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Skeptics of the role that Citadel played in the GameStop (GME) trading frenzy can expect the hedge fund’s CEO, Kenneth Griffin, to flatly deny that the firm had any role in Robinhood’s decisions to halt trading of the struggling retailer's stock, during testimony scheduled Thursday before the House Financial Services Committee.
“I want to be perfectly clear: we had no role in Robinhood’s decision to limit trading in GameStop or any other of the 'meme' stocks,” Griffin wrote in prepared remarks submitted to the committee on Wednesday.
During the last week in January, the popular trading platform Robinhood halted buying of the stock, along with other volatile stocks, after small-time investors gobbled up shares in a Reddit-user-fueled push that squeezed short sellers. According to Robinhood co-CEO Vlad Tenev, the platform halted the buying frenzy so that it could maintain mandatory clearing house capital reserves.
Doubts about Citadel’s involvement began to percolate based on its relationship with Robinhood. Citadel Securities — which is separate from Citadel but also founded by Griffin, who's its principal shareholder — executes Robinhood's trades and capitalizes on razor thin price changes between the time an order is placed and when it settles.
Reddit users questioned whether Citadel used its power as the largest market maker in the U.S. equities market to pressure Robinhood to limit trading for the benefit of other hedge funds. The theory, which both Robinhood and Citadel criticized as a conspiracy, is that Citadel Securities gave deference to short sellers over retail investors to help short sellers stop the bleeding. The market maker also drew scrutiny because Citadel, the hedge fund, together with its partners, invested $2 billion into Melvin Capital Management, which had taken a short position in GameStop.
Griffin said in his prepared testimony that he first learned of Robinhood’s trading restrictions only after they were publicly announced.
“Many brokers charge market makers a set fee to execute retail trades — a longstanding, transparent and regulated practice known as payment for order flow or PFOF,” Griffin’s statement said. “Retail brokers have used PFOF to reduce the costs of trading and it is a key reason why retail investors are able to trade for free or low commissions today.”
Still, critics say PFOF poses a potential conflict of interest for brokers that sell orders even though it allows retail investors to trade cheaply or for free. Those critics say that PFOF incentivizes brokers to maximize their own revenues rather than secure the best possible price for retail investors. It’s one of the many practices that lawmakers are likely to probe during Thursday’s hearing to investigate whether any of the parties involved in the trading debacle are responsible for manipulating or deceiving markets.
Others testifying on Thursday include GameStop investor "Roaring Kitty," along with the CEOs of Melvin Capital Management, Reddit, and Robinhood.
Alexis Keenan is a legal reporter for Yahoo Finance and former litigation attorney. Follow Alexis Keenan on Twitter @alexiskweed.