Here’s what to expect from Thursday’s GameStop hearing with Robinhood, Citadel and Reddit CEOs

The chiefs of Robinhood, Reddit, Citadel and Melvin Capital, are headed to Washington for Thursday’s highly anticipated GameStop hearing at the U.S. Congress.

Lawmakers will get their chance to grill the CEOs, as well as the Reddit trading star known as Roaring Kitty, about last month’s GameStop trading turmoil.

Robinhood CEO Vlad Tenev, Melvin Capital CEO Gabriel Plotkin, Reddit CEO and co-founder Steve Huffman, Citadel CEO Kenneth Griffin and Keith Gill, also known as Roaring Kitty, will testify to the U.S. House Financial Services Committee testimony on Thursday at 12 p.m. ET, according to a release from Chairwoman Maxine Waters, D-Calif.

“We think the congressional hearing will focus on understanding exactly what occurred during the week of service disruptions, making sure that all activity was appropriate and also determining how to avoid a similar event in the future,” JMP Securities analyst Devin Ryan told CNBC.

Last month, an epic short squeeze in GameStop’s stock rocked Wall Street and drew attention to an emerging class of retail investors on social media platforms. GameStop’s share price sky-rocketed to $483 per share, and subsequently lost 90% of its value.

The prevailing narrative was that a band of Reddit-inspired small traders rose up against Wall Street by buying GameStop, forcing a short squeeze by professional hedge fund managers, who were forced to cover their negative bets or risk catastrophic losses. However, some data show that institutional investors were the drivers of the upward price action.

“We think some of the initial speculation, on social media, around the reasons behind limited access has been proven as misinformation,” Ryan of JMP Securities added.

The mania shone a light on the millennial-favored stock trading app Robinhood, which made the unpopular decision to restrict trading of certain securities, including GameStop, during the trading fiasco.

“What we experienced last month was extraordinary, and the trading limits we put in place on GameStop and other stocks were necessary to allow us to continue to meet the clearinghouse deposit requirements that we pay to support customer trading on our platform,” Tenev said in testimony he will give that was released on Wednesday.

Tenev cites in his testimony increased capital requirements from the Depository Trust and Clearing Corp., an entity responsible for settling and clearing trades, for the trading restrictions. The brokerage raised more than $3.4 billion in a few days to shore up its balance sheet and drop some of the restrictions.

Hedge fund Melvin Capital closed out its short position in GameStop after taking huge losses as a target of the army of retail investors. Plotkin said the short position in GameStop was rooted in the thesis that the physical video game retailer was being overtaken by digital downloads through the internet.

The Hedge fund arm of Citadel, as well as Point72, infused close to $3 billion into Melvin to backstop its finances. Citadel the hedge fund is not to be confused with Citadel Securities, which works with Robinhood to execute trades.

“I want to make clear at the outset that Melvin Capital played absolutely no role in those trading platforms’ decisions,” Melvin Capital CEO Gabriel Plotkin said in a testimony released Wednesday. “Melvin closed out all of its positions in GameStop days before platforms put those limitations in place.”

The hearing’s topics are expected to include Citadel’s relationship with Robinhood and Melvin Capital, why brokerages shut down trading and how to protect retail investors.

Thursday’s hearing is a big moment for Robinhood chief Tenev, who is expected to be at the helm during the company’s initial public offering sometime this year.

“I want to be clear at the outset: any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric,” Tenev said in the testimony.

Tenev blamed the two-day trade settlement, known as T+2, for some of the clearinghouse deposit issues during the GameStop mania. For most retail stock trades that go through a broker and then a clearinghouse, settlement occurs two business days after the day the order executes.

“The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev’s testimony said. “The clearinghouse deposit requirements are designed to mitigate risk, but last week’s wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks.

JMP’s Ryan said T+2 is viewed by many as antiquated and a substantial driver of the increased capital pressure faced by the industry.

Michael Dyson, former senior counsel to Financial Industry Regulatory Authority, told CNBC T+2 is “low hanging fruit” for Tenev on Thursday. Finra is a self-regulatory organization that oversees brokerage firms and their registered representatives.

“Robinhood seeks to level the playing field that Wall Street dominates,” said Dyson, now partner at Sullivan & Worcester. “If transforming the brokerage industry to offer commission-free trading is any indication, Robinhood isn’t finished yet.”

While Tenev may deflect blame amid his crusade for real-time settlement during the Q&A portion of the hearing, the CEO has already admitted some fault during the trading mania.

Tenev said on the “All-In” podcast on Friday that Robinhood could have communicated better to its customers during the chaos. The podcast comments were first reported by Reuters.

“As soon as those emails went out, the conspiracy theories started coming, so my phone was blowing up with, ‘how could you do this, how could you be on the side of the hedge funds?’,” Tenev said.

Tenev, 33, is reportedly being coached for the hearing by Robinhood’s chief legal officer Dan Gallagher, a former SEC commissioner, according to Punchbowl News.

The brokerage firm also reportedly hired veteran congressional investigation lawyer Reginald Brown, who prepped Facebook CEO and founder Mark Zuckerberg for his Congressional testimony, Punchbowl reported.

Robinhood did not respond to CNBC’s request for comment.

The GameStop controversy was met by widespread criticism from Washington.

However, it is unclear exactly what members of Congress are intending to regulate: brokerages like Robinhood and Charles Schwab, retail investors on social media, market makers like Citadel or hedge funds.

Sen. Elizabeth Warren (D-Mass.), a longstanding critic of Wall Street, is calling for a ban of forced arbitration, which essentially prevents consumers from going to court if they are wronged by a company or product because they agreed to the terms of service.

“Robinhood promised to democratize trading, but hid information about its prerogative to change the rules by cutting off trades without notice – and about customers’ inability to access the courts if they believe they’ve been cheated – behind dozens of pages of legalese,” Warren said in a statement.

“What’s still not clear from Robinhood’s response to my questions is the full extent of Robinhood’s ties to giant hedge funds and market makers. 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,” said Warren.

Rep. Ro Khanna, D-Calif., said the GameStop controversy “put the over-financialization of Wall Street on the national stage.”

“It proved that these hedge funds are more like casino high-rollers than they are responsible investors, while retail investors are constrained by a different set of rules that explicitly favor the ultra-wealthy. The era of unregulated speculation needs to end,” Khanna said in a statement.

Rep. James Comer (R-Ky.) told CNBC he has been proud to see a company like Robinhood emerge, leveling the playing field for retail investors. However, Comer was disappointed at the decision to halt trading.

Rep. French Hill (R-Ark.) told CNBC’s “The Exchange” he wants to get to the bottom of why Robinhood had a capitalization problem during the GameStop chaos.

“I’m not a fan of day trading…I believe investing should be boring,” Rep. Brad Sherman (D-Calif.) said on CNBC’s “The Exchange” on Wednesday. “I’m a bit concerned that Robinhood may be a glorification of the gamification of investments. If you want an exciting video interface you should go to GameStop and buy a video game, don’t go to Robinhood and buy GameStop.”

Dyson warned of a “knee-jerk overcorrection” from legislator that could be more harm than good.

Piper Sandler analyst Richard Repetto told clients he expects plenty of headlines to come out of the hearing, but he doesn’t expect any substantive market structure discussions or conclusions, especially since the witness list doesn’t consist of market structure experts. Repetto said he would buy Interactive Brokers on any weakness.

JMP Securities expects there to be questions about the controversial, yet legal way that Robinhood and other brokers make money through trades despite dropping commissions: payment for order flow.

“Robinhood is not unique in receiving payment for order flow,” Tenev said in his prepared remarks. “Annual reports show that Charles Schwab, E*Trade, and TD Ameritrade all received significant payment for order flow revenues in 2019. It is important to note that Robinhood’s payment for order flow relationships are with market-makers and not with hedge funds. Robinhood Securities regularly evaluates its counterparties and routes customer orders to those market-makers that can provide the best execution quality on those orders.”

Waters told CNBC on Wednesday there will be three hearings, the first regarding the role each party played, the second with experts and a third to try to come to some conclusions.

Reddit’s CEO will likely face questions about the possibility of market manipulation and hate speech on its page WallStreetBets, which was inundated with posts about GameStop during the short squeeze.

SEC regulators reportedly combed through Reddit posts to identify if there were any bad actors trying to manipulate the market last week, according to Bloomberg News. The regulatory agency is also investigating the possibility of bots playing a role in the mob.

Gill — who goes by DeepF——Value on Reddit and Roaring Kitty on YouTube — defended his social media posts that helped spark a mania in GameStop shares last month in testimony released on Wednesday, saying he was an individual investor acting only on publicly-available information.

“My investment in GameStop and my posts on social media were entirely my own,” Gill’s testimony said. “I did not solicit anyone to buy or sell the stock for my own profit. I did not belong to any groups trying to create movements in the stock price. I never had a financial relationship with any hedge fund.”

Gill, who’s, latest post on Reddit showed he made $7.8 million off of GameStop, doubled down on his investing thesis for GameStop in the testimony.

“GameStop’s stock price may have gotten a bit ahead of itself last month, but I’m as bullish as I’ve ever been on a potential turnaround. In short, I like the stock,” Gill said in the comments.

A class action lawsuit was brought against Gill on Wednesday, filed at federal court in Massachusetts, alleging that he pretended to be a novice trader despite being a licensed professional. Gill’s testimony stated while he worked as a marketing and financial education employee at MassMutual, he said he never sold securities for the firm, nor was he a financial advisor.

House Financial Services Committee event will be livestreamed here.

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.