Wall Street, Silicon Valley, rogue internet chatrooms and Congress collided Thursday in a hearing to dissect what went down during the recent skyrocketing rally of GameStop and other stocks.
The virtual hearing of the House Financial Services Committee was called after shares of GameStop, AMC and other stocks favored by online traders surged late last month on the back of a "short squeeze" strategy that made early investors millions of dollars on paper, while hedge funds that bet against them lost billions.
Many of the retail investors used the zero-commission trading app Robinhood to execute their trades — but they found themselves shut out of the rally they had helped start when the app restricted purchases of the hot stocks because of volatility. Robinhood said it was forced to limit purchases of certain stocks because its clearinghouse had increased capital requirements to cover handling the volatile and leveraged stocks.
But online-stoked rumors swirled that relationships between Robinhood and its Wall Street business partners were behind the move to protect their interests, allegations the companies strongly denied.
"Americans feel the system is stacked and, no matter what, Wall Street wins," the committee's chair, Maxine Waters, D-Calif., said in her opening statement. The hearing will be "first in a series" she said, with future hearings to include regulators.
Republicans early on said they wanted to engage in "fact finding," but they aggressively pushed back against the notion that any further regulation was needed.
"These average investors are pretty sophisticated," said ranking Republican member Patrick McHenry of North Carolina. "Congress cannot put technology back in a box."
The brunt of the questioning was directed at Robinhood CEO Vlad Tenev, who was asked whether users were adequately informed that they might be locked out of buying or that Robinhood might have to raise capital requirements.
Tenev said customers were allowed to sell during the "black swan" event only because being prevented from doing so would be "a difficult and painful experience."
"Look, I'm sorry for what happened," Tenev said. "I apologize, and I'm not going to say that Robinhood did everything perfect and that we haven't made mistakes in the past, but what I commit to is making sure that we improve from this."
Repeatedly under fire, Tenev described the mechanics of his company's platform and defended its actions as being in the best interest of consumers, even as lawmakers have accused it of "gamification" of stock trading.
Asked whether his app — which shows digital confetti to celebrate purchases and forced interested users to tap the screen 1,000 times to maintain their positions on a signup waitlist — has any safeguards to prevent customers from acting on social media information rather than fundamentals, Tenev said the site had recently redesigned its customer education portal.
Rep. Brad Sherman, D-Calif., pressed Ken Griffin, CEO of the hedge fund Citadel, to answer whether it serves some customers better in executing their orders.
"It varies by channel of order. Size of the order is only one factor," Griffin said before Sherman cut him off and accused him of performing a "filibuster."
But it was Keith Gill, the retail investor known online as "Roaring Kitty," who perhaps stole the show, with his unvarnished and straightforward delivery with a "hang in there" kitten poster in the background. His GameStop strategy, shared online, spawned the original frenzy after other investors followed up on tips he shared on his YouTube investment channel.
"I like the stock," he said in his opening remarks, referring to a popular meme. Despite the video game retailer's struggles, he said, "GameStop has the potential to reinvent itself for gamers."
The stock briefly jumped from $43 to $48 on Thursday after Gill said he has "never been more bullish" on it before it fell below its opening price.
Some policy experts are skeptical that substantive reforms will follow the hearing, which presented a range of targets and issues and an unclear narrative.
"Right now, there isn't an agreement between Democrats and Republicans on the problem at hand, let alone the legislative and regulatory solutions," Ben Koltun, director of research at Beacon Policy Advisors, an independent policy research firm for institutional investors, said in an email.
"Republican leadership is not inclined to go after someone like GOP super donor Ken Griffin, and have traditionally been supportive of the market structure ecosystem that has been scrutinized in the past," Koltun said. "Democrats may release their own legislative reforms, but it would be more messaging than anything standing a realistic shot of passing into law."
Other experts say that potentially more important is what happens later.
"I do think you will see follow-up letters, though they may be data requests to the firms themselves," Alexis Goldstein, senior policy adviser at Americans for Financial Reform, a nonpartisan think tank, said in an online message.
For instance, lawmakers could ask firms for data about over-the-counter options, which retail investors cannot trade, which would help determine who drove the bulk of the runup: institutional investors or retail traders.
"I do think this is the beginning, not the end, of the conversation," Goldstein said.
Among accusations of "political theater" and the habitual glitches of group video conferencing — like microphone feedback and unmuted offscreen shouts — lawmakers did find aspects of the episode that disturbed them and which will continue to draw their investigation and attention.
"This episode exposes a serious threat to our financial system when tweets, social media posts, do more to move the market than material, legitimate, information," said Rep. David Scott, D-Ga. "The risk is enormous."