Live Updates
After more than five hours of testimony, the hearing has wrapped.
It seems to have been a tough day for Robinhood and Citadel Securities in particular, with lawmakers from both parties aggressively questioning both executives over whether their businesses do more harm than good.
Reddit and Keith Gill, however, got the opposite treatment.
At times, Gill was even directly praised by members of Congress for his success and his initiative. That may ultimately create a powerful narrative boost for him as he faces down a class-action lawsuit alleging that his YouTube videos constituted bad financial advice, a claim Gill refuted calmly and diplomatically by returning to his core talking point: He likes the stock.
Melvin Capital also received some scrutiny, but far less than Robinhood and Citadel. Between CEO Gabriel Plotkin’s bland office backdrop and his rather small size in the video frame, it sometimes appeared as if he were deliberately seeking to blend in with the environment in hopes of being forgotten. If so, it seemed to have worked.
Rep. Alexandria Ocasio-Cortez clashed with Robinhood CEO Vladimir Tenev over whether Robinhood investors are truly trading for free on the platform, alleging that the company is simply “hiding the cost” from retail investors by subsidizing it with payment for order flow.
“Would you be willing to commit to voluntarily pass on proceeds of payment for order flow to Robinhood customers?” Ocasio-Cortez asked.
Tenev balked at the question several times before ultimately pointing out that payment for order flow “allows for commission-free trading.”
The implication, Ocasio-Cortez said, was that trading on Robinhood isn’t truly free after all.
Tenev conceded that Robinhood is a “for-profit business and needs to generate some revenue to pay for the costs of running this business.” But, he claimed, Robinhood’s model has become the standard industrywide.
During his testimony, Robinhood CEO Vladimir Tenev admitted that the company made some mistakes during the meme stock trading frenzy. But he was somewhat evasive when Congresswoman Madeleine Dean asked him to elaborate.
“You admitted to making mistakes,” Dean said. “Specifically, what mistakes did you make?”
“I admit to always improving,” Tenev responded. “We’re not going to be perfect. And we want to improve and make sure we don’t make the same mistakes twice.”
Congresswoman Rashida Tlaib and billionaire Ken Griffin got into a fiery exchange over whether or not to tax financial transactions.
Tlaib noted that such a tax would raise nearly $800 billion over 10 years, an estimate that is backed up by a 2018 report by the nonpartisan CBO. The idea is that revenue could then be invested in infrastructure or other programs aimed at reducing inequality.
Griffin, not surprisingly, is not a fan of a financial transaction tax. His high-speed trading firm, Citadel Securities, would be hurt by the levy.
“We firmly believe a financial transaction tax would injure Americans trying to save for retirement,” Griffin said.
Tlaib did not buy that explanation and criticized Wall Street broadly.
Under questioning from Rep. Ritchie Torres, Robinhood CEO Vlad Tenev disclosed two important stats that shed light on its underlying business model.
More than half of Robinhood’s revenue is derived from payment for order flow, the trade execution practice that’s received heavy scrutiny during the hearing. Pressed on how much of Robinhood’s business comes from payment for order flow, Tenev said: “I don’t recall the exact percentage. It’s over 50%.” He also acknowledged that Citadel Securities is Robinhood’s “largest counter-party,” in that it receives the bulk of Robinhood trading orders.
Robinhood CEO Vlad Tenev admitted that the app did not have the liquidity needed to meet an early-morning demand from its clearinghouse for $3 billion on January 28.
“At that exact moment we would not have been able to post the $3 billion in collateral,” Tenev said.
Within a few hours, Robinhood managed to persuade the clearinghouse to lower its request to $1.4 billion, and the app imposed controversial restrictions on GameStop and 12 other stocks.
Congressman Anthony Gonzalez pointed out that if Robinhood did not impose those restrictions, the clearinghouse would have stepped in and liquidated unsettled trades.
“It would not have been a good situation for the firm or the customers,” Tenev said, adding that it would have caused a “total lack of access to markets” for users.
Gonzalez said this would have been an “enormous catastrophe for Robinhood.”
“I believe a vulnerability was clearly exposed in your business model and perhaps in the regime that governs your capital requirements,” he said. “We just can’t live in a world where my constituents could have had their shares liquidated without their consent.”
Illinois Rep. Sean Casten took Robinhood to task with a polite but devastating critique, highlighting the suicide of investor Alex Kearns.
“There is an innate tension in your business model between democratizing finance, which is a noble calling, and being a conduit to feed fish to sharks,” he said.
While the hearing is chugging along, the closing bell rung on Wall Street and it wasn’t a pretty day for GameStop (GME).
The company’s shares tumbled 11.4% and closed at $40.69, near the lowest point of the session. It was a worse performance than the broader market, including the small-cap Russell 2000 index that GameStop is a member of, which also closed in the red.
Melvin Capital learned a very painful lesson when the hedge fund was blindsided by an army of Reddit traders. GameStop shares went to the moon and Melvin Capital turned to rivals for a lifeline.
“Us at Melvin, we’ll adapt. And I think the whole industry will have to adapt,” Melvin Capital CIO Gabe Plotkin said.
How? Well, for starters, Plotkin is going to pay more attention to the chatter on WallStreetBets. “There will be closer monitoring of message boards,” he said.
Indeed, Wall Street is keeping very close tabs on WallStreetBets. Thinknum Alternative Data recently built and launched a tool that provides hedge funds and investment banks a ranking of the most-mentioned stocks on WallStreetBets.
That kind of intel could have allowed Melvin Capital to unwind its bets against GameStop before that company’s shares skyrocketed. Melvin ultimately accepted a $2.75 billion cash infusion (don’t call it a bailout, according to Plotkin) led by rival hedge funds Citadel and Point72.
At one point, the short interest on GameStop was an unthinkable 140% – a scenario that Plotkin said is unlikely to be repeated.
“I don’t think investors like myself want to be susceptible to these dynamics,” he said.
Congressman Michael San Nicholas, the Democrat from Guam, began his questioning by congratulating retail investors who made money trading GameStop (GME) last month.
“You guys found a low float, low volume, massively shorted stock and you squeezed it,” San Nicholas said. “I think that investors like Mr. Plotkin, large money managers, probably doubled down on their short positions thinking that they were going to win, and in the end, the massive communication networks that we have these days rallied the small to beat the large.”
San Nicholas called the success of small investors “something to behold” and said, “Robinhood made that possible.”
Reddit CEO Steve Huffman called out CNBC without saying those four letters.
“People in the United States talk about stocks on Reddit, they talk about it on TV, in magazines – in fact they do all the time on TV encourage people to make what I would call bad investment decisions,” Huffman testified.
You can trust advice you get on Reddit, though, he argued.
“On Reddit, investment advice is probably among the best because it has to be accepted by many thousands of people before getting that visibility,” Huffman said. “On Reddit you’re seeing retail investors who are giving authentic advice based on their knowledge, and you would not call into question positions they may hold before they talk about it on television.”
Fun moment in the hearing: Congressman Juan Vargas wanted to know if Citadel ever told Robinhood to ban orders of GameStop during the trading frenzy.
“Are you asking if we have contact with Robinhood?” Griffin asked.
“With respect to GameStop,” Vargas replied. “Did you talk to them about restricting? About buying – not selling – GameStop?”
“Let me be perfectly clear: Absolutely not,” Griffin said.
“So if we depose everyone in your organization we’ll find that?” Vargas asked.
“That is correct,” Griffin said.
GameStop’s short interest was greater than the number of shares on the market. That might not be such a good idea, Robinhood CEO said.
“I do believe the ability for the same share to be shorted an indefinite number of times is somewhat of a pathology that should be fixed,” Tenev said.
To make that fix, Tenev suggested modernizing the settlement infrastructure, which he called “antiquated.”
“We don’t have the ability to properly track what shares have been shorted,” he added.
To prevent Wall Street high-speed traders from gaining such an advantage over retail investors, progressive Democrats have proposed a financial transaction tax.
Robinhood CEO Vlad Tenev cautioned that it could hurt customers more than help — but he also acknowledged it could be beneficial overall.
“It could eat into the transaction costs of our customers,” Tenev said. “That would be a cost to the retail investor. Of course that would have to be weighed against the potential benefits of this tax. It’s more complicated than it seems at first.”
But Jennifer Schulp, director of financial regulation at the conservative Cato Institute, thinks it’s a bad idea.
“No, I don’t think a financial transaction tax would have an affect on fraud or manipulation,” she said. “They often fail to raise money and distort trading.”
Robinhood said its customers have made $35 billion with the company. CEO Vlad Tenev said he has no idea whether his customers have made more or less money in aggregate than they would have if they invested in an S&P 500 ETF.
Tenev said that number includes the value of all customers’ assets, including unrealized gains and positions in cryptocurrencies. But he wouldn’t share data on how much its customers’ investments have grown compared to other investments.
“I don’t have that particular cut of the data top of mind,” he said. “Maybe I could get back to you on that.”
When Congressman Jim Himes asked customers’ rate of return vs. investing in the S&P 500, Tenev objected to the question, saying rate of return should be compared to not investing at all – for example “money they otherwise would have spent or consumed.”
Himes said it’s a lot of money, but it’s meaningless unless we know whether Robinhood traders have won or lost.
“It is indeed a large amount of money, especially for our customers who are mostly individual investors,” Tenev acknowledged.
Keith Gill, aka DeepF***ingValue, was early to GameStop mania, sharing his thoughts on the WallStreetBets subreddit that helped fuel the trading frenzy.
But even he didn’t think it was going to hit a high of $483 a share.
“At the time I thought it was possible but a very low probability,” Gill testified. “Early on I felt it was an attractive investment opportunity.”
Gill acknowledged that he discussed short-sellers, who became the target of redditors’ significant vitriol.
“Yes, the topic did come up,” he said, in the understatement of the year.
Reddit users’ stock trading activity on WallStreetBets likely would not meet the definition of market manipulation, according to Jennifer Schulp, a former enforcement official at the the Financial Industry Regulatory Authority.
Speaking at Thursday’s hearing, Schulp said the Securities and Exchange Commission should probably investigate to determine if any actors sought to engage in stock manipulation on WallStreetBets.
But, echoing the remarks of Reddit’s own CEO, Schulp said there is little apparent evidence of misbehavior.
“I do think the SEC should look,” she said, “but to this point I see very little that would meet a test for manipulation, which generally involves falsely deceptive behavior.”
Elon Musk isn’t involved directly in the GameStop hearing, but the Tesla CEO’s tweet — Gamestonk!! — in the midst of the January market frenzy caught the eye of Rep. Steve Stivers.
After the tweet, the red-hot GameStop stock soared even higher in after-hours trading, further squeezing hedge funds that shorted the stock.
“Do you believe that tweet was targeting you because you had shorted Tesla stock in the past?” Stivers asked Melvin Capital’s founder, Gabe Plotkin, during the hearing.
Plotkin demurred, saying he didn’t want to speculate about Musk’s motives or the potential impact it had on GameStop’s rise, which, incidentally, did cause Melvin to lose more than 50% in January.
Melvin’s short position on GameStop was so devastating the firm took a more-than-$2 billion capital infusion from fellow hedge funds.
Musk has a long history of taunting Tesla’s short-sellers, and regularly broadcasts his disdain for them on Twitter.
Robinhood’s CEO was asked about a 20-year-old options trader who killed himself after mistakenly believing he had a negative balance of $730,000.
College student Alex Kearns mistakenly believed he owed that sum of money and took his own life last June after his desperate pleas to Robinhood went unanswered, according to his family.
“First of all, I’m sorry to the family of Mr. Kearns for your loss,” Tenev testified. “The passing of Mr. Kearns was deeply troubling to me and the entire company.”
Tenev testified that the company has taken a number of steps to prevent something similar from happening again, including:
“It was a tragedy and we went into immediate action,” Tenev said.
The Kearns family is suing Robinhood for the wrongful death of their son, who — like a growing number of novice traders — turned to the free trading app for access to sophisticated financial instruments such as options.
Congressional hearings aren’t exactly known for fact-finding and informed inquiry, but we just got a bunch of really good questions directed at Robinhood executives.
From Congresswoman Nydia Velazquez:
– “Robinhood seems to have perfected the gamification of trading providing the user with the perception that investing through the Robinhood app offers recreational gain … with no downside risk. … How does Robinhood balance disclosures about the potential downside risk of investing, including substantial downside loss?”
Vlad Tenev’s response: “We know that investing is serious and we’re investing in all the educational tools and support to help people on their investing journey.”
From Congressman Blaine Luetkemeyer:
– “Do you think we need more legislation or did the system actually work? Was it self-correcting? The fact that someone like yourself was able to take advantage of shorting? Maybe there was over-aggressive investing that was taking place … they didn’t work because you outsmarted the system?”
Keith Gill’s response: “Increased transparency could help so someone like me could have a better understanding of how those things work could be quite beneficial to retail investors.”
– “You mentioned settling trades in real time … What are the unintended consequences if you did something like that?”
Tenev’s response: “Certain market participants rely on next-day settlement to be able to take advantage of intraday netting and run up larger one-sided positions in certain stock with the knowledge they can close those positions by the time settlements happen, and I understand that could be a limitation to some of these institutions. … I don’t think these are insurmountable challenges.”
Congressman Brad Sherman was trying to get Citadel owner Ken Griffin to admit that Robinhood traders get a raw deal compared to Wall Street fat cats.
Griffin wasn’t having it.
Sherman was referencing Robinhood’s controversial payment for order flow, in which Robinhood is paid for its customers’ trades by market-makers like Citadel. FINRA fined Robinhood $1.25 million in December 2019 for sending customer trading orders to four broker-dealers without guaranteeing the best price.
“Is the Robinhood customer getting the same price as the Fidelity customer?” Sherman asked Griffin.
“Congressman, I believe that’s an excellent question,” Griffin responded. “The execution quality that we can provide as measured by terms of price improvement is heavily related or correlated to the size of the order we receive.”
Sherman interrupted him, saying he was asking a clear question: If the orders are the same size, is it not true that one (Fidelity) is getting a better price?
Griffin wouldn’t say: “Because the Robinhood community tends to be smaller in quantity…” Griffin started before getting cut off again.
“You’re evading questions by making up other questions,” Sherman shouted.
“The quality of execution varies by the channel of order,” Griffin said. “Channels matter.”
“Who gets the better deal – a broker who pays for order flow or one who doesn’t?” Sherman asked.
“Size of the order is only one factor,” Griffin insisted.
MyBookie.com, an offshore gaming site based in Antigua, was accepting bets on today’s Capitol Hill hearing such as whether hedge fund operator Steve Cohen or Telsa CEO Elon Musk will be mentioned, or how many times terms like “stonks” and “gamification” would be uttered.
The betting started a day ago and closed at the noon ET start of the hearing with a modest amount of wagers in “the high four figures,” according to David Strauss, the site’s chief oddsmaker. Still, he added, “it’s more than I expected.” There was a $25 cap on the amount of any bet.
Strauss said the site regularly takes bets on a wide range of news events, including the inauguration and the State of the Union address. “What’s popular betting on any televised event involving US politicians,” he said. Bets could include everything from what color tie the president would wear at the inaugural to the number of applause interruptions.
The last congressional hearing it took bets on was the hearing with the CEOs of Facebook, Google and Twitter in late October.
“That had much more wagered because the election was in full swing,” said Strauss. The 2020 presidential election itself was the most wagered event ever on MyBookie and other gambling sites.
Vlad Tenev apologized for failing to communicate adequately to Robinhood users, in response to pressure from Rep. Carolyn Maloney.
Maloney accused Robinhood of “vague language” and seeming to “reserve the right to make up the rules as you go along,” saying that the company’s statements to investors as it restricted trading were inconsistent with the explanation it later provided concerning Robinhood’s regulatory requirements.
Tenev acknowledged that the company erred.
Tenev pledged to learn from the experience so that the company won’t “make the same mistakes in the future.”
Chairwoman Maxine Waters tried to set the tone of the hearing early by using an aggressive style of questioning, zeroing in on Robinhood and Melvin officials by demanding they answer questions in a yes-no format and cutting them off when they sought to provide longer answers.
Waters’ tactics are an indication of how uncomfortable the hearing may soon become for some of the witnesses.
Robinhood CEO Vlad Tenev is being forced to explain his app’s decision to only ban purchases of GameStop, and not sell orders as well.
In short, Tenev said customers would have gotten very angry (even more upset than they were) if sell orders were banned.
“Preventing customers from selling is a very difficult and painful experience where customers are unable to access their money,” the Robinhood boss said. “We don’t want to impose that type of experience on our customers unless we have no other choice.”
Tenev repeated that the decision to restrict purchases of GameStop, AMC and other stocks was “purely driven” by surging deposit and collateral requirements imposed by its clearinghouse, not at the behest of hedge funds.
He added that buy orders lead to greater capital requirements than sell orders.
Last week, a trader filed a complaint against Fidelity accusing the company of preventing him from unloading Reddit stocks before they imploded. The trader said this cost him $830,000.
Reddit trader Keith Gill, also known as “Roaring Kitty” on YouTube, kicked off his testimony before the House Financial Services Committee with a few points of clarification.
“A few things I am not. I am not a cat. I’m not an institutional investor, nor am I a hedge fund. I do not have clients and I do not provide personalized investment advice for fees or commissions. I’m just an individual…”
That kitty clarification, made against the backdrop of Gill’s “Hang in There” cat poster, was a nod to the widely shared (and yet still very funny!) moment in a Texas virtual courtroom when a lawyer unwittingly appeared on screen with a cat face filter.
Gill, who goes by “Deepf—-ingvalue” on Reddit, described his role in the GameStop saga to the committee. He was one of the leading forces on the subreddit WallStreetBets driving GameStop’s stock up last month. He described himself as casual day trader with a genuine belief that GameStop was undervalued, rejecting any accusation he intentionally pushed investors to the stock to influence the market.
Ken Griffin and Vlad Tenev will face questions over payment for order flow, which they will argue benefits retail investors by making it free to trade and giving them access to deep markets.
Payment for order flow is the controversial practice of broker-dealers – including market makers like high-frequency trading firms – paying Robinhood and other free trading apps for executing the trades with them.
Critics say payment for order flow creates a conflict of interest that allows market makers to trade ahead of retail investors. And that this practice ultimately helped fuel GameStop (GME) mania because it paved the way to free trading and incentivizes brokerages to get people to trade frequently. (More trade orders on Robinhood means more payment for that order flow).
Robinhood was fined $1.25 million in 2019 by Wall Street’s self-regulator for “failures” related to routing orders without guaranteeing the best price.
The GameStop frenzy “exposed how rigged the US equity markets are to enrich big Wall Street firms, high frequency trading firms and brokers at the expense of Main Street retail investors,” Better Markets CEO Dennis Kelleher wrote in a statement Tuesday.
Jennifer Schulp, director of financial regulation studies at the Cato Institute, lauded retail investing — equities trading by individuals using brokerages such as Robinhood — in her opening testimony during Thursday’s hearing.
“Investing in the stock market … provides a path to wealth for individual investors,” Schlup said.
She noted that stock ownership has traditionally been “skewed towards the already wealthy, and it is highly correlated with race, education and age.” But with the increase in popularity of retail stock trading during the pandemic, “investors who opened accounts for the first time in 2020 were younger, had lower incomes and were more racially diverse,” suggesting growing equality in investing, Schulp said.
The volatility in GameStop (GME) shares are not necessarily an indication that guardrails need to be put up around retail investing, Schulp added.
“The fact that Gamestop traded temporarily, and perhaps still trades, above fair estimates of the company’s value is not, by itself, a reason for concern,” she said. “Stock prices move in and out of alignment all the time. And markets are no strangers to bubbles.”
Melvin Capital lost 53% last month because of the hedge fund’s massive short position in GameStop. Its founder Gabriel Plotkin testified today that members of Reddit’s WallStreetBets group looking to hurt short-sellers like Melvin sent him and others anti-Semitic hate speech.
Plotkin said one Redditor messaged him: “It’s clear we need a second Holocaust. The Jews can’t keep getting away with this.”
But Reddit CEO Steve Huffman said the company’s moderators found no evidence of the messages Plotkin highlighted.
“This team searched high and low for the specific comment mentioned in the previous testimony – or anything like it,” Huffman said. “The closest we could find was a single comment that received no votes and was deleted within five minutes. Such speech is not tolerated on Reddit.”
Huffman acknowledged that speech on WallStreetBets is often “crass” but “within the bonds of our own policies.” However, the ADL highlighted several posts on the WallStreetBets subreddit that discussed anti-Semitic tropes, including: “Wall Street is run by the jews.”
Shares of GameStop (GME) surged on Thursday as Keith Gill, the Redditor and investor who helped spark the trading fenzy on the stock, began his oral testimony.
GameStop’s stock price rose more than 6% nearly as soon as Gill appeared on camera.
While its bet only recently gained massive attention, hedge fund Melvin Capital has been shorting GameStop (GME) stock since the fund was founded nearly six years ago, chief investment officer Gabriel Plotkin told lawmakers.
Plotkin said Melvin decided to short GameStop “because we believed, and still believe, that its business model selling new and used video games in physical stores is being overtaken by digital downloads through the internet. That trend only accelerated in 2020 when, during the pandemic, people were downloading video games at home.”
He also defended the overall practice of shorting stocks.
“When our research suggests a company will not live up to expectations, and stock price is overvalued, we might short a stock,” Plotkin said. “We also short stocks because when the markets go down, we have a duty to protect our investors’ capital.”
The fund closed out its positions in GameStop several days before the surge in trading caused Robinhood and other brokerages to put restrictions on trading of the stock, he said.
Kith Gill is expected to tell lawmakers Thursday that his interest in GameStop (GME) stock was borne simply out of a belief in the company’s potential.
Gill is somewhat different from the other witnesses testifying in the hearing — he’s an individual investor, and a Redditor and YouTuber (who is also known by online handles including “Roaring Kitty”) whose online investment advice videos helped spark interest in GameStop stock.
In written testimony provided ahead of the hearing, Gill said he believed GameStop “was dramatically undervalued by the market.”
Gill says he first purchased GameStop stock, and later call options, in the summer of 2019, when GameStop was trading around $5 a share, and continued to increase his position throughout 2019 and 2020. Even after the recent volatility, Gill still believes “the market remains oblivious to GameStop’s unique opportunity.”
He is prepared to tell lawmakers that his videos were meant to provide education for individual investors, not necessarily to encourage others to buy GameStop stock.
“The idea that I used social media to promote GameStop stock to unwitting investors is preposterous,” Gill said in the written testimony. “I was abundantly clear that my channel was for educational purposes only … Whether other individual investors bought the stock was irrelevant to my thesis.”
As for the massive volatility in GameStop stock several weeks ago, “others will have to explain it,” he said.
During his testimony Thursday, Reddit CEO Steve Huffman will aim to help lawmakers understand the social media site’s content moderation policies and “governance structure,” as well as how the now-famous WallStreetBets community came about.
Reddit’s content policy prohibits “hate, harassment, bullying and illegal activity,” and is enforced by an “Anti-Evil” team that monitors the site, Huffman said in prepared testimony ahead of the hearing.
The site is also governed by a structure “akin to a federal democracy, where the aforementioned policies and teams represent the federal government, and the communities themselves represent states,” he said. For example, each community, or “Subreddit,” is created by users who become that community’s moderators.
Of WallStreetBets, Huffman said: “A few weeks ago, we saw the power of community in general and of this community in particular when the traders of WallStreetBets banded together at first to seize an investment opportunity not usually accessible to retail investors, but later more broadly to defend all retail investors against the criticism of the financial establishment.”
He added that Reddit evaluated whether “bots, foreign agents or bad actors played a significant role” in the volatile trading of meme stocks and found that “they have not.”
“It is important to protect online communities like WallStreetBets,” Huffman said. “WallStreetBets may look sophomoric or chaotic from the outside, but the fact that we are here today means they’ve managed to raise important issues about fairness and opportunity in our financial system. I’m proud they used Reddit to do so.”
Gabriel Plotkin, the co-founder and chief investment officer of Melvin Capital Management, told lawmakers Thursday that the hedge fund did not get “bailed out” amid its massive losses as GameStop (GME) shares surged.
Melvin Capital was among the hedge funds with huge short positions in GameStop, betting the share price would fall, ahead of the WallStreetBets-related surge. The fund lost 53% in January, a source familiar with the matter told CNN Business. In the wake of the volatility, Melvin Capital received a more-than-$2-billion capital infusion from Citadel, the hedge fund owned by billionaire Ken Griffin.
Here’s how Plotkin explained Citadel’s investing:
“Citadel proactively reached out to become a new investor, similar to the investments others make in our fund,” he said. “It was an opportunity for Citadel to ‘buy low’ and earn returns for its investors if and when our fund’s value went up. To be sure, Melvin was managing through a difficult time, but we always had margin excess and we were not seeking a cash infusion.”
Plotkin also pushed back on the idea that Melvin Capital had any involvement in Robinhood and other brokerages’ decisions to restrict trading of GameStop and other volatile stocks.
“I want to make clear at the outset that Melvin Capital played absolutely no role in those trading platforms’ decisions,” Plotkin said. “In fact, Melvin closed out all of its positions in GameStop days before platforms put those limitations in place.”
Ken Griffin, the billionaire owner of hedge fund Citadel and high-speed trading firm Citadel Securities, is prepared to tell lawmakers Thursday that the trading firm helped meet retail investors’ needs during the surge in trading of GameStop (GME) and other “meme” stocks, but “had no role” in Robinhood’s decision to restrict trading of those stocks.
“I first learned of Robinhood’s trading restrictions only after they were publicly announced,” Griffin said in prepared testimony. “All of us at Citadel Securities are committed to the healthy functioning of the U.S. equities markets.”
The relationship between Robinhood and Griffin’s financial empire is likely to face scrutiny during Thursday’s hearing.
According to Griffin’s testimony, Citadel Securities is the largest market maker in the US equities market. On January 27, as GameStop stock price peaked, the firm executed 7.4 billion shares on behalf of retail investors — more than the average daily volume of the entire US equities market in 2019, he wrote.
Like Robinhood CEO Vladimir Tenev, Griffin also plans to make a case for shortened equities settlement cycles.
Robinhood CEO Vladimir Tenev is again pushing back on the idea that the app restricted buying of certain volatile stocks late last month at the direction of hedge funds or other market makers.
In written prepared testimony ahead of Thursday’s hearing, Tenev said:
Robinhood has said the restrictions were necessary to help the company keep up with clearinghouse deposit requirements amid the volatility.
Among the things Tenev is expected to explain to lawmakers: the history of Robinhood, how it makes money, what financial literacy features the app provides to users and the events that led up to the company having to restrict trading of GameStop (GME), AMC (AMC) and other meme stocks. He is also set to make the case for real-time equities settlements, a change from the two-day system that currently exists.
“There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time,” he said. “Doing so would greatly mitigate the risk that such processing poses. Indeed, real-time settlement would have allowed Robinhood Securities to better react to periods of increased volatility in the markets without restricting the purchasing of securities.”
Robinhood CEO Vlad Tenev just revealed a new stat that underscores the free trading app’s enormous influence.
“Today, the total value of our customers’ assets on Robinhood exceeds the net amount of money they have deposited with us by over $35 billion,” Tenev said.
A Robinhood spokesperson said that figure includes both real and unrealized gains since the company launched in 2013.
“While markets fluctuate, this tells me that our business model is working for everyday Americans,” Tenev said.
Of course, some Robinhood users are angry over the app’s trading restrictions during the GameStop trading frenzy. And others worry Robinhood’s business model puts individual investors at a disadvantage to Wall Street firms.
The House Financial Services Committee’s top Republican says Washington thinks you’re dumb.
Congressman Patrick McHenry in his opening statement said the people who were investing in GameStop during its Reddit-fueled frenzy knew what they were up to — they knew the risks and potential rewards. And Democrats calling for investor protections are trying to create inequity between the privileged people on Wall Street and day-traders they deem too stupid to trade on their own.
“I believe Americans are far more sophisticated, informed and capable than people in DC give them credit for,” he said.
He accused Democrats of trying to pass new regulations that protect retail investors who, “in their minds don’t know the difference between dogecoin and the Dow Jones without Congress telling them.”
In reality, McHenry said he believes Americans know much more about how to invest than Democrats believe.
How will lawmakers question Keith Gill? That’s what one Reddit user and GameStop investor most wants to know.
Following Gill’s footsteps, AJ Vanover, a former battery store employee from Missouri, turned a $5,000 initial GameStop investment into more than $1.2 million. He’s still hanging onto the stock, he told CNN Business, and the value of his holdings now hovers at around $300,000 after he sold some to pay off debt and purchase a new computer.
“It’s still considerable,” he said of his portfolio. “I’m going to get my wife a new car. We’ve had a lot of snow lately, so we want something with all-wheel drive.”
Vanover thinks how lawmakers treat Gill will be extremely telling. He argues that Gill “clearly didn’t do any insider trading.”
“He saw a valuable play before anybody else did,” Vanover said, “and took full advantage of it.”
Watch his interview below.
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Senator Elizabeth Warren is pushing for answers from Wall Street’s self-regulator over the Robinhood fiasco.
Among other concerns, Warren calls out that, as CNN Business first reported, Robinhood CEO Vlad Tenev does not have a license from the Financial Industry Regulatory Authority.
In a letter to FINRA, Warren asks the regulator to describe what determines whether individuals must be registered, what the registration requirements are for executives at broker-dealers and whether it’s “unusual” that the head of a broker-dealer is not registered.
Some legal experts have expressed concern to CNN Business about Tenev’s lack of a license.
Robinhood pushed back: A footnote in Tenev’s testimony said FINRA requires that only those individuals engaged in the firm’s securities business need to be registered. And Tenev is the CEO of Robinhood Markets, the parent company that owns broker-dealer subsidiaries.
In bigger-picture issues within her letter, Warren raised questions about Robinhood’s business model — specifically the controversial practice known as “payment for order flow,” in which brokers route retail trades to high-speed trading firms.
“I am concerned that current oversight of broker-dealers,” Warren wrote, “does not sufficiently prevent conflicts of interest caused by payment for order flow.”
Republican Congressman Patrick McHenry wants everyone to slow down before rushing to push new regulation in the wake of the GameStop trading frenzy.
“It’s premature,” McHenry, the ranking member on the House Financial Services Committee, told reporters during a call Thursday before the GameStop hearing. “A slow and methodical approach is right, especially when talking about our capital markets.”
The Republican also pushed back against criticism of payment for order flow, the controversial practice where brokerages route retail orders to high-speed trading firms like Citadel Securities.
“As long as there is disclosure, it does not appear to me that there is investor harm,” McHenry said. “In fact, you’ve been able to crash fees to negligible or zero based off this practice.”
Although no system is “perfect,” he said it appears the “good outweighs the bad” when it comes to payment for order flow.
Maxine Waters, the chairwoman of the House panel, told CNN Business she plans to hold multiple hearings on GameStop.
McHenry said he’s had no discussions with Waters about future hearings, although he left the door open to it.
“I welcome the debate,” he said.
There may need to be “extra protections” and information disclosures for less-sophisticated investors who are day trading, particularly those investing in certain risky products, House Democrat Gregory Meeks told CNN’s Julia Chatterley ahead of today’s hearing before the House Financial Services Committee.
“I’m looking to listen and hear and try to figure out whether or not the rules and regulations that we have in place have kept up with technology of today,” Meeks said.
A senior member of the House Committee on Financial Services, Meeks said he understands Robinhood’s aims to make trading more accessible, but he wants to know if the platform is steering people towards risky products and disclosing enough information to investors.
Meeks wants to understand more about the role of short sellers, including hedge funds, in the recent market volatility and to probe the financial relationship between the Robinhood’ App and the market makers like Citadel.
“We don’t want to wait until something catastrophic happens at the end and say, oh, we should have looked at it earlier,” Meeks said.
Here’s a very quick primer on the key players and issues in today’s hearing.
Today’s hearing is sure to be a spectacle. But as regulators debate their next steps, lawmakers have an opportunity to press key actors on issues of importance for anyone who buys or sells stocks on public markets.
Representatives could go in a lot of directions. Here’s what remains top of mind:
Are gaming elements of apps like Robinhood encouraging investors to take uninformed risks? What about easy access to leverage and higher-risk investing strategies like options trading? Robinhood sells its order flow to market makers like Citadel, which then executes the trades. Does this practice create conflicts of interest? What steps could be taken to make short selling, which allows investors to profit off stock declines, more transparent? Have regulators done enough to guard against market manipulation on social media? How close were manic markets to spinning out of control? Could the GameStop drama have triggered broader systemic risk?
Lawmakers don’t expect to get to the bottom of all this in one day. Congresswoman Maxine Waters, who chairs the committee, told CNN Business she will likely hold a total of three hearings on the matter.
Congresswoman Maxine Waters plans to thoroughly investigate the GameStop (GME) trading frenzy by holding multiple hearings on the matter.
Waters, the chairwoman of the powerful House Financial Services Committee, told CNN Business she will likely hold three hearings, with the first one occurring Thursday.
In a second hearing, Waters said she plans to bring in experts, including from Wall Street’s self-regulator, who can talk about the role of hedge funds and the democratization of trading.
A third hearing would likely be focused on potential legislation, although Waters declined to pre-judge what new laws might be required.
Waters said in an interview:
Lawmakers are expected to press for details about the relationship between Robinhood and billionaire Ken Griffin’s financial empire, particularly hedge fund Citadel and high-speed trading firm Citadel Securities.
At issue is whether either entity influenced Robinhood’s decision to halt trading.
Like other brokerages, Robinhood gets paid to route orders to market makers, a controversial practice known as payment for order flow.
Disclosure forms indicate that in December alone Robinhood generated about $12.4 million by routing orders to Citadel Securities, the high-speed trading firm owned by Ken Griffin.
Another entity owned by Griffin, the hedge fund Citadel, provided a $2 billion bailout to GameStop (GME) shortseller Melvin Capital Management after its bets blew up.
Citadel Securities and Citadel the hedge fund have denied any role in Robinhood’s decision to suspend GameStop purchases. And Robinhood, under fire from angry users, has explained the trading restrictions were driven by staggering capital demands from its clearinghouse, not by hedge funds.
Today’s hearing will feature testimony from five individuals with distinct backgrounds and interests. Here’s who to look out for:
Vladimir Tenev, Robinhood CEO
Steve Huffman, Reddit CEO
Ken Griffin, the billionaire CEO of Citadel (Griffin also owns the high-speed trading firm Citadel Securities)
Gabe Plotkin, Melvin CIO
Keith Gill, a trader whose posts on the WallStreetBets subreddit helped fuel the GameStop (GME) boom
The hearing is being driven by concerns in Washington about the fundamental fairness (or unfairness) of the modern market.
The GameStop (GME) trading frenzy shined a bright light on the free trading boom set off by Robinhood, the role of high-speed trading firms like Citadel Securities and the populist angst at the heart of the Reddit mob.
“Markets advance faster than Congress,” said Ed Mills, Washington policy analyst at Raymond James.
