Reactions to the House Hearing on GameStop – STA Open Call Recap

Last Thursday, the House Financial Services Committee convened a hearing on the recent market volatility titled “Game Stopped? Who Wins and Loses When Short Sellers, Social Media and Retail Investors Collide.” Over the course of more than five hours, congressional representatives addressed and asked questions of several individuals involved in the GameStop controversy: Robinhood CEO Vlad Tenev, Citadel CEO Ken Griffin, Reddit CEO Steve Huffman and investor Keith Gill (aka “Roaring Kitty”).

Immediately after this hearing, STA hosted an open call in which I interviewed Joe Gawronski, President and COO at Rosenblatt Securities, to discuss our key takeaways.

The Short-Term Benefit – Clarity

We started by agreeing that hearings of this nature are valuable for the industry. Yes, there is grandstanding and political theater, and we may not agree with everything expressed, but they still serve to spotlight key issues, foster education and give our regulators a better understanding of what the industry is seeing. They’re also a great opportunity for the industry to take the temperature of the committee and identify the representatives that have a firm grasp of market structure issues, as well as ones that could benefit from more information.

Last week’s hearing offered clarity on a number of the more lurid aspects of the controversy. We agreed there is now greater confidence that no bot activity or foreign interference occurred on Reddit, although this does not mean there was no manipulative or nefarious activity. It was pointed out that Reddit’s policy of allowing anonymous users is a factor that has led to a lack of legal accountability on its forums.

We also received clarity on Robinhood’s decision to limit trading on certain securities, and it now appears overwhelmingly likely that it was their decision alone. Griffin went so far as to express his confidence that if one were to depose every employee at Citadel that interfaces with Robinhood, no one would give any indication that they were aware of the decision.

Great Power, Great Responsibility

Speaking of positives, we were glad to see arbitration discussed as an effective path for investors to recoup losses incurred during this volatile period. Entity-specific issues should not influence how we address the entire marketplace, and it was heartening to hear acknowledgement that the SEC has the investigative powers to address them effectively. In addition, Rep. Gregory Meeks of New York made the compelling point that with Robinhood and other discount brokerages’ ability to serve new retail investors comes with a great responsibility to educate these users and provide robust disclosures. We welcome what these firms bring to the marketplace, but only insofar as they are serving investors, and maximizing transparency should be a key part of that effort.

Room for Improvement – Ditch the Tired “Us vs. Them” Rhetoric

There are other aspects of this issue that we feel were inadequately or inappropriately addressed. We were disappointed that there was little discussion of the responsibility that trading platforms may have to monitor social media activity that could indicate nefarious activity. We also agreed that several representatives chose a line of questioning that gave the erroneous implication that this volatility occurred as a result of our current market infrastructure, as opposed to in spite of it. If a firm can’t operate smoothly under T+2, what assurance do we have that it can do so on T+1?

There was also a lot of talk that framed the relationship between retail and institutional investors as an us versus them situation. That’s exactly the kind of thinking that got us here in the first place. Over the years, the industry has gone to great lengths to democratize trading and enable consumers to take greater control of their investments, and the effects for retail investors have been overwhelmingly positive. As ever, we believe that a market with all kinds of different investors makes the entire industry stronger.

Looking Ahead – Short Selling, T+1 and PFOF

Where do we go from here? We agreed that there are a few areas that may be fertile ground for legislators. These include short selling – how did it happen that the aggregate position on GameStop was 140% of the flow? – as well as DTCC reform via a move to T+1 and payment for order flow. Each of these topics has been thrust into the spotlight over the past month, yet we shouldn’t expect to see action on them in the near term. Regulators will likely spend the next few months learning, investigating and probing as they try to piece together exactly what occurred and why. Once that crucial groundwork is laid, they will take some kind of action, and the circus will begin again.

It has been an eventful few weeks for all of us, and in a way, this hearing served as a natural end to the first phase of the industry-wide discussion. Going forward, it is crucial that we continue to pay attention. By taking the time to educate ourselves and engage with our legislators and regulators, we can all play a role in ensuring that U.S. markets remain robust, fair and free of manipulation.

Listen to the call here