Like many of you, I was riveted by the House Financial Services Committee’s hearing about the recent volatility in GameStop (GME) and related stocks. Many of you, no doubt, were not similarly riveted and wished the major financial networks cutaway (I was bumped by a network that decided to air the hearings rather than talk to me and I don’t blame them), but I’m glad that the testimony was broadcast in the manner it was. Here are some of my takeaways:

• That is a huge committee. How do they get anything done? There are 53 members of the committee, meaning about 12% of the 435 member House of Representatives is on it. There are many who must view its unwieldiness as a blessing – a group that large makes it difficult to advance legislation, which benefits those who don’t relish additional rules.
• No matter how well-funded you are, teleconferencing has its glitches. Neither the ample resources of the US government nor those of brokerage firms and hedge funds were sufficient to guarantee a call without echoes, fuzzy patches, and background noise. At some level, it was nice to see that everyone has the same troubles with remote meetings.
• There was less grandstanding than many expected. A well-publicized Congressional hearing of this type is often a breeding ground for bloviating and sound bites. The majority of the members really did elicit useful testimony from the panelists. 
• Payment for order flow sounds unseemly and is incredibly complex, and is at the root of a zero-commission business model, but is unlikely to be at the root of the recent volatility. That said, Citadel seemed to have a role in nearly all facets of the events that ensued.
• “Roaring Kitty” still likes GME at current prices. And he looks an awful lot like the head of Robinhood.
• Frivolity aside, Robinhood was really on the brink, and that led directly to the trading curbs. For me, this was the most critically important issue, and they could have used additional witnesses who were able to shed light on the mechanics behind it.

I thought the most enlightening exchange came when Vlad Tenev was questioned by Rep Anthony Gonzales (R-Ohio) about what would have happened had the firm been unable to meet a $3 billion charge that the main clearinghouse (DTCC) requested before the market opened on Jan. 28^th. The short answer was “It would not have been a good situation for the firm”. The longer answer is quite a bit more complex.

In written testimony, Mr. Tenev acknowledged that Robinhood would have been unable to deposit the $3 billion collateral. A company (or a person) that fails to meet its obligations is in default, plain and simple. They would have been in default. The bulk of the $3 billion charge was a $2.2 billion special assessment, which was imposed because there was an original $1.3 billion charge that exceeded the amount of net capital deposited at DTCC. That is a bizarre bit of feedback in the clearing process. In effect, the clearinghouse says, “you can’t meet your current obligations, so we’re going to further double the obligations that we know you can’t already meet.”I can’t imagine that DTCC wants to push a firm over the brink – they zealously protect their own integrity and those of its members – but a measure like this makes it more difficult for a troubled firm to meet its obligations. (One key lesson for investors is that there are advantages to holding accounts at well-capitalized and well-managed firms that are unlikely to face these sort of capital calls.)

By agreeing to trading restrictions on GME and other “meme” stocks, Robinhood was to reduce the special charge by about half, and it was eventually waived later in the day. This is a crucial piece of the narrative. There was a huge outcry from individual investors who felt that the brokerage firms were turning over the Monopoly board just when the little guys were beating the big guys.No, this plays into the more accurate narrative that there was a large set of risks that were being faced by a systemically important institution and that they needed to curb trading in order to reduce systemic risk.

That is why I think the committee made a huge mistake in failing to invite someone from DTCC. I referenced that in yesterday’s piece, which explained how risk flows from customers through their brokers to the clearinghouse. I think the House would do themselves a service if they further researched the mechanics of securities clearing and collateral to ensure that customer speculation and an individual firm’s issues do not metabolize into systemic risk.