Market Experts React To GameStop Hearing: 'Congress Needed To Dig Deeper'

Market Experts React To GameStop Hearing: 'Congress Needed To Dig Deeper'

The CEOs of Reddit, Robinhood, Citadel Securities and Melvin Capital testified in front of the House Financial Services Committee on Thursday as part of a Congressional inquiry into extreme volatility in GameStop — and Robinhood’s decision to temporarily limit buying of so-called “meme” stocks.

Robinhood CEO Vladimir Tenev and Citadel CEO Ken Griffin were also grilled about potential conflicts of interest related to Citadel’s payment for order flow (PFOF) from Robinhood and other brokers.

The hearing was understandably full of the typical Washington, D.C. grandstanding, but the ultimate fallout from the GameStop fiasco could have a major impact on financial markets if it results in new regulations on short selling, payment for order flow or margin limits for retail traders.

Related Link: Robinhood, Citadel, Melvin Capital CEOs Grilled In Response To Reddit, Hedge Fund Short Squeeze Drama

Political Theater: Themis Trading's Joe Saluzzi told Benzinga that he was disappointed with the hearing, as American investors didn’t get much insight into what happened with the GameStop trading restrictions and why.

The focus was too much on Robinhood and not enough on the bigger picture, he said.

“They are just one broker and to really find out what happened, Congress needed to dig deeper into issues like PFOF,” Saluzzi told Benzinga.

“I felt most of the questions lacked depth and they seemed ill-prepared to follow up with more probing questions.”

David Trainer, CEO of New Constructs, said Thursday’s hearing was mostly just political theater.

“It's highly unlikely that hearings on Capitol Hill will result in any regulatory changes to the investing landscape, based on the events surrounding the GameStop short squeeze. The political lobby of financial institutions across the board is just too strong,” Trainer said.

Dangers Of An Overreaction: Benzinga’s PreMarket Prep co-host Dennis Dick said the biggest risk for investors is a knee-jerk reaction from Congress to bring regulations that would increase costs for retail traders.

“My biggest fear is that Congress jumps to a quick conclusion and tries to curb speculation by pushing a financial transaction tax on the markets. A 0.1% tax would be devastating for the retail brokerage industry,” Dick said.

For example, a single $10,000 trade could end up costing a trader $10 in taxes.

“What’s worse is that the regulators would likely have to give a market maker exemption or liquidity would dry up. That means it’s Main Street that would pay the tax, NOT Wall Street,” he said.

While it’s unfortunate that many GameStop investors lost money in the trade, Dick said maintaining risk in the market is an important way to mitigate the risk of future market bubbles.

“I believe excessive speculation eventually fixes itself, as the majority of people who chase stories like $GME eventually lose money. This makes them less inclined to chase the next bubble.”

Benzinga’s Take: On the surface at least, it appears no laws were broken during the rise and fall of GameStop.

Yet Robinhood is still the subject of more than 30 lawsuits aimed at determining whether it acted appropriately in restricting its users’ access to the stock during the time its share price was most volatile.

Posted In: citadel securitiesDavid TrainerDennis DickJoe SaluzziKen GriffinMelvin CapitalNew ConstructsRedditRobinhoodThemis tradingVladimir TenevAnalyst ColorGovernmentNewsRegulationsPoliticsEventsExclusivesMarketsAnalyst RatingsInterviewGeneral