GameStop blowback will echo “Flash Boys” response

Thursday’s hearing involves witnesses like Robinhood’s Vlad Tenev, Citadel’s Ken Griffin and Reddit’s Steve Huffman and promises drama

  
People enter a GameStop store during "Black Friday" sales in Carle Place, New York November 25, 2011. REUTERS/Shannon Stapleton/File Photo

People enter a GameStop store during "Black Friday" sales in Carle Place, New York November 25, 2011. REUTERS/Shannon Stapleton/File Photo

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

WASHINGTON  - U.S. policymakers may reach for their “Flash Boys” playbook when it comes to GameStop. Lawmakers will on Thursday grill the bosses of Robinhood and Citadel about stock market gyrations triggered by retail investors and subsequent trading restrictions. For all the political hoopla, the outcome may mirror what happened after past scrutiny of high-frequency trading: A slew of penalties but nothing to change the way the market works.

Thursday’s hearing involves witnesses like Robinhood’s Vlad Tenev, Citadel’s Ken Griffin and Reddit’s Steve Huffman and promises drama. Some politicians were outraged when Robinhood in January restricted users’ trading in GameStop after the stock’s value jumped from around $20 a share to a high of $483. House Financial Services Committee member Alexandria Ocasio-Cortez called it “unacceptable” while another accused the online brokerage firm of market manipulation.

Their ire was reminiscent of the backlash against high frequency traders in 2014. Michael Lewis’s book “Flash Boys,” which detailed how algorithms and milliseconds are used to gain an edge, prompted accusations of rigged markets. Congress held hearings, including one featuring Griffin, and the Securities and Exchange Commission promised a broad review.

In the end, little changed. Citadel Securities, the market-making unit of the group, Barclays, and others paid multi-million dollar fines to settle allegations about misleading investors. But arguments over whether to ban high-frequency trading faded and market structures remained broadly intact.

There is equal angst about what happened to the share price of GameStop and some other companies. And equally few ideas about what to do. Some politicians want to punish Robinhood for restricting retail investor trades while others want to go after hedge funds and short selling. Another possibility is prohibiting firms like Citadel from paying brokers like Robinhood for data about trade orders, though that may make trading more expensive for retail investors.

Unlike high frequency trading, the GameStop roller coaster involved many retail investors. The episode may therefore hold Washington’s attention longer. Robinhood could face a fine for inadequate transparency about when users may face trading restrictions. But the blowback will probably, once again, be more flash than substance.

CONTEXT NEWS

- The U.S. House Financial Services Committee is scheduled to hold a hearing on Feb. 18 on the short squeeze in shares of GameStop starting in January 2021.

- GameStop’s share price rose from $19.95 on Jan. 12 to a high of $483 per share on Jan. 28. The stock fell from that peak after online brokerage firm Robinhood and other, similar platforms announced trading restrictions for GameStop. Its stock closed at $49.51 per share on the New York Stock Exchange on Feb. 16.

- Witnesses for the hearing include the chief executives of Robinhood, Citadel, Reddit and Melvin Capital.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Swaha Pattanaik and Amanda Gomez) ((gina.chon@thomsonreuters.com; Reuters Messaging: gina.chon.thomsonreuters.com@reuters.net))

More From Equities