Congress and regulators may need to revisit rules on short sale disclosure and order execution practices highlighted by volatile trading in GameStop in January, members of a House panel said Thursday at a hearing.
A memo before the House Financial Services Committee hearing said the short squeeze "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."
The memo also noted that the Securities and Exchange Commission was directed by the 2010 Dodd-Frank law to require short-sale data disclosure but has not done so.
The hearing focused on who were the winners and losers "when short sellers, social media and retail investors collide." Committee Democrats questioned how during the GameStop frenzy, Robinhood Financial and other online traders restricted some transactions, and how they benefited from relationships with hedge fund Melvin Capital and Citadel Securities. The latter's payment for order flow is Robinhood's largest source of revenue.
Citadel CEO Kenneth C. Griffin told the panel that his firm's ability to better execute trades than the exchanges "is very important to the democratization of finance," with trading costs at their lowest level in history to the benefit of retail investors.
In December, Robinhood agreed to pay $65 million to settle SEC charges that that it failed to satisfy best execution obligations and caused $34 million in customer losses.
SEC officials are reviewing the GameStop events and short seller practices that may disadvantage investors or inhibit their ability to trade certain securities, and what regulatory steps it should consider.
Committee Republicans expressed concern that additional regulation was not the answer, but Chairwoman Maxine Waters, D-Calif., cautioned that "nobody is talking about piling on more regulation." Ms. Waters promised several more hearings on the issues raised.
Tyler Gellasch, executive director of Healthy Markets Association, a market structure watchdog group whose members include many pension funds, urged Congress and the SEC to focus on public capital markets and do more to promote on-exchange trading activity. Market participants and regulators "should be concerned" about the recent market events involving GameStop and other 'meme' stocks that "may ultimately lead to a deterioration of the public markets, a loss of investor confidence in the integrity and stability of the markets, and less overall investment," Mr. Gellasch said in a letter to the committee.
