Unless you’ve been living under a rock for the last few weeks, odds are you’ve heard a lot of talk about GameStop. Several weeks ago, GameStop stock took off as an unorganized clan of retail investors drove up the price of the stock to send a costly message to Wall Street’s “suits” and hedge funds. Billions of dollars of short interest in the stock suddenly was set ablaze as the company rose over 2,000%.
Short squeezes are not particularly unorthodox. However, GameStop’s situation was exacerbated by a trading halt which categorically targeted retail investors looking to buy shares in meme stocks and heavily shorted companies. As a result, the price of various stocks and companies like GameStop and AMC Entertainment began to revert to the mean. The anger of the retail crowd, and some politicians, did not follow that same trend. In fact, the anger inspired politicians from both sides of the aisle to call a hearing to investigate the totality of all these events.
When I woke up on the morning of the hearing on Feb. 18, my initial hopes were that the congress-folk on the financial services committee would take advantage of the wealth of information that was at their disposal. They didn’t just have retail icon Keith Gill (Roaring Kitty) to explain his trade and break down his experience in the r/WallStreetBets community. They had the CEOs of Robinhood, Reddit and Citadel Securities to help demystify retail trading communities, the all-mysterious HFT industry, the “new stock market” and market inefficiencies. Unsurprisingly though, they spent a majority of their time beating around the bush. In fact, the only thing truly remarkable about the GameStop hearing is how unremarkable it was.
Tech is a sort of proverbial immovable object, and the government is an unstoppable force. When these two forces meet, they have untold and theoretical chaos on each other. But nothing ever seems to change.
The GameStop hearing was eerily reminiscent of a deeply ineffective “big tech” hearing held in July 2020. Why? Because though a few policy issues were talked about in both hearings, they mostly served as political theatre for congress-folk to get unnecessarily aggressive about “yes or no” questions, conduct political theatre and appear “tough” to their constituents. The only problem is that these disjointed hearings have raised even more questions and flags than we had in the first place.
It is true that the GameStop hearing provided some groundwork to advance discussions about trade settlement times. It’s also true that Congress was given the lee-way to scrutinize the potential conflicts of interest between brokers (like Robinhood) and order flow providers (like Citadel Securities). However, it feels like papier-mâché in the grand scheme of things.
Dozens of brokerages and clearing houses announced they halted trading in securities like GameStop. However, this hearing explicitly faults Robinhood — even though there is evidence of a more pervasive systemic failure.
The GameStop hearing only briefly incurred into discussion about the company’s abnormally high short float, which requires a discussion about how single shares can be shorted multiple times. Since this — and not naked short selling — is supposedly the reason why this short squeeze was so remarkable, it concerns me that this did not consume the economy of conversation.
In fact, Robinhood CEO Vlad Tenev mentioned at one point that we needed to implement some sort of system to prevent borrowed shares from being shorted multiple times to essentially prevent them from turning into leveraged shorts. This was a really good point, but nobody followed up.
Even today as millions of shares of GameStop and heavily shorted stocks still lay in limbo, Congress did not address the exorbitant volume of fails-to-deliver (FTDs). Instead, they talked about the potential policy ramifications of levying a (highly unpopular) 0.1% tax on all financial transactions by all people.
I’m willing to keep an open mind as these hearings progress with regulatory agencies. Sure, changing settlement times or embracing new models for transferring assets between counter-parties would be sweet. However, Washington’s core concerns are not necessarily aligned with those of retail investors. And for that, I have to believe that little meaningful change will come as a result of these hearings. In fact, I’m even more fearful that anything meaningful that develops as a result of these hearings will ultimately be bad for retail investors.