On Thursday the House Financial Services Committee will heat up the grill for five players in l’affaire GameStop (GME), late January’s stock market spectacle that saw the stock of the video game retailer skyrocket from the teens to well over $300 — and back down again to the mid-$40s.
There has been a lot of confusion, conspiracy theories, complex market dynamics, loss, gain, and drama, and Congress hopes to clear up some of these things. Expect questions about conflicts of interest, market manipulation, the internal workings of how stock trades happen, how trading data is shared, and more.
Still, don’t expect everything to be cleared up and tied with a pretty bow, even if the five witnesses will be answering questions under oath.
“My experience is that these hearings are tough on both [Congress]members and witnesses as the witnesses know much more about the subject matter than the members of the Committee,” Tom Block, Fundstrat’s expert in Washington’s inner workings, wrote in a recent note. “Members can get lost in questioning that a staff member may have written but is not fully understood by the member; and the witnesses need to be careful not to appear to be talking down to the Committee members.”
Because of this, Block and others see the SEC as the body that will clear up any issues.
Based on publicly available information, some people invested in GameStop, including a regular guy named Keith Gill.
He posted on a loose internet forum on Reddit called “r/WallStreetBets.” In mid-January, his investing thesis (it was undervalued) began to gather steam and others piled in — and the price began to rise. Since at least 2020, some hedge funds, including Melvin Capital, had been betting that the price of GameStop would go down and had accumulated substantial short positions in the stock.
The Reddit forum captured wide interest and the situation – and the stock – went viral. The stock climbed higher and higher, putting serious pressure on the hedge funds betting it would go down.
During this market volatility as the stock shot up, average investors were using fairly advanced products like margin (borrowing money to buy stocks) and options (buying the right to buy the stock at a certain price in the future).
Robinhood and other brokers halted buying of the stock on their platforms on Jan. 28 because of market mechanisms that usually doesn’t get discussed much, which were put in place after the Financial Crisis to mitigate risk. Essentially, GameStop and other stocks were so volatile and the positions so concentrated that the entity that “clears” the stock (the clearinghouse) told Robinhood that it needed to deposit an enormous over $1 billion as collateral if it wanted to continue to let its clients buy. This caused Robinhood to restrict buying.
Many people on the internet cried foul, lawsuits were filed, and many accused brokers like Robinhood of being on the side of the hedge funds that had bet against GameStop. Robinhood denied the claim many times — including in CEO Vlad Tenev’s prepared statement.
The excitement faded as did the price after the buying slowed down. GameStop continued to fall and many people lost a lot of money. With a lot of political uproar, Congress wanted to find out what happened and called a hearing.
Keith Patrick Gill, aka,"Roaring Kitty" aka "u/DeepFuckingValue" is being sued for his role in the GameStop fiasco. (STAR MAX Photo) ·STRF/STAR MAX/IPx
Who is testifying?
Keith Gill: The man known as “Roaring Kitty” (on YouTube) or “Deep F***ing Value” (on Reddit and Twitter). A regular “retail” investor in GameStop who made millions. Unemployed but recently worked for MassMutual, a financial services firm, where he worked in education. Gill is facing a lawsuit alleging he violated securities laws and caused "huge losses" for investors, which he denies in the strongest possible terms.
Vlad Tenev: CEO of Robinhood, a popular investment platform used by many of the people who drove the GameStop frenzy. Robinhood, founded in 2013 with a mission “to democratize finance for all,” offers commission-free trades.
Jennifer Schlup: Director of financial regulation studies at the Cato Institute, a libertarian think tank.
Ken Griffin: A billionaire and head of investment firm Citadel.
Ken Griffin participates in a panel discussion during the annual Milken Institute Global Conference at The Beverly Hilton Hotel on April 29, 2019 in Beverly Hills, Calif. (Photo by Michael Kovac/Getty Images) ·Michael Kovac via Getty Images
Short-selling: Stocks are usually bought by the people who want to own them and sold by the people who do not. That’s called “long.” Short-selling is an investing strategy that speculates a particular stock will fall. An investor borrows a stock to sell it; then if the value goes down, they buy back the stock at a discount and return it, pocketing the difference.
For example: Someone who thinks Stock A will drop from $10 to $5 borrows a share from a brokerage for $10 plus a small fee and sells it on the market. The stock goes down to $5. The short-seller then buys the stock back and returns it to the brokerage. His profit is $5 minus the borrowing fee.
If the stock goes up, say to $15, the short-seller would have to re-buy the stock for $15 to return it and get out of the situation. In that case, he loses $5. Because there is no limit to how high a stock can go up — but a limit to how much it can fall — the potential losses for a short-seller are infinite.
Margin call: If the stock goes up in value, then suddenly the short-seller (see above) who has borrowed and sold a stock needs to pay more than they got for it to return it. To make sure the short-seller can afford to buy back stock they’ve sold (that has increased in value), brokerages will often require collateral or “margin.” Being asked for more margin is a “margin call.”
The Robinhood app. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images) ·SOPA Images via Getty Images
Hedge fund: An investment firm that often uses risky methods to realize high gains for investors that pool their money together. Often they have large research teams. In the GameStop affair, Melvin is a hedge fund.
Market maker: A firm that makes sure you can always buy or sell a stock by providing quotes for selling price and buying price. They make money because there’s a small difference between the two. Brokerages work with market makers to make sure their clients can trade. Citadel Securities is a market maker for Robinhood, executing trades for the platform’s customers.
Citadel: A financial firm that has a market-making arm called Citadel Securities and a hedge-fund arm that is invested in Melvin Capital. Melvin bet against GameStop, and Citadel Securities has a relationship with Robinhood, where many customers invested in GameStop and other viral stocks.
Retail brokerage: A firm like Robinhood, Fidelity or Schwab where retail investors use to buy and sell stocks.
Retail investor: A non-professional individual investor.
Payment for order flow: Brokers have to provide clients with the best possible price under the law. There can be small differences in prices just like for goods in stores, and one exchange or seller quotes one price and another quotes a slightly different price; the broker needs to get the best price for their client.
These days, market makers like Citadel Securities provide brokerages like Robinhood with better prices for stocks than the brokerage could get on an exchange, another place where investors can buy and sell shares. Citadel will even pay for the right to execute these orders (even at the best price for the brokerage’s clients) because it finds the order flow information useful in some way. For example, if Robinhood executed a lot of trades for a particular stock with Citadel, Citadel would know that a lot of retail investors like the stock. This could be helpful information to them and their businesses.
Option: A contract that gives you the right but not the obligation to buy or sell a stock at a certain price in the future. A fairly high amount of the trading action around GameStop happened with investors buying options. Because options can be inexpensive, if the stock happens to go up, a small amount of options can conceivably provide a big payoff. Because of this, it’s a form of “leverage.”
Investing with margin: Borrowing money to buy a stock. Margin means collateral.
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
