GameStop hearing on tap with Robinhood, Melvin, Reddit and Citadel CEOs

Feb. 18, 2021 4:15 AM ETRobinhood Markets, Inc. (HOOD), GME, AMC, SCHWBB, NOK, BBBY, GME, MS, TR, IBKR, EXPR, KOSS, CENN, AMC, AAL, SQ, TRVG, SNDL, HOOD, REDDIT, BB:CABy: Yoel Minkoff, SA News Editor59 Comments
  • Get ready for the big show... Robinhood's (RBNHD) Vlad Tenev, Melvin Capital's Gabe Plotkin, Reddit's (REDDIT) Steve Huffman and Citadel's Kenneth Griffin and Keith Gill are all set to testify before the U.S. House Financial Services Committee at 12 p.m. ET. Lawmakers will get their chance to grill the executives in a hearing focused on "short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors." Also making an appearance is Reddit trading star known as Roaring Kitty, who is credited with helping start the GameStop mania, though his actions are being probed by Massachusetts regulators since he was a registered securities broker.
  • Backdrop: An army of day traders following WallStreetBets - the Reddit forum dedicated to "making money and being amused while doing it" - upended some market dynamics last month by taking aim at some heavily shorted stocks. They ran them up as a group, triggering short squeezes and causing some hedge funds like Melvin Capital to record billions of dollars in losses. The party came to an end after brokerages restricted trading on stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), though Robinhood took the most flak due to its communication about the events and delay in taking curbs off of "meme" trading.
  • Investors and policymakers alike lambasted the limits, including Dave Portnoy, Alexandria Ocasio-Cortez and Ted Cruz, accusing the trading platform of seeking to protect Wall Street's interests at the expense of smaller investors. "We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules," added Sen. Elizabeth Warren, a longtime critic of Wall Street. "You've got to have a cop on the beat." Robinhood cited clearing house requirements as reasons for the stoppage, and said it did not have a liquidity problem, but subsequently raised billions of dollars to reopen trading. More than half of its customer orders are routed to Citadel Securities, which provided rescue financing to Melvin after its short bet on GameStop went sour, in a series of events that prompted the hearing on Capitol Hill.
  • What to expect: There's likely to be a lot of noise coming out of the hearing, but not a lot of consequences. While there could be some SEC regulations down the road, they won't be coming from the House Financial Services Committee. If the SEC were to act, it could pursue a series of rules, ranging from short interest caps to taxing short-term bets, according to BofA analyst Michael Carrier. The commission may also move to review payment for order flows (PFOF) and pursue social media oversight to ward off potential market manipulation. Jefferies analyst Daniel Fannon meanwhile thinks the SEC could explore greater investor education around derivatives and risk management or increase costs for leverage services.
  • Go deeper: There's also been some talk about moving trades to a shortened settlement regime like T+1 or instant transactions.

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