Right here's what to anticipate from Thursday's GameStop listening to with the CEOs of Robinhood, Citadel, and Reddit
The heads of Robinhood, Reddit, Citadel and Melvin Capital will travel to Washington for the much-anticipated GameStop hearing at the US Congress on Thursday.
Legislators will have the opportunity to brief CEOs as well as Reddit retail star Roaring Kitty on the GameStop trading turmoil last month.
Vlad Tenev, CEO of Robinhood, Gabriel Plotkin, CEO of Melvin Capital, Steve Huffman, CEO of Reddit, Kenneth Griffin, CEO of Citadel, and Keith Gill, also known as Roaring Kitty, will be speaking before the US Financial Services Committee on Thursday at 12:00 noon -House statements. ET, according to a statement from Chair Maxine Waters, D-Calif.
"We believe the Congressional hearing will focus on understanding exactly what happened during the disruption week, ensuring that all activities are appropriate, and also determining how to avoid a similar event in the future." Devin Ryan, an analyst at JMP Securities, told CNBC.
Last month, an epic short squeeze on GameStop's stock rocked Wall Street, drawing attention to a rising class of retail investors on social media platforms. GameStop's share price rose to $ 483 per share and then lost 90% of its value.
The prevailing narrative was that a group of Reddit-inspired petty traders rose against Wall Street by buying GameStop, forcing professional pressure from professional hedge fund managers who were forced to cover their negative stakes or incur catastrophic losses take risk. However, some data shows that institutional investors were the drivers of the upside.
"We believe some of the initial speculation on social media about the reasons for the restricted access was proven to be misinformation," added Ryan of JMP Securities.
The mania shed light on the millennial stock trading app Robinhood, which made the unpopular decision to restrict trading in certain stocks, including GameStop, during the trading fiasco.
"What we saw last month was exceptional and the trading limits we set on GameStop and other stocks were necessary in order for us to continue to meet the clearinghouse deposit requirements we pay to support customer trading on our platform," said Tenev testimony he will give was released on Wednesday.
Tenev cites increased capital requirements from the Depository Trust and Clearing Corp., a company responsible for the settlement and clearing of trades, for the trade restrictions in his testimonial. The broker raised more than $ 3.4 billion in just a few days to prop up its balance sheet and lift some of the restrictions.
Melvin Capital hedge fund closed its short position in GameStop after suffering huge losses as a target for the army of retail investors. According to Plotkin, the short position in GameStop was rooted in the hypothesis that digital downloads over the Internet had overtaken the physical video game retailer.
Citadel's hedge fund arm, as well as Point72, raised nearly $ 3 billion to Melvin to help put his finances on hold. Citadel, the hedge fund, is not to be confused with Citadel Securities, which works with Robinhood to execute trades.
"I want to make it clear right from the start that Melvin Capital played absolutely no role in the decisions of these trading platforms," said Gabriel Plotkin, CEO of Melvin Capital, in a testimony published on Wednesday. "Melvin closed all of his positions in GameStop days before platforms put these restrictions in place."
Topics at the hearing are expected to include Citadel's relationship with Robinhood and Melvin Capital, why brokers should stop trading, and how to protect retail investors.
What can you expect from Robinhood?
Thursday's hearing is a big moment for Robinhood chief executive Tenev, who is expected to lead the company's IPO sometime this year.
"I want to make it clear right from the start: Any claim that Robinhood has supported hedge funds or other special interests to the detriment of our clients is absolutely false and market-distorting rhetoric," Tenev said on the testimonial.
Tenev blamed the two-day trade settlement known as T + 2 for some of the clearinghouse deposit problems during the GameStop mania. Most retail transactions, which are processed through a broker and then through a clearing house, are processed two business days after the day the order is filled.
"The existing two-day deal deadline exposes investors and the industry to unnecessary risk and is ripe for change," Tenev said. "The clearinghouse deposit requirements are designed to mitigate risk. However, last week's wildlife market activity has shown that these requirements, combined with an unnecessarily long settlement cycle, can have unintended consequences that create new risks.
JMP's Ryan said T + 2 was viewed by many as obsolete and a major driver of the increased capital pressures the industry is facing.
Michael Dyson, former senior lawyer for the financial industry regulator, told CNBC T + 2 on Thursday that Tenev was "low hanging fruit." Finra is a self-regulatory organization that oversees brokerage firms and their registered agents.
"Robinhood is trying to improve the playing field that dominates Wall Street," said Dyson, now a partner at Sullivan & Worcester. "If the brokerage industry's move to commission-free trading is a sign of this, Robinhood isn't done yet."
While Tenev may distract the blame during the real-time settlement crusade during the Q&A portion of the hearing, the CEO has already admitted to some mistakes during the trade frenzy.
Tenev said on Friday's "All-In" podcast that Robinhood could have been better able to communicate with customers during the chaos. The podcast comments were first reported by Reuters.
"As soon as those emails were sent, the conspiracy theories popped up and my phone exploded with the question, 'How can you do this, how can you be on the side of the hedge funds? "Said Tenev.
Tenev, 33, is reportedly being trained for the hearing by Robinhood's chief legal officer Dan Gallagher, a former SEC commissioner, according to Punchbowl News.
The brokerage firm has also reportedly hired veteran Congressional investigative attorney, Reginald Brown, who prepared Facebook CEO and founder Mark Zuckerberg for his testimony from Congressional, Punchbowl reported.
Robinhood did not respond to CNBC's request for comment.
This illustrative photo shows a person checking GameStop inventory on a smartphone in Los Angeles on February 17, 2021 while the Reddit, Citadel, Robinhood and Melvin Capital logos can be seen prior to the virtual hearing with GameStop inventories in the background.
Chris Delmas | AFP | Getty Images
What can be expected from the legislature?
The GameStop controversy met with broad criticism from Washington.
However, it is unclear exactly which members of Congress want to regulate: brokers like Robinhood and Charles Schwab, private investors in social media, market makers like Citadel or hedge funds.
"Robinhood promised to democratize commerce but hid information about its prerogative to change the rules by cutting off deals without notice – and about customers' inability to access the courts if they believe they have been betrayed – behind." Dozens of pages of legal language. " Warren said in a statement.
"What is still not clear from Robinhood's response to my questions is the full extent of Robinhood's ties to giant hedge funds and market makers. I will continue to urge regulators to use the full range of their regulatory tools to get a fair one Ensure our operations operate markets, especially for retail investors, "Warren said.
Rep. Ro Khanna, D-Calif., Said the GameStop controversy "put Wall Street overfunding on the national stage".
"These hedge funds have been shown to resemble casino high-rollers rather than responsible investors, while retail investors are restricted by other rules that specifically favor the ultra-rich. The era of unregulated speculation must end," Khanna said in one Explanation.
Rep. James Comer (R-Ky.) Told CNBC he was proud to see a company like Robinhood emerge that will improve the playing field for retail investors. However, Comer was disappointed with the decision to stop trading.
Rep. French Hill (R-Ark.) Told CNBC's "The Exchange" that he was trying to find out why Robinhood had a capitalization problem during the GameStop mayhem.
"I'm not a fan of day trading … I think investing should be boring," said Rep. Brad Sherman, D-Calif., On CNBC's The Exchange on Wednesday. "I'm a little concerned that Robinhood might be a glorification of the gamification of investing. If you want an exciting video interface, you should go to GameStop and buy a video game, don't go to Robinhood and buy GameStop."
Dyson warned of a "knee-jerk overcorrection" by lawmakers that could do more harm than good.
Richard Repetto, an analyst at Piper Sandler, told clients he expected the hearing to make a lot of headlines but didn't expect any significant market structure discussions or conclusions, especially since the witness list does not consist of market structure experts. Repetto said he would buy Interactive Brokers if there was any weakness.
JMP Securities believes there will be questions about the controversial yet legal way Robinhood and other brokers make money from trades despite falling commissions: paying for the flow of orders.
"Robinhood is not unique in receiving payments for order flow," Tenev said in his prepared remarks. "Annual reports show that Charles Schwab, E * Trade, and TD Ameritrade all received significant payments for order flow revenues in 2019. It is important to note that Robinhood's payments for order flow relationships are made with market makers rather than hedge funds. Robinhood Securities regularly evaluates its counterparties and forwards customer orders to those market makers who can offer the best execution quality for these orders. "
Waters told CNBC on Wednesday that there would be three hearings, the first on the role of each party, the second with experts and a third to reach some conclusions.
Reddit & Roaring Kitty
Reddit's CEO is likely to have questions about the possibility of market manipulation and hate speech on the WallStreetBets page, which was inundated with posts about GameStop during the brief squeeze.
According to Bloomberg News, SEC regulators scoured Reddit posts to see if there were any bad players trying to manipulate the market last week. The regulator is also looking into the possibility of bots playing a role in the mob.
Gill, who walks from DeepF —— Value on Reddit and Roaring Kitty on YouTube, defended his social media posts, which last month helped spark a GameStop stock mania for publicly available information.
"My investment in GameStop and my social media posts have been entirely my own," said Gill. "I have not asked anyone to buy or sell the stock for my own benefit. I did not belong to any group that attempted to cause the stock price to move. I never had a financial relationship with a hedge fund."
Gill, the last post on Reddit, revealed he made $ 7.8 million from GameStop, doubling his investment thesis for GameStop on the testimonial.
"GameStop's stock price may have improved a bit over the past month, but I'm more optimistic than ever about a possible turnaround. In short, I like the stock," Gill said in the comments.
A class action lawsuit was filed against Gill on Wednesday, which was filed in Massachusetts federal court. He pretended to be an inexperienced trader despite being a licensed professional. Gill & # 39; s testimony stated that while serving as a marketing and financial education professional at MassMutual, he never sold any securities for the company or was a financial advisor.
The House Financial Services Committee event will be broadcast live here.
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