Vlad Tenev, founder of retail stock trading app Robinhood, told a House Committee on Thursday that “the financial system should be open to everyone,” including frenzied buyers of GameStop and AMC Entertainment whipped up by a Reddit chatroom.
He apologized profusely that a funding rule had forced the app to subsequently block share purchases – a temporary restriction that was a focus of the five-hour hearing today. The stocks fell and some Robinhood users lost their shirts.
Tenev was testifying before the House Financial Services Committee alongside the CEO of a hedge fund that made a killing on GameStop (Kenneth Griffin, Citadel LLC) and another that lost big in a short squeeze (Gabriel Plotkin, Melvin Capital). Individual investor Keith Gill, known as Roaring Kitty from his YouTube videos and Reddit posts, bought GameStop and touted it on Reddit’s colorful WallStreetBets chatroom. He agreed with lawmakers that the stock “had gotten a little ahead of itself” when it hit $483 — up from a 52-week low of $2.57. Gill but swore his “posts did not cause the movement of billions of dollars into GameStop shares.” He made money but feels for investors who got out too late.
Rounding out the witness list, Reddit CEO and co-founder Steve Huffman said WallStreetBets “may look sophomoric or chaotic from the outside, but the fact that we are here today means that it has managed to raise important issues about fairness and opportunity in our financial system. I’m proud they use Reddit to do so.” He said no bots or foreign agents egged on the buying of GameStop, AMC Entertainment or other stocks and sees nothing wrong with anonymous users swapping investment advice.
The morality play/financial primer was lawmakers’ first stab at drawing out the good, the bad and the ugly in a trading phenomenon that shook Wall Street. It’s been called a populist uprising, driven by individual day traders, not funds or big institutions. Some five related film and TV projects are in the works.
Committee members were there to determine what happened, how and why and raise questions, like whether financial markets are broken (consensus: no), whether new regulation is required (maybe) and what kind (still unclear). The material is complex and Committee chair Maxine Waters (D-CA) said today’s hearing would likely be the first of three. The SEC will also investigate the trading frenzy when President Biden’s pick for commission chairman, Gary Gensler, is seated.
Lawmakers alternately praised and (mostly) slammed an unflappable, soft-spoken Tenev, who said he emigrated from an economically shattered Bulgaria with his family at age 5 and has “benefitted from all America has to offer.” Robinhood has 15 million customers. It and similar apps are commission free and let people invest small amounts, opening the market to stock pickers who are younger, more diverse and less wealthy than traditional equity investors. Its users flooded circuits buying GameStop and a handful of other heavily shorted stocks last month.
But on January 28, in the midst of the flurry, Robinhood temporarily barred those stock purchases, enraging customers who said the firm had thrown them under the bus. Tenev flatly denied accusations it was in cahoots with funds that had shorted the stock. The restrictions were needed “to meet regulatory requirements not to protect hedge funds,” he said. Griffin of Citadel denied also coordination. Robinhood uses Citadel to process its customers’ trades.
Tenev said financial regs require it have the capital or collateral to cover trades, which require two days to settle (a lag it would like to change, and regulators may look at). He said the scope of what happened was impossible to anticipate. “It was a 1 in 3.5 million event. One that had never been seen before. We had to play this by the book in compliance with our regulatory and capital requirements.”
Robinhood raised $3.2 billion, allowed trading to resume, and said it now has a cash cushion and better controls in place so that won’t happen again. He sort of admitted for the first time that the firm had been in a major bind. Previously he had indicated the cash raise was preemptive and there was no liquidity crunch. A posse of lawmakers – including an incisive AOC — rapped the firm for, at best, having miscalculated and being unprepared.
Others had larger doubts about Robinhood’s mission, creating a real push and pull around the concept of “democratizing” investment.
Rep. Ritchie Torres (D-NY) fretted that a free trading app like Robinhood could be as addictive as any video game. Rep. Cindy Axne (D-IA) called buying stocks without little or no information or data the same as gambling. “Gambling on the stock market is not really a solution to inequality. People having access is nice but if they don’t have the money to invest it’s not really democratization.”
Users on WallStreetBets urged each other to buy stocks in order to nail big hedge funds that were short GameStop and AMC – meaning the firms had made a financial bet the stocks would fall and would take a hit if they went up instead.
So what, said Rep. Tom Emmer (R-MN). “This was driven by people’s desire to make money. I don’t see what wrong with that even if is fueled by a desire to stick it to a hedge fund they don’t like,” he said. “We need more people having the opportunity to develop financial literacy. To grow their wealth.”
The hearing focused almost solely on GameStop. AMC’s gains were relatively more restrained but it still hit a high of over $20 from a 52-week low of under 2 bucks. On Thursday GameStop and AMC closed, respectively, at $40.69 and $5.51.
Gill, the son of a a truck driver and a nurse from Brockton, MA, refuted the characterization of retail investors as know-nothings. He took an interest in the stock market after graduating from college in 2009 and having a hard time finding a job. “I studied, I learned,” the WallStreetBets favorite told lawmakers, some skeptical. He thought the stock was undervalued. “The market was underestimating the prospects of its legacy business and overestimating its risk of bankruptcy. I grew up shopping at GameStop and continue to shop there.” But, “The idea that I used social media to promote GameStop stock to unwitting investors and influence the market is preposterous.”
Huffman defended Section 230, which gives Reddit the right to curate its content, and the anonymity of users. “The fact that Reddit does not require people to reveal their own identity is what allows Reddit to work. WallStreetBets would not work [otherwise] because people are revealing gains and losses, their financial situation.”
In less than a month after the story exploded, Deadline revealed that Netflix is in talks to make a film about it that Mark Boal is in negotiations to write and Noah Centineo to be attached to play a major role. The streamer is doubling down on GameStop with a new documentary series from Emmy and Oscar-winning filmmakers Dan Cogan and Liz Garbus. Also, MGM has acquired the rights to Ben Mezrich’s book proposal The Antisocial Network; Jamie Rogozinski, the founder of WallStreetBets, reportedly has sold his life story to RatPac Entertainment; and XTR, the company behind You Cannot Kill David Arquette and Bloody Nose, Empty Pockets, has teamed up with directors Chris Temple and Zach Ingrasci on a feature documentary.
A Wall Street Bets post today, Keith Gill featured: