The stock market revolution in the GameStop case, led by thousands of small investors against large Wall Street funds, which were forced to take heavy losses on their short positions, was the subject of a heated debate on Thursday in the U.S. Congress.
The House Financial Services Committee hearing featured some of the key players in the complicated drama: the leader of the revolutionaries, small investor Keith Gill; and Vlad Tenev, the CEO of Robinhood, the commission-free electronic brokerage app.
There was also Steve Huffman, the head of Reddit, the social network where the coordinated actions of small investors were discussed.
Gill, under the nom de guerre “Deepfuckingvalue,” managed from the basement of his Massachusetts home to beat funds like Melvin Capital to the punch.
They had amassed a large volume of short options, as the right to sell shares of a higher value in the future while pocketing the difference, on GameStop, a declining video game retailer, and Gill successfully bet against them together with thousands of investors.
“I am not a professional investor. I don’t give financial advice for a commission. I like Gamestop stock,” Gill told lawmakers, in a tie and with an ironic staging that included a sign with a cat with the slogan “Hang in there.”
Precisely to cries of “Hold in there, Hold in there” and “to the moon,” millions of small investors, led by Gill, drove GameStop’s stock price, which less than a year ago was at $4, to nearly $350 by the end of January.
Gill, in the process, became a millionaire and a hero to small investors.
To cut losses, these big Wall Street traders were forced to cover short positions by buying shares en masse, something that triggers an even bigger price increase, known as a “short squeeze,” a phenomenon by which large investment funds may have lost $20 billion.
In the case of Melvin Capital, it was forced to make an emergency injection of $3 billion.
Robinhood and its market manipulation
Also appearing at the Congressional hearing was Kenneth Griffin, the CEO of the Citadel investment fund, one of the largest on Wall Street, which manages Robinhood’s orders, who limited himself to defending that his actions were perfectly legal and rejected accusations of market manipulation.
Griffin assured that the GameStop case was “exceptional” and vindicated the usefulness of these novel brokerage mechanisms in the financial markets.
“It has allowed the retail investor to have the lowest cost of execution they have ever faced,” said the Citadel chief.
The volume of trades forced Robinhood to limit trading in the stocks most affected by speculation, and investors were up in arms against the very application that has allowed them to trade on the stock market, to the point of protesting in the streets.
Paradoxically, the situation managed to bring lawmakers from opposite poles into agreement, such as Democrat Alexandria Ocasio-Cortez and Republican Ted Cruz, who charged against the restrictions and demanded “freedom” to invest.
Suddenly, the electronic brokerage application went from the side of small investors to those of large funds.
Before lawmakers, Tenev apologized for what happened, something he called “unacceptable,” but claimed it was due to “increased regulatory deposit requirements” because of the huge number of trades.
“We do not respond to hedge funds (…) Please know that we are doing everything possible to ensure that this does not happen again,” Tenev told the hearing, although he acknowledged that small investors do not have the same access to the market as large funds.
However, the Securities and Exchange Commission (SEC) last year fined Robinhood for failing to explain that in reality its way of making money is by contributing a gigantic volume of buy-sell orders to large funds like Citadel, and that it makes a profit on the price differences generated between order and execution.
Currently, GameStop’s stock is valued at $44, which means that investors who entered the market at the height of the “revolution” triggered by Gill, in late January, have recorded substantial losses.
The episode has revealed the risks (both for profits and losses) of stock trading for unsophisticated investors, and the unequal access to the world’s most advanced financial market.