Frenzied trading in the shares of GameStop and other companies will be the subject of what is expected to be a fiery hearing in Congress on Thursday, when US politicians get their first chance to quiz executives from the trading app Robinhood, Reddit and other players in the saga.
The House financial services committee will hold a hearing at noon in a first step to untangling the furore surrounding trading in GameStop, AMC cinemas and other companies whose share values soared to astronomical levels as small investors piled into the stocks.
The hearing, titled Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, is expected to be fractious.
Shares in GameStop, a troubled video games chain store, soared 1,600% in January, as an army of small investors, many using the trading app Robinhood, appeared to have bet that Wall Street hedge funds had overplayed their hand when betting the stock price would collapse – a practice known as short-selling.
Spurred on by meme-toting members of the Reddit forum WallStreetBets, investors kept buying the shares, driving up the price and triggering huge losses for some hedge funds.
Robinhood briefly suspended trading in GameStop and other hot stocks at the end of January and sparked allegations that the hedge funds and others may have pushed Robinhood and other trading platforms to stop the rout.
The news managed to – briefly – unite Washington’s deeply divided political elite. Both the rightwing senator Ted Cruz and the progressive representative Alexandria Ocasio-Cortez attacked Robinhood’s decision to halt trading in GameStop by small investors.
Ocasio-Cortez sits on the bipartisan financial services committee.
Among those testifying are:
Robinhood’s CEO, Vlad Tenev.
Reddit’s CEO, Steve Huffman.
Gabe Plotkin, founder of the Melvin Capital Management hedge fund, which was forced into a rescue after retail traders crushed its bets against GameStop.
Ken Griffin, billionaire CEO of Citadel, an investment firm that executes Robinhood clients’ trades and also helped to bail out Melvin.
Keith Gill, a trader variously known online as Roaring Kitty and DeepFuckingValue and a longtime GameStop booster.
The hearing marks the first time the major players in the GameStop controversy have all been forced to publicly reckon with the anger the episode provoked among small investors and across the political spectrum.
Gregg Gelzinis, associate director for economic policy at the Center for American Progress, said: “The GameStop drama raised quite a few public policy questions but first it’s important for members of Congress to understand how events played out.”
Gelzinis said there were still questions about the timeline of events. More broadly, he said, GameStop had highlighted many crucial issues for regulators, including the role and regulation of hedge funds, whether or how Wall Street is using social media to drive investment strategy, the “gamification” of investing by trading apps and the economic incentives at play for the trading platforms.
“What would have happened if Robinhood had failed? What would have been the knock-on effects for financial markets?” he asked. “These are huge investor protection questions.
“I saw someone on Twitter describe it as a Rorschach test for financial regulators,” he added.
The hearing will not be the last inquiry that the executives at the center of the controversy will face. Federal prosecutors have begun an investigation, according to the Wall Street Journal, and the Securities and Exchange Commission, the US’s top financial watchdog, is reportedly combing through social media posts for signs of potential fraud.
In the meantime, evidence has emerged that small investors were not the largest buyers of GameStop and other hot companies. According to an analysis by JP Morgan, institutional investors may have been behind much of the dramatic rise in the share price.
“Although retail buying was portrayed as the main driver of the extreme price rally experienced by some stocks, the actual picture may be much more nuanced,” Peng Cheng, a JP Morgan analyst, told clients in a note.
Gelzinis said Thursday’s hearing was likely to raise as many new questions as it answered but was a necessary first step to understanding the seismic changes in investing that GameStop highlighted.
“This is only the start of the story,” he said. “It’s clear this is not just a clearcut small investor versus Wall Street story. It’s a fairly messy picture but hopefully by the end we can paint a clearer picture and draw up some public policy conclusions from it.”