The First GameStop Congressional Hearing: A Summary

On Thursday, a congressional hearing was held on the events of late January regarding the short squeeze of GameStop stock by retail investors, which resulted in monetary losses for hedge funds betting against GameStop’s future success. One of the focal points of the discussion was a crucial decision the trading app Robinhood had taken amid the GameStop price surge to restrict the buying of several stocks including GameStop. In the hearing, congresspeople questioned several people prominently involved in the event. Among those were Citadel LLC CEO, Melvin Capital CEO, Robinhood CEO, Reddit CEO, and the now-legendary /r/wallstreetbets user Keith Gill a.k.a. /u/DeepF***ingValue.

The more than five-hour-long hearing in the Financial Services Committee was chaired by Rep. Maxine Waters and was titled “Game Stopped? Who wins and Loses When Short Sellers, Social Media, and Retail Investors Collide”. It was the first of (“probably”) three hearings focusing on the GameStop event and its implication for financial markets and policy.

Rep. Patrick McHenry was among the first to speak. He used his opportunity to point out that contrary to the insistence of some, retail investors are often experts at their craft and make sophisticated trading decisions. He stressed that one of the central questions the attendees of the hearing should be asking themselves was: why would people involved in trading, who know the risks and the market mechanisms involved, opt to willingly and gladly lose their money in a gesture of protest against the establishment?

McHenry expressed his belief that someone like an Uber driver needs to have the same access to the financial markets as institutional investors and that the imbalance between the treatment of retail investors and large players is the root cause of many of the issues at hand. His sentiment was echoed by many others throughout the hearing. Rep. Ann Wagner said that it was “critical” to ensure that barriers to market participation are reduced. In response to Rep. Bill Huizenga’s question, Citadel LLC CEO Kenneth C. Griffin, Robinhood CEO Vlad Tenev, Reddit CEO Steve Huffman, and WallStreetBets’ Keith Gill all agreed that retail involvement is not a ‘casino’ for people to gamble, but a legitimate investment.

In their opening statements, Citadel CEO Griffin and Melvin CEO Plotkin both denied any involvement in Robinhood’s decision to limit the buying of GameStop stocks on January 28th. Robinhood CEO Tenev himself explained more closely the steps his company had taken during the GameStop surge. According to Tenev, on January 28th, the daily deposit requirements to cover an increased volume of trades had risen tenfold in comparison with the amount on January 25th. Robinhood responded to this, Tenev continued, with the restriction on GameStop stock buying to comply with “increased regulatory deposit requirements, not to help hedge funds”. He also apologized to Robinhood’s customers for the lack of preparedness which led to this response being enacted.

Responding to a question by Rep. Patrick McHenry on why Robinhood had restricted the buying but not the selling of GameStop stocks, Tenev reiterated that their decisions had been purely driven by deposit and collateral requirements imposed by clearinghouses. He added that preventing users from exiting their positions by selling their stocks would be a much more drastic step that they did not want to take as it was not necessary to help meet the regulatory requirements.

Rep. Barry Loudermilk later commented on Robinhood’s explanation:

“It’s ironic that people are criticising brokerage firms because they pause trading, which they sometimes have to do to comply with regulations… The same folks are now saying we need to respond to this with more regulations.”

Asked whether the market needed more regulation, WallStreetBets’ Keith Gill replied that increased transparency in how financial markets and major financial institutions operate could help retail investors’ position. He did not call for any other legislative action. Similarly, the expert on financial regulation on the committee and Director of Financial Regulation Studies at Cato Institute, Jennifer Schulp, voiced her belief that the events around GameStop should not lead to restrictions on retail investors’ access to the market.

Keith Gill clarified in his statement his position in the recent events to the lawmakers:

“A few things I am not: I’m not a cat, I am an institutional investor, nor am I a hedge fund, I do not have clients and I do not provide investment advice for fees and commissions. I’m just an individual whose investment in GameStop and posting on social media were based upon my own research and analysis.”

Gill added that despite criticisms of many, social media levels the playing field between institutional and retail investors. Legitimate information about assets is being shared and discussed on forums like WallStreetBets, thanks to which retail investors can make informed investment decisions. He added:

“As for me, I like the stock.”

Later, he reiterated: “My investing is based on the fundamentals.” When he started investing in GameStop in 2019, Gill was convinced that the real value of a GameStop share was somewhere around $20-$25. He said he had maintained his opinion of the stock’s fundamentals while adjusting his original valuation according to new developments.

Addressing, once again, the now-infamous buying restrictions on GameStop stock by Robinhood on January 28th, Rep. Anthony Gonzales asked Tenev about alternatives to this decision and outlined the counterfactual, had Robinhood not prevented its users from trading the stock. Since, at the time, Robinhood was at the risk of not meeting regulatory collateral requirements amid the rapid developments, the company would be forced to liquidate its exposed portfolio altogether. According to Tenev, this would prevent all Robinhood users from trading any stocks, not just GameStop and the twelve other stocks involved.

Rep. William Timmons stated that the Dodd-Frank Act, which introduced sweeping changes to the financial industry in the wake of the 2008-09 financial crisis, was to blame for the situation, as it had been the capital requirements included in it that effectively forced Robinhood to act in the way it did. The Cato Institute’s Jennifer Schulp agreed with this sentiment.

Along with others throughout the hearing, Rep. Vicente Gonzales said that at the heart of the whole issue is the two-day clearing process which needs to be urgently addressed and updated. Tenev agreed with his sentiment, maintaining that one of the main shortcomings in today’s US financial market is its “antiquated settlement infrastructure”. He explained: “I do believe, if we had real-time settlement capability and the infrastructure was modernized, we would not have seen similar problems.” 

Many congresspeople present alleged that Robinhood is guilty of ‘gamifying’ trading - that through game-like features, it exploits people’s psychological weaknesses and incites them towards faster and riskier trading. Tenev repeatedly denied these allegations, claiming instead that the app only aims to provide its customers with the services they demand and appreciate, with the goal of making retail trading as accessible as possible.

In relation to future congressional inquiries into the GameStop situation, Jennifer Schulp stated that more information is needed on whether institutional investors got involved in the GameStop short squeeze as the price of the stock was skyrocketing. She explained that it was possible that they had not and that the price hike was only due to retail involvement, because the surge in price was that of a small company, not a giant company like Apple, for example.

Rep. Bryan Steil said that in further hearings, the committee should focus more on the comparison between Robinhood’s actions on January 28th and the actions of other brokerage firms that also limited GameStop trading amid the short squeeze. In the concluding remarks, Rep. Maxine Waters announced that the next hearing will include securities market experts and investors advocates who will discuss potential legislative solutions. It will also include testimonies from regulators including the SEC and FINRA.