Here’s what to expect at the Congressional hearings on GameStop and Robinhood

The players

Robin Hood: The popular commission-free online brokerage has been a favorite tool of a new class of retail investors who have incorporated social media into their investment decision making.

While the company’s app has exploded in popularity in recent years, it has come under fire for not being direct with customers about how it makes money and for intermittent outages that have kept its users from accessing. to negotiate. Last month’s decision to restrict purchases of shares of GameStop Inc. just as a social media campaign to increase the stock was in full swing led to accusations the company was trying to sabotage the stock. to help short sellers.

Robinhood executives, however, said in sworn testimony that Robinhood halted share purchases because its users were placing massive, long, one-way bets on the highly volatile stock, often with borrowed money. , which triggered massive calls for collateral from the broker’s clearinghouse. . Co-CEO Vlad Tenev will testify on Thursday.

Citadel Securities: Founded by billionaire Ken Griffin, who will also testify on Thursday, the securities wholesaler is one of Robinhood’s biggest revenue streams, as it pays brokers for the privilege of fulfilling their clients’ orders. Market makers like Citadel Securities practice this “payment for order flow” because they make a very small profit from every trade they execute – the spread between the buy and sell price of a security – which is on average slightly more than what they pay to complete the exchange.

Melvin Capital: A hedge fund that reportedly racked up huge losses after betting against GameStop by selling the stock short. The fund was bailed out by other hedge funds Point72 and Citadel, according to the Wall Street Journal. The Citadel hedge fund is also partially owned by Ken Griffin, but is otherwise not affiliated with Citadel Securities. CEO Gabriel Plotkin will appear before the committee on Thursday.

Reddit: A popular social news platform where GameStop action has been heavily promoted. Regulators investigated the site to determine if users promoting these memes stocks were engaging in illegal behavior, such as intentionally lying about a title in order to manipulate its price. Reddit CEO and co-founder Steve Huffman will testify on Thursday.

Keith gill: An independent investor who frequently published about his success in investing in GameStop and other stocks even.

What questions will be asked?

Lawmakers will be eager to hear if there has been collusion on the part of Robinhood, Citadel Securities and Melvin Capital to stop the rally in GameStop shares. Citadel Securities and Robinhood have publicly denied that this is the case, but expect committee members to investigate the matter further.

Ben Koultun, director of research at Beacon Policy Advisors, predicted that a very wide range of questions could be raised in the audience outside of researching what motivated Robinhood to restrict trade.

“What I’m looking for is whether a narrative will emerge from hearings that pave the way for regulatory or legislative changes, or whether members are more concerned with keeping their own political talking points that they can fit into a press release, ”he told MarketWatch.

Koulton said it would likely be the last, given that several weeks after meme stock volatility declined, no consistent narrative has emerged as to what the episode tells policymakers about the state of the markets. financial.

Democrats have in the past blasted Robinhood for features that encourage frequent use of the app, which observers have called gamification, but in the wake of GameStop volatility, top Democrats were much more eager to attacking hedge funds, the practice of short selling and Robinhood for blocking GameStop new purchases that they criticized online brokers for making speculation in financial securities too easy and attractive.

Republicans, on the other hand, may see the wisdom of attacking Wall Street and Silicon Valley in the abstract, but Koulton predicted they would work primarily to fend off Democrat attacks and call for tighter regulation of market structure or practices such as short selling. .

“There has been a more populist lean towards the Republican Party lately, but I doubt he’s eager to go after a Republican mega-donor like Ken Griffin,” he said.

What will be the effect of the hearing?

Without a bipartisan agreement on the problems the GameStop saga has exposed in U.S. financial markets, the hearings are unlikely to serve as much as political theater, according to Brian Gardner, chief Washington policy strategist at Stifel.

“The audience will make good television, but to determine if any policy changes might result from the GameStop episode, we would pay more attention to the Senate Banking Committee hearing on the appointment of Gary Gensler as the head of the Securities and Exchange Commission. , since the SEC will take the lead in making policy changes, ”he wrote in a note to clients on Tuesday.

“Congress could force the SEC to make specific changes, but regulatory action rather than legislation is the way to go,” he added, noting that the Gensler hearing could be scheduled as early as next week.

The most likely issue the SEC needs to focus on in its regulatory review is the practice of payment for order flow, which critics say creates a conflict of interest between the broker’s clients and accepting market brokers. payment.

Regulators, however, have carried out extensive reviews of the practice in the past, most notably following a 2014 Senate investigation. “The payment of order flows has been disputed in the past and the SEC has decided not to make any major changes,” Koltun said, noting that supporters of the practice say it has allowed brokers to eliminate commissions, for the benefit of the average investor. “Citadel and Pay for Order Flow have too many strong supporters in the DC atmosphere for that to change.”

Senator Sherrod Brown, Democrat of Ohio and chairman of the Senate Banking Committee, said he also intends to hold a hearing “on the current state of the stock market,” but has not yet decided of date.