The U.S. agencies probing the GameStop ‘Reddit rally’ saga


A raft of federal agencies are probing last month’s “Reddit rally” in which Reddit users trading on low cost retail platforms banded together to push up GameStop Corp and other stocks, burning hedge funds that had bet against the companies.

The resulting volatility triggered massive margin calls from post-trade clearing houses that guarantee stock trades, prompting several retail brokers to suspend buying in the affected securities. Here is who is probing the saga:

The House Financial Services Committee on Thursday will grill executives involved in the saga.

Lawmakers have questioned whether the retail trading platforms, by curbing buying in the affected securities, sided with powerful hedge funds over Mom and Pop investors.

On Thursday, they will likely focus on commercial arrangements between trading platforms and market makers they route orders to and whether that “payment for order flow” model may disadvantage retail investors. There are also questions about whether hedge funds that bet against the shares pressured trading platforms to suspend buying and whether Reddit or its users breached the letter or spirit of the law by hyping shares.

Market makers and retail brokers say “payment for order flow” often results in better prices for retail investors than if their orders were sent to the stock exchange. Lawyers say retail trading platforms’ user agreements typically allow them to curb buying, while social media platforms like Reddit are shielded from liability for users’ activity under a 1996 law.

Representative Maxine Waters, the committee chair, has power to subpoena the companies if she is not satisfied on Thursday.

The SEC is looking at every aspect of and parties involved in the episode, suggesting a swath of industry players may be swept up in its review of the trading frenzy.

The potential misconduct the SEC is probing, according to its acting chair Allison Lee, includes: market manipulation; whether retail brokers breached fair access rules by restricting buying; the role of hedge funds with short positions in the companies, including whether there was enough data and transparency around their bets; and whether the companies took advantage of the rally to raise funds.

The agency may also examine whether hedge funds broke risk management rules that aim to ensure investors can make good on their short bets, said lawyers. Consumer advocates expect the SEC will also examine “payment for order flow” arrangements.

The Massachusetts Secretary of the Commonwealth William Galvin has expressed concern about market integrity and systemic risks. This month, he subpoenaed Keith Gill, a YouTube streamer known as Roaring Kitty who helped drive the surge of GameStop shares.

Last month, Texas Attorney General Ken Paxton began probing retail trading firms, alleging “apparent coordination between hedge funds, trading platforms, and [social media platforms] to shut down threats to their market dominance.”

New York Attorney General Letitia James is also reviewing the episode.

The Wall Street Journal reported last week that the Justice Department and the San Francisco U.S. attorney’s office have sought information from brokers and social-media companies.

Prosecutors are probing whether market manipulation or other types of criminal misconduct fueled the rally, the WSJ said.

It also reported that the Commodity Futures Trading Commission (CFTC) was probing an apparent Reddit rally in silver futures and an exchange-traded fund tied to the metal.

Spokespeople for the Justice Department and CFTC declined to comment on the WSJ report. The CFTC has said it is monitoring the recent silver market activity.