Reddit and Robinhood are testifying to Congress today about GameStop's unlikely rally. Here's what's going on.

AP alexandria ocasio-cortez
Rep. Alexandria Ocasio-Cortez and Rep. Rashida Tlaib took aim at Robinhood after it temporarily restricted trading on GameStop stock. Kathy Willens/AP Photo
  • Here's everything to know ahead about today's House hearing regarding GameStop's unexpected rally.

  • Committee Chair Maxine Waters said hedge funds are responsible for predatory conduct.

  • Reddit sided with individual investors and Robinhood explained why it restricted trading.

  • Visit the Business section of Insider for more stories.

The House Committee on Financial Services today grilled the power players involved in last month's GameStop trading frenzy.

The CEOs of Reddit, Robinhood, Melvin Capital, and Citadel are testifying to Congress following an unexpected rally of GameStop stock driven by individual investors.

Lawmakers criticized these firms after some retail investors, including members of a popular Reddit forum r/WallStreetBets, invested in GameStop to burn institutional investors who bet against the stock. The trading frenzy caused GameStop shares to surge 2,000% month-to-date on January 29 and caught the attention of Elizabeth Warren, Alexandria Ocasio-Cortez, and Ted Cruz.

Here's everything to know about Thursday's hearing on GameStop:

What will members of Congress argue during the hearing on GameStop?

Rep. Maxine Waters from California, who is the committee chair, said hedge funds have a "long history" of predatory conduct by short-selling when announcing the hearing.

"We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility," Waters said in a statement.

Rep. Patrick McHenry (North Carolina), a ranking member of the Committee on Financial Services, told Yahoo the Robinhood frenzy wasn't caused by "a single company or any two companies," but rather a desire for more people to get access to stock market gains.

McHenry called to "open up" regulation and laws to allow individual investors access to stock market trading.

Rep. Brad Sherman (California), who chairs the Capital Markets Subcommittee, told CNBC he expects the hearing to "get larger" than just the GameStop situation. He said the capital market should benefit functioning businesses rather than allowing for casino-like day trading.

Rep. Alexandria Ocasio-Cortez (New York) and Rep. Rashida Tlaib (Michigan), members of the committee, took aim at Robinhood after it temporarily restricted trading on GameStop stock, many prominent lawmakers and businesspeople accused the firm of unfairly targeting retail investors.

"This is unacceptable," Rep. Alexandria Ocasio-Cortez, a member of the committee, said in a tweet following Robinhood's decision. "We now need to know more about @RobinhoodApp's decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit."

How will Reddit, Robinhood, and other firms testifying defend themselves?

Robinhood attracted the most scrutiny for its complicated decision to block GameStop purchases at the height of the rally.

Robinhood initially said it blocked purchases of GameStop shares to "help customers stay informed" amid market volatility. It later clarified that the decision was due to deposit requirements from clearinghouses registered with the Securities and Exchange Commission.

In his prepared testimony, Tenev said the firm has to wait several days to trades to register due to SEC rules, which he argues had led to the lack of deposit money. Tenev urged Congress to look into revising dated SEC trading rules to allow technology to make investing simpler for more people.

Meanwhile, Reddit CEO Steve Huffman appeared to side with members of r/WallStreetBets in an interview with The Wall Street Journal earlier this month. In his testimony, he said GameStop's frenzy proved Reddit's power in attracting and organizing "everyday people."

"WallStreetBets may look sophomoric or chaotic from the outside, but the fact that we are here today means they've managed to raise important issues about fairness and opportunity in our financial system," Huffman said.

The company said the GameStop saga inspired Reddit to pay for a five-second Super Bowl ad that commented on the situation: "One thing we learned from our communities last week is that underdogs can accomplish just about anything when they come together around a common idea," the ad read.

What will happen after the House's Congressional hearing?

Though the GameStop rally itself was short lived, the Congressional hearing suggests involvement from the firms testifying might drag on.

Multiple Robinhood users filed a class-action lawsuit against the trading app, leading the firm to beef up its legal team.

"We hope that this House Committee will ask the right questions and require Robinhood to account for its actions," Josh Gossett, one of the plaintiffs in a class-action suit filed against Robinhood on January 29, 2021, said in a statement to Insider.

Sen. Sherrod Brown, chairman of the Senate Banking, Housing, and Urban Affairs Committee, would hold a hearing to hold Wall Street accountable for the volatile stock market. The hearing date has not yet been announced.

"Robinhood promised to democratize trading, but hid information about its prerogative to change the rules by cutting off trades without notice behind dozens of pages of legalese," Sen. Warren said in a statement on February 17. "I'm going to keep pushing regulators to use the full range of their regulatory tools to ensure the fair operation of our markets, particularly for small investors."

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