House gears up for first GameStop stock hearing

A group of technology and financial industry executives will face a bipartisan firestorm Thursday during the first congressional hearing on the GameStop stock controversy.

The leaders of major companies at the center of last month’s wild stock market volatility will find few allies on the House Financial Services Committee as members in both parties plan to hold their feet to fire.

Executives from Robinhood, hedge fund Citadel, Melvin Capital and Reddit will seek to defend the heavily scrutinized ways they dealt with a surge in purchases of shares of GameStop and other struggling companies organized by an online community of traders.

The GameStop frenzy raised serious questions about stock market regulation, the rise of retail trading websites and Wall Street transparency. The hearing may also lay the groundwork for further congressional investigations or attempts to impose tougher rules on hedge funds and trading platforms.

But financial policy experts say those concerns are likely to take a backseat to big tech backlash, mistrust of Wall Street and other politically potent grievances when lawmakers get their crack at the executives.

“The hearing will make for good TV,” wrote Brian Gardner, chief Washington policy strategist at investment bank Stiefel, in a Tuesday research note.

“In terms of figuring out what if any policy changes might result from the episode, we would pay more attention to the Senate Banking Committee’s hearing on the nomination of Gary Gensler to run the Securities and Exchange Commission since the SEC will take the lead in making any policy changes.”

The SEC — Wall Street’s top cop — is locked in a partisan 2-2 split among its commissioners and therefore unlikely to take any significant action until Gensler is at the helm.

Thursday’s Financial Services hearing will be the first time the major players of the GameStop controversy will be forced to publicly reckon with the anger and skepticism the episode provoked across the political spectrum.

In late January, shares of video game retailer GameStop soared more than 1,800 percent as members of a Reddit forum organized an attempt to “short squeeze” Melvin Capital, a hedge fund that had placed heavy bets on GameStop’s stock plummeting in value.

As Melvin and other short sellers closed out their positions, the price of GameStop and other Reddit-favored stocks soared, cheered on by Wall Street critics and other prominent investors who brand themselves as industry disruptors.

Reddit will likely face questions about whether the viral short squeeze organized on its platform made it an accomplice to market manipulation, but securities attorneys say it’s not clear whether the public nature of the rally ran afoul of securities laws. Keith Gill, a prominent trader on Reddit, is set to testify and will likely be grilled on the goals of the rally.

But the most intense scrutiny is expected to focus on Robinhood, a stock trading app popular among amateur investors that blocked the purchase of GameStop and other quickly rising shares. While Robinhood was not the only trading company to slam on the brakes, its higher profile and history of regulatory lapses made it a prime target for lawmaker criticism.

Robinhood CEO Vlad Tenev has insisted in a series of interviews that the decision to halt purchases was made to comply with federal and industry regulations. Securities attorneys and some industry-sympathetic lawmakers have said that explanation is likely accurate given the intensity of the rally.

Even so, Tenev will face a barrage of questions about what Robinhood could have done to prevent restricting its customers, how it plans to respond to those harmed by the decision and whether it’s sturdy enough to withstand another similar event.

“When financial executives are about to face hostile lawmakers, it’s smart for them to show up with concessions that can take some steam out of the questioners,” wrote Ian Katz, director at policy consultancy Capital Alpha Partners, in a Sunday research note.

“We expect a few minor admissions, like confessing that communications or disclosures could have been better. Tenev is already trying that approach.”

The Senate Banking Committee has said it plans to hold a similar hearing, but no date has been set.

Tenev and Citadel CEO Ken Griffin on Thursday are also likely to be hit with questions about whether Robinhood was pressured to shutdown GameStop purchases to help limit Melvin Capital’s losses.

Griffin, who will testify Thursday, is the founder of Citadel — which took a stake in Melvin Capital after bailing it out — and Citadel Securities, a legally separate entity that processes more than half of all stock orders on Robinhood.

Critics of Robinhood have claimed that the company was pressured by Citadel Securities to halt GameStop purchases to protect the Citadel hedge fund’s investment in Melvin.

Both Robinhood and Citadel have flatly denied any connection, and Griffin is expected to emphasize the distinction between the hedge fund the market maker he founded with the same name. That’s unlikely to put Wall Street critics like House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) at ease.

“Hedge funds will be a target of Democrats including Maxine Waters. She has already released a statement saying their ‘unethical conduct directly led to the recent market volatility,’ ” Katz wrote.

“Even so, narrow Democratic majorities in both chambers may mean legislation to back up the fury of the hearing may fall flat. While most Democratic lawmakers might agree to a bill bashing hedge funds, it’s nowhere close to unanimous. Barring egregious high-profile behavior by hedge funds in the future, any legislation is likely to amount to messaging bills for progressives.”