Robinhood, Reddit CEOs will testify before Congress on GameStop

The Financial Services Committee of the United States House of Representatives has scheduled a hearing on “the recent market volatility involving GameStop [Corporation (GME)] actions and other actions. “The hearing will be held virtually, starting at noon, Eastern Time, on Thursday, February 18, 2021. Among those called to testify are Vladimir Tenev, CEO of online trading firm Robinhood Markets, Inc., and Steve Huffman, CEO and co-founder of the social media community and the online forum site Reddit.

The committee is chaired by Representative Maxine Waters, D-Calif. The press release announcing this hearing states: “Since becoming chairman of the House’s Financial Services Committee, Congresswoman Waters has transformed the Committee to focus its agenda on justice, consumer and investor protection and accountability for large financial institutions. it is a practice to convene Committee hearings with CEOs of major financial institutions and companies to hold them accountable. “

Earlier statement by Waters representative

Representative Waters released the following statement on January 28, 2021, in the wake of the GameStop stock dispute.In it, she launches hedge funds as enemies of ordinary American savers and investors:

“Hedge funds have a long history of predatory conduct and that conduct is completely indefensible. Private funds that attack pension funds of working Americans must be stopped. Private funds that engage in predatory short selling to the detriment of other investors should be stopped. funds involved in vulture strategies that harm workers must be stopped.

“Addressing this predatory and manipulative conduct is the responsibility of the legislators and regulators of securities charged with protecting investors and ensuring that our capital markets are fair, orderly and efficient. As a first step to curb these abusive practices, I will call a hearing to examine the recent activity around GameStop (GME) shares and other impacted actions focusing on short sales, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.

“We must deal with hedge funds whose unethical conduct has directly led to recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit while others pay the price.”

Robinhood and payment for order flow

In addition to choosing hedge funds to receive criticism, Robinhood CEO Vladimir Tenev is likely to face hostile questions about his company’s actions in the GameStop case. In particular, the committee’s memo notes that payment by order flow (PFOF) has been Robinhood’s main source of revenue since its inception and that its decision to restrict trading of GameStop and other actions may have been influenced by its ties with investment firms that have been caught in small pressures on those stocks.

The committee’s memo also notes: “In December 2020, the SEC accused Robinhood of making erroneous statements about receiving payment from the company for the order flow and for failing to fulfill its obligation to ensure that customer trades were executed in the best possible light. possible terms. Robinhood’s failure to meet his best performing obligations resulted in more than $ 34 million in aggregate customer losses. Robinhood was censored and agreed to pay $ 65 million to resolve the claim. ”

Robinhood and gambling addictions

In addition to concerns about the impact of payment on the order flow, the committee’s memo also notes that “some attribute the current controversy to the ‘gamification’ of investments and the growing role that social media and technology play in capital markets” .

The memo adds: “Gamification involves tactics used to engage customers in transactions, such as increasing the use of notifications, prizes and other psychological tools and design elements to increase quick and short-term trading, rather than a more cautious approach. Robinhood in particular was accused of using gamification to increase the use of his app, possibly to the detriment of his customers, examples include designs to attract younger users, including digital confetti to celebrate transactions, color illustrations and his permission for users tap up to 1,000 times a day to improve their position on the waiting list for Robinhood’s cash management feature. This has led to criticism that gamified online trading platforms, like Robinhood, encourage behavior similar to gambling addiction. “

The memo concludes: “Regulators have expressed concern about Robinhood’s investment platform. On December 16, 2020, Massachusetts regulators filed a complaint against Robinhood for his ‘aggressive tactics to attract inexperienced investors, his use of investment strategies’. gamification to manipulate clients and their failure to avoid frequent interruptions and interruptions in their trading platform. ‘”

Significance for investors

Hearings may take additional legislation and regulation regarding securities markets, but this is not absolutely certain. One thing is certain: extensive questions about the order payment flow, the incentives he creates and the degree to which Robinhood engages in gamification are issues that tend to tarnish the company’s image, but not necessarily to deter a significant number of Robinhood’s customers or potential customers to use its platform.