Lawmakers questioned Robinhood CEO Vlad Tenev for more than five hours on Thursday about the online broker’s role in frantic buying last month GameStop shares and other defeated shares. Although Tenev apologized for his company’s decision to restrict business at the video game retailer and other high-risk 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 of the Cato Institute. Together, the group faced questions about the intersection of social media, hedge funds and small investors using Robinhood.
The great volatility of GameStop’s shares – which rose nearly 3,000% in January – has sparked criticism from lawmakers about Robinhood’s business practices and its links with Wall Street. While Robinhood touts free trade to small investors, he earns his money by routing these deals to hedge funds, including Citadel. Tenev said the company receives more than 50% of its revenue 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 perfect and we haven’t made any mistakes in the past.”
GameStop’s stock skyrocketed last month with ordinary investors, powered by Reddit’s WallStreetBets message board, piling up on the stock. Faced with what Robhinhood said was the need to raise more capital to meet the requirements of the clearinghouse, Robinhood stopped trading GameStop and other shares. This generated a backlash among customers, questions from lawmakers and a series of lawsuits.
Robinhood, which offers free trade to 13 million investors, has promised to “democratize finance”. But critics say his business model has an inherent conflict because Robinhood generates revenue from selling client stock orders to larger commercial firms, including hedge funds like Citadel, whose CEO Ken Griffin is also testifying at the hearing.
Tenev denied that his company was pressured by hedge funds to stop the GameStop trade. He added that the halt in the negotiations was due to the need for his company to raise more capital due to the requirements of the clearinghouse. Robinhood raised $ 3.4 billion from investors over four days to meet growing capital needs.
“We don’t respond to hedge funds,” Tenev told lawmakers. Asked if he was pressured by hedge funds when GameStop’s stock skyrocketed to halt trading, Tenev said: “Zero at all”.
Tenev also faced questions from Rep. Emmanuel Cleaver, D.-Missouri, about the death of Alex Kearns, a 20-year-old Robinhood client who killed himself last year after mistakenly believing that he had lost almost $ 750,000 in a risky operation.
“It was a tragedy and we took action immediately to ensure that we not only made the options trading product more accessible to our clients, but also the most secure,” said Tenev.
After Kearns’s death, Robinhood clarified how the app displays the customer’s purchasing power, added phone support for people who trade options and took other steps to improve the platform, said Tenev.
sparks fly
Maloney noted that Robinhood’s January 28 blog post blamed the market’s volatility for his decision to stop trading GameStop and other stocks, not to mention the need to raise additional funds due to capital requirements. Tenev said the company “will be reviewing everything about it.”
“The $ 3.4 billion we raised goes a long way to keeping the company out of future volatility and other black swan events,” said Tenev.
Congressman Brad Sherman pressured Griffin to find out whether institutional investors like Citadel, who have a business relationship with Robinhood, have an unfair advantage over average investors in the way their dealings are managed. As Griffin tried to answer, the California Democrat repeatedly interrupted, accusing him of trying to evade the question.
“Don’t tell me there are other factors involved and they take us the other way,” said Sherman, visibly irritated. “I am asking you a clear question … Who gets the best deal – a [trade] that comes from a broker who is being paid for the flow of orders, and another one is not? Can you testify that, in general, there is no difference, assuming the same size of the order? “
Sherman then interrupted Griffin before he had a chance to fully address the issue, saying, “You are doing a great job of wasting my time. If you are going to obstruct, you should run for the Senate.”
Congresswoman Rashida Tlaib, a Democrat from Michigan and an outspoken critic of Wall Street, said lawmakers considered it a small bond trading tax. Proponents of a so-called financial transaction tax say it would lessen reckless speculation while raising billions of dollars in government revenue.
“We firmly believe that a transaction tax will hurt Americans who want to save for retirement,” said Griffin.
“Political theater”?
Lawmakers also held the hearing itself, with Congressman Bill Huizenga, a Michigan Republican, calling it “political theater”.
But some lawmakers resisted that characterization, including Waters and California’s deputy Juan Vargas, a Democrat.
Robin Hood’s character, a folklore legend, “was to steal from the rich and give to the poor, and here you almost have the opposite, where you steal from the small retail investor and give it to the big institutional investor,” said Vargas, adding that he believes that explains the interest in the GameStop saga.
Payment by order flow
Lawmakers have investigated the “pay-per-order flow” issue or when Robinhood directs its clients’ stock orders to larger commercial firms like Citadel, which execute the transaction. In turn, Citadel and other large firms pay Robinhood to send business to them. Both Tenev de Robinhood and Griffin de Citadel defended the practice, noting that it is legal and SEC approved.
But although the practice is legal, it can be a practice that raises conflicts for Robinhood, as it makes money from large trading companies that may have different goals than small retail investors. Tenev, from Robinhood, said the company advertises the practice “in several places” to its customers.
Tenev and Citadel’s Griffin and defended the practice, noting that it allowed companies like Robinhood to offer commission-free negotiations to small investors. Tenev noted that payment for order flow is his company’s biggest source of revenue.
“We just play by the rules,” said Griffin. “The payment for the order flow has been approved by the SEC. It is customary practice. I believe it has been an important 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-profile actions. Tenev said his company does not monitor social media, while Reddit CEO Huffman noted that his company does not require people to reveal their identities.
“They can choose to reveal as much as they want,” said Huffman.
That identity issue came up with investor Keith Gill, a Redditor who goes by the name “Roaring Kitty” and also appeared at the hearing, after being sued earlier this week for securities fraud. The suit accused him of misrepresenting himself as an amateur investor when the suit alleges he is a licensed bond trader.
Gill, who is known for his cat-themed T-shirts and bright red headband in widely followed videos, swapped his suit for a jacket and tie – although the headband could be seen hanging on a kitten poster with the words “Stay firm.”
Aimee Picchi
Gill portrayed himself as an individual investor who worked hard at GameStop. He also promoted GameStop during the hearing, saying, “I think it is an attractive investment in this price range.”
GameStop shares, which reached $ 483 at the end of January, fell 11% on Thursday, closing at $ 40.69. The retailer’s market capitalization has fallen by about $ 32 billion since the company’s share soared last month.
Additional regulation?
In the opening speech, the committee’s legislators said the hearing is an opportunity to learn more about the connection between Robinhood, hedge funds and small investors. Some Democrats suggested that additional regulation may be needed to protect small investors, while Congressman Patrick McHenry of North Carolina, a Republican, rejected the idea.
“If you are rich, you are ready to continue,” said McHenry. “And if not, you are too stupid to have your own reliable money.”
He added: “It is 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 audience.
“This is not going to be a substantive conversation or debate. The structure of the stock market is complex,” Jaret Seiberg of the Cowen Washington Research Group told investors in a report. “The vast majority of Congress has little knowledge of the internal workings of the market.”