Reddit founder and chief executive Steve Huffman, Robinhood chief executive Vladimir Tenev, and other executives and individuals involved in the recent GameStop stock saga are preparing to provide testimony and answer questions before the House Financial Services Committee Thursday. The committee hearing follows public outcry against online trading platform Robinhood and other brokers' decisions to restrict trading in so-called meme stocks last month.
It's been three weeks since GameStop's stock peaked at close to $500, and free-trading pioneer Robinhood restricted trading shares of the formerly lackluster companies that have become known on Reddit and elsewhere as "stonks"--including not just GameStop, but also AMC, Blackberry, and Koss. The move prompted outrage on Reddit's WallStreetBets forum--one popular place where day-trading investors rallied behind the stocks--and calls from Representative Alexandria Ocasio-Cortez and Senator Ted Cruz for regulation.
That regulation, should it ever happen, is much further down the road. Tomorrow's hearing simply could fuel the fire--and be a deep-dive into the workings of hedge funds, trading platforms, and perhaps, how to navigate future meme-amplified social-trading frenzies. Here are some key elements the hearing could have in store.
1. Grilling of Robinhood.
Expect harsh questions for Tenev, Robinhood's CEO, over his company's actions, its business model, and its business ties to the investment firms that were caught in short squeezes on GameStop and other stocks. Lawmakers will probably want to know why Robinhood required two massive rounds of capital infusion, a total of $3.4 billion, to get through the two turbulent weeks. Also watch for questioning around whether Tenev's app-based trading platform fosters addictive behavior by gamifying day trading.
2. Clarity on the relationship between Robinhood and the firms who enable it to offer customers free trades.
Citadel Securities pays for executing Robinhood's order flow. Beyond just seeking to understand how payment for order flow works, members of the House likely will grill Citadel Securities' billionaire founder Ken Griffin over his firms' actions and possible conflicts of interest. Citadel--a separate entity from Citadel Securities, partially owned by Griffin--is one of the funds that bailed out Melvin Capital, the hedge fund that racked up huge losses after betting against GameStop. Melvin Capital's chief executive, Gabriel Plotkin, also will appear Thursday. (In his testimony, Tenev will phrase the payment for order flow as a standard practice used by many investment firms.)
3. Scrutiny of hedge funds.
While many observers expect little but political showmanship to come of the hearing, Donna Edwards, a former Democratic member of Congress from Maryland, told CNBC: "We need to make sure there are rules in place so that Robinhood can operate and not destroy the market, and so it protects small investors." She added that she's interested in "the opening this may be to looking again at the operation of hedge funds: They still remain largely unregulated in the market." That's also likely to be a focus of committee chair Maxine Waters, a Democrat from California, who has been a harsh critic of hedge funds.
4. Questions about the power of social media to move markets.
Huffman, Reddit's CEO, will likely attempt to stay out of the action by providing insight on the WallStreetBets community as a keen observer. In his planned testimony, Huffman explains the structure and function of Reddit, and dives into the culture on WallStreetBets, humanizing its posters. "I will stress that WallStreetBets is first and foremost a real community. The self-deprecating jokes, the memes, the crass-at-times language, all reflect this. And if you spend time on WallStreetBets, you'll find a significant depth to this community, exhibited by the affection its members show one another," he writes. He also notes that Reddit is open to cooperating with any legal requests from regulators: "That said, we do believe that this community was well within the bounds of our own policies."
5. A show.
The day trader who provoked WallStreetBets into paying attention to GameStop goes by a profane phrase on the site, but elsewhere is known as "Roaring Kitty," and his given name is Keith Gill. He'll testify, and it should be interesting. While Gill's testimony, released in advance of the hearing, claims that his posts about GameStop stock were "for educational purposes only," he also writes: "Social media platforms like YouTube, Twitter, and WallStreetBets on Reddit are leveling the playing field. And in a year of quarantines and Covid, engaging with other investors on social media was a safe way to socialize. We had fun." Redditors are already celebrating Gill's appearance at the hearing by sharing a clip of a Rambo movie with his face superimposed over Sylvester Stallone's.