Those of us who sat through yesterday’s five-and-a-half-hour House Committee on Financial Services hearing on the GameStop short squeeze had maybe, foolishly, hoped against hope to see some cold hard accountability. We came to hear Robinhood’s CEO explain why, at the peak of the GameStop run, the trading app shut out its users from buying GameStop, after which the value of the stock plummeted. The committee had the CEO of Robinhood and its credibly-suspicious hedge fund friends all assembled and vulnerable to potentially incriminating questions.
And yet, we got an epic bipartisan shit show.
Over 50 Congress members attempted rapid-fire five-minute interrogations while battling an experimental noise band of moving furniture, clinking cups, and ambient yelling. Present were the major GameStop squeeze characters: Robinhood CEO Vlad Tenev, Citadel CEO Kenneth Griffin, Melvin Capital CEO Gabriel Plotkin, and unofficial WallStreetBets CEO “DeepFuckingValue” aka Keith Gill. (And, for some reason, Reddit CEO Steve Huffman.) For all of the chaos, delight, comedy, parody, boredom, rage, and rage-inspiring boredom this produced, our elected representatives’ loose command of the mute button quickly got depressing.
Republicans argued that the Democrat-led hearing was political theater, via political theater. We veered into breathtakingly delusional meta-questions about why Robinhood CEO Vlad Tenev isn’t monitoring all of social media for trustworthy investment advice. One representative spent the whole of his time talking about TikTok and the Chinese Communist Party, and others lobbed righteous but scattershot protests against class inequality to hedge fund CEOs. Some prompted the thought: “You’re on the Financial Services Committee? That’s terrifying!” And many demonstrated the potential value in ceding time to a fellow party member.
The hearing rarely came close to the point, which is that Wall Street guys may have effectively sequestered a ton of uninformed poor people into a casino that’s presented itself as the stock market. To review, the hearing was prompted in late January, when the free, entry-level trading app Robinhood essentially pulled the rug out from under a once-in-a-lifetime raid on Wall Street devised by members of the subreddit WallStreetBets. (That’s the movie version.)
The story is that working-class Redditors banded together to take an enormous risk by buying up tons of stock on an ailing company—the video game retailer GameStop—which sensationally paid off, driving GameStop’s value to unthinkable heights at the expense of hedge funds who’d shorted the stock. At the peak of the GameStop run, Robinhood decided, without warning, to block its users from buying GameStop stocks. GameStock’s value plummeted, and some even claimed that the app had force-sold their shares, a charge which Robinhood has denied.
Some think the whole idea of the hearing is stupid, and they make a valid point. “If the hearing is being called because Congress believes that small investors were hurt because they could not trade GME for a day, I think it is being delusional,” Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, refreshingly told Gizmodo via email. “Stop trading incessantly, since no one (not the hedge funds, portfolio managers) wins that game in the end. And if you put your money in Citadel as an investor, I have no sympathy for your hand wringing.”
Payment for order, oh no
So yes, GameStop was gambling 101. But, if we’re calling a hearing to seize on a rare opportunity to probe Wall Street’s practices, Congress could easily have made hay out of this group. They would examine Robinhood’s relationship with Citadel Securities, a division of a hedge fund that pays Robinhood (a lot) for the power to broker its users’ orders. They would also note that Citadel happened to pass a $2 billion bailout to its fellow hedge fund Melvin Capital, the major holder of GameStop short positions which Robinhood users weaponized.
Many, including Elizabeth Warren, would like to better understand whether these relationships pose the kind of conflict of interest that might, for example, incentivize Robinhood to stop its own users from trading.
The relationship deserves inspection because Robinhood doesn’t make money directly from users on its commission-free trades. When you tap “buy” or “sell” on Robinhood, your order doesn’t go straight to the New York Stock Exchange; instead, Robinhood sends your order to high-frequency trading firms, primarily, Citadel Securities, in what’s called “payment for order flow” (PFOF). Citadel then executes both sides of the trade internally (called “internalizing”) and pockets the difference between the rates at which the seller sold and the buyer paid. Because I am not a financial journalist, I defer here to the brilliant Matt Levine:
The wholesaler [eg Citadel Securities] does the thing I just said: It pays the sellers more for their shares than the exchange offers, charges the buyers less for shares than the exchange would, and keeps 5 cents for itself. Well, it keeps, say, 3 cents for itself, and sends 2 cents back to the retail broker who sent it the trade. The broker has subcontracted the internalizing job to the wholesaler, and they share the profits.
PFOF proponents say that the process actually incentivizes market makers to execute trades within a slimmer, more competitive price range. Robinhood CEO Vlad Tenev has maintained that Robinhood had to halt sales of GameStop stocks due to a last-minute call for $3 billion in cash from its clearinghouse, the National Securities Clearing Corporation (NSCC). As Levine has also pointed out, it’s not unusual or unreasonable for a clearinghouse to ask for collateral during a totally unpredictable trading frenzy over a stock that could diminish to a quarter of its value by tomorrow.
But prior to this, the SEC has fined both Citadel and Robinhood for misleading unknowing retail investors to turn a profit. So that’s what we’re here to learn about, and I spent the entirety of the hearing hoping that AOC would attend. She did, we’ll get to that, but I’m not sure it was worth it.
WallStreetBets investor and financial analyst DeepFuckingValue (aka Keith Patrick Gill) passed this hearing with flying colors. Do I trust him? Not at all, but his testimony did exactly what it needed to: disarmingly cast himself as the antithesis to the surrounding assholes, a guy who plausibly believes in GameStop as a company, rather than a savvy investor who identified the potential for a short squeeze (as portrayed in a lawsuit accusing him of unfairly manipulating followers for personal gain). He opened with the disclaimer: “I’m not a cat. I’m not an institutional investor, nor am I a hedge fund.” Bravo. He went on to advocate for GameStop’s inherent value:
I grew up playing video games and shopping at GameStop, and I plan to continue shopping there. GameStop stores still provide real value to consumers and reliable revenue for GameStop. Second, I believe that GameStop has the potential to reinvent itself as the ultimate destination for gamers within the rapidly-growing, $200 billion gaming industry. GameStop has a unique opportunity to pivot toward a technology driven business by embracing the digital economy. GameStop may be able to find new revenue streams that vastly exceed the value of its business.
Uh-huh. But if he were thinking about this like a Wall Street investor who legally does this all day long anyway—why not?
When I wrote and spoke about GameStop and social media with other individual investors, our conversations were no different from people in a bar or on a golf course or at home talking or arguing about a stock. Hedge funds and other Wall Street firms have teams of analysts working together to compile research and analyze shares of companies. Individual investors do not have those resources. Social media platforms like Reddit, YouTube and Twitter are leveling the playing field. The idea that I use social media to promote GameStop stock to unwitting investors and influence the market is preposterous. My post did not cause the movement of billions of dollars into GameStop shares. It is tragic that some people lost money in my heart goes out to them. But what happened in January just demonstrates again that investing in public securities is extremely risky.
Are Congresspeople okay?
About an hour into the hearing, Representative Ed Perlmutter (D-CO) finally acknowledged the elephant in the room.
“Madame Chairman—Madame Chairman—point of order,” he said. “I’d just like—yeah, Perlmutter, just to remind people, when they’re not speaking—to mute themselves because there’s a lot of feedback when the question is asked and the mic stays open.”
Representative Maxine Waters affirmed that representatives should heed the mute rules. And yet, hours later, as Kenneth Griffin was midway through explaining why Citadel offers better execution than exchanges limited by regulatory mandate, this happened:
Kenneth Griffin: We’re able—
Distant offscreen voice: WHY ARE YOU HERE, AND WHAT ARE YOU DOING??
Griffin: Ex-excuse me?
Rep. Frank Lucas (R-OK): That wasn’t either one of us, continue, Mr. Griffin.
Griffin: Alright. So, we’re able to share our trading acumen with retail investors, and we’re able to give them a better price, and we’re able to make payments for order flow to firms like Robinhood that allow them to have lower or, today, in most cases, no commission.
Well, that’s ominous.
Robinhood stopped selling GameStop because of fucking Democrat regulations!!!
Republicans are very pissed that Democrats are using this little show trial to push their Big Government agenda. In the telling of certain GOP reps, the government stepped in and forced Robinhood to stop allowing their users to buy meme stocks, and now Maxine Waters is manipulating the outrage to impose more market regulations. Not for nothing, this stance could score points with voters and potential hedge fund donors.
The reality is a little more complicated. Robinhood CEO Vlad Tenev has maintained that the company had to halt GameStop buys after its clearinghouse NSCC suddenly asked for $3 billion in collateral at 5am ET. The NSCC and its parent company, the Depository Trust and Clearing Corporation (DTCC), are beholden to SEC rules designed to mitigate risk. Tenev pointed out in his testimony that this might not have been an issue if the SEC enabled clearinghouses to settle trades immediately, rather than the current two-day cycle (the “T+2" settlement period).
On the day Robinhood halted GameStop buys, CNBC interrogated Tenev about whether Robinhood simply didn’t have the money on-hand for collateral, i.e., whether Robinhood had a “liquidity problem.” Money problems are probably not good to admit from a business standpoint, but that might have been a more understandable answer than Tenev’s vague insistence that Robinhood just had to “‘protect the firm and protect our customers” while meeting “SEC net capital requirements.”
Yesterday, Tenev finally sorta admitted to “liquidity issues” in a line of questioning from Rep. Anthony Gonzalez (R-OH). Here’s the exchange:
Gonzalez: In your testimony, you mentioned that the automated deposit requirements for DTCC came in at 5:11 a.m. Eastern, and it showed a three billion dollar deficit, correct?
Tenev: I believe that’s correct. Yes.
Gonzalez: OK. At that point, at 5:11 a.m., did you have the liquidity to meet the additional three billion dollar deposit requirement?
Tenev: So as we wrote in detail...in my written testimony, there were a series of steps that the Robinhood securities team took to….
Gonzalez: At that exact moment, did you have the liquidity for three billion, 5:11 AM?
Tenev: At that moment, we would not have been able to post the three billion in collateral.
According to Fortune, a source close to the NSCC confirmed that Robinhood was able to reduce that $3 billion to $1.4 billion by agreeing to halt purchases of meme stocks.
Anyway, Republicans seized on his reference to regulations in order to point out that the government shouldn’t regulate markets.
Rep Barry Loudermilk (R-GA): Mr. Tenev, again, can you remind us again why Robinhood temporary paused trading of GameStock—GameStop—and other stocks?
Vlad Tenev: Of course, thank you, Congressman. Robinhood paused trading temporarily—or, I should say, paused buying about 13 securities on Thursday—so we could meet our regulatory deposit and collateral requirements.
Loudermilk: Okay, so what you’re saying is you were paused [sic] because you had to comply with regulations, is that true?
Loudermilk: Alright, so it’s ironic that the people who are criticizing brokerage firms because they paused trading, which they sometimes have to do to comply with regulations—these same folks are now saying we need to respond to this with more regulations. I would say if people don’t like brokers occasionally having to pause trading, I would suggest they look at the regulations that required it.
Subplot: Elon Musk Revenge Theory
Wait, why wasn’t Elon Musk here? He doesn’t really have anything to do with this, but neither does Steve Huffman and he showed up.
At least one man made sure that he was not forgotten. Rep. Steve Stivers (R-OH) worked him into a back-and-forth with Melvin Capital CEO Gabe Plotkin:
Stivers: Mr. Plotkin, are you a frequent short seller? Yes or no?
Plotkin: We were on a long, short portfolio. The majority of our investments are long investments, but we also have short investments to hedge our market risk.
Stivers: Thank you, Mr. Plotkin. Has Melvin capital ever engaged in short selling of the stock Tesla?
Plotkin: We have been short Tesla in the past, that’s correct.
Stivers: Mr. Plotkin also this is a longer question...did you see the tweet from Tesla CEO Elon Musk about GameStop stock?
Plotkin: I did see that, after market hours on, uh, yes—
Stivers: Do you believe that Mr. Musk’s tweet had any significant effect of driving the price in GameStop stock?
Plotkin: I don’t want to speculate on what the actions of his tweet were. The stock did rise.
Stivers: Do you believe that that tweet was targeting you because you had shorted Tesla’s stock in the past?
Plotkin: You know, we had a very small, short position years ago in Tesla, that would be pure speculation as to his motives in putting that tweet out.
AOC Asks a Useful Question, and This is What Happens
Imagine now that you’re 5 hours and 15 minutes deep into this livestream, and you’ve nearly abandoned all hope. By some miracle, Waters calls upon Alexandria Ocasio-Cortez.
AOC to Tenev: If removing the revenues that you make from payment for order flow would cause the removal of free commissions—doesn’t that mean that trading on Robinhood isn’t free to begin with because you’re just hiding the cost? The cost in terms of potentially poor execution or the cost of lost rebates to your customers?
Tenev: So, certainly, Congresswoman, Robinhood is a for-profit business and needs to generate some revenue to pay for the costs of running this business. People were initially skeptical that the model even with payment for order flow would work when you remove commissions, and I think we’ve proven that otherwise by making this the standard model by which brokerages operate now.
AOC: I see...I have a timeline question here for Mr. Plotkin. I see that earlier your testimony today was that Melvin Capital had not engaged in..um...sorry—Madame Chairwoman?
[Maxine Waters, indiscernible]
AOC: I’m sorry, I think you’re not muted, sorry about that. [Laughs] Mr. Plotkin, earlier today you mentioned that Melvin Capital had not engaged in a naked short of GameStop. And Melvin closed out its position on GME on the [inaudible date], correct?
Waters: I’m sorry, but the gentlelady’s time has expired.
If you’ve made it all the way here, I hope this was as informative to you as it was for me!