Despite the fact that it was reported on Wednesday that Reddit ringleader Deepf*ckingvalue was being sued for securities fraud in the GameStop fiasco, Ken Griffin's Citadel is likely going to be the biggest target during Thursday's congressional hearings.
At the core of the runup in GameStop stock was Griffin's Citadel, executing trades on behalf of Robinhood, who it pays for order flow. Griffin was also at the center of the controversy due to one of his other businesses offering up a $2 billion bailout to Melvin Capital, who was hit hard by the runup in shares.
And so, Griffin will likely become the target for all types of grandstanding and faux outrage at Thursday's hearing, where a clueless House Financial Services Committee will do their best to fake any understanding of capital markets while attempting to put on a political show. Citadel could be the scapegoat for all types of new financial regulation, Bloomberg wrote on Wednesday.
Erik Gordon, a professor at the University of Michigan’s Ross School of Business, said: “Ken sits in a unique position. The more roles you play in the industry and the bigger roles you play work to your advantage until something goes wrong and they’re looking for somebody to blame. Then those bigger roles make you a bigger target.”
And a big role Citadel does, in fact, play. "Citadel Securities handled 27% of all daily trades last year, generating $6.7 billion of revenue," Bloomberg noted. They were one of the first firms to invest in the technology that, today, makes up the plumbing of the financial markets. As we have reported at length, Citadel handles Robinhood's order flow, allowing them to have microsecond-long "first mover advantages" when executing trades for unwitting retail investors.
Griffin has defended Citadel to Congress before, appearing before the Senate Banking Committee back in 2014 after being featured in Michael Lewis' book "Flash Boys" exposed high frequency trading. This time around, he is certain to have his work cut out for him.
Representative Jesus “Chuy” Garcia said: “Hedge funds and Wall Street elites get rich off instability in our financial system and don’t care if making a quick buck means playing with people’s livelihoods.”
Analyst Isaac Boltansky commented: “As long as Ken Griffin sticks to his talking points and doesn’t take the bait, Citadel will be fine.”
We happen to agree. Like any untouchable business, Citadel has done its fair share of cozying up to Washington elite - which will be sure to help them stay in favor with Washington regardless of the outcome on Thursday. Bloomberg notes:
The firm has also hired several former Securities and Exchange Commission officials, including Stephen Luparello, who ran the agency’s trading and markets division and is now Citadel Securities’ legal chief. The hedge fund counts former Federal Reserve Chairman Ben Bernanke as a senior adviser, and U.S. Treasury Secretary Janet Yellen, also an ex-Fed chief, collected more than $800,000 in speaking fees from Citadel while she was out of government.
Recall, we reported yesterday that the hearing is also said to be focusing on "short selling and stock manipulation". Bloomberg reported Tuesday that the hearing would also focus on "consumer protection, short squeezes, and the roles of 'gamification' of trading and social media" - which should be a hoot, considering precisely nobody in congress comprehends equity valuations, how capital markets work, what a short squeeze is - or really anything other than how to trade on inside government information.
The topics were reportedly sent out Monday in a "memo sent to members of the House Financial Services Committee by Democratic staff." The memo says that the GameStop chaos “raises questions regarding whether legislators and regulators should take a closer look at existing rules governing short sales and related disclosures, as well as the conflicts between the practice of payment for order flow and firms’ best execution obligations."
Lest we forget, it was short sellers who were the target in the GameStop run up, not the parties who may have conspired to manipulate the price of the security artificially by buying it all at once. Though we can't say we are surprised that Congress already appears to be off-base, before the hearing has even started.
The memo also says: “It also raises important questions about the efficacy of anti-market manipulation laws and whether technology and social media have outpaced regulation in a manner that leaves investors and the markets exposed to unnecessary risks.”