Congress criticizes Robinhood for lack of transparency around GameStop stock peaks

GameStop’s stock price skyrocketed in late January, as traders in the r / WallStreetBets The Reddit community faced Wall Street investors that would bet against the success of the video game retailer. Soon, GameStop shares were reaching new highs, jumping more than 2,600% since the beginning of the year, before falling down. Market volatility caught the Congress attention, who now says he wants to find out what happened and whether there was a crime.

Congresswoman Maxine Waters of California said that the House Financial Services Committee hearing was “an opportunity for this committee to obtain facts about the role that each of the entities represented by the witnesses played in the events we are examining today.” Your title, Game Stopped? Who wins and loses when short sellers, social media and retail investors come into conflict, emphasized this point.

Reddit’s chief executives, Robinhood, Citadel and Melvin Capital were present, along with the Reddit poster that led the GameStop shopping frenzy. there via video conference and gave answers under oath. But many times, committee members complained that some of the CEOs were not giving enough direct answers. And at the end of the 5-hour hearing, the committee members found themselves without details. (Although Keith Gill, the Reddit trader also known as “RoaringKitty” on YouTube, confirmed at congress that he is not, in fact, a cat.)

Instead, what Congress learned was that the entire market process, from how trades are resolved to how Robinhood and other brokers are able to offer trades without fees, is irritatingly opaque. Committee members regularly asked repeated questions about which market forces led to commercial problems at the height of the drama and how these issues were communicated to users at various points.

Another major theme of the session was whether sophisticated trading mechanisms, as short selling, are suitable for individual investors. Committee members tried to find out whether Robinhood’s drive to “democratize finance” to the public is more harmful than beneficial. Members have repeatedly raised questions such as the story of Alex Kearns, a 20-year-old man who committed suicide after the app appeared to tell him that he had amassed about $ 730,000 in commercial losses on the app. His family is suing Robinhood.

The line of questioning suggests that at least some lawmakers will examine the financial technology industry and even act to introduce legislation that brings more regulation. Some members of the Republican committee said the general market response was appropriate, however, and dismissed the need for further regulation.

“We don’t have the facts – we need the facts, not just the lewd parts or nasty comments about Reddit,” said North Carolina MP Patrick McHenry, who advocated more flexible investment regulations instead. “Instead of isolating the American public through new regulations, new forms of taxation or so-called protections, we are going to use this opportunity to side with them.”

Robinhood in the spotlight

Robinhood, in particular, caught the committee’s attention a lot. His app was at the heart of what had happened, making it easier for new investors to trade accounts, offering commission-free trades and more tolerant loan terms. But it also attracted the user’s ire when stopped buying GameStop stock on Thursday, January 28, accusing the company of market manipulation as prices began to fall.

Robinhood CEO Vlad Tenev denied the allegations, saying instead that Robinhood took these steps in response to market restrictions, demanding that the company have more money in its coffers to help cover its users’ trades. . Tenev said that Robinhood has since secured more capital to ensure that this does not happen again.

When asked if Robinhood had not been adequately prepared for the GameStop drama in the first place, Tenev said there was a 3.5 million chance that a GameStop situation would happen, calling it a “Black Swan event”.

Still, the committee members continued to ask questions, asking for details about how Robinhood communicates with users and how it educates them about the market. And some have lost patience with him and his seemingly evasive responses.

“You admitted to making mistakes,” Rep. Madeline Dean of Pennsylvania told Tenev at one point. “Specifically, what mistakes did you make?”

“I admit that I am always improving,” replied Tenev.

Waters, who is chairman of the committee, said more hearings about the increase in GameStop’s shares are being planned.