July 25, 2021

the winners and losers of the United States Congress hearing

Five hours of questions. Questions sometimes without concessions, even aggressive, sometimes conciliatory, to put it mildly. The big barnum of the hearing before the American Congress on the GameStop saga, broadcast live on many TV channels, worked wonderfully. Even if, in the end, no conclusion of this speculative madness of a few days, which surrounded some discounted stocks, including GameStop, has yet been drawn.

The main victim of that day at the House of Representatives Financial Services Commission was undoubtedly Vald Tenev, the co-founder and CEO of the free online brokerage platform Robinhood. Yesterday adored by small carriers, the platform today suffers from a disastrous image with the public after having imposed purchase restrictions on certain titles at the height of speculation, from January 28. And Vald Tenev had to face the wrath of members of Congress from the first minutes of the hearing.

Have avoided just a disaster

Of course, Vald Tenev apologized for interrupting some exchanges by insisting he couldn’t do otherwise – “We did not have the cash to meet a January 28 morning demand for $ 3 billion in clearing house collateral.” As if the platform had narrowly avoided, that day, ” the catastrophe “, according to the expression of a deputy. By placing restrictions on a dozen stocks, Robinhood managed to cut the clearinghouse requirements in half …

Vald Tenev also defended himself for having privileged certain powerful partners, in this case the financial group Citadel, and recalled that the platform is before everything “at the service of millions of small investors”. Finally, the young prodigy admitted, out of his mouth, that his company had made mistakes, and that he would not “Not the same mistakes twice”.

An economic model on the grill

But it is the economic model of free Robinhood that has been questioned. And this is arguably the most interesting part of this hearing. It is well known, when it is free, there is someone who pays.

The heart of the matter? Payment for order flow. This is the real sentence of the day. This highly controversial practice consists of routing, for a fee, client orders to market intermediaries who execute them on their own account. Obviously with the suspicion that these intermediaries execute orders in their best interest, and not that of individual investors.

At least that’s what critics of this system denounce, who see it as a conflict of interest between market makers and small investors, who are not guaranteed to see their orders placed at the best price. It is the eternal trial of the “rigged” stock markets for the benefit of the large Wall Street firms and to the detriment of individual investors.

Thus, the more Robinhood orders to its partners, the more commissions the platform earns. This practice even represents “ more than half of Robinhood’s income ” finally conceded Vald Tenev under the pressure of questions. He also acknowledged that Citadel Securities is “Its greatest counterpart” Insofar as “She receives most of Robinhood’s trading orders.”

Citadel under siege

Ken Griffin, boss of the powerful Citadel, both investment fund and brokerage (and as such, one of the biggest market makers in US stocks) spent a tough quarter of an hour in Congress , violently questioned about his role in this affair.

In fact, Citadel is everywhere. The group is linked by contract with Robinhood and it has become a major shareholder in another hedge fund, Melvin Capital, which is one of the Wall Street players who lost the most money. Suddenly, rumors of conflict of interest swell on social networks and question politicians.

Basically, Citadel would have put pressure on Robinhood to force it to cut the buy orders on GameStop and thus to slow down the losses of Melvin Capital. Still, all this must be demonstrated. Except that Citadel had to bail out Melvin Capital to the tune of $ 2.75 billion.

But Ken Griffin has solemnly declared that his company played no part in the restrictions on transactions imposed by Robinhood. He even said that Citadel Securities had processed, at the height of speculation, on January 27, a volume of 7.4 billion dollars of transactions for individual investors, “More than the average daily volume of all US stocks in 2019”.

One MP asked Ken Griffin at length about equal treatment in the markets: “Does the Robinhood client get the same price as the Fidelity client? “. And the Wall Street colossus responds: “The quality of execution that we can provide, measured in terms of price, is correlated with the size of the orders we receive”. A dodge that caused a pass of arms between the financier and the deputy. “You are wasting our time! “, the latter got angry.

Low profile for Melvil Capital

The Melvil Capital investment fund tried to be forgotten during the hearing. He doesn’t have the best part. His assets evaporated by 53% in a matter of days and he had to accept a bailout – “I prefer the term liquidity injection”, corrected Gabriel Plotkin, one of the founders of Melvil – nearly $ 3 billion.

He tried to explain his job “We decided to shorten GameStop because we believed, and we still believe, that its business model of selling video games in stores is being overtaken by downloads” ; to justify the short sale, “We sell short when the markets go down because we have a duty to protect the capital of our investors” ; to denounce social networks that seek “To harm short sellers” with speeches by “Hatred and anti-Semite” and, finally, to rule out any conflict of interest with Robinhood, “We had cut all our positions before Robinhood applied its restrictions.”

Gabriel Plotkin does not think this episode could happen again and that hedge funds will now carefully follow what is said on the stock exchange forums.

I am not a cat

One of the initiators of this campaign for the title GameStop, known by the speudo DeepF *** ingValue on the Wallstreetbets forum (Reddit), also host of the YouTube channel as Roaring Kitty, and eventually identified as a young 34-year-old stock market enthusiast, Keith Grill, gave his soothing speech in front of rather benevolent, even enthusiastic MPs. One of Keith’s last posts, however, indicated a gain of 4,000% on GameStop, or $ 46 million ….

Keith Grill has a keen eye for storytelling. “I am not a cat. I am not an institutional investor, nor a hedge fund. I have no clients and I do not give personalized investment advice for fees or commissions. I am only an individual ”. A lover of the Stock Exchange, anxious to share his knowledge of the markets with as many people as possible.

He explained that GameStop was an investment opportunity for him as early as 2019, even though he “Never thought that the action could go up to 483 dollars”, and that he was content to share his opinions on the networks and just to mention, in passing, the issue of short sellers. The latter have become the vitriolic target of Internet users.

He strongly rejects any accusation that he intentionally pushed investors into action to influence the market. The sensitive chord in the United States of the defense of the market and of the small investors played full with the deputies.

No stock manipulation

Likewise, the boss of the social network Reddit, Steve Huffman, easily dismissed any responsibility. « People in the United States talk about stocks on Reddit but they also talk on TV, in magazines, in fact, they are doing TV all the time to encourage people to make what I would call bad decisions. investment “, testified Steve Huffman.

“On Reddit, investment advice is probably among the best because it has to be accepted by several thousand people before gaining this visibility”, even advanced Steve Huffman, without real opponents.

Keith Grill and Steve Huffman have also received the support of a former head of one of the regulatory authorities (FINRA), Jennifer Schulp, who believes that “Stock market activity of Reddit users on WallStreetBets would likely not meet the definition of market manipulation”. While specifying that the SEC, the gendarme of Wall Street, would ” probably “ launch an investigation to determine whether certain actors have sought to manipulate prices.

American star

The shadow of the earthy Tesla boss, Elon Musk, sometimes hovered over the debates. He was not summoned to the hearing, not being involved in the GameStop affair. Even if his tweet on the value, in full frenzy, questioned some deputies.

The founder of Melvil Capital declined to comment on the influence of this tweet on the share price, nor on the objective pursued by Elon Musk by publishing his message. But everyone knows that Elon Musk has long laughed at short sellers – who have for a while played against the Tesla value which has soared yet – and that he regularly posts on Twitter all the contempt he their door.

MEA culpa

In the end, few revelations, unanswered questions, and Robinhood’s commitment to do better next time. The Robinhood CEO still pointed out that his clients made $ 35 billion with the company, which is the value of all client assets, including unrealized gains and cryptocurrency positions.

Modernization of infrastructure was also mentioned, but nothing that could call into question the ability to invest in the stock market, which “Offers an access route to wealth for individual investors”, according to a deputy. Either way, House of Representatives hearings don’t have a reputation for actually making a difference. Meanwhile, GameStop stock fell 11% during the hearing to $ 40.69.