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Illustration: Aïda Amer/Axios

The reason that GameStop stock rose so sharply last month was, paradoxically, because so many people had bet that it was going down.

Why it matters: That kind of bet — known as short-selling — is often considered distasteful, or worse.

Driving the news: Robinhood CEO Vlad Tenev set the tone for Thursday's hearing by tweeting this week that "it should not be possible to short sell more shares than are out there."

  • The blog post he linked to subsequently had to be edited to admit that "as long as there is short selling, there will always be a chance that short sellers can short more shares than there are outstanding."

Between the lines: Short-selling involves borrowing a share from one person and selling it to someone else. Since both people then own the stock, the process effectively increases the gross number of shares outstanding, while keeping the net number of shares constant (since the person shorting the stock effectively owns -1 shares.)

  • This process is normally harmless, and helps with liquidity and price discovery.
  • Tenev says in his Congressional testimony that Robinhood "does not allow short selling."
  • He doesn't mention that he's happy to facilitate billions of dollars' worth of trades in put options, none of which would be possible without other market participants hedging those options by shorting stocks.

By raising the specter of "naked shorts," and even raising the question of whether short selling should be allowed at all, Tenev perpetuates the fallacy that when a stock has a large short interest of more than the free float, that's evidence of nefarious activity or market manipulation.

The bottom line: Short selling is a time-honored, much maligned, and little understood part of the financial markets. More famous CEOs than Tenev — including Elon Musk — have railed against it, but there's no political consensus to try to curb it.

Go deeper:

Go deeper

Citadel and Robinhood CEOs will call for new stock trading rule at GameStop hearing

Co-founder and CEO of Robinhood Vladimir Tenev. Photo: Noam Galai / Getty Images

Players central to the GameStop market bonanza will call on Congress to shorten the time required for stock trades to settle, according to testimonies released ahead of their appearances at a Congressional hearing on Thursday.

Why it matters: A typically obscure part of stock trading is set to be among the issues at the forefront — as Robinhood and others look to deflect the anger that stemmed from the Reddit-fueled stock frenzy.

Dion Rabouin, author of Markets
Feb 17, 2021 - Economy & Business

Hedge funds will be the villain at GameStop hearing

Illustration: Annelise Capossela/Axios

The House Financial Services Committee will convene a hearing tomorrow on "recent market volatility involving GameStop stock and other stocks" to continue the whodunnit of the current state of financial markets, especially U.S. stocks.

What's happening: Chair Maxine Waters will question the CEOs of Reddit, Robinhood, Citadel Securities, Melvin Capital and Keith Gill, also known as Roaring Kitty or u/DeepF--kingValue.

Reddit user behind GameStop saga releases opening statement ahead of hearing

Wall Street protesters. Photo: Tayfun Coskun/Anadolu Agency via Getty Images

Keith Patrick Gill, known on YouTube and Twitter as Roaring Kitty, released his opening statement ahead of testimony before the House Financial Services Committee on Wednesday about his role in the surge of GameStop's stock price.

The big picture: Gill will join the CEOs of Reddit, Robinhood, Citadel and Melvin Capital at Wednesday's hearing. The committee plans 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," per a statement by Rep. Maxine Waters (D-Calif.), chair of the committee.