House to investigate Wall Street’s GameStop frenzy

Reddit logo displayed on a phone screen and GameStop logo in the background are seen in this illustration photo taken in Poland on February 1, 2021.

Jakub Porzycki/NurPhoto via Getty Images

Photo courtesy of Getty Images. Reddit logo displayed on a phone screen and GameStop logo in the background are seen in this illustration photo taken in Poland on February 1, 2021.

Rep. Maxine Waters, the House Financial Services Committee’s chairwoman, has stated that she wants to hear testimony at a congressional hearing about the short squeeze that shook the stock market in late January. Among the few, she mentioned she wanted Redditor Keith Gill, Robinhood, Gamestop and hedge funds who were involved in the stock market incident at the hearing.

“I’m trying to get everybody that, you know, has a role to play. I want Reddit there. I want Robinhood there. I even want GameStop there. And I want a couple of the hedge funds there. I’m looking at Citadel and Melvin Capital,” said Waters.

The stock saga began after a legion of retail traders banded together in the WallStreetBets forum on Reddit and decided to invest in GameStop stocks to make profits, while simultaneously making well-financed hedge funds lose money. As a result, shares of the struggling video game retailer leaped by more than 14,300% before dropping down to less than $100 on Feb. 3. The recent surge of retail investors trying to get in on the profits also ended up causing billions of dollars in losses for financial firms who were betting against GameStop’s stock.

Most retail investors involved in the frenzy used Robinhood, a brokerage that was advertised to “democratize finance for all,” to bet that the stock price of video-game retailer GameStop would go up.

Keith Gill is the man who helped inspire the epic short squeeze in GameStop that sent Wall Street into a frenzy. Gill attracted an army of day traders and first-time investors who rallied and encouraged each other to pile into the brick-and-mortar video game stock and call options, creating a massive short squeeze as the shares jumped 400% in the first week of February alone. Gill did this by posting a series of videos and actively posting on WallStreetBets. A subreddit knows for users posting about making stock market plays akin to gambling but with money in the tens of thousands.

Keith Gill, who goes by DeepF——Value on Reddit and Roaring Kitty on YouTube, has stated in previous posts that he has been holding 50,000 shares of GameStop and 500 call options since the beginning of 2021. When GameStop hit record-high share prices, Gill’s total profits in his positions soared to more than 2,000% return on his investment, equating to as much as $33 million, according to his Reddit posts.

However, GameStop’s short squeeze started to fade this week, taking a big bite out of Gill’s massive gains. The trader lost $13.6 million on his positions in GameStop shares and calls, following a more than $5 million loss on Monday.

According to his posts on Reddit, Gill owned GameStop’s 10,000 shares and bought more shares at the beginning of the new year.

The issue with what happened comes from the relationships between Melvin Captial, Citadel Securities and Robinhood and what that might mean as far as accusations of market manipulation.

Melvin Capital Management, the hedge fund that bore the brunt of losses from the soaring stock prices of recent heavily shorted stocks, lost 53% on its investments in January, the Wall Street Journal reported. Citadel Securities, a market maker that pays Robinhood for the right to execute its clients’ stock trades, bailed out Melvin to the tune of $2 billion for its losses on GameStop.

Within the space of five days, Robinhood received $3.4 billion from existing investors in capital infusion to cover increased demands at clearinghouses where trades are processed.

Robinhood also infuriated customers when it restricted them from buying new shares, citing liquidity and compliance issues. Because of these restrictions, the price of shares for GameStop plummeted, resulting in many first-time investors losing money. At the same time, hedge funds could recover from losses and even profit from the stock market’s ongoing volatility.

“It’s ridiculous how they manipulated the stock market and aren’t even trying to hide it,” said Jose Fonseca, a COD student who lost money in the trading madness. “I am lucky that I was able only to lose a couple of hundred dollars. Others invested more than they should’ve. Mortgages, rent, I think I even saw someone post about how they sold their car trying to make money on this. In these times where people have been waiting on stimulus checks and to get our old jobs back, it is just disappointing to see how badly rigged the stock market is against normal people like us.”

In a press release from Jan. 28, Waters stated that hedge funds had been involved in predatory behavior in the stock market for some time now. “That conduct is entirely indefensible,” she said, “private funds engaging in predatory short selling to the detriment of other investors must be stopped.”

“Addressing that predatory and manipulative conduct is the responsibility of lawmakers and securities regulators who are charged with protecting investors and ensuring that our capital markets are fair, orderly, and efficient,” Waters continued. “As a first step in reining in these abusive practices, I will convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification, and their systemic impact on our capital markets and retail investors.

Waters also stated, “We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility, and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price.”

The congressional hearing is set to happen on Feb. 18, 2021. The Chaparral reached out to Gill via Reddit and YouTube but did not get a response.