Congressional Hearing On GameStop Ahead: What Investors Need To Know

On Thursday, Congress is taking its first crack at sorting through the stock market drama surrounding Reddit’s WallStreetBets, the trading app Robinhood, hedge fund Citadel Securities and high-flying stocks like GameStop Corp. GME.

What Happened? The House Financial Services Committee is holding a hearing on Thursday in which the CEOs of Reddit, Robinhood, Citadel Securities and Melvin Capital will testify about the circumstances surrounding extreme volatility in GameStop that led to Robinhood restricting buying in the stock.

WallStreetBets poster and GameStop trader Keith Gill, also known as Roaring Kitty, will also testify.

Related Link: Robinhood Facing Dozens Of Lawsuits Ahead Of Potential 2021 IPO

Why It’s Important: WallStreetBets users coordinated a massive pump-and-dump strategy targeting GameStop and other highly shorted stocks in January by leveraging the power of an option market gamma squeeze and a short squeeze.

By aggressively buying out-of-the-money call options and shares of the underlying stocks, these retail traders forced a positive feedback loop of buying volume from momentum traders, institutional hedging and hedge fund short covering. As a result, GameStop’s shares skyrocketed from under $20 to as high as $483 in a matter of days.

Losses at Melvin Capital got so bad that the hedge fund required a $2-billion investment from Citadel, which also pays Robinhood for its order flow.

Robinhood subsequently banned and restricted buying of GameStop, a decision that is now the subject of at least 30 user lawsuits. Robinhood said the decision to restrict trading was not influenced by Citadel or any other customer and was simply made to protect its users from potential losses.

See also: Robinhood Alternatives

Since Robinhood first enacted the restrictions, GameStop’s share price has crashed back down to around $46.

What To Watch For Thursday: Citadel founder Ken Griffin will likely face tough questioning on Thursday about Citadel’s roles as a hedge fund, a market maker and one of Robinhood’s largest customers. Citadel reportedly handled 27% of all the NYSE trades last year, generating $6.7 billion in revenue in the process. Its separate hedge fund business also buys and sells stocks and oversees about $34 billion in assets.

On Wednesday, Piper Sandler analyst Richard Repetto said investors should expect a lot of noise and very little action from Washington.

“We suspect there will be plenty of headlines to come out of the hearing. However, we don't expect any substantive market structure discussions or conclusions to result,” the analyst said in a note. 

Repetto recommended investors buy any hearing-related weakness in shares of Interactive Brokers Group, Inc. IBKR and Virtu Financial Inc VRTU.

Benzinga’s Take: The Washington, D.C. grandstanding machine will likely be out in full force on Thursday, and investors should expect Citadel and Robinhood to be the primary targets.

Yet the much more important piece of the puzzle will be if and when the WallStreetBets fiasco results in actual changes to market regulations, including potential restrictions on short selling or changes to short seller disclosure laws.