Wall Street hedge fund managers, the chief executives of Robinhood and Reddit, and a YouTube streamer known as Roaring Kitty face a grilling on Thursday afternoon from US lawmakers over the Reddit rally in shares of GameStop Corp.
Some of Wall Street's most powerful players, including billionaire Republican mega-donor and Citadel CEO Ken Griffin, will make rare public statements about their businesses during the congressional hearing on how Reddit users trading on retail platforms banded together to squeeze hedge funds that had bet against shares of the video game retailer and other companies.
Griffin will appear before the Democratic-led House finance panel alongside Robinhood CEO Vlad Tenev, Melvin Capital CEO Gabriel Plotkin, Reddit CEO Steve Huffman, and Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who promoted his investment in GameStop.
The five men have been at the centre of the saga, which roiled Wall Street in January prompting probes by several federal and state agencies.
Little guy victory
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.
GameStop shares soared 1,600% in January before falling back to Earth. 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 panel, Rep. Maxine Waters, D-Calif., is homing in on hedge funds, which she says have a history of “predatory short-selling".
“We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility,” Waters said in a statement.
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.
Robinhood denies changing rules to favour big clients
Robinhood CEO Tenev is denying speculation from some lawmakers that the platform acted to favour its big Wall Street clients when it blocked customers on January 28 from buying shares of GameStop and a dozen other companies. The restrictions lasted in some form for days.
The accusation is that Robinhood changed the rules of the road midway through to favour big clients that stood to lose money if GameStop shares kept rising.
“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 says in written testimony prepared for the hearing. “Our customers are our top priority.”
Tenev says Robinhood imposed the trading restrictions solely to meet capital requirements set by regulators.
Fault lines in market structure
As they question Tenev and other witnesses, lawmakers will look for what the GameStop trading frenzy says about the fault lines and potential conflicts in the structure of the market that can hurt unsophisticated investors.
“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.”
Online GameStop booster, Gill, or "Roaring Kitty", plans to tell the lawmakers that he reaped a profit on his investment because he did his homework, and not because he touted the stock to “unwitting investors", according to his prepared remarks.
“I did not solicit anyone to buy or sell the stock for my own profit,” Gill says. “I had no information about GameStop except what was public.”
(FRANCE 24 with AP and REUTERS)