Two billionaire hedge fund managers, the 34-year-old co-founder and CEO of startup trading app Robinhood, and a YouTube investment streamer named “Roaring Kitty” voiced their defense Wednesday ahead of a hearing by lawmakers over last month's rollercoaster rally in GameStop and other underperforming stocks.
During the spree, online retail traders ganged up on a Reddit forum to buy shorted stocks such as video game retailer GameStop and movie theater operator AMC, mostly through the no-commission trading app Robinhood. The ensuing rally pushed share prices into the stratosphere, forcing some short sellers to buy up billions of dollars of shares to cover their losses — sending stock prices soaring even further.
But during the market mayhem, Robinhood and other trading platforms had to temporarily limit activity on the volatile stocks, which has bipartisan lawmakers worried about harm to investors who were unable to fully participate in the market. Other investors had stocks that precipitously lost value as the rally faded and prices came crashing back to earth.
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While the rally was initially portrayed as a besting of Wall Street Goliaths by an army of anonymous and irreverent Reddit and Robinhood users, data released by JPMorgan shows that institutional investors were drivers of the run-up, raising questions as to whether hedge funds had found a new way to play the market.
The House Committee on Financial Services, led by Chairwoman Maxine Waters, D-Calif., is certain to take a hard line on hedge funds and the relationship between Robinhood and its Wall Street business partners.
“We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price,” Waters said in a statement.
Robinhood has already had several class-action lawsuits filed against it by angry customers.
“I've never sued anybody,” one plaintiff, Kevin Kelley, a 51-year-old football coach in Little Rock, Arkansas, told NBC Nightly News. “This is right and wrong.”
Kelley has been buying and selling stocks for 20 years, he said. He used the Robinhood app to buy stocks and options in GameStop, but as the rally crested and he was ready to sell, he found the button he needed to push was grayed out after Robinhood restricted his and other traders’ ability to transact during the volatility. Meanwhile the market selloff was in full swing.
By the time he could trade again, instead of being up about $20,000, he lost around $3,000.
Now, he and his 24-year-old son have filed a lawsuit against Robinhood. “I would like for the powers that be to come out and re-establish that it's going to be safe for the little trader like me to have their platform to trade,” Kelley said.
Robinhood has drawn ire from regulators in the past. In December, the trading platform settled a $65 million fine with the Securities and Exchange Commission for not routing customers' orders to the broker that would best fulfill them, and was insufficiently transparent about the arrangement. This week the online platform missed an IRS deadline to give its customers necessary tax reporting forms.
Testimony released ahead of the hearing showed witnesses rebutting arguments they expected to face Thursday.
“The idea that I used social media to promote GameStop stock to unwitting investors is preposterous,” said Keith Gill, the online investor known as “RoaringKitty” whose strategy formed the basis of the initial Reddit rally, in testimony released Wednesday by the Committee. “I was abundantly clear that my channel was for educational purposes only, and that my aggressive style of investing was unlikely to be suitable for most folks checking out the channel.”
Vlad Tenev, the Bulgarian-American co-founder and CEO of Robinhood, will argue that every step the company took was to protect its customers and follow all rules.
“In the face of this unprecedented volatility and volume, which has been cited as a five sigma event, Robinhood Securities placed temporary restrictions on certain securities to facilitate compliance with clearing house deposit requirements,” Tenev said in testimony released by the Committee in advance of the hearing, "thereby allowing Robinhood to continue to serve our customers and comply with all trading regulations.”
Gabe Plotkin, CEO of Melvin Capital — the hedge fund at the center of some Redditors' ire — defended his company’s strategies.
“Absolutely none of Melvin’s short positions are part of any effort to artificially depress or manipulate downward the price of a stock” he said in written testimony. “In the frenzy during January, GameStop’s stock rose from $17 to a peak of $483. I do not think anyone would claim that that price had any relationship to the intrinsic value of the company.”
While Thursday's hearing could include headline-grabbing moments and fiery exchanges, don’t expect much in the way of detailed policy recommendations to follow, said Joshua Mitts, professor of corporate and securities law at Columbia Law School.
“Congressional hearings are not well suited for detailed fact finding and evidence gathering,” he told NBC News in an email.
“There are a number of policy solutions that have been put forth, including enhancing disclosure around market-moving social media campaigns,” as Mitts and other securities law professors proposed in an SEC rulemaking petition, “but I anticipate the questioning to focus primarily on industry behavior rather than regulatory reform,“ Mitts said.
Under President Joe Biden, regulators may be looking for enforcement action if necessary. However, the timeframe for such changes is usually measured in years, said Ben Koltun, director of research at Beacon Policy Advisors, an independent policy research firm for institutional investors.
“The SEC is still working on the Consolidated Audit Trail that was in response to the Flash Crash in May 2010,” Koltun said.