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

The players

Robin Hood: The popular no-fee online broker is a tool of choice for a new class of retail investors who have integrated social media into their investment decisions.

As the company’s app has exploded in popularity in recent years, it has come under fire for not being straightforward with customers about how it makes money and due to periodic outages that prevent users from trading. Last month’s decision to purchase GameStop Inc. as well as a social media campaign to pump up the stock led to allegations that the company was trying to sabotage the stock to help short sellers.

However, Robinhood executives have said in sworn testimony that Robinhood halted stock purchase because users overwhelmingly placed one-way investment on the extremely volatile stock, often with borrowed money, leading to massive demand for collateral from the broker’s clearinghouse. . Co-CEO Vlad Tenev will testify on Thursday.

Citadel EffectsFounded by billionaire Ken Griffin, who will also testify Thursday, the securities wholesaler is one of Robinhood’s biggest revenue streams as it pays brokers for the privilege of executing their clients’ orders. Market makers like Citadel Securities apply this ‘payment for order flow’ because they make a very small profit on every trade they make – the spread between the buy and sell price of a security – which is on average slightly greater than what they pay to take out. feed. the trade.

Melvin Capital: A hedge fund that is said to have taken massive losses after betting against GameStop by selling its stock short. According to the Wall Street Journal, the fund was saved by fellow hedge funds Point72 and Citadel. 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 stocks were heavily promoted. Regulators have investigated the site to determine if users promoting such meme shares are engaging in illegal behavior, such as deliberately lying about a security to manipulate its price. CEO and co-founder of Reddit Steve Huffman will testify Thursday.

Keith Gill: An independent investor who regularly reports on his success in investing in GameStop and other meme stocks.

What questions are asked

Lawmakers will be wondering if there was a collusion on the part of Robinhood, Citadel Securities and Melvin Capital to stop the rally in GameStop stock. Citadel Securities and Robinhood have publicly denied this is the case, but expect committee members to thoroughly investigate the matter.

Ben Koultun, research director at Beacon Policy Advisors, predicted that a very wide range of issues could arise at the hearing beyond the investigation of what motivated Robinhood to restrict trade.

“What I’m looking for is whether there is a story coming out of the hearings that provides a path forward for changes in regulations or legislation, or whether members are more concerned about sticking to their own political discussion points that they can put in a press release. packaging, ”he told MarketWatch.

Koulton said this will likely be the latter, as a few weeks after meme stock volatility has subsided, no coherent story has emerged as to what the episode tells policymakers about the state of the financial markets.

Democrats have ravaged Robinhood in the past for features that encourage frequent use of the app, which observers have dubbed gamification, but after GameStop’s volatility, prominent Democrats were much more eager for hedge funds, the practice of short selling, and Robinhood for blocking new purchases. GameStop said they were critical of online brokers for making it too easy and attractive to speculate in financial collateral.

Republicans, on the other hand, may see the wisdom in attacking Wall Street and Silicon Valley in the abstract, but Koulton predicted they would work mainly to quell the Democrats’ attacks and advocate for tighter regulation of market structure or practices such as short selling. .

“The Republican Party has had a more populist tendency lately, but I doubt they will be 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 issues the GameStop saga has exposed in U.S. financial markets, the hearings are unlikely to serve much more than political theater, said Brian Gardner, Washington Policy Strategist chief at Stifel.

“The hearing will make for good TV, but as to whether there could be any policy changes coming from the GameStop episode, we would pay more attention to the Senate Banking Committee hearing on Gary Gensler’s nomination to the Securities and Markets. Exchange Commission, as the SEC will lead the way in making policy changes, ”he wrote in a note to clients on Tuesday.

Congress might surprise the SEC in specific changes, but regulatory action rather than legislation is the likely way forward, he added, noting that the Gensler hearing could take place next week.

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

However, regulatory agencies have extensively reviewed this practice in the past, particularly following a 2014 Senate investigation. “Payment for order flow has been filed in the past and the SEC has decided not to make any major changes,” said Koltun, noting that proponents of the practice say it has allowed brokers to eliminate commissions, benefiting the average investor. coming. “Citadel and payment for order flow have too many strong advocates within the DC atmosphere to change it.”

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