Top News  Shutterstock Grab the popcorn... Robinhood's (RBNHD) Vlad Tenev, Melvin Capital's Gabe Plotkin, Reddit's Steve Huffman and Citadel's Kenneth Griffin and Keith Gill are all set to testify before the U.S. House Financial Services Committee at 12 p.m. ET. Lawmakers will get their chance to grill the executives in a hearing focused on "short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors." Also making an appearance is Reddit trading star known as Roaring Kitty, who is credited with helping start the GameStop mania, though his actions are being probed by Massachusetts regulators because he was a registered securities broker.
Backdrop: An army of day traders following WallStreetBets - the Reddit forum dedicated to "making money and being amused while doing it" - upended some market dynamics last month by taking aim at some heavily shorted stocks. They ran them up as a group, triggering short squeezes and causing some hedge funds like Melvin Capital to record billions of dollars in losses. The party came to an end after brokerages restricted trading on stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), though Robinhood took the most flak due to its communication about the events and delay in taking curbs off of "meme" trading.
Investors and policymakers alike lambasted the limits, including Dave Portnoy, Alexandria Ocasio-Cortez and Ted Cruz, accusing the trading platform of seeking to protect Wall Street's interests at the expense of smaller investors. "We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules," added Sen. Elizabeth Warren, a longtime critic of Wall Street. "You've got to have a cop on the beat." Robinhood cited clearing house requirements as reasons for the stoppage, and said it did not have a liquidity problem, but subsequently raised billions of dollars to reopen trading. More than half of its customer orders are routed to Citadel Securities, which provided rescue financing to Melvin after its short bet on GameStop went sour, in a series of events that prompted the hearing on Capitol Hill.
What to expect: There's likely to be a lot of noise coming out of the hearing, but not a lot of consequences. While there could be some SEC regulations down the road, they won't be coming from the House Financial Services Committee. If the SEC were to act, it could pursue a series of rules, ranging from short interest caps to taxing short-term bets, according to BofA analyst Michael Carrier. The commission may also move to review payment for order flows (PFOF) and pursue social media oversight to ward off potential market manipulation. Jefferies analyst Daniel Fannon meanwhile thinks the SEC could explore greater investor education around derivatives and risk management or increase costs for leverage services. (17 comments)    | | Top News Shutterstock Grab the popcorn... Robinhood's (RBNHD) Vlad Tenev, Melvin Capital's Gabe Plotkin, Reddit's Steve Huffman and Citadel's Kenneth Griffin and Keith Gill are all set to testify before the U.S. House Financial Services Committee at 12 p.m. ET. Lawmakers will get their chance to grill the executives in a hearing focused on "short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors." Also making an appearance is Reddit trading star known as Roaring Kitty, who is credited with helping start the GameStop mania, though his actions are being probed by Massachusetts regulators because he was a registered securities broker.
Backdrop: An army of day traders following WallStreetBets - the Reddit forum dedicated to "making money and being amused while doing it" - upended some market dynamics last month by taking aim at some heavily shorted stocks. They ran them up as a group, triggering short squeezes and causing some hedge funds like Melvin Capital to record billions of dollars in losses. The party came to an end after brokerages restricted trading on stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), though Robinhood took the most flak due to its communication about the events and delay in taking curbs off of "meme" trading.
Investors and policymakers alike lambasted the limits, including Dave Portnoy, Alexandria Ocasio-Cortez and Ted Cruz, accusing the trading platform of seeking to protect Wall Street's interests at the expense of smaller investors. "We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules," added Sen. Elizabeth Warren, a longtime critic of Wall Street. "You've got to have a cop on the beat." Robinhood cited clearing house requirements as reasons for the stoppage, and said it did not have a liquidity problem, but subsequently raised billions of dollars to reopen trading. More than half of its customer orders are routed to Citadel Securities, which provided rescue financing to Melvin after its short bet on GameStop went sour, in a series of events that prompted the hearing on Capitol Hill.
What to expect: There's likely to be a lot of noise coming out of the hearing, but not a lot of consequences. While there could be some SEC regulations down the road, they won't be coming from the House Financial Services Committee. If the SEC were to act, it could pursue a series of rules, ranging from short interest caps to taxing short-term bets, according to BofA analyst Michael Carrier. The commission may also move to review payment for order flows (PFOF) and pursue social media oversight to ward off potential market manipulation. Jefferies analyst Daniel Fannon meanwhile thinks the SEC could explore greater investor education around derivatives and risk management or increase costs for leverage services. (17 comments) | |
| Outlook New York Stock Exchange (NYSE:ICE) officials have not been asked to testify at the upcoming House hearing, even though GameStop (NYSE:GME), AMC (NYSE:AMC) and several other "meme stocks" trade on the exchange. NYSE President Stacey Cunningham still has plenty to discuss on the subject, especially after Sen. Elizabeth Warren told the SEC that "investors big and small are treating the stock market like a casino" and the "recent [GameStop] chaos revealed a clear distortion in securities markets."
Quote: "The markets are not a casino. They are highly regulated and they're highly overseen," Cunningham responded. "We are running a market that provides opportunities for investors to come in, invest in the companies they believe in, they believe that are gonna grow, and then share in that wealth creation. That's what made this country so great, is that a dreamer, an entrepreneur with an idea can start that business and grow it by getting others to invest and share in their success."
While casinos are also highly regulated and overseen, customers cannot build long-term positions or bet on future growth and value appreciation. That doesn't mean gambling doesn't happen in the stock market. In fact, recent academic research suggests that 15.2% of stock market volume in the U.S. is associated with "lottery stocks." The percentage was determined by looking at volume divided by market cap, then filtering by remarkably large ratios.
Other comments on regulation: Cunningham also supports taking a "fresh look" at short selling, especially surrounding hedge funds that take large positions against a company's success. "It's interesting that shorting is not part of 13-F filings (i.e., mechanism used by investment managers to disclose positions). It's also disclosed 45 days after the end of a quarter, meaning it is really old news by that time. There is an effort to look and modernize that." (17 comments)
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