Feb 18, 2021 - Economy

Congress divided over who's to blame for Reddit trading phenomenon

Photos: Getty Images, company websites, Keith Gill courtesy of YouTube; Graphic: Andrew Witherspoon/Axios

There's little consensus about what went wrong, if anything, during the trading mania that drove a group of "meme stocks" to meteoric heights — and those tensions could animate today's GameStop-centered Congressional hearing.

Why it matters: What went wrong and who's to blame — short-sellers, Robinhood, Reddit daytraders, etc. — depends on whom you ask. Any of the witnesses set to appear could be targeted, and there's not much clarity about what direction Congress might go in response.

  • "What went wrong depends on where you sit," Larry Tabb, head of market structure at Bloomberg Intelligence, tells Axios.

Where it stands: Regulators — and reportedly the Justice Department — are looking into whether anything unlawful happened in the wild days of trading that caused GameStop's stock to surge as much as 2,000% before falling back down to earth.

What to watch: Key sticking points for lawmakers include payments for directing trades to the likes of Citadel Securities, the length of trade settlements, market manipulation (on-and-off Reddit), and the rise of platforms that make it easy to trade.

A sign of the tension: "The Robinhood interface should not be providing visual rewards for day trading," referring to the confetti that appears when you make your first trade, Rep. Brad Sherman (D, Calif.), a member of the Financial Services Committee, which is holding today's hearing, tells Axios.

  • Sherman adds: "There's been a stick it to the man idea here, and if you want to stick it to the short sellers then come to us with proposals on how to limit short selling. Don't buy a stock for more than you think it's worth."

The bottom line: The meme-stock phenomenon is over, for now. The next big question is whether the hearing will lead to legislation, and experts say that's unlikely.

  • "We need to listen to determine if there were situations where existing rules and regulations failed — and then pursue aggressively ... but it may turn out that the system worked as designed," Rep. Frank Lucas (R, Okla.), another member of the panel, tells Axios.
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