Robinhood and Reddit in the spotlight during GameStop congressional hearing

By Matt Egan, Brian Fung and Clare Duffy, CNN Business

Updated 5:51 p.m. ET, February 18, 2021
25 Posts
Sort byDropdown arrow
1:06 p.m. ET, February 18, 2021

Robinhood CEO explains why it banned BUYING, but not SELLING

From CNN Business' Matt Egan

Robinhood CEO Vlad Tenev is being forced to explain his app's decision to only ban purchases of GameStop, and not sell orders as well.

In short, Tenev said customers would have gotten very angry (even more upset than they were) if sell orders were banned.

"Preventing customers from selling is a very difficult and painful experience where customers are unable to access their money," the Robinhood boss said. "We don’t want to impose that type of experience on our customers unless we have no other choice."

Tenev repeated that the decision to restrict purchases of GameStop, AMC and other stocks was "purely driven" by surging deposit and collateral requirements imposed by its clearinghouse, not at the behest of hedge funds.

He added that buy orders lead to greater capital requirements than sell orders.

Last week, a trader filed a complaint against Fidelity accusing the company of preventing him from unloading Reddit stocks before they imploded. The trader said this cost him $830,000.

1:04 p.m. ET, February 18, 2021

'I am not a cat,' Reddit day trader assures House Committee

From CNN Business' Allison Morrow

Reddit trader Keith Gill, also known as "Roaring Kitty" on YouTube, kicked off his testimony before the House Financial Services Committee with a few points of clarification.

"A few things I am not. I am not a cat. I'm not an institutional investor, nor am I a hedge fund. I do not have clients and I do not provide personalized investment advice for fees or commissions. I'm just an individual..."

That kitty clarification, made against the backdrop of Gill's "Hang in There" cat poster, was a nod to the widely shared (and yet still very funny!) moment in a Texas virtual courtroom when a lawyer unwittingly appeared on screen with a cat face filter.

Gill, who goes by "Deepf----ingvalue" on Reddit, described his role in the GameStop saga to the committee. He was one of the leading forces on the subreddit WallStreetBets driving GameStop's stock up last month. He described himself as casual day trader with a genuine belief that GameStop was undervalued, rejecting any accusation he intentionally pushed investors to the stock to influence the market.

12:57 p.m. ET, February 18, 2021

Buzzy phrase of the day: payment for order flow. Here's what that means

From CNN Business' Matt Egan

Ken Griffin and Vlad Tenev will face questions over payment for order flow, which they will argue benefits retail investors by making it free to trade and giving them access to deep markets.

Payment for order flow is the controversial practice of broker-dealers – including market makers like high-frequency trading firms – paying Robinhood and other free trading apps for executing the trades with them.

Critics say payment for order flow creates a conflict of interest that allows market makers to trade ahead of retail investors. And that this practice ultimately helped fuel GameStop (GME) mania because it paved the way to free trading and incentivizes brokerages to get people to trade frequently. (More trade orders on Robinhood means more payment for that order flow).

Robinhood was fined $1.25 million in 2019 by Wall Street's self-regulator for "failures" related to routing orders without guaranteeing the best price.

The GameStop frenzy "exposed how rigged the US equity markets are to enrich big Wall Street firms, high frequency trading firms and brokers at the expense of Main Street retail investors," Better Markets CEO Dennis Kelleher wrote in a statement Tuesday.
1:08 p.m. ET, February 18, 2021

Financial regulation expert urges lawmakers not to restrict retail investors' access to Wall Street

From CNN Business' Clare Duffy

Jennifer Schulp, director of financial regulation studies at the Cato Institute, lauded retail investing — equities trading by individuals using brokerages such as Robinhood — in her opening testimony during Thursday's hearing.

“Investing in the stock market ... provides a path to wealth for individual investors," Schlup said.

She noted that stock ownership has traditionally been "skewed towards the already wealthy, and it is highly correlated with race, education and age." But with the increase in popularity of retail stock trading during the pandemic, "investors who opened accounts for the first time in 2020 were younger, had lower incomes and were more racially diverse," suggesting growing equality in investing, Schulp said.

These new opportunities for individuals to grow their wealth should be welcomed and expanded, not restricted," Schulp said.

The volatility in GameStop (GME) shares are not necessarily an indication that guardrails need to be put up around retail investing, Schulp added.

"The fact that Gamestop traded temporarily, and perhaps still trades, above fair estimates of the company's value is not, by itself, a reason for concern," she said. "Stock prices move in and out of alignment all the time. And markets are no strangers to bubbles."

12:56 p.m. ET, February 18, 2021

Melvin Capital founder: Redditors sent me anti-Semitic messages. Reddit CEO: We couldn't find it

From CNN Business' David Goldman

Melvin Capital lost 53% last month because of the hedge fund's massive short position in GameStop. Its founder Gabriel Plotkin testified today that members of Reddit's WallStreetBets group looking to hurt short-sellers like Melvin sent him and others anti-Semitic hate speech.

Plotkin said one Redditor messaged him: "It's clear we need a second Holocaust. The Jews can't keep getting away with this."

But Reddit CEO Steve Huffman said the company's moderators found no evidence of the messages Plotkin highlighted.

"This team searched high and low for the specific comment mentioned in the previous testimony -- or anything like it," Huffman said. "The closest we could find was a single comment that received no votes and was deleted within five minutes. Such speech is not tolerated on Reddit."

Huffman acknowledged that speech on WallStreetBets is often "crass" but "within the bonds of our own policies." However, the ADL highlighted several posts on the WallStreetBets subreddit that discussed anti-Semitic tropes, including: "Wall Street is run by the jews."

12:55 p.m. ET, February 18, 2021

GameStop surges during hearing

From CNN Business' Brian Fung

Shares of GameStop (GME) surged on Thursday as Keith Gill, the Redditor and investor who helped spark the trading fenzy on the stock, began his oral testimony.

GameStop's stock price rose more than 6% nearly as soon as Gill appeared on camera.

12:50 p.m. ET, February 18, 2021

Here's why Melvin Capital shorted GameStop

From CNN Business' Clare Duffy

U.S. House Committee on Financial Services
U.S. House Committee on Financial Services

While its bet only recently gained massive attention, hedge fund Melvin Capital has been shorting GameStop (GME) stock since the fund was founded nearly six years ago, chief investment officer Gabriel Plotkin told lawmakers.

Plotkin said Melvin decided to short GameStop "because we believed, and still believe, that its business model selling new and used video games in physical stores is being overtaken by digital downloads through the internet. That trend only accelerated in 2020 when, during the pandemic, people were downloading video games at home."

He also defended the overall practice of shorting stocks.

"When our research suggests a company will not live up to expectations, and stock price is overvalued, we might short a stock," Plotkin said. "We also short stocks because when the markets go down, we have a duty to protect our investors' capital."

The fund closed out its positions in GameStop several days before the surge in trading caused Robinhood and other brokerages to put restrictions on trading of the stock, he said.

12:51 p.m. ET, February 18, 2021

Keith Gill: My investing videos on GameStop were for 'educational purposes only'

From CNN Business' Clare Duffy

Kith Gill is expected to tell lawmakers Thursday that his interest in GameStop (GME) stock was borne simply out of a belief in the company's potential.

Gill is somewhat different from the other witnesses testifying in the hearing — he's an individual investor, and a Redditor and YouTuber (who is also known by online handles including "Roaring Kitty") whose online investment advice videos helped spark interest in GameStop stock.

In written testimony provided ahead of the hearing, Gill said he believed GameStop "was dramatically undervalued by the market."

The prevailing analysis about GameStop’s impending doom was simply wrong," he said.

Gill says he first purchased GameStop stock, and later call options, in the summer of 2019, when GameStop was trading around $5 a share, and continued to increase his position throughout 2019 and 2020. Even after the recent volatility, Gill still believes "the market remains oblivious to GameStop’s unique opportunity."

He is prepared to tell lawmakers that his videos were meant to provide education for individual investors, not necessarily to encourage others to buy GameStop stock.

"The idea that I used social media to promote GameStop stock to unwitting investors is preposterous," Gill said in the written testimony. "I was abundantly clear that my channel was for educational purposes only ... Whether other individual investors bought the stock was irrelevant to my thesis."

As for the massive volatility in GameStop stock several weeks ago, "others will have to explain it," he said.

12:36 p.m. ET, February 18, 2021

Reddit CEO: Bots and foreign agents did not play 'significant role' in GameStop saga

From CNN Business' Clare Duffy

U.S. House Committee on Financial Services
U.S. House Committee on Financial Services

During his testimony Thursday, Reddit CEO Steve Huffman will aim to help lawmakers understand the social media site’s content moderation policies and “governance structure,” as well as how the now-famous WallStreetBets community came about. 

Reddit’s content policy prohibits “hate, harassment, bullying and illegal activity,” and is enforced by an “Anti-Evil” team that monitors the site, Huffman said in prepared testimony ahead of the hearing. 

The site is also governed by a structure “akin to a federal democracy, where the aforementioned policies and teams represent the federal government, and the communities themselves represent states,” he said. For example, each community, or “Subreddit,” is created by users who become that community’s moderators. 

Of WallStreetBets, Huffman said: “A few weeks ago, we saw the power of community in general and of this community in particular when the traders of WallStreetBets banded together at first to seize an investment opportunity not usually accessible to retail investors, but later more broadly to defend all retail investors against the criticism of the financial establishment.” 

He added that Reddit evaluated whether “bots, foreign agents or bad actors played a significant role” in the volatile trading of meme stocks and found that “they have not.” 

“It is important to protect online communities like WallStreetBets,” Huffman said. “WallStreetBets may look sophomoric or chaotic from the outside, but the fact that we are here today means they’ve managed to raise important issues about fairness and opportunity in our financial system. I’m proud they used Reddit to do so.”