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House Financial Services Committee Hears Testimony from Key Players in GameStop Trading Event

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

A number of key players in the short squeeze of the stocks involving GameStop, AMC and KOSS testified at a U.S. House Financial Services Committee hearing. Witnesses included, among others:

  • Chief Executive Officer of Robinhood Financial LLC ("Robinhood") Vladimir Tenev;

  • Founder and CEO of Citadel Kenneth C. Griffin;

  • Founder and Chief Investment Officer of Melvin Capital Management LP ("Melvin Capital") Gabriel Plotkin; and

  • retail investor Keith Patrick Gill.

As described in the Committee Memorandum, investors, such as Mr. Gill, "collectively" effected a short squeeze on the abovementioned stocks, which had been heavily shorted by hedge funds. The Committee Hearing, entitled, "Game Stopped? Who Wins and Loses when Short Sellers, Social Media and Retail Investors Collide," examined public speculation that Robinhood, in response to the short squeeze, placed restrictions on the stocks' transactions so that it could route orders to Citadel in exchange for payment, and that a business relationship between Robinhood, Citadel and Melvin Capital led to profits for the hedge fund despite reported losses in the stock.

At the hearing, Mr. Griffin of Citadel and Mr. Plotkin of Melvin Capital both testified that their respective companies had no role in Robinhood's decision to limit trading in GameStop. Mr. Griffin and Mr. Plotkin stated that they found out about the trading restrictions when that information was publicly announced. Mr. Tenev of Robinhood testified that the trading restriction "was for one reason and one reason only: to allow [Robinhood] to continue to meet our regulatory deposit requirements" imposed by Robinhood's clearinghouse.

In discussing the role of Citadel in the short squeeze, Mr. Griffin stated that on the week of January 24, Citadel was the only major market maker that provided continuous liquidity, and specifically cited that, on January 27 alone, Citadel executed 7.4 billion shares on behalf of retail investors. Mr. Griffin explained that this is more shares for retail investors than the average daily volume of the entire U.S. equities market in 2019.

In discussing Melvin Capital's position in the short squeeze, Mr. Plotkin stated that the company's "research-supported view" to short GameStop had been in place "since Melvin's inception six years earlier." Mr. Plotkin defended Melvin Capital's decision to close out its position in GameStop at a loss "not because [Melvin Capital's] investment thesis had changed, but because something unprecedented was happening."

Mr. Gill, who maintained an opposing thesis on GameStop's potential, testified that GameStop was "dramatically undervalued by the market" and that "the prevailing analysis about GameStop's impending doom was simply wrong." In discussing his stance on GameStop, Mr. Gill pointed to GameStop's legacy business and potential evolution in the gaming industry as two factors that contributed to his decision to purchase call options in the stock on June 7, 2019, and increase his position through 2019 and 2020. Mr. Gill explained that he decided to share his investment opinions on social media because "hedge funds and other Wall Street firms have teams of analysts working together to compile research and critique investment ideas, while individual investors have not had that advantage." Mr. Gill stated that he uses social media to "identify holes in [his own] analysis," and described allegations that he used the platform to promote GameStop stock as "preposterous."

Commentary

Will this hearing be the first step to a round of ill-advised government interventions? Consider these Cabinet recommendations: Regulators Should Focus Less on Solving the Problem; More on Improving the Situation.

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