GameStop hearing: Lawmakers set to grill Robinhood CEO Vlad Tenev over trading frenzy
GameStop's stock may have fallen from its stratospheric heights, but that doesn't mean the formerly high-flying retailer is out of the spotlight. Lawmakers on Thursday are set to question some of the key players involved in the unusual stock frenzy, in which amateur investors harnessed the power of social media to drive up the price of beaten-down stocks.
Scheduled to appear at the hearing before the powerful House Financial Services Committee are Robinhood CEO Vlad Tenev, Reddit CEO Steve Huffman and Keith Gill, the Reddit poster who under the moniker "Roaring Kitty" urged investors on Reddit board WallStreetBets and other platforms to invest in GameStop.
Two hedge fund executives, Kenneth Griffin of Citadel and Gabriel Plotkin of Melvin Capital Management, will also testify, with lawmakers eager to hear how the latter firm was ensnared in the drama after losing billions of dollars betting that GameStop shares would fall.
The GameStop saga, which some investors characterized as a chance for Main Street to punish Wall Street, has raised questions about popular stock-trading app Robinhood. After the shares of GameStop, theater chain AMC Entertainment, software maker BlackBerry and more than a dozen other companies surged in January, Robinhood halted trading in GameStop and other small stocks promoted by Reddit users.
The moved sparked anger and confusion among some customers of Robinhood, which since launching in 2013 has swiftly attracted millions of users by eliminating commissions and enabling what it promotes as "Investing for Everyone."
Robinhood does make money on trading by taking its customers' stock orders and selling them to larger trading firms, such as hedge funds, that execute the transactions. That business, called "payment for order flow," has drawn fire from some critics who say the practice aligns Robinhood's financial priorities with those of big financial firms rather than its base of small investors.
"The hearing will make for good TV," noted Brian Gardner, chief Washington policy strategist at Stifel, in a research note.
Gill is facing additional scrutiny after a lawsuit was filed Tuesday accusing him of profiting from "deceitful and manipulative conduct." He plans to tell the House panel that he made a profit on his investment in GameStop because he did his homework on the company, and not because he touted the stock to "unwitting investors," according to prepared remarks.
GameStop shares, which skyrocketed to more than $480 last month, closed Wednesday at just under $46. The plunge has erased more than $30 billion in the company's market value.
Less clear is whether any policy changes will emerge from the hearing. Instead, investors may learn more from the Senate Banking Committee's yet-unscheduled hearing on the nomination of Gary Gensler to run the U.S. Securities and Exchange Commission, Gardner noted.
"The SEC will take the lead in making any policy changes," he said.
What is the GameStop hearing about?
The hearing is expected to focus on the dynamics linking short sellers — investors who bet a stock will fall in value — to social media sites like Reddit and average investors who got caught up in the GameStop mania. In this case, GameStop and other stocks had high levels of short interest, with hedge funds betting that their shares would fall. They had hoped to book profits when GameStop's stock tumbled.
But because small investors crowded into the stocks being touted on Reddit, GameStop's shares soared. That created a "short squeeze," in which short sellers were forced to buy shares to cover their bets and limit their losses on a bet gone awry.
Some lawmakers are also likely to zero in on hedge funds' penchant for short-selling, with Congresswoman Maxine Waters noting in a January statement that such firms "have a long history of predatory conduct." Waters, who is chair of the House Financial Services Committee, said that abusive "short selling to the detriment of other investors must be stopped," and called the hearing the "first step" to halting such practices.
It's important to note that short-selling, while subject to some SEC regulations, is a legal investment strategy.
Robinhood's relationship with hedge funds
Another area legislators are likely to probe in Thursday's hearing: The commercial relationship between Robinhood and hedge funds, including how that might have influenced the app's decision to halt trading. Robinhood has said it limited trading to comply with federal capital requirements for brokerages and that it was acting to protect small investors.
"Any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric," Tenev said in prepared remarks for the hearing. "Our customers are our top priority."
But lawmakers have signaled that they want to hear more from Robinhood about its decision to halt trading, such as whether it was influenced by its hedge fund clients.
"The public deserves a clear accounting of Robinhood's relationships with large financial firms and the extent to which those relationships may be undermining its obligations to its customers," Senator Elizabeth Warren, a Democrat from Massachusetts, wrote in a February 2 letter to Robinhood.
Warren won't be one of the lawmakers at the House hearing, but it's likely that other lawmakers will follow this line of questioning.
"We now need to know more about @RobinhoodApp's decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit," Alexandra Ocasio-Cortez, who has demanded answers about why the app halted trading in GameStop and other stocks, tweeted last month.
Each of the 56 members of the House panel will get five minutes to ask questions. Given that lineup, it's unclear whether any substantial new information will come to light during the hearing, Stifel's Gardner noted. "Regulatory action, rather than legislation, is the likely path forward," he said.
The Associated Press contributed to this report.