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GameStop Hearing to Focus on Short Selling, Hedge Funds

Lawmakers in Washington will grill the key players in last month's Reddit-fueled GameStop rally that pitted Wall Street veterans against an army of retail traders.

GameStop  (GME) - Get GameStop Corporation Report shares edged higher Thursday as lawmakers in Washington prepared to grill some of the key players involved in the stock's meteoric Reddit-fueled rise last month that triggered historic volatility on Wall Street while pitting retail traders against the financial elite. 

The House Financial Services Committee will hear from several people involved in the GameStop saga, including online trading platform CEO Vlad Tenev, billionaire hedge fund manager Ken Griffin of Citadel and Reddit legend Keith Gill -- also known as 'Roaring Kitty' -- the man many claim to have ignited the GameStop trading frenzy with his YouTube videos that touted the hidden value of the money-losing retailer's shares.

California Democrat Maxine Waters, who will chair the House Committee, has vowed to focus on "hedge funds whose unethical conduct directly led to the recent market volatility", but the probe itself is likely to focus on the interplay between retail investors and the rules that set capital requirements and trading restrictions for online platforms such as Robinhood.

Tenev rejected accusations of favoring hedge fund clients over retail investors, telling the Committee in a prepared statement that 'any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric." 

Still, trading limits and account restrictions kept many Robinhood users from adding to their positions during the GameStop rally, which added more than $30 billion to the stock's market value over the month of January as shares soared to a record-high $483 a share, angering many and triggering class-action lawsuits against Tenev and the company.

Gill, the 'Roaring Kitty' epicenter of the saga, also faces legal action for his role in the GameStop rally, with plaintiffs claiming he used his positions as a market professional -- while appearing as an individual investor -- to pump the stock's value for his own profit. 

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"I did not solicit anyone to buy or sell the stock for my own profit," Gill will tell the Committee. "I had no information about GameStop except what was public."

What may end up the focus of today's hearing, however, is the nature of short-selling and its role in the public markets.

Short sellers are investors who bet against a certain stock by selling it by borrowing them from another investor and selling them on various exchanges or platforms in the hope of buying them back at a lower price in the future and pocketing the profits.

Wall Street pros argue that short sellers provide several key functions in the market, including price discovery and additional liquidity, while critics counter that some rely on "predatory" practices that can damage companies and wipe-out small investors. 

GameStop was one of the most heavily shorted stocks on Wall Street prior to its mid-January surge, with a short interest reportedly at 140% of the outstanding float. Its subsequent Reddit-fueled rise ignited similarly-meteoric rises in what became known as 'meme stocks', including Bed Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report and Blackberry  (BB) - Get BlackBerry Limited Report, while lifting the key benchmark of equity volatility to the highest levels in nearly a year while tagging several hedge funds with collective losses of more than $20 billion.

Lawmakers aren't the only officials looking into the GameStop saga, either, with the U.S. Securities & Exchange Commission indicating it's investigating possible charges of market manipulation, data transparency and breaches of fair access rules by online trading platforms.

The Wall Street Journal has also reported that the Department of Justice could pursue criminal charges and that the Commodity Futures Trading Commission is looking at Reddit's role in the late January rally of silver prices.