Lawmakers Overseeing GameStop Top U.S. Market Participation

Members of the U.S. House committee in charge of Thursday’s GameStop hearing have more exposure to the market than the average American family but most don’t hold any individual stocks.

Disclosure forms for the House Financial Services Committee’s 54 members show that 83%, or 45 lawmakers, have some exposure to the market in mutual funds, retirement accounts, or direct ownership of individual stocks. That includes Chair Maxine Waters, a California Democrat whose husband holds two mutual funds with equities. That compares to 53% of American families in 2019, according to the Federal Reserve Survey of Consumer Finances.

Lawmakers Overseeing GameStop Top U.S. Market Participation

Only 20 members, fewer than half, hold any stocks directly. Nine of the members list no direct or indirect stock holdings on their disclosure forms.

Just eight lawmakers reported trading any stocks since January 2020, including the panel’s senior Republican, Patrick McHenry of North Carolina, who sold all the shares of the only equity he held -- between $15,001 and $50,000 in Dominion Energy Inc. stock -- in November. And Ohio Republican Anthony Gonzalez, a former Indianapolis Colts player, bought up to $100,000 in stock in Charter Communications Inc. In total, 20 members of the committee directly own stock.

Lawmakers Overseeing GameStop Top U.S. Market Participation

New York Democrat Alexandria Ocasio-Cortez, a committee member and vocal critic of Wall Street and restrictions on trading apps like Robinhood Markets, had a 401(k) from a previous employer of between $1,001 and $15,000 and cash in a pair of accounts with Charles Schwab Corp., including a brokerage account with, at most, $1,000 in it, the disclosures show.

Most of the members would not comment on their holdings but some said they steer clear of getting too involved in the market because of their position on a committee that oversee these matters.

“We don’t deal in it regularly,” committee member Al Green, a Texas Democrat, said of the stock market. “Some of us have lost money in it.”

Green has a retirement account from his work for Harris County in Texas, and an individual retirement account that holds at least $50,000, according to his financial disclosure forms. He said the challenge for the committee is to understand the intricacies of modern stock trading.

Lawmakers Overseeing GameStop Top U.S. Market Participation

“We also are making sure that we understand market flow, that we understand the bid-ask spread,” he said when on Bloomberg Television. “These things are so incomprehensible, it just takes a person some time to acquaint themselves with the language.”

Committee member Brad Sherman, a California Democrat, says he doesn’t trade actively because “I don’t think I can beat the market,” and he worries that well-timed trades would lead to the appearance of using inside knowledge.

“I would hope that none of my colleagues are high-frequency traders. They shouldn’t have enough time to do it right,” said Sherman, who holds three Vanguard funds worth that combined are worth at least $215,0000 and a California state pension.

Only about 15% of American families hold individual stocks, according to the Federal Reserve Survey of Consumer Finances. But among those who make more than $100,000 a year, as members of Congress do, 88% had direct or indirect stock-market exposure, compared to 83% for committee members.

Members of the Senate Banking Committee, which plans to hold a hearing on GameStop but hasn’t yet scheduled it, have more direct familiarity with the market. Some 22 of its 24 members report that they or a family member directly owned some stock.

The college-age son of Senator Patrick Toomey of Pennsylvania bought and sold somewhere between $1,001 and $15,000 of GameStop stock on consecutive days in January, according to the senator’s financial disclosure forms. Still, just three senators on the committee reported making stock sales since January 2020.

“The trades were made without my knowledge,” Toomey said in a statement, adding that had he been aware of them, he would have told his son that GameStop was a classic bubble that will end badly for most participants.

House members’ holdings vary greatly in size and scope. Thirty-five members reported that they, their spouses and their dependent children held assets in mutual funds or exchange-traded funds, including Waters and McHenry.

The members do raise money from Wall Street in order to meet their constant need to raise money for re-election. Employees and political action committees of securities and investment firms -- the kind made uneasy by the app-fueled rally GameStop saw last month -- gave more than $9.5 million to the committee members in the 2020 election cycle, more than any other industry, according to the Center for Responsive Politics.

The stock market the members oversee is vastly more complex than it was just a few decades ago, as the GameStop frenzy revealed. On its face, it’s never been easier -- or seemingly cheaper -- to buy or sell shares. Paying commissions and calling brokers to make a trade are rapidly becoming a thing of the past. But behind those advances -- and last month’s wild trading -- is a complex web of brokerages, high-frequency-trading firms and stock exchanges that may prove particularly hard to examine in a congressional hearing.

The hearing Thursday will examine how retail traders on social media drove up the share prices of shorted stocks like GameStop, AMC Entertainment Holdings Inc. and Nokia Oyj.

Among those slated to appear before the House panel are Gabriel Plotkin, head of Melvin Capital Management, the hedge fund that lost as much as $7 billion on its GameStop short and other bets, and its rescuer Kenneth Griffin, founder of Citadel, which put $2 billion into Melvin, and Vladimir Tenev, chief executive officer of Robinhood, which made the app that first facilitated and then clamped down on the retail traders’ buying binge.

Lawmakers’ Trades

Indiana Republican Representative Trey Hollingsworth, a multimillionaire whose company refurbishes abandoned industrial sites, was also one of the most active traders with more than 30 transactions since January 2020.

New Jersey Democrat Josh Gottheimer, reported more than 525 individual transactions over the same period, with his biggest investment in his former employer, Microsoft Corp. A financial adviser trades on his behalf, his office said.

Lawmakers Overseeing GameStop Top U.S. Market Participation

Members will be hearing about the epic January rally in stocks such as GameStop that ended shortly after the Robinhood app temporarily restricted certain trading. It will include technical jargon familiar to market insiders, like payment for order flow, designated market markers, lot size, market data fees and internalization.

All the complexity is built on sweeping regulations that the Securities and Exchange Commission set up in 2005 and reams of guidance and interpretations that it’s issued since, usually at the behest of powerful industry players.

A recent attempt by the SEC to overhaul the system was stymied by a barrage of legal challenges, and Congress has not written new laws on the issue.

Skirting Exchanges

Many trades on Robinhood don’t actually happen through a stock exchange. When someone uses the app to buy shares or options in GameStop, Tesla Inc. and other companies, she may get matched with a seller on the New York Stock Exchange or Nasdaq, but many times that order never actually makes it there. Rather, the request is quickly filled by Griffin’s Citadel Securities, or its rivals like Virtu Financial Inc, through a process called internalization.

Those firms pay Robinhood and other brokerages for those orders and the right to pick which to fill, collecting money on the price differential between purchases and sales. Unwanted orders are passed on to be filled at a stock exchange, which pays firms like Citadel a small fee for providing the business. And it all happens at lightning speeds using complex algorithms. The situation is only more convoluted with options trading, which played a major role in GameStop’s massive run up and decline.

A spokeswoman for Representative Blaine Luetkemeyer, a Missouri Republican, said Luetkemeyer spent 30 years in the banking industry, but avoids active trading to “avoid any baseless suggestions of conflicts of interest or impropriety.”

“While some members may lack experience in certain areas, it is Congress’s job to learn about and understand the issues placed in front of committees,” spokeswoman Georgeanna Sullivan said. “This hearing should give them the opportunity to do that.”

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