Lawmakers grilled Robinhood CEO Vlad Tenev for greater than 5 hours Thursday over the web brokerage agency’s position in frenzied shopping for final month of GameStop shares and different overwhelmed down shares. Although Tenev apologized for his firm’s resolution to limit buying and selling within the online game retailer and different high-flying shares, he additionally defended its enterprise mannequin as one which advantages common buyers.

Tenev was joined by two hedge fund managers, Citadel CEO Kenneth Griffin and Melvin Capital CEO Gabriel Plotkin, in addition to Reddit CEO Steve Huffman, Reddit investor Keith Gill and the Cato Institute’s Jennifer Schulp. Together, the group confronted questions concerning the intersection of social media, hedge funds and small buyers that use Robinhood. The wild volatility in GameStop’s inventory — which soared almost 3,000% in January — has sparked criticism from lawmakers about Robinhood’s enterprise practices and its hyperlinks to Wall Street. While Robinhood touts free buying and selling to small buyers, it makes its cash by routing orders to market makers together with Citadel Securities. Tenev mentioned that the corporate receives greater than 50% of its earnings from such transactions. 
“I’m sorry for what occurred,” Tenev mentioned, including that the corporate is reviewing its processes. “I apologize. I’m not going to say Robinhood did every little thing good and we did not make errors prior to now.”GameStop shares soared final month as bizarre buyers, fueled by Reddit’s WallStreetBets message board, piled into the inventory. Face with what Robhinhood mentioned was a necessity to boost extra capital to satisfy clearinghouse necessities, Robinhood halted buying and selling in GameStop and different shares. That sparked a backlash amongst prospects, questions from lawmakers and a variety of lawsuits.
The information are vital. @FSCDems are working to unravel what occurred in late January with #GameStop inventory and different shares. Watch the listening to right here: 📺 https://t.co/GtDsNGl8c2 pic.twitter.com/wz8OPHiyhT— U.S. House Committee on Financial Services (@FSCDems) February 18, 2021

Robinhood, which gives free buying and selling to 13 million buyers, promised to “democratize finance.” But critics say its enterprise mannequin has an inherent battle as a result of Robinhood generates income by promoting prospects’ inventory orders to bigger buying and selling companies, together with market makers like Citadel Securities, whose founder Ken Griffin additionally testified within the listening to. (Griffin is the CEO of Citadel, a hedge fund, and in addition the founding father of market maker Citadel Securities, which is a separate enterprise and to which Robinhood and different companies route their trades.)

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Tenev denied that his firm was pressured by hedge funds to halt buying and selling in GameStop. He added that the buying and selling halt was because of his firm’s want to boost extra capital because of clearinghouse necessities. Robinhood raised $3.4 billion from buyers over 4 days with a view to meet elevated capital necessities.”We do not reply to hedge funds,” Tenev instructed lawmakers. Asked if he was pressured by hedge funds as GameStop’s inventory soared to halt buying and selling, Tenev mentioned, “Zero in any respect.”Tenev additionally confronted questions from Rep. Emmanuel Cleaver, Democrat of Missouri, concerning the demise of Alex Kearns, a 20-year-old Robinhood buyer who killed himself final yr after mistakenly believing he’d misplaced almost $750,000 in a dangerous commerce.”It was a tragedy, and we went into quick motion to ensure that we made not simply probably the most accessible options-trading product for our prospects, however the most secure as nicely,” Tenev mentioned. 

After Kearns’ demise, Robinhood clarified how the app shows a buyer’s shopping for energy, added phone-based assist for individuals who commerce utilizing choices and took different measures to enhance the platform, Tenev mentioned. Sparks flyMaloney famous that the Robinhood’s January 28 weblog submit blamed market volatility for its resolution to halt buying and selling in GameStop and different shares, with out mentioning the necessity to elevate further funds because of capital necessities. Tenev mentioned the corporate “might be reviewing every little thing about this.””The $3.4 billion we raised goes a good distance from pushing the agency from future volatility and different black swan occasions,” Tenev mentioned.Rep. Brad Sherman pressed Griffin on whether or not market makers like Citadel Securities which have a business relationship with Robinhood have an unfair benefit over common buyers in how their trades are dealt with. As Griffin sought to reply, the California Democrat repeatedly interrupted, accusing him of making an attempt to evade the query.”Don’t inform me there are different elements concerned and take us down one other highway,” a visibly irritated Sherman mentioned. “I’m asking you a transparent query … Who will get the higher deal — one [trade] that comes from a dealer who’s being paid for order movement, and one not? Can you testify that, on stability, there is not any distinction, assuming the identical dimension of the order?”Sherman then reduce Griffin off earlier than he had an opportunity to totally handle the query, saying: “You are doing a fantastic job of losing my time. If you are going to filibuster, it is best to run for the Senate.”Rep. Rashida Tlaib, a Michigan Democrat and outspoken critic of Wall Street, mentioned lawmakers take into account a small tax on securities buying and selling. Advocates of a so-called monetary transactions tax say it will dampen reckless hypothesis whereas elevating billions of {dollars} in authorities income.

“We firmly imagine {that a} transaction tax will injure Americans hoping to avoid wasting for his or her retirement,” Griffin mentioned.”Political theater”?Lawmakers additionally focused the listening to itself, with Rep. Bill Huizenga, a Republican from Michigan, decrying it as “political theater.” But some lawmakers pushed again in opposition to that characterization, together with Waters and Rep. Juan Vargas of California, a Democrat. The character of Robin Hood, a legend from folklore, “was presupposed to steal from the wealthy and provides to the poor, and right here you nearly have the alternative, the place you steal from the small retail investor and provides it to the massive institutional investor,” Vargas mentioned, including that he believes this defined the curiosity within the the GameStop saga. Payment for order movementLawmakers delved into the problem of “cost for order movement,” or when Robinhood steers its prospects’ inventory orders to bigger buying and selling companies like Citadel Securities that execute the transaction. In flip, Citadel Securities and different large companies pay Robinhood for sending the trades to them. Both Robinhood’s Tenev and Griffin defended the observe, noting that it’s authorized and accredited by the SEC. But whereas it the observe is authorized, it could be a observe that raises conflicts for Robinhood, provided that it makes its cash from massive buying and selling companies that may have completely different targets than small retail buyers. Robinhood’s Tenev mentioned the corporate discloses the observe “in a number of locations” to its prospects. Tenev and Griffin famous that the observe has allowed corporations like Robinhood to supply commission-free buying and selling to small buyers. Tenev famous that cost for order movement supplies his agency’s largest income.

“We merely play by the principles,” Griffin mentioned. “Payment for order movement has been accredited by the SEC. It is customary observe. I do imagine it has been an vital pressure for innovation within the trade.”Reddit and social mediaThe position of Reddit and social media was questioned, given the position of the WallStreetBets message board in selling GameStop and different high-flying shares. Tenev mentioned his agency does not monitor social media, whereas Reddit CEO Huffman famous that his firm does not require individuals to reveal their identities. “They can select to disclose as a lot or as little as they like,” Huffman mentioned. That query of identification got here to the forefront with investor Keith Gill, a Redditor who goes by the title of “Roaring Kitty” and in addition appeared on the listening to, after he was sued earlier this week for securities fraud. The lawsuit accused him of misrepresenting himself as an newbie investor when the lawsuit claims he’s a licensed securities skilled.Gill, who is understood for his cat-themed T-shirts and a vivid crimson runner’s headband in broadly adopted movies, modified out his apparel for a jacket and tie — though the headscarf may very well be seen hanging on poster of a kitten with the phrases “Hang in There.”

Gill, also referred to as “Roaring Kitty,” testified about his position as an investor in GameStop. Gill, who usually wears shirts adorned with cats, testified with a poster of a kitten and the phrases “Hang in There” behind him. 

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Gill portrayed himself as a person investor who did his legwork on GameStop. He additionally promoted GameStop in the course of the listening to, saying, “I do discover it is a gorgeous funding at this worth level.”GameStop shares, which peaked at $483 in late January, fell 11% on Thursday to shut at $40.69. The retailer’s market worth has fallen roughly $32 billion for the reason that firm’s shares soared final month.

Additional regulation?In opening remarks, lawmakers on the committee mentioned the listening to is a chance to be taught extra concerning the connection between Robinhood, hedge funds and small buyers. Some Democrats recommended that further regulation could also be wanted to guard small buyers, whereas Rep. Patrick McHenry of North Carolina, a Republican, pushed again in opposition to the notion.”If you’re rich, you’re good to go,” McHenry mentioned. “And for those who aren’t, you are too dumb to be trusted with your personal cash.” He added, “It is simpler to purchase a lottery ticket than spend money on Google.”But some Wall Street analysts are skeptical that any regulatory adjustments will emerge from the listening to.”This won’t be a substantive dialog or debate. Equity market construction is advanced,” Jaret Seiberg of Cowen Washington Research Group, instructed buyers in a report. “The overwhelming majority of Congress have little understanding of the inside working of the market.”