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GameStop Short Squeeze Hearing in US Congress

On Thursday the US House Committee on Financial Services will hold a hearing on the market upheaval that took place around recent trading in GameStop. Witnesses include hedge fund managers Ken Griffin of Citadel and Gabe Plotkin of Melvin Capital. Also included are Steve Huffman, the CEO of social media site Reddit, Vlad Tenev, co-founder and CEO of commission-free trading app Robinhood and Keith Gill, the trader known as “Roaring Kitty” who emerged as one of the key players leading up to the GameStop rally.

On 13th January shares in old school bricks-and-mortar gaming retailer GameStop jumped from a shade under $20 to over $38.  Little more than a fortnight later the stock peaked at just over $482 for a two-week gain of around 2,300%. It has since tumbled. But even though the stock price has stabilised at around $50, Washington’s legislators and regulators have moved to verify whether the episode was driven by market manipulation or other issues in the financial system.

The rally in GameStop shares was triggered by retail investors who were active on Reddit’s social media platform. They challenged the hedge funds betting on a decline in the gaming retailer’s shares and soon had the short sellers on the run. It was then that some on Wall Street accused the retail investors of market manipulation, a stunning example of hypocrisy if ever there was one.

But far more seriously, Robinhood and some other retail-focused trading platforms caused outrage when they imposed trading restrictions on GameStop and other companies that had seen a short squeeze on their shares. Robinhood’s Tenev insists the company had to impose the restrictions after wild trading in the stocks triggered a $3 billion margin call by the company's clearing house, putting pressure on its balance sheet. But others point out Robinhood’s cosy relationship with Citadel, with the former selling customer orders to the latter, a set-up known as ‘payment for order flow’ or PFOF. It was also Citadel which pumped funds into Melvin Capital, the primary victim of the short squeeze.

Recently Janet Yellen, the US Treasury secretary, convened a meeting of top regulators, including the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). She stated that the core infrastructure of the market was resilient but said the SEC and CFTC will be “reviewing whether trading practices are consistent with investor protection and fair and efficient markets”.

Ahead of this, it will be interesting to see what members of the House Committee focus on: supposed market manipulation by retail investors posting on an open forum, or what really happened before Robinhood, and others, restricted trading to retail customers while the rest of Wall Street was free to trade what it wanted. Hopefully there will be some honest oversight and some intelligent questioning. But judging on previous hearings we shouldn’t bank on it.

Do you want to watch how the twists and turns of this event affect financial markets? Login to your practice account and see.

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