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Lawmakers Grill Robinhood CEO in GameStop Hearing

House members probe January's trading frenzy surrounding GameStop by grilling 'Roaring Kitty,'  and Robinhood CEO.

The U.S. House Committee on Financial Services conducted an extensive hearing into the GameStop  (GME) - Get GameStop Corporation Report trading frenzy Thursday, hearing from "Roaring Kitty," a fan of the stock, and the CEO of the Robinhood trading app, among others.

Shares of GameStop, a struggling, mall-based video game seller, soared last month after an online message board on Reddit targeted the heavily shorted stock in a coordinated bid to boost the share price. 

TheStreet founder Jim Cramer wrote about what his expectations were for the GameStop hearing Thursday morning.

Keith Gill, aka "Roaring Kitty", who heavily promoted GameStop on Reddit’s WallStreetBets forum, said the idea that he used social media to promote GameStop to unwitting investors and influenced the market wasn't true.

 "What happened in January just reflects that investing in public securities is extremely risky," he told members of the committee in a virtual hearing.  "My posts did not cause the movement of billions of dollars into Gamestop shares," he said.

Gill said he invested in GameStop in 2019 and 2020 because he felt the market was underestimating the prospects of its legacy business and overestimating the likelihood of its bankruptcy.

Many of those participating in last month's action used the Robinhood trading platform, which makes it easy for young and inexperienced traders to gain access to markets. 

The heavily shorted stock rose more than 1,700% from Jan. 1 through Jan. 27. At the height of the frenzy, Robinhood slapped limits on its customers' ability to buy the stock, leading to more wild trading swings and accusations the platform was trying to help hedge funds who were short the stock.

Robinhood CEO Vlad Tenev said his company had to impose the limits. "Robinhood Securities [its clearing broker] put the restrictions in place in an effort to meet the increased regulatory deposit requirements, not to help hedge funds," said Tenev in his opening testimony.

"We don't answer to hedge funds. Robinhood immediately secured additional funds altogether through capital raising and other measures. We increased our liquidity by more than $3 billion to cushion ourselves against increased collateral requirements and related market stress in the future," he added.

Tenev committed to a review of the incident and added that the company will work to improve its risk management procedures.

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Tenev also added that most of Robinhood's 13 million customers were investing for the long term. Tenev described trading conditions in January as unacceptable and apologized to his customers.

Shares of GameStop closed at $40.69 Thursday. Here are the stocks with the highest short interest as of Feb. 9. 

Market maker Citadel Securities' Kenneth Griffin said it had no role in Robinhood's decision to limit trading in GameStop or any of the other so-called meme stocks. "I first learned of Robinhood's trading restrictions only after they were publicly announced," said Griffin.

Melvin Capital CEO Gabriel Plotkin also said that his firm played absolutely no role in trading platform decisions made to limit trading GameStop. "Melvin closed out all its positions in GameStop days before those decisions were made. Melvin Capital was not bailed out in the midst of these events," he added.

"Specific to GameStop we had a research-supported view well before the recent events," said Plotkin. Melvin has held a short position on GameStop since its inception 6 years ago because "we believe its business model of selling new and old video games is being taken over by digital downloads through the Internet." 

"In January 2021, a group on Reddit took information from our SEC filings and encouraged others to trade in the opposite direction. When this frenzy began Melvin started closing out its position in GameStop at a loss, not because our investment thesis had changed but because something unprecedented was happening," said Plotkin.

Reddit's CEO and co-founder Steve Huffman said in prepared testimony that WallStreetBets members 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."

Huffman described WallStreeBets as a community that specializes in higher risk, higher reward investments than what one might find in other more conservative financial communities.

"I want to stress that WallStreetBets is a real community. The self-deprecating jokes, memes, the crass, at times, language all reflect this."

With the increase in attention WallStreetBets unsurprisingly faced a surge in traffic of new users. "At Reddit, our first duty in these situations is to our communities and our role was to keep WallStreetBets online."

"We have since analyzed activity on WallStreetBets and determined that bots, foreign agents, or other bad actors have not played any significant role and the community is in compliance with our standards."

The committee is planning additional hearings on trading volatility in the weeks ahead.