Lawmakers pointed to Robinhood CEO Vlad Tenev for more than five hours Thursday for the role of the online brokerage firm frantic purchase last month GameStop actions and other outdated actions. While Tenev apologized for his company’s decision to restrict trade to the video game retailer and other high-flying stocks, he also defended his business model as benefiting average investors.
Tenev teamed up with 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 of GameStop shares, which rose nearly 3,000% in January, has sparked criticism from lawmakers about Robinhood’s trading practices and its links to Wall Street. While Robinhood promotes free trade to small investors, it earns its money by running these hedge fund trades, including Citadel. Tenev said the company receives more than 50% of its income from hedge funds and other market makers.
“I’m sorry about what happened,” said Tenev, who added that the company is reviewing its processes. “I apologize. I won’t say Robinhood did everything perfectly and we didn’t make mistakes in the past.”
GameStop shares soared last month as ordinary investors, driven by Reddit’s WallStreetBets message board, accumulated in shares. Faced with what Robhinhood said was a need to raise more capital to meet the compensation center’s requirements, Robinhood stopped trading GameStop and other shares. This provoked a backlash from customers, questions from lawmakers and various lawsuits.
Robinhood, which offers free trade to 13 million investors, pledged to “democratize finances.” But critics say its business model has an inherent conflict because Robinhood generates revenue by selling client stock orders to larger commercial companies, including hedge funds like Citadel, whose CEO Ken Griffin is also testifying in the view.
Tenev denied that his company was pressured by hedge funds to stop listing on GameStop. He added that the halt in trading was due to his company’s need to raise more capital due to the requirements of the clearing houses. Robinhood raised $ 3.4 billion from investors over four days to meet the increased capital requirements.
“We don’t respond to hedge funds,” Tenev told lawmakers. When asked if hedge funds pressured him when GameStop shares skyrocketed to stop trading, Tenev said, “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 business.
“It was a tragedy and we took immediate action to make sure we manufacture not only the most affordable options trading product for our customers, but also the safest,” Tenev said.
After Kearns ’death, Robinhood clarified how the app shows a customer’s purchasing power, added phone support for people trading with options, and took other steps to improve the platform, Tenev said.
The sparks fly
Maloney noted that the January 28 Robinhood blog 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 all of this.”
“The $ 3.4 billion we have raised goes a long way in pushing the company into future volatility and other black swan events,” Tenev said.
Representative Brad Sherman insisted Griffin on whether institutional investors like Citadel who maintain a business relationship with Robinhood have an unfair advantage over average investors in the way their operations are managed. 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 that will take us down another road,” one visibly annoyed Sherman said. “I ask you a clear question … Who gets the best deal? [trade] which comes from a broker who is paid for the flow of orders, and one not? Can you declare that, in short, there are no differences, assuming the same order size? “
Sherman cut Griffin off before he had a chance to fully address the issue, saying, “You’re doing a great job wasting my time. If you’re going to stand in the way, you should run in the Senate.”
Representative Rashida Tlaib, a Michigan Democrat and outspoken critic of Wall Street, said lawmakers consider a small tax on securities trading. Proponents of the so-called financial transaction tax say it would dampen reckless speculation while increasing government revenue by billions of dollars.
“We firmly believe that a transaction tax will hurt Americans who hope to save for retirement,” Griffin said.
“Political theater”?
Lawmakers also addressed the hearing, with Rep. Bill Huizenga, a Republican from Michigan, denouncing it as “political theater.”
But some lawmakers backed down against that characterization, including Waters and California Rep. Juan Vargas, a Democrat.
The character of Robin Hood, a folklore legend, “was supposed 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 believes this explained the interest in the GameStop saga.
Payment for order flow
Lawmakers delved into the issue of “payment for order flow” or when Robinhood directs its customers ’stock orders to larger commercial companies like Citadel, which execute the transaction. In turn, Citadel and other large companies pay Robinhood to send them the operations. Both Tenev of Robinhood and Griffin of Citadel defended the practice, noting that it is legal and approved by the SEC.
But while the practice is legal, it can be a conflict-ridden practice for Robinhood, as it gets its money from large commercial companies that may have different goals than small retail investors. Tenev, of Robinhood, said the company reveals the practice “in various places” to its customers.
Tenev and Citadel’s Griffin defended the practice noting that it has allowed companies like Robinhood to offer trade without commissions to small investors. Tenev noted that order flow payment is the biggest source of revenue for his company.
“We just play by the rules,” Griffin said. “The SEC has approved the payment of the order flow. It’s a 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 was questioned, given the role of the WallStreetBets message board in promoting GameStop and other high-flying actions. Tenev said his company does not control 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 or as little as they want,” Huffman said.
This question of identity came to the fore with investor Keith Gill, a Redditor named “Roaring Kitty” and who also appeared in court after he was 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 professional.
Gill, who is known for his cat-themed t-shirts and a bright red runner’s headband in videos below, changed his attire for a jacket and tie, although the headband hung on the poster. a kitten with the words “Stay there.”
Aimee Picchi
Gill was portrayed as an individual investor who did his job at GameStop. He also promoted GameStop during the hearing, saying, “I think it’s an attractive investment at this price point.”
Shares of GameStop, which reached $ 483 at the end of January, fell 11% on Thursday to close at $ 40.69. The retailer’s market value has fallen by about $ 32 billion since the company’s share increased last month.
Additional regulations?
In initial statements, committee lawmakers 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 might be needed to protect small investors, while Rep. Patrick McHenry of North Carolina, a Republican, backed down from the notion.
“If you’re rich, you can go,” McHenry said. “And if you’re not, you’re too stupid to trust yourself 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 regulatory changes in sight will emerge.
“This will not be a conversation or substantive debate. The structure of the equity market is complex,” Jaret Seiberg of Cowen Washington research group told investors in a report. “The vast majority of Congress has little understanding of the internal workings of the market.”