Chicago billionaire Ken Griffin faces controversy involving Wall Street chat rooms, Robinhood trading app and GameStop’s stock

Ryan Ori, Chicago Tribune
·4 min read

GameStop’s unexpected leap from outdated shopping-mall staple to a leading role in one of Wall Street’s biggest sagas in years has created an unexpected — and unwanted — moment in the spotlight for Chicago billionaire Ken Griffin.

The story of chat-room bros launching a coordinated and lucrative attack on hedge funds known for short-selling stocks has roiled the market, and increased the profile of online trading platforms such as Robinhood, which are marketed toward smaller retail investors. The chaotic week turned ordinary investors into multimillionaires while leaving some massive hedge funds on the brink of ruin.

Here’s a catch-up:

What happened

Participants in chat rooms such as Reddit’s WallStreetBets talked of piling into investments in struggling companies such as GameStop, which had large numbers of hedge funds shorting — or making financial bets — against them.

Hedge funds borrow shares from a broker and sell them, planning to buy them back as prices fall. They return the shares to the broker and keep the difference as profit.

In this case, hedge funds were caught in what is known as a short squeeze, which can lead to crippling losses.

With its unexpected and newfound attention, GameStop rallied to a high of $483 per share earlier this week, up almost 2,500% from its previous share price. Hedge funds betting against the company scrambled to cover their losses.

In one instance, New York-based Melvin Capital Management raised $2.75 billion in rescue funding from other investor firms, including $2 billion from Griffin’s Citadel Securities. In exchange for its investment, Citadel Securities will share in Melvin’s future revenues.

Citadel’s role

Amid the volatility, Robinhood and other trading platforms limited transactions involving GameStop, theater chain AMC Entertainment and other heavily shorted companies.

Those limitations, which included a temporary halt on new purchases of certain shares such as GameStop, created an uproar. Critics argued the trading apps were stifling demand and swinging momentum back to larger investors that were shorting the shares.

On social media, Robinhood was accused of caving to influential hedge funds such as Citadel, which is owned by Griffin. Citadel spokesman Zia Ahmed, however, said the hedge fund is not involved with Robinhood.

“Citadel is not involved in, or responsible for, any retail brokers’ decision to stop trading in any way,” he said in an emailed statement.

Citadel was not part of $1 billion raised by Robinhood to weather the crisis, Ahmed said.

The Citadel hedge fund is a separate business from Griffin’s Citadel Securities, which is a market maker that processes trades for Robinhood and other platforms.

Citadel Securities is Robinhood’s biggest market maker, and the firm reportedly provides much of Robinhood’s revenue by buying trading data.

Amid this week’s furor, critics pointed out that Griffin would benefit from a reversal in Melvin’s fortunes, since he’s entitled to collect a cut of future revenues. Both of Griffin’s firms dispute there’s a conflict of interest.

“Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business,” the statement said. “Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions.”

Robinhood’s explanation

With online investing, there’s a delay between the execution of a trade and funds for the trade settling. Trades are processed through large clearinghouses.

Volatile, high-volume trading days like those of recent days can cause a scarcity of available cash for companies such as Robinhood to back unsettled trades.

“We absolutely did not do this at the direction of any market maker or hedge fund or anyone we route to, or other market participants,” Robinhood CEO Vlad Tenev said in a CNBC interview Thursday.

“We’re really in unprecedented times, and in order to protect the firm and protect our customers we had to limit buying in these stocks,” Tenev later added.

The aftermath

By Thursday multiple lawsuits had been filed against Robinhood, including one by Naperville lawyer Richard Gatz, regarding the trade restrictions.

There already is talk of congressional hearings and investigations by the U.S. Securities and Exchange Commission.

After seeing its value plunge from highs, GameStop shares recovered much of their value Friday to close at $325 a share.

rori@chicagotribune.com

Twitter @Ryan_Ori