Lawmakers grilled Robinhood CEO Vlad Tenev for over five hours on Thursday about the role of the online broker frenzied buying last month of GameStop stock and other deposited stocks. While Tenev apologized for his company’s decision to restrict trading in the video game retailer and other high-flying stocks, he also defended his business model as one that benefits average investors.
Tenev was joined by two hedge fund managers, Citadel CEO Kenneth Griffin and Melvin Capital CEO Gabriel Plotkin, as well as Reddit CEO Steve Huffman, Reddit investor Keith Gill and Jennifer Schulp from the Cato Institute. Collectively, the group faced questions about the intersection of social media, hedge funds, and small investors using Robinhood.
Wild volatility in GameStop’s stock – which rose nearly 3,000% in January – has sparked criticism from lawmakers about Robinhood’s business practices and its ties to Wall Street. While Robinhood praises free trading to small investors, it makes its money by routing those trades to hedge funds, including Citadel. Tenev said the company receives more than 50% of its revenues from hedge funds and other market makers.
“I’m sorry what happened,” said Tenev, adding that the company is reviewing its processes. ‘I apologize. I’m not going to say that Robinhood did everything perfectly and that we didn’t make mistakes in the past. ‘
GameStop shares soared last month as common investors, fueled by Reddit’s WallStreetBets message board, piled into the stock. Faced with what Robhinhood said was the need to raise more capital to meet clearinghouse requirements, Robinhood stopped trading GameStop and other stocks. This led to backlash from customers, questions from legislators and a number of lawsuits.
Robinhood, which offers free trading to 13 million investors, pledged to “democratize finances.” But critics say the business model has an inherent conflict as Robinhood generates revenue by selling client stock orders to larger trading firms, including hedge funds such as Citadel, whose CEO Ken Griffin also testified at the hearing.
Tenev denied that his company was pressured by hedge funds to stop trading GameStop. He added that the trading freeze was due to his company’s need to raise more capital due to clearinghouse requirements. Robinhood has raised $ 3.4 billion from investors in four days to meet increased capital requirements.
“We are not responsible for hedge funds,” Tenev told lawmakers. When asked if he was pressured by hedge funds when GameStop’s stock stopped trading, Tenev said, “All zero.”
Tenev also faced questions from Rep. Emanuel Cleaver, D.-Missouri, about the death of Alex Kearns, a 20-year-old Robinhood customer who committed suicide last year after falsely assuming he had lost nearly $ 750,000 in a risky trade.
“It was a tragedy and we took immediate action to ensure that we not only made the most accessible option trading product for our customers, but also the safest,” said Tenev.
After Kearns’ death, Robinhood clarified how the app represents a customer’s purchasing power, added phone support for people trading using options, and took other steps to improve the platform, Tenev said.
Sparks fly
Maloney noted that Robinhood’s January 28 blog post blamed market volatility for his decision to stop trading GameStop and other stocks, without mentioning the need to raise additional funds due to capital requirements. Tenev said the company will “review everything about this”.
“The $ 3.4 billion we have raised is a far cry from future volatility and other black swan events,” Tenev said.
Representative Brad Sherman urged Griffin whether institutional investors such as Citadel who have a commercial relationship with Robinhood have an unfair advantage over average investors in the way their trades are handled. While Griffin tried to respond, the California Democrat repeatedly interrupted and accused him of dodging the question.
“Don’t tell me there are other factors involved and taking us in a different direction,” said a visibly irritated Sherman. ‘I’m asking you a clear question … Who gets the best deal – one [trade] that comes from a broker who is paid for the order flow, and one not? Can you testify that there is no difference on balance, assuming the same size of the order? “
Sherman then cut off Griffin before he had a chance to answer the question in full, saying, “You’re doing a great job wasting my time. If you’re going to be filibuster, you should run for the Senate.”
Rep. Rashida Tlaib, a Michigan Democrat and outspoken Wall Street critic, said lawmakers are considering a small tax on securities trading. Proponents of a so-called financial transaction tax say it would dampen reckless speculation and bring in billions of dollars in government revenue.
“We firmly believe that a transaction tax will injure Americans who hope to save for retirement,” Griffin said.
“Political theater”?
Lawmakers also addressed the hearing itself, with Representative Bill Huizenga, a Michigan Republican, denouncing it as “political theater.”
But some lawmakers oppose that characterization, including Waters and Rep. Juan Vargas from California, a Democrat.
The character of Robin Hood, a legend of folklore, “had to steal from the rich and give to the poor, and here you have almost the opposite: you steal from the small retail investor and give it to the large institutional investor,” Vargas said. , adding that he believes this explained interest in the GameStop saga.
Payment for order flow
Lawmakers delved into the issue of “payment for order flow,” or when Robinhood sends its clients’ stock orders to larger trading firms such as Citadel that execute the transaction. Citadel and other large corporations, in turn, pay Robinhood to send the transactions to them. Both Robinhood’s Tenev and Citadel’s Griffin defended the practice, noting that it is legal and approved by the SEC.
But while the practice is legal, it can be one that leads to conflict for Robinhood as it makes money from large trading firms that may have different objectives than small private investors. Robinhood’s Tenev said the company is disclosing the practice to its customers “in multiple places”.
Tenev and Citadel’s Griffin and defended the practice by noting that it has enabled companies like Robinhood to offer commission-free trading to retail investors. Tenev noted that payment for order flow is his company’s biggest source of income.
“We’re just playing by the rules,” said Griffin. “The payment for the order flow has been approved by the SEC. It’s common practice. I think it’s been a major force for innovation in the industry.”
Reddit and social media
The role of Reddit and social media has been questioned given the role of the WallStreetBets message board in promoting GameStop and other high-flying stocks. Tenev said his company doesn’t monitor social media, while Reddit CEO Huffman noted that his company doesn’t require people to disclose their identities.
“They can choose to disclose as much or as little as they want,” Huffman said.
That identity issue came to the fore with investor Keith Gill, a Redditor called “Roaring Kitty” who also appeared at the hearing after being charged with securities fraud earlier this week. The lawsuit accused him of misrepresenting himself as an amateur investor, while according to the lawsuit, he is a licensed securities professional.
Gill, who is known for his cat-themed T-shirts and bright red runner headband in many followed videos, swapped his clothes for a jacket and tie – although the headband was featured on a poster of a kitten that read “Hang in there.” “
Aimee Picchi
Gill portrayed himself as an individual investor doing his legwork at GameStop. He also promoted GameStop at the hearing, saying, “I think it’s an attractive investment at this price.”
GameStop shares, which peaked at $ 483 in late January, fell 11% Thursday to close at $ 40.69. The retailer’s market value has fallen about $ 32 billion since the company’s stock soared last month.
Additional regulations?
In the opening address, lawmakers in the committee said the hearing is an opportunity to learn more about the link between Robinhood, hedge funds and small investors. Some Democrats suggested additional regulation may be needed to protect small investors, while Rep. Patrick McHenry from North Carolina, a Republican, opposed the idea.
“When you’re rich, you’re ready to go,” said McHenry. “And if you aren’t, you’re too dumb to be trusted with your own money.”
He added, “It’s easier to buy a lottery ticket than to invest in Google.”
But some Wall Street analysts are skeptical that any regulatory changes will emerge from the hearing.
“This will not be a substantive conversation or debate. The structure of the stock market is complex,” Jaret Seiberg of Cowen Washington Research Group said in a report to investors. “The vast majority of Congress has little understanding of the inner workings of the market.”