Published: February 23rd, 2021
On Thursday, February 18, Congress questioned Robinhood, Reddit, and Citadel chiefs over the GameStop trading fiasco. All defended their roles in the stock's surge. GameStop shares have been the subject of alleged stock price manipulation witnessed on Wall Street in January and part of February.
Weeks after GameStop defied market dynamics and shot to the top before crumbling just as fast, a lot more information about what happened is only emerging following last week's testimonies before Congress.
Reddit CEO Steve Huffman appeared before Congress on Thursday, February 18, where he defended his platform's role in the January surge, which has directed the public's scope to a myriad of regulatory issues.
Huffman said his platform's moderation mechanisms make it particularly good at eliminating inaccurate information. He added that the platform's users' financial advice might be more reliable than sources such as traditional media houses since Reddit's information is vetted by the community.
Huffman told the House Financial Services Committee members that his platform did not detect foreign actors' influence or any significant bot-driven activity on the subreddit r/WallStreetBets.
Users of the online community triggered a buying frenzy for severely shorted stocks such as AMC, Blackberry, and GameStop. However, while retail traders poured their resources into the once-undesirable stocks, media observers and politicians raised questions about the identity of the people behind the posts that sparked the frenzy. The house committee also sought to find out how basic trading mechanisms can be manipulated.
Vladimir Tenev, Robinhood CEO, was also grilled by Congress. He took the chance to explain the rationale behind his platform's fee-free stock trading approach meant to democratize markets and give ordinary retail traders a chance to make money on Wall Street.
In response to a question by Rep. Alexandria Ocasio-Cortez, Tenev said that most brokerages have tiered margin rates where wealthier Wall Street big shots pay considerably lower margins. He added that his platform's approach gives every trader a uniform rate that does not advantage wealthier customers. Tenev admitted that their approach led to problems when other brokerages sliced their margins on GameStop and other stocks during the trading frenzy.
Ocasio-Cortez jumped on Tenev's answer about stopping buys and accused his platform of what she termed as Robinhood's failure to contain internal risks.
The representative said that if the trading platform had stopped buys when GameStop's price got to $500 a share, it would not have been forced to post a $3 billion collateral requirement. Tenev added that in a worst-case scenario, Robinhood would have liquidated investors' shares without their consent.
Congress also grilled YouTube and Reddit trading star called "Roaring Kitty." The trader, whose actual name is Keith Gill, defended his posts on social media that observers say helped spark the GameStop trading mania. Keith said he is an individual investor who acted on information that was available publicly.
Keith also used his testimony to put forth a case for his reason for remaining bullish on GameStop.
Despite the fears flailing in Washington, the immediate former head of the Securities and Exchange Commission Chairman is calm about the whole situation. Jay Clayton told the press on Friday, February 19, that he does not think the trading frenzy sparked by chats on Reddit depicts an illegal, pump-and-dump scenario.
Clayton was responding to a question by the Squawk Box co-host Joe Kernen who prodded the former agency boss on whether the January stock mania was a modern-day pump-and-dump propagated on social media.
The former civil servant said that there are no firm reasons to convince him that whatever happened was criminal based on what he has witnessed. Earlier this month, the SEC announced that it was investigating social media activity to determine if fraud was committed to sending GameStop stock on its meteoric rise.
Early in January, GameStop shares shot from just under $20 to post an intraday high of $483 towards the end of the month. The single-day rise represents an increase of more than 2,300%. The stocks have since declined sharply. By the close of business on Thursday, February 18, the price had dropped to just $40.69.
The SEC is specifically looking for misinformation that was posted to skew the direction of the market intentionally. According to the SEC, pump-and-dump happens when markets push misinformation information to spark a buying frenzy.
After a price increase, the participating parties often dump the shares in their custody at the new, high, artificial prices.
Clayton said that from his observation, the traders who moved GameStop stock were clear about their intentions. He added that the overall participation in the GameStop mania is fairly explicit, and the participants were transparent about their actions and intentions.
It is emerging that the fiasco has given birth to two schools of thought. Politicians and policymakers believe that not every action in the mania was above board. Clayton and company think the retail traders committed no crime.
Bill Gates is spinning a different web. While speaking to the media, the former Microsoft CEO likened the madness surrounding the GameStop trading to gambling and not investing. The billionaire added that people like gambling, but unfortunately, it is a zero-sum game where the people who get in early end up with a windfall while those who jump late are left with the short end of the stick.
Gates said the idea of pushing the value of a stock way above what is rational is never a fair use of society's time.
Aside from questioning Robinhood and Reddit chiefs and Keith Gill, Congress also grilled Citadel Securities CEO Ken Griffin and Melvin Capital chief executive, Gabriel Plotkin.
The recent trading madness that took GameStop shares from just under $20 to almost $500 in a day played again before Congress. The House Financial Services Committee questioned Reddit, GameStop, Citadel Securities, and Melvin Capital chiefs, and a YouTube trader to determine if there was market manipulation on the part of any of them.