Robinhood, the trading app at the center of the retail trading frenzy that rocked the stock market last month, found itself on the defensive Thursday as lawmakers trained their focus on its business model and decision-making in the first congressional hearing examining those events.
Vlad Tenev, the company’s co-founder and CEO, apologized for Robinhood’s performance, including its move to restrict trading in stock of GameStop and other largely overlooked companies targeted by amateur traders organizing on social media. The decision, and similar ones by other online brokers, caught the investors off guard, drew a rash of lawsuits and provoked outrage from lawmakers in both parties.
Tenev said the company has already made improvements aimed at preventing a repeat and pledged further changes.
“I’m sorry for what happened. I apologize,” he said. “And I’m not going to say that Robinhood did everything perfect and that we haven’t made mistakes in the past.”
The wide-ranging hearing stretched over five hours and also featured testimony from Citadel CEO Ken Griffin, Melvin Capital CEO Gabriel Plotkin, Reddit co-founder Steve Huffman and Keith Gill, the trader known as “Roaring Kitty” on YouTube who helped set off the stock frenzy.
Lawmakers touched on everything from a Robinhood competitor’s Chinese ties to whether the practice of short-selling should face new federal regulation.
Yet Tenev and his company absorbed most of the heat. On top of criticizing Robinhood’s response to the trading mania, lawmakers questioned the executive about selling users’ trades to market-making firms such as Citadel Securities to execute, a practice known as payment for order flow.
Rep. Cindy Axne (D-Iowa) was among those who called the arrangement a conflict of interest that disadvantages the users Robinhood says it exists to empower. The app’s users “aren’t your customers, they’re your product,” she said. “Your customer is sitting right next to you,” indicating Griffin, though the hearing was conducted remotely.
Tenev acknowledged Robinhood generates the majority of its revenue from the deals but disputed Axne’s characterization, arguing its business model “has become the industry standard for a reason. It’s because it’s good for customers,” and allows them to trade for free.
Others questioned Tenev on whether the trades are actually free. Rep. Alexandria Ocasio Cortez (D-N.Y.), a leading critic of Robinhood’s role in the GameStop trading, suggested the claim was disingenuous. “If removing the revenues that you make from a payment for order flow would cause the removal of free commissions,” Ocasio-Cortez asked Tenev, “doesn’t that mean that trading on Robinhood isn’t actually free to begin with because you’re just hiding the costs?”Default Mono Sans Mono Serif Sans Serif Comic Fancy Small CapsDefault X-Small Small Medium Large X-Large XX-LargeDefault Outline Dark Outline Light Outline Dark Bold Outline Light Bold Shadow Dark Shadow Light Shadow Dark Bold Shadow Light BoldDefault Black Silver Gray White Maroon Red Purple Fuchsia Green Lime Olive Yellow Navy Blue Teal Aqua OrangeDefault 100% 75% 50% 25% 0%Default Black Silver Gray White Maroon Red Purple Fuchsia Green Lime Olive Yellow Navy Blue Teal Aqua OrangeDefault 100% 75% 50% 25% 0%AOC criticizes Robinhood’s track record at GameStop hearingOn Feb. 18, Rep. Alexandria Ocasio-Cortez (D-N.Y.), a leading critic of Robinhood’s role in the GameStop trading, pressed Vlad Tenev on his business model. (The Washington Post)
Meanwhile, Rep. Jim Himes (D-Conn.), a former Goldman Sachs vice president, pressed Tenev to reveal the aggregate return Robinhood investors have seen on their investments — to allow a comparison, say, with the return from investing in the S&P 500. Tenev declined, and also said he didn’t know whether those trading in GameStop through the app so far have ultimately come out ahead or behind.
The spirited and contentious GameStop hearing seemed to freeze in time when Rep. Emanuel Cleaver II (D-Mo.) asked Tenev about the death of a 20-year-old customer last year.
Alex Kearns died by suicide last summer, after his Robinhood brokerage account appeared to show a negative balance of about $730,000. At the time, the company had emailed him demanding “immediate action” in the form of a deposit of more than $178,000, according to a wrongful-death lawsuit filed earlier this month.
But the sophomore at the University of Nebraska actually did not owe any money at all, according to the lawsuit. The massive losses displayed on his account may have simply indicated that only one side of his options transaction had been processed, the lawsuit states.
“First of all, I’m sorry to the family of Mr. Kearns for your loss,” Vladimir Tenev said at the hearing, in response to Cleaver’s question. “The passing of Mr. Kearns was deeply troubling to me and to the entire company. And we have vowed to take a series of steps, very aggressive steps to make our options products safer for our customers.”
Kearns had repeatedly contacted Robinhood’s customer support team, thinking that he was facing an enormous loss. His family contends that Robinhood’s “misleading communications” contributed to his death.
Tenev said Robinhood has made several improvements to the service following Kearns’s death, including adding the ability to instantly exercise options in the app, clarifying the display of a user’s buying power, and adding a live phone-based customer support for “acute” options cases.
As members of Congress interviewed the key players in the GameStop saga, Reddit users on the investing forum WallStreetBets published live commentary, cheering on Gill, who has become a folk hero in online trading communities.
“Today, the whole world shall know his name,” stated one trending post praising Gill, which went on to use an offensive term for people with developmental disorders that forum users affectionately call themselves.
Much of the commentary seized on the surreal nature of the hearings in which the heroes, villains, crass inside jokes and self-deprecating memes of a once-niche community have exploded into the mainstream, attracting the gaze of congressional scrutiny.
“This hearing is putting us on the map! New hype baby!” one user said, highlighting the excitement of seeing one’s own subculture reflected through the prism of national media.
The forum also provided a platform for users to lash out at their perceived villains, including Tenev, who drew criticism from users who thought he was not directly addressing the questions of lawmakers.
GameStop shares finished the day down 11 percent, setting a new low for the month and continuing a U-turn from astronomical heights in January. The stock is now down 88 percent since then. While the stock briefly surged at the beginning of the hearing following the opening testimony of Keith Gill, who defended his bullish case for the video game retailer, GameStop shares slumped to $40.69 at the closing bell.
Tenev shared the hot seat with some of his fellow witnesses. Citadel founder Ken Griffith also faced some tough questioning, including from Rep. Brad Sherman (D-Calif.), who chairs the panel’s subcommittee overseeing Wall Street.Rep. Sherman clashes with Citadel founder at GameStop hearingRep. Brad Sherman (D-Calif.) and Kenneth Griffin, CEO of Citadel, argued during a House Committee on Financial Services hearing on Feb. 18. (The Washington Post)
Sherman lost his patience with the billionaire hedge fund executive during an exchange about the business model of “free” online trading apps. He was asking about whether Robinhood’s users ended up paying a hidden fee because of the way Citadel Securities prioritizes some trades over others. According to “everyone I’ve talked to in this industry,” Sherman said, Citadel does not find the best prices, or “execution,” for trades it processes on behalf of free online brokerages.
Citadel imposed this hidden fee, Sherman alleged, because Citadel has to pay Robinhood for stock trades. “You’re not making as much on the transaction,” Sherman said. In his response, Griffin confirmed that “the execution varies by the channel of the order.” He compared this to a large bank such as JP Morgan charging different interest rates to different types of customers.
It’s not clear what legislative response, if any, the panel will mount. Waters said the hearing would be the first in a series into the recent market volatility. She told The Washington Post earlier this month her primary aim Thursday would be fact-finding and said lawmakers “have a long way to go” before considering potential new laws.
But the stakes are high. Attorneys in the Justice Department’s criminal division have launched a wide-ranging investigation into potential market manipulation in the trading frenzy and recently issued a subpoena to Robinhood as part of that, a person familiar with the matter said. The investigation appears to be in its early stages, and the Securities and Exchange Commission is conducting its own probe.
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