GameStop hearing to feature Robinhood and Reddit CEOs, hedge-fund titans and a YouTube streamer

19 Feb, 2021 01:09
source: Singularity Financial

Singularity Financial Hong Kong February 18, 2020 – Lawmakers in Washington are set to dig into the GameStop saga at a congressional hearing Thursday.

Robinhood CEO Vlad Tenev, Melvin Capital CEO Gabriel Plotkin, Reddit CEO and co-founder Steve Huffman, Citadel CEO Kenneth Griffin and Keith Gill, also known as Roaring Kitty, will testify to the U.S. House Financial Services Committee on Thursday at 12 p.m. ET, according to a release from Chairwoman Maxine Waters, D-Calif.

What to expect from Melvin Capital

Hedge fund Melvin Capital closed out its short position in GameStop after taking huge losses as a target of the army of retail investors. Plotkin said the short position in GameStop was rooted in the thesis that the physical video game retailer was being overtaken by digital downloads through the internet.

The Hedge fund arm of Citadel, as well as Point72, infused close to $3 billion into Melvin to backstop its finances. Citadel the hedge fund is not to be confused with Citadel Securities, which works with Robinhood to execute trades.

“I want to make clear at the outset that Melvin Capital played absolutely no role in those trading platforms’ decisions,” Melvin Capital CEO Gabriel Plotkin said in a testimony released Wednesday. “Melvin closed out all of its positions in GameStop days before platforms put those limitations in place.”

Meanwhile, Citadel Securities said in a statement last week that “Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business.”

What to expect from Robinhood

While public outrage has centered around the conspiracy theory that Robinhood blocked purchases of GameStop and other stocks in order to help Citadel Securities — one of its largest sources of revenue and a sister company to the hedge fund Citadel — the known facts support Robinhood’s claim that its actions were taken in order to trim risk in the face of collateral requests from the clearinghouse that executes its trades.

Robinhood CEO, Vlad Tenev, is denying speculation from some lawmakers that Robinhood acted to favor its big Wall Street clients when it blocked customers from buying shares of GameStop and a dozen other companies. The restrictions lasted in some form for days.

Like other retail brokerage firms, Robinhood generates revenue from routing customers’ orders to high-speed traders, which pay for the right to execute many of those trades. That business, known as “payment for order flow,” earned Robinhood $687 million in 2020, according to securities filings. Allegations that Robinhood misled its customers for years about its reliance on those deals were at the heart of an SEC investigation that Robinhood agreed to settle in December for $65 million. (Robinhood didn’t admit wrongdoing.)

Lawmakers are also likely to press Mr. Tenev about whether Robinhood makes it too easy for customers to buy risky options or to go into debt to buy stocks. Rep. Brad Sherman (D., Calif.) wrote a letter to Mr. Tenev and Robinhood co-founder Baiju Bhatt in July to ask about the safeguards the company puts around options trading and how it determines eligibility for option trading.

Tenev blamed the two-day trade settlement, known as T+2, for some of the clearinghouse deposit issues during the GameStop mania. “The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev’s testimony said. “The clearinghouse deposit requirements are designed to mitigate risk, but last week’s wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks.

What to expect from Reddit and Roaring Kitty

Also expected to testify remotely at Thursday’s hearing is 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.

SEC regulators reportedly combed through Reddit posts to identify if there were any bad actors trying to manipulate the market last week, according to Bloomberg News. The regulatory agency is also investigating the possibility of bots playing a role in the mob.

WallStreetBets “is first and foremost a real community,” Huffman says in his written testimony. “We saw the power of community in general and of this community in particular when the traders of WallStreetBets banded together at first to seize an investment opportunity not usually accessible to retail investors, but later more broadly to defend all retail investors against the criticism of the financial establishment.”

One of the most prominent figures on the WallStreetBets subreddit Keith Gill (aka Roaring Kitty), a licensed securities professional instead of an amateur investor, is being accused of profiting from the GameStop short squeeze by manipulating the market.

“Gill’s deceitful and manipulative conduct not only violated numerous industry regulations and rules, but also various securities laws by undermining the integrity of the market for GameStop shares,” the proposed class action suit says. “He caused enormous losses not only to those who bought option contracts, but also to those who fell for Gill’s act and bought GameStop stock during the market frenzy at greatly inflated prices.”

According to the filing, Gill “actively worked as a professional in the investment and financial industries” for many years. It claims that he holds a number of securities licenses and qualifications, including a Charted Financial Analyst license. The suit also states that Gill, who is set to testify before the House Financial Services Committee on Thursday, was previously employed by Massachusetts Mutual Life Insurance Company (MassMutual) as a “Financial Wellness Director.”

Gill defended his social media posts that helped spark a mania in GameStop shares last month in testimony released on Wednesday, saying he was an individual investor acting only 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 solicit 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 financial relationship with any hedge fund.”

Gill, who’s, latest post on Reddit showed he made $7.8 million off of GameStop, doubled down on his investing thesis for GameStop in the testimony.