Today, Congresswoman Maxine Waters (D-CA), Chairwoman of the Committee on Financial Services, and Congressman Al Green (D-TX), Chair of the Subcommittee on Oversight and Investigations, released a Majority staff report entitled, “Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Regulatory and Legislative Reform.”

GameStop Corporation (GameStop) and other “meme stocks” became extraordinarily popular on social media leading into January 2021. Institutional investors bet against these stocks, predicting they would fall in price, while retail traders took the other side of that bet, purchasing the stocks en masse. This trading frenzy drove historic market volatility, which reached a peak on January 28, 2021.

In response, Chairwoman Waters immediately addressed the matter and called for a deep dive into the circumstances and practices that led to the market volatility. Under the leadership of Chairwoman Waters and Oversight and Investigations Subcommittee Chair Green, the Committee convened three full Committee hearings “to get to the facts,” advanced multiple pieces of legislation, and launched a thorough and full investigation.

“Last year’s meme stock market frenzy raised important questions about the fairness of our financial markets, the gamification of trading, the treatment of retail investors, and so much more. In response to those events, my Committee held multiple hearings—including the first of them with CEOs from Robinhood, Citadel Securities, and many others—to get to the bottom of the role these companies played in the volatility and disruption in the stock market in January 2021,” Chairwoman Waters said.

“At last October’s full Committee oversight hearing with SEC Chair Gary Gensler, I said that my Committee would also investigate the events that led to the market volatility and recommend policies we should have in place to better protect investors when this scenario arises again. This report details the findings and recommendations that came from our thorough and robust response to the meme stock market event, including the investigation we’ve now completed.

“My Committee’s investigation into the matter showed we need better market regulation to address the troubling business practices that were uncovered during our investigation. Payment for order flow and gamification make it profitable for a new generation of trading apps to push retail investors to make as many trades as possible, making the markets more volatile than ever. The report makes clear that significant legislative and regulatory reforms are needed to modernize the regulatory framework for protecting the market and ensuring that the events on January 28, 2021, do not happen again. Under my leadership, the Financial Services Committee will continue to lead these efforts.”

Over the course of 16 months, Committee staff conducted more than 50 interviews with representatives from 19 institutions and combed through more than 95,000 pages of documents as part of its investigation.

“The GameStop report is the culmination of a long, detailed investigation, including multiple hearings, by the U.S. House Committee on Financial Services. The report reached multiple key conclusions, including the finding of existing deficiencies with the current market regulatory structure. My hope is that the report’s findings will lead to improvements in the functioning and regulation of the U.S. securities markets and result in a more fair and secure system for all investors,” said Representative Green.

Key Findings:

The Committee Staff identified four key findings from its investigation, including that:

• Robinhood exhibited troubling business practices, inadequate risk management, and a culture that prioritized rapid growth above stability during the Meme Stock Market Event.
  
• Broker-dealers facing the most severe operational and liquidity concern executed the most expansive trading restrictions during the Meme Stock Market Event.
  
• Most of the firms the Committee spoke to do not have explicit plans to change their policies for how they will meet their collateral requirements during extreme market volatility or adopt trading restrictions when market volatility may warrant.
  
• The Depository Trust & Clearing Corporation (DTCC) waived $9.7 billion of collateral deposit requirements on January 28, 2021. The DTCC lacks detailed, written policies and procedures for waiver or modification of a "disincentive” charge it calculates for brokers that are deemed to be undercapitalized and has regularly waived such charges during periods of acute volatility in the two years before the Meme Stock Market Event.
  
  

Committee Staff Policy Recommendations:

Committee Staff recommend policy changes so that regulators can:

• Better understand the influx of retail traders;
  
• Enhance supervision of retail facing “superbrokers”; and,
  
• Strengthen capital and liquidity requirements and oversight
  

Read the full report HERE.

Background:

On January 28, 2021, Chairwoman Waters released a statement immediately responding to the market instability caused by the meme stock trading frenzy and announcing that the Committee would examine the conduct and practices of short selling, online trading platforms, gamification, and their systemic impact on our capital markets and retail investors.

On February 12, 2021, two weeks after the meme stock market event, Chairwoman Waters announced that the Committee would convene the first of a series of three full Committee hearings looking into the meme stock event with the key players and Wall Street firms involved, including the CEOs of Robinhood Markets, Inc. (Robinhood), Citadel LLC (Citadel), Melvin Capital Management LP (Melvin Capital), and Reddit.

On February 18, 2021, Chairwoman Waters led the Committee’s first full hearing to examine the market volatility involving GameStop and other stocks entitled, “Game Stopped: Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide,” and delivered an opening statement. Robinhood CEO Vlad Tenev, Citadel CEO Kenneth C. Griffin, Melvin Capital CEO Gabriel Plotkin, Reddit Co-Founder and CEO Steven Huffman, and Keith Gill testified at the hearing.

On March 17, 2021, Chairwoman Waters led the second of three full Committee hearings examining the Wall Street practices and trends in our financial markets—including in social media and tech—leading up to the market volatility involving GameStop and other meme stocks entitled, “Game Stopped: Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II,” and delivered an opening statement.

On May 6, 2021, Chairwoman Waters led the third of three full Committee hearings entitled, “Game Stopped: Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III,” and delivered an opening statement, to further scrutinize the Wall Street practices and market developments that led to the volatility, as well as reforms that would make our markets fairer and more transparent.

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