The House Financial Services Committee on Thursday called before it the major players in the rapid rise and collapse of GameStop’s GME, -0.25% stock as it shined a spotlight on some troubling aspects of equities-market structure in the U.S.
The committee questioned Robinhood Chief Executive Vlad Tenev, Citadel Securities founder Ken Griffin, individual investor Keith Gill — aka ‘Roaring Kitty,’ Reddit CEO Steve Huffman and Melvin Capital CEO Gabe Plotkin.
Chairwoman Maxine Waters opened the proceedings by saying the events of late January “reinforced” many retail investors’ belief that “the system is rigged against them.”
Reddit co-founder Steve Huffman, the only witness not to come from the financial services industry, described WallStreetBets, the Reddit forum that has become famous for its promotion of GameStop shares, as a “real community” that “banded together at first to seize an investment opportunity not usually accessible to retail investors, but later more broadly to defend all retail investors against the criticism of the financial establishment.”
Keith Gill, known on Reddit as “Roaring Kitty,” snuck a joke into his opening testimony, telling the committee “I’m not a cat.” (Here is Gill’s testimony. “Before I go further, I want to be clear about what I’m not,” he said before making the joke.
Democratic Rep. Brad Sherman of California attacked the system of payment for order flow as a means for hiding the true costs of trading to retail investors. “Everybody I’ve talked to in this industry says when your broker is being paid for order flow you get a worse execution,” he said, in a heated exchange with Citadel’s Griffin. Griffin defended payment for order flow. “It has allowed the American retail investor to have the lowest execution cost they’ve ever had in the history of U.S. financial markets,” he said.
Rep. Al Green, a Democrat from Texas, cited regulatory fines that Citadel has paid over the course of the past decade, totaling more than $124 million, but noted revenues over that time were $13.2 billion. “It seems to me the punishments for these improper trades [and for misleading customers] are so small given the amount of revenue generated,” he said. “Citadel has at least an opportunity to build into its cost of doing business paying penalties…the punishment doesn’t seem to deter Citadel.”
Reddit CEO Steve Huffman said financial advice on Reddit is better than what you see on TV, because Reddit posts have to be endorsed by “thousands” of people before they gain widespread visibility.
Gabriel Plotkin, founder of Melvin Capital, said the investment management industry will respond to the GameStop saga by paying much closer attention to message boards like Reddit’s WallStreetBets. “We have a data science team that will be looking at that,” he said. His fund suffered losses as a result of the short squeeze in GameStop stock.
Rep. Alexandria Ocasio-Cortez asked Tenev to commit to passing on all payment for order flow revenue to its customers. “Payment for order flow allows for commission-free trading,” Tanev countered. Ocasio-Cortez argued that if eliminating payment for order flow would bring back commissions, then trading on the app isn’t actually free. “You’re just hiding the cost,” she said.
Keith Gill said that he still believes GameStop’s current price of roughly $45 a share undervalues the company. “I like the stock,” he said.
The stock is trading lower on Friday than at the beginning of Thursday’s hearing. As of midday Friday, GameStop was trading below $42 per share.