U.S. Congress will hold hearings on the GameStonks fiasco.
U.S. House Financial Services Committee Chair Rep. Maxine Waters said on Friday that the committee’s lawmakers plan to investigate short selling and online trading platforms. And Sen. Sherrod Brown, chair of the Senate Banking and Housing Committee, vowed to hold a hearing on the “current state of the stock market.” The New York Attorney General’s office, meanwhile, says it is “reviewing” the stock-trading app at the core of the GameStop stock controversy.
This week, the massive Reddit stock-trading community WallStreetBets organised to jack up the price of GameStop in a bid to screw over hedge funders at Melvin Capital and elsewhere that had taken massive short-seller positions on its stock. (GameStop is inarguably not a healthy company, but one that nonetheless holds nostalgia value for many chronic forum posters and recently got renewed energy thanks to the guy who helped turn Chewy.com into a pet-products powerhouse joining its board.)
The Reddit-led charge called Melvin Capital’s bet big time, with Wall Street sharks joining in a feeding frenzy that sent shares of GameStop skyrocketing to as high as $US483 ($630) on Thursday, up from $US17.25 ($22) on Jan. 4 and $US4 ($5) in December. Melvin took a brick to the face, but it’s likely other vultures made out far better than most traders on WallStreetBets.
Stock trading app Robinhood and other brokerages reacted by pressing panic buttons on Thursday, preventing anyone from buying into Gamestop and other companies targeted by Redditors such AMC and Blackberry. The decision attracted withering criticism from users and lawmakers, who accused the app of market manipulation by kneecapping GameStop shares to protect major Wall Street firms from big losses.
Robinhood’s fumbling — if self-serving — efforts to contain the situation particularly affected the variety of amateur investors who have been attracted to the no-commission app in droves during the coronavirus pandemic. It also drew attention to its business model, which puts payment for order flow firms in a privileged position to profit from high trading volumes.
The speculative frenzy dominated Friday’s news cycle, and Waters announced that her committee will be holding hearings delving into hedge funds’ role sparking it off.
— U.S. House Committee on Financial Services (@FSCDems) January 28, 2021
“Hedge funds have a long history of predatory conduct and that conduct is entirely indefensible,” Waters, a California Democrat, wrote in a statement. “Private funds preying on the pension funds of hard working Americans must be stopped. Private funds engaging in predatory short selling to the detriment of other investors must be stopped. Private funds enaging in vulture strategies that hurt workers must be stopped.”
Waters added: “As a first step in reining in these abusive practices, I will convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.”
Ohio Democrat Brown, meanwhile, lamented Wall Street elites as a scourge on non-rich Americans and said he plans to hold a hearing on the matter. “People on Wall Street only care about the rules when they’re the ones getting hurt,” he wrote in a statement. “American workers have known for years the Wall Street system is broken — they’ve been paying the price. It’s time for SEC and Congress to make the economy work for everyone, not just Wall Street.”
The New York Attorney General Letitia James’s office sent Gizmodo a brief statement by email: “We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock. We are reviewing this matter.”
U.S. Congressional investigators can wield the power of subpoenas to compel testimony and request internal documents, but the fallout is usually in the form of reputational damage and the prospect of legislation rather than direct legal consequences. Democratic Reps. Alexandria Ocasio-Cortez, Ro Khanna, and Rashida Tlaib have all blasted Wall Street firms for rampant speculation, as have Brown and Republican Sens. Ted Cruz, Mike Lee, and Patrick Toomey.
According to Bloomberg, sources said that Robinhood has had to tap hundreds of millions of dollars’ worth of credit lines at big banks. The company is also facing a class-action lawsuit from incensed investors who claim it violated customer agreements when it “randomly [pulled] a profitable stock from its platform,” and allegedly failed to execute orders placed by customers on specific stocks like GameStop that were placed in advance.
Robinhood plans to resume “limited” trades of the dozen-plus stocks it restricted on Thursday. GameStop’s stock price closed down more than 44% on Thursday at $US193.60 ($252). In after-hours trading, however, it’s jumped to more than $US345 ($450), as of 7PM ET.