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Ronaldo Grizzanti
What started off as a small internet joke is now at the heart of a key hearing, and the results have the potential to set the benchmark for similar cases in years to come. What is set to be a messy trial will surely have the common retail investor left staring off into the distance. This article will clean up the muck, and provide a simplified, factual account of what’s to come ahead of today’s hearing with the House Financial Services Committee and GameStop’s recent stock activity.
What’s Happening?
Video game retailer GameStop (NYSE: GME) was trading at less than $8/share 8 months ago. Unexpectedly, last month GME hit a high of $483/share, but what was behind the rally?
Thousands of retail investors on the internet chat service, Reddit, banded together and formed a group called “WallStreetBets” to work toward investment goals together. Their most well-known endeavor started when they caught wind of hedge funds taking massive short positions in GME. In response, the WSB crowd decided to start buying up shares of GME in order to drive up the price. Their goal was twofold, to make a profit for themselves, and to hurt the hedge funds by making them close their short positions at a massive loss.
Why Hold a Hearing?
The House Financial Services Committee is holding hearing to get to the heart of a few potential issues including market integrity and market manipulation. Online brokerages such as Robinhood and TD Ameritrade restricted trading for GME (among other stocks), when they became increasingly volatile, only allowing investors to make trades to close their positions. This is where a big question stems from—were the restrictions legal, or was it an attempt to manipulate the market?
Key Players
Keith Gill- WSB investor who took up huge positions in GME stocks and options
Vlad Tenev- CEO of Robinhood Markets Inc.
Steve Huffman- CEO of Reddit, which hosts WallStreetBets
Rep. Maxine Waters- Chair of House Financial Services Committee
Ken Griffin- CEO of Citadel LLC, executes orders placed on Robinhood, TD Ameritrade
Gabe Plotkin- Founder of Melvin Capital Management LP, a leading hedge fund until it lost billions in GME and other stocks
Hearing
Led by Rep. Waters, the House Financial Services Committee will hold a virtual hearing on
Thursday, February 18th with the goal of uncovering why GME’s price moved so much, and if there was any malpractice conducted that would constitute punishment for any party involved. Social media plays a big role in the potential for market manipulation, due to users having such a large influence on their followers. This is how stock prices can become inflated, placing trades based on “hype” or simply being influenced to do so, rather than taking an objective look at a company.
Possible Outcomes
With Robinhood being the most popular online brokerage platform for retail investors, they have been quickly put in the spotlight and are constantly monitored by all necessary regulatory authorities. If they are found guilty of market manipulation by restricting trades of GME, there will be proportionate punishments. Speculating, they may have placed these restrictions because their buddies at the hedge funds got mad that the WSB crowd (which mainly uses Robinhood and TD Ameritrade) forced their hand to realize their losses. The WSB group will most likely not be punished, as it would be imputative to try each individual investor. However, Steve Huffman, CEO of Reddit, may be liable for inciting price manipulation, mainly “pumping & dumping”.
The hearing will give a greater vision of what is to come of the parties in question. Be sure to
tune in at noon on Thursday, February 18th for complete coverage of the hearing.
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