’ orders to them for execution.
For the hearing, Gill wore a jacket and tie, although the headband could be seen hanging on poster of a kitten with the words “Hang in There."
As they question Tenev and other witnesses, lawmakers will look to see if there was manipulation of any kind in the GameStop trading frenzy or other conflicts that put smaller investors at a disadvantage.
“We don’t know whether it will just be warnings versus actual findings in terms of (stock) manipulation. That’s going to take time,” Quincy Krosby, chief market strategist at Prudential Financial, said in an interview Wednesday. “It’s clear the concern is there. We’ll see how the (Biden) administration handles this.”
Gill told lawmakers that he reaped a profit on his investment because he did his homework, and not because he touted the stock.
“The idea that I used social media to promote GameStop stock to unwitting investors and influence the market is preposterous,” Gill said.
“My posts did not cause the movement of billions of dollars into GameStop shares. It is tragic that some people lost money and my heart goes out to them.”
GameStop shares rose as high as $483 in January but reversed course this month and now trade around $45, still more than double where they traded at the start of the year.
As the frenzy escalated, the acting head of the Securities and Exchange Commission said the agency is examining the trading restrictions imposed by Robinhood and other online brokerages as well as possible stock manipulation, and the role that short-selling may have played in GameStop’s extreme price swings.
The small investors were seen as the winners after they mobilized against Wall Street heavies on the subreddit. Their buying swelled the share prices of GameStop and other beaten-down companies beyond anyone’s imagination. Not coincidentally, it inflicted billions in losses on the hedge funds that had placed bets that the stocks would drop.
The populist traders’ strategy was risky. GameStop stock plunged 60%, to $90 on Feb. 2, wiping out hundreds of thousands of dollars in a few hours. The stock dropped another 42%, to $53, on Feb. 4 and currently trades around $46.
The panel’s senior Republican, Rep. Patrick McHenry of North Carolina, put forward conservatives’ view that the GameStop episode shouldn’t be used by Washington to bring new regulations on the markets.
Jennifer Schulp, director of financial regulation studies at the CATO Institute, to the panel, “By no means, though, should these events lead to restrictions on retail investors’ access to the markets.”
The Associated Press contributed to this report.