GameStop Hearing Live Updates: Keith Gill and CEOs of Robinhood, Reddit Testify

Rep. Nydia Velázquez (D., N.Y.) and Rep. Blaine Luetkemeyer (R., Mo.) broached whether short-selling should be subject to increased regulation, with Ms. Velázquez saying she believed short-selling hurts “ordinary investors and families.”

Investors who have taken a stake of 5% or more in a U.S.-listed company are required to disclose their position. Ms. Velázquez asked Gabe Plotkin of Melvin Capital Management if he would support such a regulation for short selling. Mr. Plotkin sidestepped the question, saying it wasn’t a matter for him to decide “but if those are the rules, I’ll certainly abide by them.”

The Wall Street Journal reported Wednesday that the Securities and Exchange Commission was weighing whether to require more transparency of short selling and the opaque network of stock lending and borrowing that facilitates it.

The European Union requires the disclosure of short positions above a certain threshold; that regulation has affected the size of short positions hedge funds have taken there.

For instance, some hedge funds that bet against the German fintech company Wirecard AG, which filed for the German equivalent of bankruptcy in a stunning downfall last year, have said that for years they kept their short bets against the company below the disclosure threshold to avoid drawing its attention. Wirecard had aggressively defended itself against questions related to its accounting.

Rep. Luetkemeyer took note of the unusually high short interest in GameStop’s stock, which topped 140% earlier this year, to ask whether limits should be placed on how much short interest there can be in a stock. He pressed Mr. Plotkin and Ken Griffin, whose Citadel LLC is a large Chicago hedge fund, to explain how the high short interest wasn’t a manipulation of the stock’s price. Mr. Griffin said the elevated short interest in GameStop was “exceptional” and that he wasn’t sure a legislative response was needed to address a rare incident.

Mr. Griffin also said so-called naked short-selling had largely been curtailed, and Mr. Plotkin said his fund is forced by Melvin’s systems to “find a borrow” when it shorts a stock, meaning Melvin doesn’t engage in naked shorting.

Short sellers profit when the value of a security falls. In a short sale, a trader borrows stock from a third party and sells it in the hope of buying it back later for a lower price. Traders are typically allowed to sell the stock before they borrow it, as long as they do so within several days after the sale. In naked short selling, a trader never follows through on the promise to borrow. Regulators say the practice distorts markets because it can lead to abuses in which traders push the price of a stock to abnormal lows.