Robinhood founder Vlad Tenev and other players in the GameStop saga will appear before the House financial services committee at noon, the first public hearing in a wide-ranging investigation into trading in GameStop, AMC cinemas and other companies whose share values soared to astronomical levels as small investors piled into the stocks.
“The buying surge that occurred during the last week of January in stocks like GameStop Corp was unprecedented, and it highlighted a number of issues that are worthy of deep analysis and discussion,” Tenev said in prepared remarks released ahead of the hearing.
“I look forward to addressing those issues today, but I want to be clear at the outset: 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.”
GameStop’s shares surged 1,600% in January as small investors worldwide – many coalescing on the Reddit forum WallStreetBets – piled into the troubled retailer’s shares betting against Wall Street hedge funds that had bet the share price would collapse – a practice known as short-selling. At one point short-sellers had borrowed far more of GameStop’s shares (140%) to sell short than were available on the market.
According to Tenev, Robinhood and other brokers had no choice but to suspend trading in GameStop and other hot investments during this period of “historic volatility”.
Robinhood is required to place a deposit using its own funds at a clearinghouse to cover risks until trades are settled between a buyer and seller. On 28 January, the company was informed by its clearing house, NSCC, that it had a deposit deficit of approximately $3bn – up from $124m just days before.
With trading in hot stocks suspended, Robinhood moved to raise $3.4bn from investors and trading was resumed.
But the suspension triggered a firestorm of criticism among small investors and in Washington, with Republicans and Democrats attacking Robinhood and accusing it of backing the losing hedge funds over small investors.
Christopher Iacovella, CEO of the brokerage-industry group American Securities Association, dismissed Tenev’s explanation and said the system had worked as it should to defend the US’s financial system.
“As the GME [GameStop] short squeeze unfolded, the clearinghouse recognized that an inadequately capitalized broker-dealer could pose a risk to our markets and it took the action necessary to protect the system,” Iacovella said in a letter to the House committee. “Attempts to blame the clearinghouse or the timing of the settlement cycle for what happened during the short squeeze are a smokescreen.”
Thursday’s hearing, titled Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, is expected to be heated.
Among the conflicts of interest expected to be aired is the role of Citadel, an investment firm that executes Robinhood clients’ trades and also invested in Melvin Capital Management after the hedge fund’s bets against GameStop collapsed.
Both Citadel’s founder, Ken Griffin, and Melvin’s founder, Gabe Plotkin, will testify at the hearing. In his testimony, Plotkin denied that Citadel “bailed out” Melvin. “It was an opportunity for Citadel to ‘buy low’ and earn returns for its investors if and when our fund’s value went up,” he said.
Plotkin said January’s frenzied trading in GameStop was “untethered to fundamentals” and quoted racist messages aimed at him and others, including antisemitic statements such as “it’s very clear we need a second Holocaust, the Jews can’t keep getting away with this.”
“The unfortunate part of this episode is that ordinary investors who were convinced by a misleading frenzy to buy GameStop at $100, $200, or even $483 have now lost significant amounts,” said Plotkin.
GameStop’s share price has now collapsed from a high of $483 on 28 January to just over $44. But one of the small investors who helped drive the stock to dizzy heights is still a believer.
In his testimony Keith Gill, a trader variously known online as Roaring Kitty and DeepFuckingValue, said his investments had made him a millionaire.
“GameStop’s stock price may have gotten a bit ahead of itself last month, but I’m as bullish as I’ve ever been on a potential turnaround. In short, I like the stock,” he said.