Key players in the GameStop saga that fascinated financial observers last month, causing jubilation and despair among even small-scale investors, are set to testify before Congress on Thursday in an eagerly-anticipated hearing.
The House Committee on Financial Services will hear from six people who were deeply involved in the drama.
Last month saw the price of shares in GameStop soar to $483, before plummeting back down again.
GameStop’s shares rocketed to $483 each last month, and are now worth $45
Keith Gill, known as Roaring Kitty, encouraged investors on Reddit to buy GameStop stock
Millions of traders made their deals using Robinhood, the app ran by Vlad Tenev (pictured)
The rollercoaster ride was propelled by amateur investors discussing their trades on a Reddit forum, and driving massive volatility in GameStop and other shares.
Tenev is expected on Thursday to appeal for a change in trading regulations
In the midst of the drama, the post-trade clearing houses that guarantee trades called for billions of dollars in collateral from Robinhood and other retail trading platforms.
The platforms, in response, suspended buying in the affected stocks on January 28, to prevent their companies collapsing.
This outraged traders and politicians, who questioned if the trading platforms were siding with hedge funds that had bet against the shares over small-scale investors.
Vlad Tenev, the 34-year-old CEO of trading app Robinhood, has come under intense scrutiny for his actions.
He will testify and argue for a change in rules around trading – an agreement supported by the billionaire CEO of Citadel, a hedge fund which stepped in to bail out another firm involved, Melvin Capital.
Melvin’s CEO, Gabe Plotkin, will say he was ‘personally humbled’ by the efforts that drove up the stock price, causing a huge loss to his company.
Gabe Plotkin, who runs Melvin, personally lost $460 million during the GameStop frenzy
Plotkin’s company lost 53 per cent of its value in January, amid the frenzy: Plotkin himself personally lost $460 million, Bloomberg reported.
One of those who helped ensure that Plotkin’s company lost the enormous sums, day trader Keith Gill, known as Roaring Kitty, will argue that it is ‘preposterous’ to suggest he encouraged novice investors to lose money.
Reddit CEO Steve Huffman is expected, according to a version of his testimony released on the eve of the hearing, to defend r/WallStreetBets, the community that sparked the rush.
Huffman says group activity ‘was well within normal parameters,’ and the group was not infiltrated by bots, foreign agents or bad actors.
Finally Jennifer Schulp, a former official at financial regulator FINRA, will testify that changes to the trading system are not needed.
She is expected to tell the committee that the wild trading ‘did not present a systemic risk to the functioning of our markets.’
Ken Griffin’s firm Citadel bailed out Melvin and but had no involvement in Robinhood, he says
Griffin, whose firm Citadel Securities last month played a critical role in processing retail investors’ orders, will insist his firm was not involved in Robinhood’s decision to limit trading in GameStop.
Griffin, who has been trading stocks for more than half his life, plans to suggest shorter settlement cycles and transparent capital models, in a bid to avoid the fury felt at Robinhood’s actions.
The 52-year old billionaire investor, who founded hedge fund Citadel LLC in 1990 and co-founded Citadel Securities in 2002, will deliver prepared remarks and answer questions.
‘When others were unable or unwilling to handle the heavy volumes, Citadel Securities stepped up,’ Griffin said, describing the frenzied retail stock trading when Citadel Securities processed 7.4 billion shares for retail investors on January 27.
‘That day Citadel Securities executed more shares for retail investors than the average daily volume of the entire U.S. equities market in 2019.’
Citadel Securities, led by Peng Zhao, competes with other market makers for order flow from companies like Robinhood and receives a large percentage of orders based on execution quality. It also pays Robinhood to process orders it receives.
Retail investors have benefited from technology that companies like Citadel Securities are employing to speed trading and help cut fees, Griffin said.
But last month’s events – when an army of retail investors sent up the stock prices of unloved companies like GameStop – illustrate that more work is needed.
Trades should be settled faster, Griffin said noting that the trade date now usually takes two business days to settle.
Tenev will go further, and ask for trades to be settled in real-time.
This would have allowed the company ‘to better react to periods of increased volatility in the markets without restricting the purchasing of securities,’ Tenev will say.
Robinhood: The trading app for amateurs started by two millennial best friends
Baiju Bhatt and Vladimir Tenev founded Robinhood in 2013, saying they were inspired by the Occupy Wall Street protests.
Robinhood is a free stock trading app that allows users to easily load cash and buy and sell stocks and options.
The popular app boasts 13 million users, and reportedly about half of them own shares of GameStop.
On January 28, Robinhood restricted the purchase of shares in GameStop and several other stocks popular on the Reddit forum WallStreetBets.
Baiju Bhatt (left) and Vladimir Tenev (right) founded Robinhood in 2013, saying they were inspired by the Occupy Wall Street protests
Traders who own the stocks were still able to hold or sell them on Robinhood, but no users were allowed to purchase new shares.
The move drew furious condemnation across the political spectrum, and accusations that Robinhood is coming to the aid of hedge funds at the expense of small investors.
Legal experts say brokerages have broad powers to block or restrict transactions.
Bhatt and Tenev met while they were students at Stanford University, and had previously collaborated to start a high-frequency trading firm and a company selling software to professional traders.
Both have an estimated net worth of about $1 billion, thanks to their stakes in Robinhood, which is valued at $11.7 billion.
Last month, the SEC ruled that Robinhood had misled its customers about how it was paid by Wall Street firms for passing along customer trades and that the start-up had made money at the expense of its customers.
Robinhood agreed to pay a $65 million fine to settle the charges, without admitting or denying guilt.
Bhatt, 36, is the son of Indian immigrants, and earned a bachelor’s degree in physics and master’s in mathematics from Stanford.
Tenev, 34, was born in Bulgaria and moved to the US with his family when he was five. He earned a bachelor’s in mathematics from Stanford and dropped out of a PhD program to team up with Bhatt.