GameStop hearing live: Robinhood CEO and others in trading saga testify before Congress

Representative questions whether it is reckless to gamify investment

Cindy Axne of Iowa targeted Tenev with questions about the Robinhood app’s design and the consequences of gamifying trade. She asked who truly stands to benefit from the rise of Robinhood, which Tenev has repeatedly asserted aims to “democratize” investment.

“Your clients are not your customer – the users are the product, your customer is sitting next to you – it’s companies like Citadel securities that stand to make a fortune on retail order flow,” Axne said.

Axne noted that Robinhood incentivizes inviting friends to the app and gamification of trading, “adding gaming elements that look like gambling.”

Robinhood took from its customers to boost its own business model, lawmaker alleges

Michael San Nicolas of Guam, a Democrat, congratulated the small investors who orchestrated the short squeeze: “Robinhood made that possible,” he said.

But he also questioned Tenev about the $3bn shortage, and where the money borrowed to cover it came from. Tenev said he got $3bn from venture capitalists, which San Nicolas argued means Robinhood materially benefited from the shareholders.

San Nicolas said Robinhood’s Silicon Valley ethos of “move fast and break things” led it to value scale over anything else.

“That’s where I have a serious concern,” he said. “Your business model causes you to take extraordinary risks, and you took from customers to protect your position. That is very, very troubling.”

Reddit CEO is asked if financial advice on the forum can be trusted

Steve Huffman, CEO of Reddit, conceded in questioning on Thursday that users on the forum responsible for the GameStop buy-up are an “eccentric” bunch but that they did not breach any of the platform’s terms of service.

He said financial advice on Reddit, in fact, is better than what is seen on TV because each post has been vetted by its voting process, which requires endorsement by hundreds and even thousands of users before it is widely visible. Huffman:

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.

Did Reddit’s coordinated buying represent market manipulation? Expert says no

The meteoric rise of GameStop stocks was fueled largely by a frenzy on Reddit community r/WallStreetBets. Arkansas Republican Representative French Hill asked Thursday whether that constituted “market manipulation” – artificially impacting the price of a security or otherwise influencing the market for personal gain.

Keith Gill, who is also speaking on Thursday’s panel, has been sued in a class action lawsuit accusing him of exaggerated claims and misrepresented posts as part of his role on Reddit in kicking off the GameStop market frenzy, which personally netted him more than $30m.

“I think there’s little evidence at this time that there’s any false or deceptive conduct taking place,” said Jennifer Schulp, director of financial regulations studies at the Cato Institute speaking on the forum.

She did say due to the anonymous nature of Reddit it is possible there is some “deceptive behavior” that could not readily be determined. Other have argued that Robinhood’s freezing of GameStop stocks in response to the buy-up itself represented market manipulation.

Everyone is shouting

Representative Brad Sherman, Democrat from California, had some pointed questioning for Citadel owner Ken Griffin regarding how the average trader on Robinhood is treated compared to more wealthy Wall Street traders and larger firms.

He asked about payment for order flow – a controversial practice in which stock brokers get a kickback for essentially selling the ability to execute trades. This allows some larger customers to avoid paying higher transaction fees. Sherman said it is a means for hiding the true costs of trading.

Griffin kept attempting to skirt the question: “Congressman, I believe that’s an excellent question – 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.”

“Everybody I’ve talked to in this industry says when you’re a broker being paid for order flow, you get a worse execution,” Sherman replied, referencing the dealing in which Robinhood is paid for its customers’ trades by market-makers like Citadel.

Finra fined Robinhood $1.25 million in December 2019 for this practice, saying it sent customer trading orders to broker-dealers without guaranteeing the best price.

Griffin defended the payment for order flow practice, saying “it has allowed the American retail investor to have the lowest execution cost they’ve ever had in the history of US financial markets”.

Sherman also repeatedly asked if the average Robinhood customer gets the same deals and prices as larger firms like Fidelity.

“Is the Robinhood customer getting the same price as the Fidelity customer?” Sherman asked Griffin.

Griffin wouldn’t say, talking around the answer and explaining that it can’t be determined “because the Robinhood community tends to be smaller in quantity” before getting cut off again.

“You’re evading questions by making up other questions,” Sherman shouted. “You are doing a great job of wasting my time. If you want to filibuster you should run for the Senate.”

Lawmakers roast Robinhood CEO

In addition to comments from Waters, Robinhood CEO Vlad Tenev faced intense criticism from other lawmakers.

Carolyn Maloney, a Democrat from New York, accused Tenev of recklessly handling customers’ money.

“You reserve the right to make up the rules as you go along,” she said.

“I’m sorry for what happened,” Tenev replied. “I’m not going to say that Robinhood did everything perfect.”

Chairwoman Maxine Waters is reclaiming her time

Maxine Waters, the chairwoman of the House committee on financial services, took a stern tone with executives involved in the hearing on Thursday.

She frequently interrupted Robinhood CEO Vlad Tenev, demanding he actually answer the questions she was posing as he meandered around the point. Waters stated “yes or no, answer the question” a minimum of ten times in the first hour of the hearing.

Melvin Capital CEO Gabriel Plotkin claims the company was not looking for a bailout

Gabriel Plotkin, CEO of one of the hedge funds hit by the coordinated Reddit trades, claims Melvin did not coordinate or ask for Robinhood’s ban on trading.

The GameStop frenzy targeted hedge funds like Melvin with huge short positions in GameStop, which had bet the share price would fall and stood to cash in when it did so. After the Reddit-fueled surge, the fund lost 53% in January. It reportedly received a $2bn+ capital infusion from Citadel as its losses grew.

“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 said.

He says he was the subject of antisemitic and threatening posts on Reddit surrounding the markets incident.

“I want to make clear at the outset that Melvin Capital played absolutely no role in those trading platforms’ decisions,” said Plotkin. “In fact, Melvin closed out all of its positions in GameStop days before platforms put those limitations in place.”

Citadel owner Ken Griffin: we had ‘no role’ in Robinhood’s decision to restrict certain stocks

Ken Griffin is the billionaire owner of hedge fund Citadel and high-speed trading firm Citadel Securities, which works with Robinhood.

He said in testimony on Thursday that the firm provided securities to meet investors’ needs during the unprecedented surge of trading of GameStop stocks, but had “no role” in the decision made by Robinhood to restrict trading of those stocks.

The incident “reflects the competence of our firm’s ability to deliver in all market conditions”, he said.

Opening statements: Robinhood, Citadel, and Melvin Capital CEOs

We are off running with some opening statements from the biggest players in the Reddit-fueled stock market meltdown.

First, Robinhood CEO Vlad Tenev spoke about how he came to found Robinhood, talking of his childhood in Bulgaria, where the financial system was “on the verge of collapse”. Tenev said he wanted to give more people access to financial systems.

“We created Robin Hood to economically empower all Americans by opening mutual markets to them,” he said.

He referenced just how much money has been created by Robinhood investments, saying “the total value of our customers’ assets on Robinhood exceeds the net amount of money they have deposited with us, over $35bn”.

Next, Citadel CEO Kenneth Griffin and Melvin Capital CEO Gabriel Plotkin will speak.