Lawmakers made Robinhood CEO Vlad Tenev available for more than five hours on Thursday over the role of the online brokerage firm frantic buying last month GameStop shares and other downed shares. Although Tenev apologized for his company’s decision to restrict trading to the video game retailer and other high-flying stocks, he 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 wild volatility in the GameStop stock – which rose by almost 3,000% in January – has drawn criticism from lawmakers about Robinhood’s business practices and its links to Wall Street. While Robinhood promotes free trading to small investors, it earns its money by directing those transactions to hedge funds, including Citadel. Tenev said the company receives more than 50 percent of its revenues from hedge funds and other market factors.
“I’m sorry about what happened,” Tenev said, adding that the company is reviewing its processes. “I’m sorry. I won’t say that Robinhood did everything perfectly and I haven’t made any mistakes in the past.”
GameStop shares rose last month as regular investors, fueled by Reddit’s WallStreetBets message board, piled up in stocks. In the face of what Robhinhood said was a need to raise more capital to meet the compensation center’s requirements, Robinhood stopped trading in GameStop and other shares. This provoked a reaction among customers, questions from parliamentarians and a series of lawsuits.
Robinhood, which offers free trading to 13 million investors, has promised to “democratize finance.” But critics say its business model has an inherent conflict, as Robinhood generates revenue by selling customer stock orders to larger companies, including hedge funds such as Citadel, whose CEO Ken Griffin also testified at the meeting.
Tenev denied that his company was pressured by hedge funds to stop trading on GameStop. He added that the cessation of trading was due to his company’s need to raise more capital due to the requirements of the clearing house. Robinhood raised $ 3.4 billion from investors over four days to meet increased capital requirements.
“We are not responding to hedge funds,” Tenev told lawmakers. Asked if he was pressured by hedge funds, while GameStop shares rose to stop trading, Tenev said, “Zero not 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 committed suicide last year after mistakenly believing he had lost nearly $ 750,000 in a risky transaction.
“It was a tragedy and we took immediate action to ensure that we created not only the most affordable options trading product for our clients, but also the safest,” Tenev said.
After Kearns’ death, Robinhood clarified how the app displays a customer’s purchasing power, added telephone support for people trading using options, and took other steps to improve the platform, Tenev said.
sparks jump
Maloney noted that the January 28 Robinhood post blamed market volatility for its decision to stop trading on GameStop and other stocks, not to mention 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 far from pushing the company out of future volatility and other black swan events,” Tenev said.
Representative Brad Sherman insisted on Griffin whether institutional investors like Citadel who have a business relationship with Robinhood have an unfair advantage over average investors in the way their transactions are handled. As Griffin tried to answer, the California Democrat repeatedly interrupted him, accusing him of trying to evade the question.
“Don’t tell me there are other factors involved and take us on a different path,” said a visibly annoyed Sherman. “I ask you a clear question … Who gets the best offer – one [trade] which comes from a broker who is paid for the order flow and one not? Can you testify that, in general, there is no difference, assuming the same order size? “
Sherman then interrupted Griffin before he had a chance to fully address the question, saying, “You’re doing a great job of wasting my time. If you are going to do obstacles, you should run for the Senate. “
Representative Rashida Tlaib, a Democrat from Michigan and an open critic of Wall Street, said lawmakers consider a small tax on securities trading. Proponents of a so-called financial transaction tax say it would reduce reckless speculation, while raising billions of dollars in government revenue.
“We strongly believe that a transaction tax will hurt Americans who hope to save for retirement,” Griffin said.
“Political theater”?
Lawmakers also targeted the hearing itself, with Bill Huizenga, a Michigan Republican, denouncing it as “political theater.”
But some lawmakers have opposed the characterization, including Waters and California Rep. Juan Vargas, a Democrat.
The character of Robin Hood, a folklore legend, “had to steal from the rich and give to the poor, and here you have almost the opposite, where you steal from the small retail investor and give it to the big institutional investor,” Vargas said, adding that he thinks this explains the interest in the GameStop saga.
Payment for order flow
Lawmakers have deepened the issue of “order flow payment” or when Robinhood directs customer stock orders to larger commercial firms, such as Citadel, which executes the transaction. In turn, Citadel and other large companies pay Robinhood for sending them their jobs. Both Robevhood’s Tenev and Griffin defended the practice, saying it was legal and approved by the SEC.
But while the practice is legal, it can be a conflicting practice for Robinhood, as it earns its money from large commercial firms that may have different goals than small retail investors. Tenev, from Robinhood, said the company discloses the practice “in several places” to its customers.
Tenev and Citadel’s Griffin defended the practice, noting that it allowed companies such as Robinhood to offer commission-free transactions to small investors. Tenev noted that order flow payment is his company’s largest source of revenue.
“We just play by the rules,” Griffin said. “Payment for the flow of orders has been approved by the SEC. It is common practice. I think it has been a major force for innovation in the industry.”
Reddit and social media
The role of Reddit and social networks has been questioned, given the role of the WallStreetBets message board in promoting GameStop and other flying stocks. Tenev said his company did not monitor social media, while Reddit CEO Huffman said his company did not ask people to reveal their identities.
“They can choose to reveal how much or how little they want,” Huffman said.
This identity issue came to the fore with investor Keith Gill, a Redditor named “Roaring Kitty”, and he also appeared at the hearing after being sued earlier this week for securities fraud. The lawsuit accused him of misrepresenting himself as an amateur investor when the lawsuit claims he is a licensed securities professional.
Gill, who is known for his cat-themed T-shirts and a bright red runner’s band in widely watched videos, changed his clothing for a jacket and tie – though his headband could be seen hanging on a poster. kitten with the words Stay there. “
Aimee Picchi
Gill described himself as an individual investor who did his job on GameStop. He also promoted GameStop during the meeting, saying: “I think it is an attractive investment at this price.”
GameStop shares, which hit a high of $ 483 at the end of January, fell 11 percent on Thursday to close at $ 40.69. The retailer’s market value has fallen by about $ 32 billion since the company’s share rose last month.
Additional regulation?
In opening statements, committee lawmakers said the hearing was an opportunity to learn more about the connection between Robinhood, hedge funds and small investors. Some Democrats have suggested that additional regulation may be needed to protect small investors, while Republican Rep. Patrick McHenry of North Carolina has pushed back against the notion.
“If you’re rich, you’re good to go,” McHenry said. “And if you’re not, you’re too stupid to trust your 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 come out of the meeting.
“This will not be a conversation or a substantive debate. The structure of the capital market is complex,” Jaret Seiberg of Cowen Washington Research Group told investors in a report. “The vast majority of Congress doesn’t really understand the inner workings of the market.”