[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
GAME STOPPED? WHO WINS AND LOSES
WHEN SHORT SELLERS, SOCIAL MEDIA,
AND RETAIL INVESTORS COLLIDE
=======================================================================
VIRTUAL HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 18, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-3
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
43-966 PDF WASHINGTON : 2022
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
February 18, 2021............................................ 1
Appendix:
February 18, 2021............................................ 93
WITNESSES
Thursday, February 18, 2021
Gill, Keith Patrick, GameStop Investor........................... 13
Griffin, Kenneth C., Chief Executive Officer, Citadel LLC........ 8
Huffman, Steve, Chief Executive Officer and Co-Founder, Reddit,
Inc............................................................ 11
Plotkin, Gabriel, Chief Executive Officer, Melvin Capital
Management LP.................................................. 9
Schulp, Jennifer J., Director, Financial Regulation Studies, Cato
Institute...................................................... 14
Tenev, Vladimir, Chief Executive Officer, Robinhood Markets, Inc. 6
APPENDIX
Prepared statements:
Gill, Keith Patrick.......................................... 94
Griffin, Kenneth C........................................... 99
Huffman, Steve............................................... 102
Plotkin, Gabriel............................................. 105
Schulp, Jennifer J........................................... 108
Tenev, Vladimir.............................................. 114
Additional Material Submitted for the Record
Budd, Hon. Ted:
Business Insider article by Jennifer J. Schulp entitled,
``Retail Investors are Revolutionizing the Stock Market. So
Stop Calling Them `Dumb Money.''', dated December 19, 2020. 127
Casten, Hon. Sean:
CNBC article entitled, ``Here's how Robinhood is raking in
record cash on customer trades despite making it free'',
dated August 13, 2020...................................... 130
Davidson, Hon. Warren:
Keynote speech of Vice Chancellor J. Travis Laster before the
Council of Institutional Investors, dated September 29,
2016....................................................... 138
Hill, Hon. French:
Written statement of the American Securities Association
(ASA)...................................................... 162
McHenry, Hon. Patrick:
Written statement of the Depository Trust & Clearing
Corporation (DTCC)......................................... 167
Written statement of the Security Traders Association (STA).. 173
Griffin, Kenneth C.:
Written responses to questions for the record from Chairwoman
Waters..................................................... 186
Written responses to questions for the record from
Representative Beatty...................................... 179
Written responses to questions for the record from
Representative Green....................................... 180
Written responses to questions for the record from
Representative Lynch....................................... 184
Written responses to questions for the record from
Representative Sherman..................................... 185
Plotkin, Gabriel:
Written responses to questions for the record from
Representative Beatty...................................... 193
Written responses to questions for the record from
Representative Sherman..................................... 193
Schulp, Jennifer J.:
Written responses to questions for the record from
Representative Roger Williams.............................. 194
*Tenev, Vladimir:
Written responses to questions for the record from Chairwoman
Waters..................................................... 196
Written responses to questions for the record from
Representative Beatty...................................... 213
Written responses to questions for the record from
Representative Sherman..................................... 217
Written responses to questions for the record from
Representative Steil....................................... 221
Written responses to questions for the record from
Representative Roger Williams.............................. 223
*Additional information provided by Robinhood is contained in
Committee files.
GAME STOPPED? WHO WINS AND LOSES
WHEN SHORT SELLERS, SOCIAL MEDIA,
AND RETAIL INVESTORS COLLIDE
----------
Thursday, February 18, 2021
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12:01 p.m., via
Webex, Hon. Maxine Waters [chairwoman of the committee]
presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Meeks, Scott, Green, Cleaver, Perlmutter,
Himes, Foster, Beatty, Vargas, Gottheimer, Gonzalez of Texas,
Lawson, San Nicolas, Axne, Casten, Torres, Lynch, Adams, Tlaib,
Dean, Ocasio-Cortez, Garcia of Illinois, Garcia of Texas,
Auchincloss; McHenry, Lucas, Luetkemeyer, Wagner, Huizenga,
Stivers, Barr, Hill, Emmer, Zeldin, Loudermilk, Mooney,
Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose,
Steil, Timmons, and Taylor.
Chairwoman Waters. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair. This will
minimize disturbances while Members are asking questions of our
witnesses. The staff has been instructed not to mute Members,
except when a Member is not being recognized by the Chair and
there is inadvertent background noise.
Members are also reminded that they may only participate in
one remote proceeding at a time. If you are participating
today, please keep your camera on. And if you choose to attend
a different remote proceeding, please turn your camera off.
Today, we will make an exception and allow Members from
Texas to participate without their video function if they are
experiencing power outages which prevent them from having a
working video.
If Members wish to be recognized during the hearing, please
identify yourself by name to facilitate recognition by the
Chair. I would also ask that Members be patient as the Chair
proceeds, given the nature of conducting committee business
virtually.
Today's hearing is entitled, ``Game Stopped? Who Wins and
Loses When Short Sellers, Social Media, and Retail Investors
Collide.''
I now recognize myself for 3 minutes to give an opening
statement.
Good afternoon, everyone. This hearing is the first in a
series of hearings for the committee to examine the recent
market volatility involving GameStop and other stocks. I want
to know how each of the witnesses here today and the companies
they represent contributed to the historic trading events in
January.
This recent market volatility has put a national spotlight
on institutional practices by Wall Street firms and prompted
discussion about the evolving roles of technology and social
media in our markets. These events have illuminated potential
conflicts of interest and the predatory ways that certain funds
operate, and they have demonstrated the enormous potential
power of social media in our markets.
They've also raised issues involving gamification of
trading, potential harm to retail investors, and the business
models of apps with retail investors as their users.
All of this is why we have witnesses from many of the key
players here to testify today, including witnesses representing
Wall Street firms, Melvin Capital and Citadel; social media
company, Reddit; and trading app, Robinhood; as well as one of
the retail investors involved.
In subsequent hearings, we will hear from regulators and
other experts regarding these events, including why Dodd-Frank
Act rulemakings related to short selling disclosures were never
implemented.
Many Americans feel that the system is stacked against
them, and that no matter what, Wall Street always wins. In this
instance, many retail investors appeared motivated by a desire
to beat Wall Street at its own game.
And given the losses that many retail investors have
sustained as a result of volatility in the system, there are
many whose belief that the system is rigged against them has
been reinforced.
Others have noted that there are winners and there are
losers in every trade in our financial markets.
Our role, as the Financial Services Committee, is to ensure
fairness in our financial markets and systems, robust
protections for investors, and accountability for Wall Street.
Today, we will hear firsthand from the witnesses regarding
these events. The hearing will be an opportunity for this
committee to get the facts about the role each of the entities
the witnesses represent played in the events we are examining
today.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
And let me just begin by saying, I believe Americans are
far more sophisticated, informed, and capable than people in
D.C. give them credit for.
When I called for this hearing last month, I wanted this to
be a fact-finding mission. We have speculation, we have
headlines and finger pointing, but we don't have the facts. We
need facts, not just the salacious bits or nasty comments on
Reddit. And, look, there's plenty of that. We need the facts
today.
Now, some on the left are already floating new restrictions
or things to, ``protect,'' these so-called uninformed retail
investors whom, in their eyes, don't know the difference
between a dogecoin and a Dow Jones without Congress telling
them.
I think if we've learned anything from the past few weeks,
it's that these average, everyday investors are pretty darn
sophisticated. There is wisdom in the crowd.
So, let's zoom out on that idea just for a moment. The
GameStop story represents a larger truth: A fundamental change
is happening. Like never before, everyday investors can
communicate, access more information, and work collectively to
move markets--all in real time.
Technology is fueling this revolution. Congress cannot put
technology back in the box. GameStop is a culmination of years
of pent-up frustration. That frustration is now paired with
faster, cheaper, and better technology.
Consider for a moment that for every story of someone being
able to pay off their student debt from the GameStop trade, or
conversely, every story of somebody who lost money, there were
stories of those who said they were investing in protest. They
would gladly risk losing money just to prove a point.
And while no one should ever risk investing money that they
cannot afford to lose, let's tell the truth of why someone
would do something like that. The sad truth is the K-shaped
economy is nothing new in our capital markets because the
structural core of our regulations literally enshrined
inequity.
Policies, like the, ``accredited investor,'' definition,
blatantly pick winners and losers. If you're wealthy, you're
good to go. And if you're not, you're deemed too dumb to be
trusted with your own money. So, a privileged few get to invest
alongside Ivy League endowments, getting early access in
private markets to the greatest returns of the last 2
generations.
But not so fast for the average, everyday investor. In the
eyes of our government, you need to be protected, protected
from your own decisions, protected from your own money, and
protected from more opportunities.
So, you're left with a savings account which pays no
interest. And if you need more money than that, well, we
created a world where it's easier to go buy a lottery ticket
than it is to invest in the next Google.
Is it any wonder why the unhealthy dynamics of GameStop
happened?
It's time we get serious about equity and ownership in the
American economy. We should live in a world where the
construction worker or Uber driver trading on Robinhood has the
same access to equity shares in Robinhood itself as the white-
collar employees who work there. The same goes for Reddit and
Reddit users, by the way. Both contributed to its success. Why
can't both share in its future success?
I'll conclude with a reminder for some of my colleagues who
want to regulate more and more. In the 1980s, Massachusetts
State regulators barred citizens from investing in what The
Wall Street Journal called, ``the latest in a cascade of stocks
of high-technology companies,'' that occurred that year. What
IPO was too risky in the eyes of the government? Apple.
So instead of shutting the American public out through new
regulations, new forms of taxation, or so-called protections,
let's use this opportunity instead to side with them.
I'll begin where I started: Americans are far more
sophisticated, informed, and capable than folks in D.C. give
them credit for, and it's time our securities laws treat them
that way.
I look forward to the hearing, and I yield back.
Chairwoman Waters. Thank you so very much.
I'm so pleased that you're cooperating today, and you were
able to join with us when we called for this hearing.
I want to welcome today's witnesses to the committee.
Vladimir Tenev is the chief executive officer of Robinhood
Markets, Inc., a company with a trading app that after
increased trading activity in GameStop and certain other
stocks, restricted trading of those stocks for a period of
time.
Kenneth C. Griffin is the chief executive officer of
Citadel LLC, a firm which is one of Robinhood's main customers
and sources of revenue, and which also provided financial
support to Melvin Capital Management LP, when Melvin faced
significant losses over GameStop and other trades.
Gabriel Plotkin is the chief executive officer of Melvin
Capital Management LP, which held a significant short position
in GameStop and other stocks and experienced significant losses
due to its positions.
Steve Huffman is the chief executive officer and co-founder
of Reddit, Inc., a social media platform which is home to the
subreddit WallStreetBets, where retail investors discuss
trading and where a large number of members discussed the
purchase of GameStop and other stocks which experienced
volatility.
Keith Gill is a retail investor who posted on Reddit and
YouTube regarding investing in GameStop and other stocks.
Jennifer Schulp is the director of financial regulation
studies at the Cato Institute.
Each of you will have 5 minutes to summarize your
testimony.
And without objection, your written statements will be made
a part of the record.
Mr. Sherman. Madam Chairwoman? Brad Sherman here. I believe
that there were only 3 minutes of Democratic opening statements
with the idea that the subcommittee chair on the Democratic
side would be called as well. That's what I was told by your
staff.
Chairwoman Waters. Thank you very much. If that is the
order that has been organized, I will cease my introductions,
and I will call on you, Mr. Sherman, to please go ahead and
make an opening statement. Thank you.
Mr. Sherman. Thank you so much.
Back in the day, the law school professor would create an
exam where he weaved together a story that would exemplify each
of the issues in that area of the law. But never did the
professor do as good a job as the GameStop saga, which
identifies most of the issues facing our capital markets.
Short selling: should there be limits or required
additional disclosures?
What do we do with market participants, whether they be on
Reddit or on Wall Street, who are shorting a stock or buying a
stock for the purpose of influencing its price?
What is this payment for order flow model?
And what does it mean when some participants get best
execution and some get enhanced best executions and price-
enhanced best execution?
And are all traders being treated fairly and is payment for
order flow free to the consumer?
We need to look at the plumbing where it takes 2 days to
settle a transaction, but also why is it the broker's capital
rather than the customer's capital that is posted during the 2-
day period?
And finally, we need to look at the gamification and
glorification of high-frequency trading.
I thank the chairwoman for the time. And I hope that in the
months to come, we will have several hearings to explore these
issues and that we're able to pass legislation this year to
deal with each of them.
And I yield back.
Chairwoman Waters. Thank you.
The Chair now recognizes the gentleman from Texas, Mr.
Green, who is also the Chair of our Subcommittee on Oversight
and Investigations, for 1 minute.
Mr. Green. Thank you very much, Madam Chairwoman. I greatly
appreciate the opportunity to express some concerns that I
have.
It is a fact that Citadel Securities has paid over $100
million in penalties. And my concern is this: It deals with
whether we can allow a market maker's profit from misleading
clients and improperly trading ahead of clients to become
something as simple as the cost of doing business. The risk of
punishment for violations must always exceed the rewards to
deter the risk.
I'm concerned, and my hope is that we'll get some
additional intelligence on how these punishments have impacted
the rewards that have been received.
I yield back.
Chairwoman Waters. Thank you very much.
And I will go back to the introduction of our witnesses. I
left off with Jennifer Schulp, the director of financial
regulation studies at the Cato Institute.
Each of the witnesses will have 5 minutes to summarize your
testimony. You should be able to see a timer on your screen
that will indicate how much time you have left, and a chime
will go off at the end of your time. I would ask you to be
mindful of the timer and quickly wrap up your testimony if you
hear the chime.
And without objection, your written statements will be made
a part of the record.
Now, before we begin with your oral testimonies, I would
like to swear in the witnesses. I will call each of your names
individually to respond.
Would you please raise your hands?
Do you solemnly swear to affirm that the testimony you will
give for this committee in the matters now under consideration
will be the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Tenev?
Mr. Tenev. I do.
Chairwoman Waters. Mr. Griffin?
Mr. Griffin. I do.
Chairwoman Waters. Mr. Plotkin?
Mr. Plotkin. I do.
Chairwoman Waters. Mr. Huffman?
Mr. Huffman. I do.
Chairwoman Waters. Mr. Gill?
Mr. Gill. I do.
Chairwoman Waters. Ms. Schulp?
Ms. Schulp. I do.
Chairwoman Waters. Thank you very much.
Let the record show that all of the witnesses have answered
in the affirmative. We will now begin with their oral
testimony.
Mr. Tenev, you are now recognized for 5 minutes to present
your oral testimony.
TESTIMONY OF VLADIMIR TENEV, CHIEF EXECUTIVE OFFICER, ROBINHOOD
MARKETS, INC.
Mr. Tenev. Chairwoman Waters, Ranking Member McHenry,
members of the committee, my name is Vlad Tenev and I'm the
chief executive officer and co-founder of Robinhood. Thank you
for the invitation to speak about Robinhood and the millions of
people we serve.
Almost 8 years ago, Baiju Bhatt and I founded Robinhood. We
believed then, as we do now, that the financial system should
be built to work for everyone, not just a select few. We
dreamed of making investing more accessible, especially for
people without a lot of money. The stock market is a powerful
wealth creator in which more than half of U.S. households
participate.
Chairwoman Waters. Mr. Tenev, I would like you to use your
limited time to talk directly to what happened on January 28th
and your involvement in it.
Mr. Tenev. Certainly.
Mr. McHenry. Madam Chairwoman, the witness has the
opportunity to give their own testimony.
Chairwoman Waters. Excuse me. You are not recognized.
Mr. McHenry. [inaudible]--time for your questioning.
Chairwoman Waters. You are not recognized.
Mr. Tenev, please go right ahead and speak directly to the
question.
Mr. Tenev. We created Robinhood to economically empower all
Americans by opening financial markets to them.
I was born in Bulgaria, a country with a financial system
that was on the verge of collapse. At the age of 5, I
immigrated with my family to America in search of a better
life. I have benefited from all that America has to offer, and
Robinhood's mission to democratize finance for all has a very
special significance for me.
Robinhood's platform allows people from all backgrounds to
invest with no account minimums and zero commissions. Contrary
to some very misleading and highly uninformed reports, we see
evidence that most of our customers are investing for the long
term. With features like fractional shares, dividend
reinvestment, and recurring investments, our customers can
start with small amounts and grow their investments in blue
chip stocks and exchange-traded funds (ETFs) over time.
We've always recognized the responsibility that comes with
helping people invest. We'll continue to enhance our
educational platform to help customers no matter where they are
in their financial journey. Hundreds of free educational
resources are available to everyone on our Learn website right
now.
While markets fluctuate, the total value of our customers'
assets on Robinhood exceeds the net amount of money they have
deposited with us by over $35 billion. This tells me that our
business model is working for everyday Americans, the Robinhood
community. Many people say that Robinhood has helped them to
pay car loans, reduce student loan debt, meet daily bills, and
save for the future, and we're proud to serve them.
You've invited me today to discuss the events of last
month, and I welcome this opportunity.
In late January, many brokerage firms saw a massive
increase in trading activity in a handful of stocks. Prices
were moving dramatically day to day, even hour to hour.
One specific day, January 28th, proved to be a completely
unprecedented event. The spike in trading activity and
volatility meant that Robinhood Securities, our clearing
broker, had to hold the line and post additional firm capital
as collateral to support our clearinghouse deposit demands.
To put it in perspective, on January 28th, our daily
deposit requirement was 10 times more than on January 25th.
As a result, Robinhood Securities, along with many other
firms, imposed temporary trading restrictions on certain
securities. We began allowing limited buys of these securities
the following day, and we have since lifted the restrictions
entirely.
There are two points I want to make clear about these
temporary restrictions.
First, Robinhood Securities put the restrictions in place
in an effort to meet increased regulatory deposit requirements,
not to help hedge funds. We don't answer to hedge funds. We
serve the millions of small investors who use our platform
every day to invest.
Second, Robinhood immediately secured additional funds.
Altogether, through capital raising and other measures, we've
increased our liquidity by more than $3 billion to cushion
ourselves against increased collateral requirements and related
market stress in the future.
Despite the unprecedented market conditions in January, at
the end of the day, what happened is unacceptable to us. To our
customers, I'm sorry, and I apologize. Please know that we are
doing everything we can to make sure this won't happen again.
And I want to highlight one more thing. The existing 2-day
period to settle trades exposes investors and the industry to
unnecessary risk. There is no reason why the greatest financial
system in the world cannot settle trades in real time.
I believe we can and should act now to deploy our
intellectual capital and our engineering resources to move to
real-time settlement. Together, we can solve this.
Before I close, I want to sincerely thank the millions of
customers who continue to use Robinhood to access the markets
every day. We are grateful and committed to you.
Members of the committee, I appreciate the opportunity to
answer your questions.
[The prepared statement of Mr. Tenev can be found on page
114 of the appendix.]
Chairwoman Waters. Mr. Griffin, you are now recognized for
5 minutes to present your oral testimony.
TESTIMONY OF KENNETH C. GRIFFIN, CHIEF EXECUTIVE OFFICER,
CITADEL LLC
Mr. Griffin. Chairwoman Waters, Ranking Member McHenry, and
distinguished members of the committee, thank you for the
opportunity to testify today on the recent market events.
The U.S. capital markets are the envy of the world. Our
nation's ability to allocate capital to its best and highest
use creates jobs, drives innovation, and fuels our economy.
America's retail investors play an important role in our
capital markets.
According to Gallup, about 55 percent of Americans own
stock right now. Citadel Securities, as the largest market
maker in the U.S. equities market, executes more trades on
behalf of retail investors than any other firm.
As I will discuss shortly, Citadel Securities played an
important role in meeting the needs of retail investors during
the week of January 24th.
Before doing so, I want to be perfectly clear: We had no
role in Robinhood's decision to limit trading in GameStop or
any of the other, ``meme,'' stocks. I first learned of
Robinhood's trading restrictions only after they were publicly
announced. All of us at Citadel Securities are committed to the
healthy functioning of the U.S. equities markets.
I first participated in the financial markets as a retail
investor. In the late 1980s, while attending college, I traded
stocks and options from my dorm room.
My passion for investing led to my founding of Citadel in
1990. Today, Citadel is one of the world's leading alternative
investment managers. Our capital partners include pension
plans, colleges, hospitals, foundations, and research
institutions.
In 2002, my partners and I founded Citadel Securities.
Today, Citadel Securities is one of the world's preeminent
market makers. We've been a leader in using technology to
transform our markets, particularly for retail investors.
Citadel Securities invests hundreds of millions of dollars each
year to serve the needs of our customers.
In the last week of January, the importance of this
investment was on full display. During the period of frenzied
retail equities trading, Citadel Securities was able to provide
continuous liquidity every minute of every trading day.
When others were unable or unwilling to handle the heavy
volumes, Citadel Securities was there. On Wednesday, January
27th, we executed 7.4 billion shares on behalf of retail
investors.
To put this into perspective, on that day, Citadel
Securities executed more shares for retail investors than the
entire average daily volume of the entire U.S. equities market
in 2019. The magnitude of the orders routed to Citadel
Securities reflects the confidence of the retail brokerage
community in our firm's ability to deliver in all market
conditions and underscores the critical importance of our
resilient and stable systems.
I could not be more proud of our team at Citadel
Securities--my colleagues who were committed to ensuring that
the interests of America's retail investors were preserved
during this extraordinary period.
Once again, I appreciate the opportunity to appear today,
and I look forward to answering your questions.
[The prepared statement of Mr. Griffin can be found on page
99 of the appendix.]
Chairwoman Waters. Thank you, Mr. Griffin.
Mr. Plotkin, you are now recognized for 5 minutes to
present your oral testimony.
TESTIMONY OF GABRIEL PLOTKIN, CHIEF EXECUTIVE OFFICER, MELVIN
CAPITAL MANAGEMENT LP
Mr. Plotkin. Chairwoman Waters, Ranking Member McHenry,
members of the committee, I would like to thank you for this
opportunity to share Melvin Capital's perspective on the recent
trading activities in GameStop.
As the founder and chief investment officer of Melvin
Capital, I'm humbled by these unprecedented events. Many
investors on all sides have experienced losses. I am here today
to share my own personal experience and to be helpful in this
conversation.
I understand that part of the focus of this hearing is the
decision of stock trading platforms to limit trading in
GameStop. I want to make clear at the outset that Melvin
Capital played absolutely no role in those trading platform
decisions. In fact, Melvin closed out all of its positions in
GameStop days before the platforms put those limitations in
place. Like you, we learned about those limits from news
reports.
I also want to make clear at the outset that, contrary to
many reports, Melvin Capital was not, ``bailed out,'' in the
midst of these events. Citadel proactively reached out to
become a new investor, similar to the investments that others
make in our fund. 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 access and we were not seeking a cash
infusion.
I'm here testifying today far removed from my background. I
grew up in a middle-class family in Portland, Maine. I went to
a public high school. I studied hard and got into a good
college. Upon graduation, I did not have a job.
Today, I'm married with four children, and my time is spent
with my family, and on Melvin Capital, which I founded 6 years
ago. I named Melvin after my grandfather who ran a convenience
store. I wanted the firm to represent his values: integrity;
hard work; taking care of customers and employees; and
commitment to excellence.
Melvin Capital manages a hedge fund. Investors such as
academic institutions, medical research and other charitable
foundations, pension funds, retirees, and others, invest with
us. We have 36 employees and hundreds of investors, and I feel
a personal duty to all of them.
Melvin specializes in the consumer and technology sector,
including companies like GameStop, AutoZone, and Expedia.
Most of our investments are long. In other words, we buy
stock in companies that create jobs, grow the economy, and
develop new products for consumers. We do this after extensive
fundamental research, sometimes literally for years.
When our research convinces us that a company will grow
relative to expectations, we make a long-term investment. When
our research suggests a company will not live up to
expectations, and its stock price is overvalued, we might short
a stock.
Like with our long positions, our practice is to short a
stock for the long term after extensive research. We also short
stocks because when the markets go down, we have a duty to
protect our investors' capital. There are laws governing
shorting stock, and, of course, we always follow them.
In addition, it's very important to understand that
absolutely none of Melvin's short positions are part of any
effort to artificially depress or manipulate downward the price
of a stock. Nothing about our short position prevents a company
from achieving its objectives. It is just Melvin's view about
whether it will.
Specific to GameStop, we had a research-supported view well
before the recent events. In fact, we've been shorting GameStop
since Melvin's inception 6 years earlier, 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.
And that trend only accelerated in 2020 when, because of
the pandemic, people were downloading video games at home. As a
result, the gaming industry had its best year ever, but
GameStop had significant losses.
In January 2021, a group on Reddit began to make posts
about Melvin's specific investments. They took information
contained in our SEC filings and encouraged others to trade in
the opposite direction. Many of these posts were laced with
anti-Semitic slurs directed at me and others. The posts said
things like, ``It's very clear that we need a second Holocaust;
the Jews can't keep getting away with this.'' Others sent
similarly profane and racist text messages to me.
In the frenzy during January, GameStop stock rose from $17
to a peak of $483. I do not think anyone would claim that the
price had any relationship to the intrinsic value of the
business.
The unfortunate part of this episode is that ordinary
investors who were convinced by a misleading frenzy to buy
GameStop at $100, $200, or even $483 have now lost significant
amounts.
When this frenzy began, Melvin started closing out its
position in GameStop at a loss, not because our investment
thesis had changed, but because something unprecedented was
happening. We also reduced many other Melvin positions at
significant losses, both long and short, that were the subject
of similar posts.
I'm personally humbled by what happened in January.
Investors in Melvin suffered significant losses. It is now our
job to earn it back. And while I do not think that anyone could
have anticipated these events, I've learned much from them and
I'm taking steps to protect our investors from anything like
this happening in the future.
I look forward to answering your questions.
[The prepared statement of Mr. Plotkin can be found on page
105 of the appendix.]
Chairwoman Waters. Thank you, Mr. Plotkin.
Mr. Huffman, you are now recognized for 5 minutes to
present your oral testimony.
TESTIMONY OF STEVE HUFFMAN, CHIEF EXECUTIVE OFFICER AND CO-
FOUNDER, REDDIT, INC.
Mr. Huffman. Thank you. Madam Chairwoman, Mr. Ranking
Member, honorable members of the committee, my name is Steve
Huffman. I am the co-founder and CEO of Reddit, and I am
pleased to talk with you today about how Reddit works and what
we have seen on our site in the past few weeks.
Reddit's mission is to bring community and belonging to
everyone in the world. What started in 2005 as a single
community has since evolved into a vast network of many
thousands of communities. They range from standard topics like
news, sports, and politics, to internet culture, and support.
For example, our unemployment community has become a source of
support for hundreds of thousands of Americans who have turned
to Reddit after losing their jobs during the pandemic.
Our communities are created and run by our users. Because
of this, we describe Reddit as the most human place on the
internet. Although we are small compared to the largest
platforms, our communities provide an online home for millions
of people every day.
I'd like to share a bit about how content moderation on
Reddit works. Reddit's moderation system starts with our
content policy, the platform-wide rules which all communities
must follow. Among other things, these rules prohibit hate,
harassment, bullying, and illegal activity on Reddit, and
they're enforced by Reddit's Anti-Evil team, which is composed
of engineers, data scientists, and other specialists.
This team also ensures the integrity of the site, and we
have continuously honed our methods to stay ahead of bad actors
to protect Reddit from manipulation, spam, and other threats.
This team searched high and low for the specific comments
mentioned in the previous testimony or anything like it. The
closest we could find was a single comment that received no
votes and was deleted within 5 minutes. Such speech is not
tolerated on Reddit, and we will, of course, investigate any
further claims of this nature.
Centralized moderation is common, but Reddit additionally
uses a governance structure akin to a Federal democracy, where
the aforementioned policies and teams represent the Federal
Government, and the communities themselves represent States.
All communities, or subreddits, are created by users that
we call moderators. They set the community's rules, which may
be as strict as they like as long as they are not in conflict
with the platform-wide policies, and they have a variety of
tools to enforce these rules independently.
Moderators are not paid employees, but rather users who are
passionate about their communities. They have the context and
judgement to make decisions no algorithm could.
The members of each community contribute both the content
itself and the ranking of it by voting up or down on any post
or comment. Unlike other platforms where a submission has a
built-in audience through the author's follower count, every
piece of content on Reddit, no matter how famous the author,
starts at zero and has to earn its visibility.
Through their votes, the community itself enforces not just
the explicit rules of their community, but also the unwritten
rules that define their culture. This layered approach has
helped our users create the most authentic communities online.
The specific community we'd like to talk about today is
WallStreetBets. It's important to understand that
WallStreetBets is one of many finance- and investing-related
communities on Reddit. This particular community specializes in
higher-risk, higher-reward investments than what you might find
in other, more conservative financial communities on Reddit,
with such names as personal finance, investing, and financial
independence.
I will stress that WallStreetBets is, first and foremost, a
real community. The self-deprecating jokes, the memes, the
crass-at-times language all reflect this. If you spend any time
on WallStreetBets, you'll find a significant depth to this
community exhibited by the affection its members show one
another. They are just as quick to support a fellow member
after a big loss as they are to celebrate after a big gain.
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.
With the increase in attention, WallStreetBets
unsurprisingly faced a surge in traffic and new users. At
Reddit, our first duty in these situations is to our
communities, and our role in this moment was to keep
WallStreetBets online.
Working around the clock, we scaled our infrastructure,
made technology changes to help this community withstand the
onslaught of traffic, and we acted as diplomats to help resolve
conflicts within WallStreetBets' leadership.
We have since analyzed activity in WallStreetBets to
determine whether bots, foreign agents, or other bad actors
played a significant role. They have not.
In every metric we checked, the activity in WallStreetBets
was well within normal parameters, and its moderation tools are
working as expected. We will, of course, cooperate with valid
legal requests from Federal and State regulators. That said, we
do believe that this community was well within the bounds of
our own policies.
To conclude, I would like to reiterate why it is important
to protect online communities like WallStreetBets.
WallStreetBets may look sophomoric or chaotic from the outside,
but the fact that we're here today means they've managed to
raise important issues about fairness and opportunity in our
financial system. I am proud they use Reddit to do so.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Huffman can be found on page
102 of the appendix.]
Chairwoman Waters. Thank you very much, Mr. Huffman.
Mr. Gill, you are now recognized for 5 minutes to present
your oral testimony.
TESTIMONY OF KEITH PATRICK GILL, GAMESTOP INVESTOR
Mr. Gill. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee. I'm happy to discuss
with the committee my purchases of GameStop shares and my
discussions of their fair value on social media.
It is true that my investment in that company multiplied in
value many times. For that, I feel enormously fortunate. I also
believe the current price of the shares demonstrates that I've
been right about the company.
There are a few things I am not. I am not a cat. I am 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 whose investment in
GameStop and posts on social media were based upon my own
research and analysis.
I grew up in Brockton, Massachusetts. My family was not
wealthy. My father was a truck driver and my mom was a
registered nurse. I was one of 3 kids, and the first in my
family to earn a 4-year college degree when I graduated from
Stonehill College in 2009. That was not a good time to be
looking for a job.
From 2010 to 2017, I worked for a few start-up companies,
but there were significant periods when I was unemployed. I
took an interest in the stock market, and even though I had
very little money, I used those times to educate myself and
learn more about investing.
In 2019, after nearly 2 years unemployed, I accepted a
marketing and financial education job at MassMutual. My wife
Caroline and I were thrilled that I had an income and benefits.
My job was to help develop financial education classes that
advisers could present to prospective clients. I was not a
stockbroker or a financial adviser. I did not talk to clients,
and I did not recommend stocks for them to buy.
Before and after I joined MassMutual, I studied and
followed stocks. One of those was GameStop. In early June of
2019, the price of GameStop stock declined below what I thought
was its fair value. I invested in GameStop in 2019 and 2020
because, as I studied the company, I became more and more
confident in my analysis.
Two important factors, based entirely on publicly available
information, gave me confidence that GameStop was undervalued.
First, the market was underestimating the prospects of
GameStop's legacy business and overestimating the likelihood of
bankruptcy. I grew up playing video games and shopping at
GameStop, and I plan to continue shopping there. GameStop
stores still provide real value to consumers and reliable
revenue for GameStop.
Second, I believe that GameStop has the potential to
reinvent itself as the ultimate destination for gamers within
the rapidly-growing $200 billion gaming industry. GameStop has
a unique opportunity to pivot toward a technology-driven
business. By embracing the digital economy, GameStop may be
able to find new revenue streams that vastly exceed the value
of its business. I am hardly the only person who has advocated
these points.
When I wrote and spoke about GameStop in social media with
other individual investors, our conversations were no different
from people in a bar or on a golf course or at home talking or
arguing about a stock.
Hedge funds and other Wall Street firms have teams of
analysts working together to compile research and analyze
shares of companies. Individual investors do not have those
resources.
Social media platforms like Reddit, YouTube, and Twitter
are leveling the playing field. The idea that I used social
media to promote GameStop stock to unwitting investors and
influence the market is preposterous. My posts did not cause
the movement of billions of dollars into GameStop shares.
It is tragic that some people lost money, and my heart goes
out to them. But what happened in January just demonstrates,
again, that investing in public securities is extremely risky.
As I said earlier, I consider myself and my family
fortunate with our investment. When the stock price broke $20
in December, I knew my investment was a success. I was so happy
to visit my family in Brockton for the holidays. The money
would go such a long way for us.
We had an incredibly difficult 2020. Most difficult was the
tragic and unexpected loss of my sister, Sara, in June. I am
grateful to be in a position to give back to and support my
family.
As for what happened in January, others will have to
explain it. It's alarming how little we know about the inner
workings of the market. And I am thankful that this committee
is examining what happened.
I also want to say that I support retail investors' right
to invest in what they want, when they want. I support the
right of individuals to send a message based on how they
invest.
As for me, I like the stock. I'm as bullish as I've ever
been on a potential turnaround for GameStop, and I remain
invested in the company.
Thank you. Cheers, everyone.
[The prepared statement of Mr. Gill can be found on page 94
of the appendix.]
Chairwoman Waters. Thank you, Mr. Gill.
Ms. Schulp, you are now recognized for 5 minutes to present
your oral testimony.
TESTIMONY OF JENNIFER J. SCHULP, DIRECTOR, FINANCIAL REGULATION
STUDIES, CATO INSTITUTE
Ms. Schulp. Chairwoman Waters, Ranking Member McHenry, and
distinguished members of the Committee on Financial Services,
my name is Jennifer Schulp, and I'm the director of financial
regulation studies at the Cato Institute's Center for Monetary
and Financial Alternatives. Thank you for the opportunity to
take part in today's hearing.
Before addressing the GameStop phenomenon specifically, I'd
like to talk about the participation of retail or individual
investors in our public equities markets. Retail participation
has ebbed and flowed over the years, but the recent upward
trend accelerated sharply during the pandemic. Most point to
zero-commission trading, but several other factors also likely
attracted retail investors, including fractional share trading,
low account minimums, and easy app-based platforms. More time
at home during the pandemic probably even played a role.
Retail participation in our equities markets is important.
The fact that retail investors behave differently from
institutional ones, and differently from each other, can be
particularly valuable in times of market stress. In fact,
individual investors may have helped stabilize the market in
March 2020.
Importantly, investing in the stock market also provides a
path to wealth for individual investors. But stock ownership
traditionally has been skewed towards the already-wealthy and
it is highly correlated with race, education, and age.
Retail investors making up this new surge are different.
Recent research by the Financial Industry Regulatory Authority
's (FINRA's) Investor Education Foundation, and the National
Opinion Research Center (NORC) at the University of Chicago
found that investors who opened accounts for the first time in
2020 were younger, had lower incomes, and were more racially
diverse. These new investors also held lower account balances.
This may portend, as one of the researchers noted, ``a shift
towards more equitable investment participation.''
These new opportunities for individuals to grow their
wealth should be welcomed and expanded, not restricted.
Now, I'll turn to GameStop. At the outset, I will note that
it is difficult to analyze the impact of the trading in
GameStop and other stocks because many facts are unknown.
But some things seem clear. Importantly, the temporary
volatility in these stocks did not present a systemic risk to
market function. As the Treasury Department recognized, the
market's, ``core infrastructure was resilient during high
volatility and heavy trading volume.''
This is not surprising. Despite the huge trading volume and
rapid increase in value, only a small part of the market was
affected, and spillover effects on the wider market were mild
and short-lived.
The fact that GameStop traded temporarily and perhaps still
trades above fair estimates of the company's value is not in
itself a reason for concern. Stock prices move in and out of
alignment all the time and markets are no strangers to bubbles.
If a company is valued by the market differently than a review
of its fundamentals suggests, it might indicate that the
analysis is missing relevant information about a company's
prospects, or it might indicate that the company's stock price
is due for a correction.
The market's mechanisms, including the tool of short
selling, generally work well to handle these circumstances.
Stepping in to prevent trading where a stock price moves
contrary to conventional wisdom could deprive the market of
important information.
The SEC, among a host of others, is reviewing the relevant
trading and conducting a study of the events. The SEC will have
access to far more information than has been made publicly
available, and I believe it has the tools necessary to address
any harmful misconduct that may have occurred.
I cannot opine on whether any regulatory changes are
warranted on this incomplete record. I tend to believe the
answer will be no, in light of the minimal impact on the
market's function, but if regulators learn more, there may be
areas identified for improvement.
By no means, though, should these events lead to
restrictions on retail investors' access to the markets.
Thank you, and I welcome any questions that you may have.
[The prepared statement of Ms. Schulp can be found on page
108 of the appendix.]
Chairwoman Waters. Thank you, Ms. Schulp.
I now recognize myself for 5 minutes for questions.
The market volatility surrounding GameStop and other
securities has highlighted how many people feel that the cards
are stacked against them, and that market participants, like
our witnesses, hide the ball.
Mr. Tenev, you explained that Robinhood restricted
transactions in certain securities to meet demands coming from
your clearinghouse, and yet, on January 28th, you represented
to the media that there was no liquidity problem.
Isn't it true that being concerned about having enough
capital to meet deposit requirements--isn't that a liquidity
problem? Could you just answer yes or no?
Mr. Tenev. Chairwoman Waters, I appreciate the opportunity
to address that.
Chairwoman Waters. Just yes or no.
Mr. Tenev. We always felt comfortable with our liquidity
and the additional capital that Robinhood raised--
Chairwoman Waters. Please answer yes or no.
Mr. Tenev. We always felt--
Chairwoman Waters. Reclaiming my time, I don't have time, I
just need a yes-or-no answer.
Mr. Tenev. I stand by my statement. The additional capital
we raised wasn't to meet capital requirements or deposit
requirements--
Chairwoman Waters. Does the gentleman--
Mr. Tenev. Excuse me?
Chairwoman Waters. I'm reclaiming my time.
This liquidity problem had real consequences for your
customers, but I wonder if they were all that surprised.
Between December 2019 and December 2020, Robinhood customers
experienced monetary losses due to system outages. Customer
accounts were reportedly compromised. The firm repeatedly
failed at its best execution obligations, and it misled its
customers regarding its revenue sources. It seems that retail
investors often get a bad deal at Robinhood.
Mr. Tenev, while you testified today that, ``Robinhood's
customers benefit greatly from payment for order flow,'' in
December 2020, the SEC charged Robinhood for not disclosing
that it was getting paid to send customer trades to Citadel
Securities and other market makers and for not seeking the best
terms for its customers' orders. Robinhood provided such
inferior trade prices that it cost your customers over $34
million.
Is it your testimony that after Robinhood paid the SEC $65
million to settle those charges, this conflict of interest is
in your customers' best interest, yes or no?
Mr. Tenev. Chairwoman Waters, first, let me say, regulatory
compliance is at the center of everything that we do. We've
made mistakes in the past. I'm not claiming that I'm perfect--
Chairwoman Waters. But could you answer yes or no to that
question?
Mr. Tenev. Citadel Securities is an important counterparty.
Nobody's denying that. The reason that--
Chairwoman Waters. The gentleman cannot answer yes or no.
I'm reclaiming my time.
Meanwhile, Mr. Griffin, Citadel's role in this event also
raises significant questions for policymakers. Citadel
Securities pays Robinhood tens of millions of dollars to
process trades by Robinhood's customers. This relationship
gives Citadel Enterprise key nonpublic information as to
direction and volume of trades by retail investors. Your firm
makes use of private exchanges called dark pools and other off-
exchange trading to trade large sizes without moving the market
against you.
In fact, at some point last month, 50 percent of all trades
occurred in dark pools or via over-the-counter (OTC) off-
exchange trades. Your business strategy is designed
intentionally to undermine market transparency and skim profits
from companies and other investors. One problem, though, Mr.
Griffin, is that we don't really know how central your forum
has become to the capital markets,
Mr. Griffin, does Citadel handle 47 percent of the U.S.-
listed retail volume? Please, yes or no?
Mr. Griffin. Excuse me, Chairwoman Waters. What percentage?
I couldn't hear that number.
Chairwoman Waters. 47 percent.
Mr. Griffin. Chairwoman Waters, to the best--
Chairwoman Waters. Yes or no?
Mr. Griffin. To the best of my knowledge, we handle in
excess of roughly 40 percent of all retail volumes.
Chairwoman Waters. Thank you very much. Reclaiming my time,
Mr. Griffin, on January 27th, Citadel executed 7.4 billion
shares for retail investors, which would be more trades than
the average daily volume of the entire United States equities
market in 2019, yes or no?
Mr. Griffin. Chairwoman Waters, that was in my written and
oral testimony.
Chairwoman Waters. Thank you very much.
And with that, I now recognize the distinguished ranking
member, Mr. McHenry, for 5 minutes for questions.
Mr. McHenry. Thank you.
Mr. Tenev, I'm going to come to you first. I just want to
get to what happened on that day in January.
So, let's take a step back here. You get a call in the
middle of the night, according to what I've heard you say in
interviews, and based on that conversation with your compliance
team, you decided to halt the buying of GameStop stock.
People were furious. We'll get into the regulations and the
settlement parts of that today. We will get to that. But this
is what I think needs to be answered about your decision. Why
did Robinhood restrict the buying but not the selling of
GameStop? And why did folks get locked out on the buy side
only?
Mr. Tenev. Ranking Member McHenry, I appreciate the
opportunity to address that.
The reason that Robinhood--first of all, let me say,
Robinhood is always committed to providing access. It's in our
name. It's in everything that we do.
The decision to restrict GameStop and other securities was
driven purely by deposit and collateral requirements imposed by
our clearinghouses. So, buying--
Mr. McHenry. But why--
Mr. Tenev. --securities--
Mr. McHenry. But why--
Mr. Tenev. --in pieces are [inaudible] requirements.
Selling does not.
Moreover, preventing customers from selling is a very
difficult and painful experience, where customers are unable to
access their money. So, we don't want to impose that type of
experience on our customers unless we have no other choice.
And even though I recognize that customers were very upset
and disappointed that we had to do this, I imagine it would
have been significantly worse if we had prevented customers
from selling.
Mr. McHenry. Okay. Let me ask this question: Is payment for
order flow legal?
Mr. Tenev. Yes. Payment for order flow is legal and
regulated and is a common industry practice.
Mr. McHenry. And is this disclosed to users of your app?
Mr. Tenev. Yes. Payment for order flow is disclosed in
multiple places.
Mr. McHenry. Okay.
Mr. Tenev. Moreover, payment for order flow enables
commission-free trading. And that's why it's become the
industry standard model as other brokerages have replicated our
model and started offering commission-free trading to their
customers as well.
Mr. McHenry. Okay. So to that, to this greater point of
what happened that day and the model that you're using, let's
be crystal clear. That decision you made to restrict the buying
but not the selling of GameStop was based--was it based on
pressure from anyone on the witness panel here today?
Mr. Tenev. Not at all. Zero pressure from anyone. It was a
collateral depository requirement decision made by our
Robinhood Securities president, and we stand by it.
Mr. McHenry. Let me get in this question. You want to
democratize finance. You want to open up Wall Street to retail
investors. You say that Robinhood's mission is to democratize
finance for all. So, let's talk about that.
Yes or no, can a Robinhood customer invest in Robinhood,
the company?
Mr. Tenev. Robinhood is currently a private company, so
that's not possible, no.
Mr. McHenry. Do you mean to tell me that the people who use
your platform, who make you a successful company, and I would
say directly contribute to your company's exponential growth
and success, don't get the same access to equity shares as a
Robinhood employee or your institutional investors. Is that
correct?
Mr. Tenev. Currently, that is correct, yes.
Mr. McHenry. Okay.
Ms. Schulp, let me pivot to you. Why is that? Why is it
that everyday investors on the Robinhood app, people that I
would argue contributed to its success, can't invest in
Robinhood itself?
Ms. Schulp. The SEC limits a lot of investment in private
companies to those folks who are known as accredited investors.
And to become an accredited investor, you have to meet a wealth
test of earning at least $200,000 a year or having a net worth
of over a million dollars. The vast majority of people in this
country don't meet that standard and are unable to invest in
most private companies.
Mr. McHenry. Okay. So, let me just be clear on this.
Mr. Tenev, I don't blame you for the restriction you've put
on your customers not being able to invest in equity. I'd like
to have more opportunity to ask Mr. Gill his thoughts on this.
But let me just say this: I don't fault you for the inequitable
regulatory structure that D.C. has created, but I think we need
to clear this up.
Final thing, Madam Chairwoman. For the record, I'd like to
submit a letter from the DTCC, which is the clearing company
that was not on the panel today, and your staff has this
letter.
Chairwoman Waters. Without objection, it is so ordered.
Mr. McHenry. Thank you all, and I look forward to getting
to the facts of the matter--
Chairwoman Waters. The gentleman's time has expired.
Mrs. Maloney is now recognized for 5 minutes.
Mrs. Maloney. Thank you, Chairwoman Waters and Ranking
Member McHenry, for convening this hearing. I hope today's
hearing sheds light on how our markets are working, or in many
cases, are not working for smaller investors and ways we can
fix that.
The events of late January saw tremendous volatility and
stock prices that were totally divorced from market
fundamentals. The whole enterprise was viewed by some as a
giant video game, trading stocks instead of properties in
monopoly money. But it is not all fun and games because people
can lose their life savings, their hard-earned cash, and
tragically, last summer, we know of at least one suicide linked
to potential trading losses.
Beyond those possible losses, the actions of Robinhood and
other trading platforms during the GameStop frenzy caused
confusion and anger, and undermined investor confidence in the
fundamental fairness of our capital markets. None of this is
healthy for our markets or good for investors. What makes
markets work fairly is when everyone knows the rules and that
the rules remain consistent and predictable and are enforced.
But because of Robinhood's actions, too many customers did
not get that predictability. Many retail investors woke up on
January 28th to find that they could no longer buy and sell
stocks the same way they could in the days prior, and they were
being treated differently than other market participants who
could still buy and sell those same stocks. So, I don't blame
them for thinking that things were stacked against the little
guy.
Mr. Tenev, you stated in your testimony that Robinhood
restricted trading for certain securities, including GameStop,
in order to meet your financial requirements with your
clearinghouse. But when I go to Robinhood's website and the
blog post you initially released on January 28th, your
financial requirements with your clearinghouse are not
mentioned. You only mention market volatility.
And when I review the Robinhood customer agreement, you
don't include specifics on how and when you may decide to
restrict trading which you did. And you don't include any
language or disclosures regarding your capital requirements. It
only includes vague language that at any time, and in its sole
discretion, Robinhood can restrict trading. In other words, you
seem to reserve the right to make up the rules as you go along.
I have two questions for you. First, do you think you owe
your customers more disclosure and transparency than you gave
them?
And, second, do you believe your lack of candor with your
customers might have contributed to the wild speculation and
confusion that resulted in the aftermath of your trading
restrictions?
Mr. Tenev. Congresswoman, I appreciate the questions.
To answer the second question, look. I am sorry for what
happened. I apologize. And I am not going to say that Robinhood
did everything perfect and that we haven't made mistakes in the
past, but what I commit to is making sure that we improve from
this, we learn from it, and we don't make the same mistakes in
the future. And Robinhood as an organization will learn from
this and improve to make sure it doesn't happen again, and I
will make sure of that.
Mrs. Maloney. I expect we will experience future events
with increased volatility, and Robinhood's recent actions
appeared arbitrary, which is why I don't blame customers for
feeling as though they were treated unfairly. Your trading
restrictions came out of the blue, and your communication was
not clear.
Mr. Tenev, looking forward, what operational changes is
Robinhood making to better respond to future market volatility,
to improve transparency with your customers, and to ensure that
retail customers don't get the rug pulled out from under them
at the last minute?
Mr. Tenev. Thank you for that question, Congresswoman. We
will be committing to reviewing absolutely everything about
this, but the $3.4 billion that we raised I think goes a long
way to cushioning the firm from future market volatility and
other similar black swan events.
And I believe that even throughout this process, we
improved our risk management processes and strengthened them so
that the experience customers had that week was much improved
from Thursday.
Chairwoman Waters. Thank you very much.
Mr. Tenev. We continue to learn and improve upon this.
Chairwoman Waters. Mrs. Wagner, you are recognized for 5
minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. I would like to
thank our witnesses for testifying today to discuss the late
January market volatility that took place, along with what I
hope is a broader discussion on market functions and their
effect on everyday investors.
Since I was very first elected, I have advocated for
America's Main Street investors and worked tirelessly to ensure
that all Americans, especially those low- and middle-income
savers, are given the investment choice, access, and
affordability that they deserve. Retail investors are the
strength of our stock market, and I have fought throughout my
career for their best interests in the financial markets, and
this hearing today is no different.
The advances in financial technology that we have witnessed
in the last decade have improved the way that Americans and our
businesses perform financial activities.
In just the past year, we have seen retail investors'
market participation more than double, and I think this is
great. I believe in the wisdom of the retail investor, and I
will say that I believe in the First Amendment, too.
This increase is attributed to Robinhood and other trading
brokerages who are lowering account minimums, permitting
fractional share trading, and implementing zero-commission
trading. It is critical that Congress focus on reducing
barriers to market participation, they rarely want to do, let
me sadly say, and allowing Main Street Americans access to the
financial instruments that can create long-term investment
savings.
All of these changes have given millions of Americans the
ability to invest better for their families and their future.
My hope is that the Majority does not use this hearing as an
excuse to once again add new Federal regulatory burdens to an
industry that is already heavily regulated, which would prevent
people from participating in our capital markets. Letting
existing regulations work is key, not burdening everyday
investors with new and more costly barriers to entry.
Mr. Tenev, it appears that at the time, your company did
not have money to meet the collateral requirements for that
level of trading by your customers. In your view, were the
collateral requirements from the DTCC unreasonably high, was
the amount of trading on your platform unforeseeable, or was
your company undercapitalized, given its risk profile?
Mr. Tenev. Thank you for the question, Congresswoman.
This event was a Phi Sigma event, which is a 1-in-3.5-
million event. To put that in context, there have only been
tens of thousands of stock market days in the history of the
U.S. stock market, so, a 1-in-3.5-million event is basically
unmodelable.
That said, we can learn from it, and in this particular
case, our risk management processes worked appropriately to
keep us in compliance with all of our deposit requirements and
collateral requirements.
Mrs. Wagner. Mr. Tenev, I realize that you are doing a full
review of your practices and such. I encourage you to do that.
And certainly, communication with your investors is going to be
key to that because you didn't communicate with them early on.
Let me just say, as the ranking member on our Diversity and
Inclusion Subcommittee, I am delighted to be speaking with our
witness, Ms. Jennifer Schulp. Ranking Member McHenry and I have
spent countless hours stressing the importance of having
qualified women in finance, so I am pleased to have you here
today to lend your expertise.
Ms. Schulp, we now know that it was the daily collateral
demands set by the National Securities Clearing Corporation
(NSCC) that were the reason Robinhood had to temporarily
restrict trading. Can you briefly explain the purpose of these
capital requirements and their overall relationship to ensuring
that our markets function in an orderly manner? And did you see
any broad failures of market function during these events,
ma'am?
Ms. Schulp. Sure. Thank you. And thank you for the
compliment.
The NSCC's collateral requirements serve the function to
provide security for the stock-selling process. So while an
investor thinks that what has happened is they bought a stock
on the day that they make a trade, it really takes 2 days for
the settlement process to clear. During that time, the
brokerage firm, the Depository Trust & Clearing Corporation
(DTCC), and the investor on the upper side can remain at risk
of that stock not actually clearing. And the collateral report
is in place to mitigate the risk that the brokerage firm will
not be able to make good on its promises to sell or buy.
I didn't see any broad-scale failures. The DTCC's
collateral requirement was long, but understandable, and I
think it functioned correctly, for the most part.
Mrs. Wagner. My time has expired. I thank you all for your
testimony, and I yield back, Madam Chairwoman.
Chairwoman Waters. I thank the gentlewoman.
Mr. Perlmutter. Madam Chairwoman, point of order.
Chairwoman Waters. Point of order
Mr. Perlmutter. Just to remind people that when they are
not speaking, to mute themselves, because there's a lot of
feedback when a question is asked and the microphone stays
open, and the people are answering the question. Just remind
everybody to mute when you're not speaking. That is all.
Chairwoman Waters. Thank you very much. You heard Mr.
Perlmutter. I would hope that every Member would certainly do
that.
Mr. Sherman, you are recognized for 5 minutes.
Mr. Sherman. Thank you very much.
We have come to expect things on the internet to be free.
Just because you are not paying for it, it is not free. You are
the product. Someone else is the customer. When you go onto
Facebook and it is free, you are the product being sold to the
advertiser, and your information is sold to God-knows-whom.
So, we now have a system where we are telling investors
that it is free to buy and sell stock. There are two ways to
pay the folks involved in Wall Street for buying and selling
stock.
One is a commission, and you know what it is. So, we
discourage investors a little bit from buying and selling stock
because they have to pay a commission, and they know they are
paying a commission.
The other way to do it is to give them a worse execution.
Whenever there is, say, a stock being purchased and sold, the
market maker, perhaps Citadel, might be willing to sell the
stock for $10.05, but will buy it for only $10. The difference
is $0.05. And so, the issue is whether Robinhood and other
people who are being told you get it for free are really
getting it for free.
Mr. Griffin, you are a market maker. You pay some brokers
for order flow. You don't pay others for order flow. So when
you pay for order flow, you are not making as much on the
transaction. You have to pay some of that back to the broker.
The amount of that is hidden from the customer. The fact that
it exists has perhaps recently been disclosed.
SEC rules require that people get the best execution, but I
have recently learned that there is best execution and enhanced
pricing. So if you get an order from Fidelity, and you get an
order from Robinhood, and you are paying for the Robinhood
order flow, is the Robinhood customer getting as good a price
as the Fidelity customer?
Mr. Griffin?
Mr. Griffin. Congressman, I believe that is an excellent
question. The execution quality that we can provide as measured
in terms of price improvement is heavily related or correlated
to the size of the order that we receive. So if I were to
speculate--
Mr. Sherman. Don't tell me that there are other factors
involved and take us down another road. I am asking you a clear
question.
Assuming same size of order, one comes in from Robinhood,
and one comes in from Fidelity, isn't it true that one is going
to be getting enhanced best execution, and the other one is
just going to get best execution?
Mr. Griffin. As I was trying to explain, because the
Robinhood order comes from a community of traders who tend to
trade in smaller size--
Mr. Sherman. That isn't my question, sir. You are evading
my question by making up other questions. Let me repeat: Two
identical orders come in; same stock, same quantity. One is
from Robinhood, one is from Fidelity. What happens?
Mr. Griffin. The quality of the execution varies by the
channel of the order. This is a commonly-understood phenomena
in economics, that channels matter. For example, when you go
get a mortgage, a mortgage from JPMorgan to their clientele has
a different rate of interest than a mortgage--
Mr. Sherman. Okay. Reclaiming my time, sir, who gets the
better deal, the one that comes from a broker who is being paid
for order flow, and one not? Can you testify that on balance,
there is no difference, assuming the same size of the order?
Mr. Griffin. As I said earlier, the size of the order is
only one factor.
Mr. Sherman. You are doing a great job of wasting my time.
If you are going to filibuster, you should run for the Senate.
Everyone else I have talked to in this industry says that
when your broker is being paid for order flow, you get a worse
execution. And otherwise, you are in a peculiar circumstance
where you are making more money on a Fidelity transaction than
a Robinhood transaction which would be an absurd business
practice.
Chairwoman Waters. The gentleman's time has expired.
Mr. Lucas, you are recognized for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman, for holding this
hearing, and thank you to the witnesses for agreeing to
testify.
It has been reported that approximately 20 percent of
market volume is now attributable to retail customers, which I
think is just fascinating, considering that is up from 10
percent in 2019, and that is an overwhelmingly positive
development, allowing for more market liquidity, more
stability, and additional avenues for households to grow their
wealth. It is important to increase market access for retail
customers, and I don't want to disrupt that, so I would like to
turn with my first question to Mr. Tenev.
Let's talk about the attention that this payment for order
flow has received. You explained in your testimony that
Robinhood's relationship with market makers is important for
Robinhood's ability to offer commission-free trading. So
expand, if you would, on how that process benefits the everyday
investor. Just expand in general on that, if you would?
Mr. Tenev. Congressman, I'd be happy to. Thanks for giving
me an opportunity.
As I mentioned in my written testimony, payment for order
flow enables commission-free trading. Prior to Robinhood
changing the industry standard model to be commission-free,
most brokers collected a commission on top of the payment for
order flow on every transaction.
Now, Robinhood routes to market makers. Including Citadel
Execution Services, we have seven in total across equities and
options, and we route without consideration of payment for
order flow. All payment for order flow arrangements are uniform
across the market makers, and our system routes orders based on
who provides the best execution quality for our customers.
So, the reason Citadel gets a relatively high percentage of
our customer order flow is because they provide superior
execution quality for our customers, and that is first and
foremost, the most important consideration that we look for:
How are customers getting the best execution quality?
If another market maker were to improve upon the execution
quality that Citadel Execution Services provides on any subset
of orders, our system is set up to automatically route more
traffic to that market maker.
Mr. Lucas. Continuing down this line, because clearly, this
is one of the things that my colleagues and the public has a
very strong interest in, and having lived through Dodd-Frank
before, I have seen worse times. Major things can occur. I want
to turn to Mr. Griffin.
Could you also elaborate on how payment for order flow
provides, whether it is the best price to the retail investor
from the market maker's perspective? Could you expand on that--
Mr. Griffin. Congressman--
Mr. Lucas. --as you outlined in--
Mr. Griffin. Absolutely, Congressman. As the CEO of
Robinhood just set forth clearly, the orders that are allocated
amongst the market makers today are allocated principally on
the basis of price improvement. We have fought for 15 years to
make that the basis by which orders are allocated because we
strongly believe that Citadel is able to provide a better
execution for retail orders in the long run. We make a huge
investment in our team and our technology to do so.
How is it that we are able to provide better execution
quality than exchanges? Because exchanges are limited in their
ability to do business by regulatory mandate. Exchanges, by
law, have a minimum $0.01 wide market, which for low-price
securities means that they are less competitive than they
otherwise could be. We're able to share our trading acumen with
retail investors, and we are able to give them a better price,
and we are able to make payments for order flow to firms like
Robinhood that allow them to have lower, or today, in most
cases, no commission. And of particular note, we are able to
help Robinhood and other brokers pay exchange fees to the
exchanges at the time of execution. This has been very
important to the democratization of finance. It has allowed the
American retail investor to have the lowest execution costs
they have ever had in the history of the U.S. financial market.
Mr. Lucas. Mr. Tenev, in the Dodd-Frank process that the
chairwoman and I went through a decade ago plus, there was much
discussion about margin requirements. Give us just a discussion
for an instant about when you discovered you had a $3 billion
additional margin call?
Mr. Tenev. Thank you, Congressman. I believe the full play
by play of that situation was described in detail in my written
testimony. Just to clarify, though, this decision had--
Mr. Lucas. My time has expired, unfortunately.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. The gentleman's time has expired.
Mr. Meeks, you are recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman, and Mr. Ranking
Member, for this hearing,
Let me ask a question to Mr. Tenev. I have been burned once
or twice in the market, but particularly since I have been a
Member of Congress, one of the things that I recall greatly was
the financial crises in 2008.
And we thought that opening the market up to where people
had adjustable rate mortgages, et cetera, they were able to get
into the market, people who may not have been before, but a lot
of disclosure had not happened. So we didn't look, nor were
there any documents to look at what their incomes were or
anything of that nature.
So when those adjustable rates happened, many individuals
lost their homes. Many people who bought those mortgages or who
initially agreed to those mortgages sold them immediately
because they did know that the people would not be able to
afford them, and they would default shortly thereafter.
I understand your model of trying to get more people, more
democratization, but that means that there is now a greater
responsibility for ensuring that your customers have all of the
information they need to access riskier trades. For me, the
information has to be digestible and accessible.
One of the problems I have, for example, is you are
allowing up to $1,000 to buy stocks on margin, and buying on
margin is risky. So, how do you disclose this? How do you make
the determination of individuals who are not the most
sophisticated investor and allow them to buy these risky stocks
that are on margin?
Mr. Tenev. Thank you, Congressman, for the opportunity to
address that. Let me set the stage a little bit by saying that
about 2 percent of our customers borrow on margin, about 13
percent on a monthly basis perform an options transaction, and
a much smaller number, around 3 percent, perform a multi-leg
options transaction. So, the vast majority of our customers are
engaging in buy and hold activities and long-term investing on
our platform.
To clarify your point on the $1,000 margin, that is
actually something that we refer to as Robinhood Instant, and
it is provided as a courtesy. When a customer initiates a
deposit, we allow them access to up to $1,000 of that deposit
immediately. Similar to how, if you deposit a check at a bank,
as a courtesy, they might provide access to those funds or a
portion of them before that check clears.
As for margins specifically, borrowing money on margin, the
rules are very ironclad industry-wide. Obviously, Robinhood
Securities conforms to all of the applicable rules. And
Robinhood's product is in many ways more restrictive than that
of our competitors, because in order to even qualify for
borrowing on margin, you have to be a Robinhood Gold Customer,
which involves paying $5 a month for the service.
Mr. Meeks. You say that everything is restrictive, but when
you are going after the less sophisticated investor, it is more
than that. There is a greater responsibility that you have
because they could lose. And when they lose, it could make a
determination of whether or not they can pay their mortgage or
their rent, and they could be taken advantage of.
Oftentimes, we find in the financial industry, it is those
who have the least, who are really taken advantage of. So, the
big guys--it becomes a reverse Robinhood situation which really
concerns me.
Let me get to this really quickly because it was something
that you said in regards to liquidity. You said that you didn't
borrow the money because you needed it at the time, but later
in the question, you raised the additional money, and I want to
know how you spent the money for future situations, which says
to me that you did have a liquidity problem or you anticipated
possibly having a liquidity problem or would have one in future
transactions. What is the deal there?
Mr. Tenev. I appreciate that question. I stand by what I
said. Robinhood was able to meet our deposit requirements. We
were in compliance with firm net capital obligations throughout
the period, and that additional capital, the $3.4 billion,
wasn't to service our existing requirements. It was entirely to
prepare for a future, even greater black swan event, and to
unrestrict and remove restrictions on the trading and the
buying of these securities.
Chairwoman Waters. The gentleman's time has expired.
Mr. Huizenga, you are next for 5 minutes.
Mr. Huizenga. Thanks, Madam Chairwoman. And this would have
been a little nicer 10 minutes ago, when I was supposed to go,
but I am going to go back to Mr. Griffin and the Chair of the
Capital Markets Subcommittee. The ranking member, I think, was
filibustering himself, and I just wanted to make sure, Mr.
Griffin, that you had the opportunity to feel comfortable with
the explanation of that best execution, and what was attempted,
apparently, to try to be asked.
Mr. Griffin. Congressman, I hope so. I think it is
important to emphasize that we have vigorously advocated for
execution quality to be one of the dominant decision-making
factors in the routing of order flow in the United States. This
has saved retail investors billions of dollars over the years
in contrast to the executions that they would receive through
other execution strategies.
Mr. Huizenga. Okay.
Mr. Griffin. With respect to payment for order flow, we
simply play by the rules of the road. Payment for order flow
has been expressly approved by the SEC. It is a customary
practice within the industry. If they choose to change the
rules of the road, if we need to drive on the left side versus
the right side, that is fine with us.
I do believe that payment for order flow has been an
important source of innovation in the industry. As the CEO of
Robinhood has testified, they drove the industry towards zero
dollar commissions. This has been a big win for American
investors.
Mr. Huizenga. I am going to Ms. Schulp from the Cato
Institute. I know that Greenwich Associates had a study, and
others are out there. Do you concur that this has been good for
consumers, for the most part?
Ms. Schulp. I think that there are still ongoing studies,
but I do think that payment for order flow and the price
improvements have largely been good for customers. And I agree
with Mr. Griffin that this has helped drive innovation in the
industry.
I think disclosure can always be better, and I think people
should understand that their broker still needs to make money,
even if they are providing a zero-commission trading service.
Mr. Huizenga. Okay. I have about 3 minutes left. I was
going to start, actually, with this and ask each one of you why
you thought you were here today, but I am going to dispense
with that because it is going to take too much time, and I will
provide the answer. Political theater for the most part. That
is what this hearing is today. And we are on the business
channels right now and on C-SPAN. I think you will see a few of
my colleagues playing to the cameras.
But we need to have some of these fundamental and important
questions answered at the end of the day. And one of the
assertions that you have heard already today is that investing
is, ``casino gambling, it is using monopoly funny money,'' and
I guess I want to know, is individual retail participation in
the marketplace gambling, casino gambling, or using funny
money?
Mr. Gill, why don't we just start with you? Very quickly.
I don't hear him. So, Mr. Huffman, let's move to you.
Mr. Huffman. No. I believe that investing is investing.
Mr. Huizenga. Okay. Mr. Griffin?
Mr. Griffin. I believe the vast, vast majority of retail
participants are people saving to meet their dreams.
Mr. Huizenga. Mr. Tenev?
Mr. Tenev. Congressman, thank you. As I mentioned in my
opening statement, Robinhood customers have essentially made
over $35 billion in unrealized and realized gains--
Mr. Huizenga. Very quickly.
Mr. Tenev. --on all of their assets.
Mr. Huizenga. It has been a good thing for them, correct?
Mr. Tenev. Absolutely. It is investing, and it is building
wealth.
Mr. Huizenga. I'll go back to Mr. Gill.
Mr. Gill. Yes. I believe it is an opportunity for investors
to participate in the market just as institutionals
participate.
Mr. Huizenga. Okay. So actually, the business channels had
a good question from one of the Reddit readers, which is, you
recommended GameStop before. Would you buy their stock now at
roughly $45? It started at $48 earlier today. You were talking
about buying it and being happy when it hit cross 20. So are
you buying that stock today?
Mr. Gill. Let me just say that investing can be risky, and
my particular approach to investing is rather aggressive and
may not be suitable for anyone else, but for me personally,
yes.
Mr. Huizenga. So, yes or no, are you buying the stock,
and--
Mr. Gill. For me personally, yes. I do find it is an
attractive investment at this price point.
Mr. Huizenga. A quick question, did you invest in GameStop
because you were not aware of the payment for order flow? That
is one of the accusations that people bought into this because
they don't know that.
Mr. Gill. Sorry. Could you repeat that question?
Mr. Huizenga. Did you buy GameStop because you were not
aware of the payment for order flow?
Mr. Gill. My investment in GameStop was based on the
fundamentals.
Mr. Huizenga. Okay. I think that answers it. I believe my
time has expired.
Chairwoman Waters. Ms. Velazquez, you are recognized for 5
minutes.
Ms. Velazquez. Thank you, Madam Chairwoman.
Mr. Tenev, Robinhood seems to have perfected the definition
of trading, providing the user with a perception that investing
through the Robinhood app offers a recreational game, playing
with little or downside risk. Of course, many of us understand
that investing is not a game and carries significant risk.
How does Robinhood balance disclosures and the potential
downside risk of investing, including the risk of substantial
loss and the more enticing claims of profitability and the ease
of trading?
Mr. Tenev. Congresswoman, I appreciate that question.
Giving people what they want in a responsible way is what
Robinhood is about. We don't consider that gamification. We
know that investing is serious, and we are investing in all of
the educational tools and customer support to help people on
their investing journey.
What we see is most of our customers are buy and hold. A
very small percentage are trading options, about 13 percent,
and less than 3 percent borrow on margin. So, most people use
Robinhood to build up portfolios over time, and--
Ms. Velazquez. But can you answer my question? How do you
balance disclosures and the potential downside risk of it?
Mr. Tenev. We make lots of disclosures, Congresswoman. We
are also a self-directed brokerage, so that means we don't
provide advice, and we don't make recommendations for what
customers should or should not invest in.
Ms. Velazquez. So, you are saying that as a result of
emphasizing profitability and ease of trading over the risk of
loss, many amateur investors were unaware of the situation in
which they could find themselves?
Mr. Tenev. I want to mention again, as in my opening
statement, Robinhood customers have earned more than $35
billion in unrealized and realized gains on top of what they've
deposited.
So, I think this shows us that the product is working for
customers, and our mission is working.
Ms. Velazquez. Okay. Thank you.
Mr. Plotkin, over the course of my time in Congress, I have
been concerned and have spoken out about the dangers of short
selling. While I understand that short selling can be used for
legitimate purposes, too often, I have seen abuse, and it ends
up harming ordinary workers and families.
I first saw it against the people of Puerto Rico, and now
we are seeing it here against GameStop. Large investors,
including hedge funds like yours, have to disclose their long
positions when they own 5 percent or more of the company's
shares, but no such disclosure is required for short positions.
As we consider reforms, is this type of disclosure for
short positions something you will support? Mr. Plotkin?
Mr. Plotkin. Yes. Congresswoman, thank you very much for
the question. I think it is a really good question. Whenever
regulation is put forth in the marketplace, we will obviously
operate within those rules. It is certainly something I would
be happy to follow up with the committee on.
Ms. Velazquez. What about my question about short selling?
Mr. Plotkin. Yes. I think it is a really good question. It
is not for me to decide, but if those are the rules, I will
certainly abide by them.
Ms. Velazquez. Okay. I am glad to hear that answer.
Mr. Gill, public reports credit with you helping to start
the GameStop craze by encouraging other amateur investors to
bet against the short position that Mr. Plotkin and others
took. But the stock has now fallen from its high, and many
amateur investors have lost hundreds of thousands of dollars.
It is my understanding that you are a registered broker. Is
that correct?
Chairwoman Waters. The gentlelady's time has expired.
Ms. Velazquez. Okay. Thank you. I yield back.
Chairwoman Waters. Thank you. And I appreciate all of the
Members who are participating today. This is not political
theater at all. This is serious oversight responsibility, and
Members are reminded not to impugn the motive of other Members.
Thank you.
Mr. Luetkemeyer, you are recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. My first
question will go to Mr. Gill.
Mr. Gill, you are a very serious investor, somebody who
does his homework, and invests in the market your own personal
funds. We are discussing the actions around Robinhood, all of
the transactions that took place. Do you think we need more
legislation as a result of what happened here, or did the
system actually work?
And let me just make a couple of comments on that part.
From the standpoint that it did work, was it self-correcting?
Did the fact that somebody like yourself was able to invest and
maybe take advantage of the overshorting positions by the hedge
fund guys who were trying to really drive down the price of
stock for other reasons, whatever, or did it point out perhaps
that we had some companies, perhaps like Robinhood, where I
would argue it was undercapitalized or underreserved, or maybe
there was overaggressive other types of investing that was
taking place.
The algorithms that were there, the different business
models, they didn't work because you outsmarted the system, so
to speak. Would you like to comment on these questions and how
I formatted that?
Mr. Gill. Thank you for the questions, Congressman. I would
say my expertise is in analyzing the business, the fundamentals
of the business, not so much on the inner workings of the
market. I am not so sure about legislation, per se. What I
would say is that increased transparency could help, that if
someone like me could have a better understanding of how those
types of things work, I feel as though it would be quite
beneficial to retail investors.
Mr. Luetkemeyer. Thank you for that.
Mr. Tenev, Robinhood has an interesting name. As I recall,
the old story is to take from the rich, and give to the poor. I
assume what you are doing is allowing the poor to compete with
the rich, which is interesting.
You made the comment in your testimony, Mr. Tenev, about
settling this in real time. We have the electronic ability to
do this. I think that would probably help the situation that
occurred here, but what other problems occur when you do this
in real time? What are the things we have to look at? What
other unintended consequences would there be if you did
something like that?
Mr. Tenev. Thank you, Congressman, for the question. I
believe that right now, certain market participants rely on
next-day settlement to be able to take advantage of intra-day
netting and run up larger, one-sided positions in certain
stocks with the knowledge that they can close those positions
or reduce them by the time settlement happens.
And I understand that would be the limitation to the
trading activities of some of these institutions, so that's
certainly one area to consider.
The other is around securities lending. We would have to
make changes to how securities lending works. I don't think any
of these are insurmountable challenges, and I would be happy,
as I mentioned earlier, to deploy our intellectual capital and
our team's engineering resources to help solve these problems
very quickly.
Mr. Luetkemeyer. Thank you for that.
Mr. Plotkin and Mr. Griffin, the question is for both of
you here. Whenever you are short selling--I understand that
GameStop stock was short sold at 140 percent. And, Mr. Plotkin,
you made the comment in your testimony a minute ago that you
were not trying to manipulate stock. Yet, if you are short
selling a stock 140 percent, for me, on the outside looking in,
it looks like that is exactly what you are doing. Explain to me
why that is not manipulating the stock?
Mr. Plotkin. Thank you, Congressman. I can't speak to other
people who were shorting. For us, any time we short a stock, we
locate a borrower. Our systems actually force us to find a
borrower. We always short stocks within the context of all of
the rules.
Mr. Luetkemeyer. Mr. Griffin, would you like to comment on
that? You guys are both market makers, and brokers and hedge
fund guys. You do all of it. Why is this not considered
manipulating the stock whenever you can short sell at 140
percent? Don't you think there should be a limit on something
like that?
Mr. Griffin. I believe that the short interest in GameStop
was exceptional, and I am not sure it is worth us delving into
legislative corrections for a very unique situation in terms of
the extreme size of the short interest.
I will say that all of the large markets, in fact, every
bank, every hedge fund does have to comply with the requirement
to borrow shares to short shares in the course of their day in
and day out business. The practice of naked shorting was
largely curtailed by SEC mandate years ago.
Chairwoman Waters. The gentleman's time has expired.
Mr. Scott, you are recognized for 5 minutes.
Mr. Scott. Thank you, Chairwoman Waters. And let me just
say that the people of this country appreciate you for pulling
this Financial Services hearing together because this is a
threat to the future of our financial system, and we have to
get to the bottom of it.
Let me start with you, Mr. Tenev. Let's go through this.
The sequence of events that led to the extreme rise in value of
GameStop stock and the subsequent market volatility originated
through a Reddit discussion, and then that was fueled through
social media. And as the story gained traction, tweets by well-
known figures with the influence to move markets sent the stock
value even higher and higher.
Let me start with you, Mr. Tenev. What policies does
Robinhood have in place to monitor what happened on social
media and how it drives the use of your trading platforms?
Mr. Tenev. Thank you for the question, Congressman.
Currently, Robinhood does not perform any sort of moderation of
social media. We simply don't have the data that the social
media platforms have at their disposal to tie these posts to
identities. We do, however, within Robinhood Securities conform
to all regulatory requirements around monitoring and trade
surveillance and all things of that nature.
Mr. Scott. Mr. Tenev, don't you see something has gone
terribly wrong here? What do you do to monitor the trades in
individual stocks, particularly when in the case of GameStop,
they are singled out and moved on social media? What do you do?
Mr. Tenev. I appreciate the question. Our priority
throughout the exceptional market conditions in January and
early February was to maintain the uptime and performance of
our platform and make sure that we are available to customers--
Mr. Scott. Let me try to get to a point here. Do you,
Robinhood, have any policies in place to ensure that investors
are making trades based on legitimate material financial
information and not the influence of social media, the design
of trading platforms, or any other superfluous information? Do
you have anything, any guards up?
Mr. Tenev. Absolutely. Congressman, we provide educational
resources to our customers, including our redesigned Robinhood
Learn Portal, which is not just available to Robinhood
customers but to the general public, and it had over 3.2
million people visiting in 2020.
Mr. Scott. But you are at the center of this. Don't you see
and agree that something very wrong happened here and that you
are at the center of it? And we are looking on this committee
at how we can protect our wonderful, precious financial system.
We need it from you.
What about you, Mr. Hoffman. Do you have anything?
Mr. Huffman. Congressman--
Mr. Scott. What steps is your company taking to guard
against this, anything at all?
Mr. Huffman. Congressman, we spend a lot of time at Reddit
ensuring the authenticity of our platform, so we have a large
team dedicated to this exact task. Everything on Reddit, all of
the content is created by users, voted on by users, and ranked
by users, and we make sure that it is authenticated and as
unmanipulated as possible. And in this specific case, we did
not see any signs of manipulation.
Mr. Scott. Madam Chairwoman, I just want to conclude, I
have maybe 10 seconds left. But this episode exposes a serious
threat to our financial system when tweets and social media
posts do more to move the market than material, legitimate
information, and this is enormous.
Chairwoman Waters. Thank you very much.
Mr. Stivers, you are now recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman. I appreciate you
calling this hearing. The American financial markets, I
believe, are the envy of the world, but they are still
imperfect. I would have liked to seen this committee have a
meaningful discussion about capital requirements and the T plus
2 clearing rules that may have contributed to some of
Robinhood's customers not being able to purchase stock,
including GameStop, for a period of time.
But because the Majority didn't include the SEC, the
Depository Trust & Clearing Corporation, or the National
Securities Clearing Corporation to testify, we are left with
what we have. That is because I believe the Majority is
attempting to use this hearing to drive a narrative about the
U.S. capital markets being rigged. But I do have several
questions.
Mr. Tenev, you decided to stop allowing your users to buy
GameStop and other stocks as a result of capital requirements
on Robinhood securities. Is that correct?
Mr. Tenev. That is correct, yes, deposit requirements with
our clearinghouses.
Mr. Stivers. And those got resolved, but for a period of
time, some of your users could only sell and not buy, and that
could have contributed to the stock actually not going up as
fast because some of your users were prohibited from buying. Do
you think it is possible that that could have happened?
Mr. Tenev. I shouldn't speculate on what could have
happened.
Mr. Stivers. If there are more sellers than buyers, does
the stock price go down or up?
Mr. Tenev. Congressman, to be clear, Robinhood is a
minority of trading activity in--
Mr. Stivers. I understand.
Mr. Tenev. --these securities.
Mr. Stivers. I understand. But if your buyers can only sell
and not buy, then it clearly keeps you from putting upward
pressure on the stock price. Is that correct?
Mr. Tenev. On Thursday--
Mr. Stivers. Among your users.
Mr. Tenev. --customers on our platform could only sell.
Mr. Stivers. Correct.
Mr. Tenev. There was no ability to buy, that is correct.
Mr. Stivers. Right. You said earlier--by the way, I know
some people have attacked your arbitration agreements, but I
want you to be clear. If your users were harmed as a result of
these actions, they can recover through arbitration. Is that
correct, yes or no?
Mr. Tenev. Yes. That is correct, and our arbitration is
FINRA-supervised and overseen, and we do believe arbitration
gives customers a fair and speedier resolution to their claims.
Mr. Stivers. Thank you. Does your user agreement and your
arbitration allow for group arbitration or only individual
arbitration?
Mr. Tenev. Let me get back to you on that.
Mr. Stivers. If a group was treated similarly and similarly
affected or lost upside or lost money, can they do it as a
group, or is it only individuals in your arbitration agreement?
Mr. Tenev. Congressman, I am sure you are familiar with the
number of class action lawsuits filed against Robinhood for--
Mr. Stivers. And I am not asking about a class action
lawsuit. I am asking in your arbitration system, can a group of
people come together as an individual? And this is not a trick
question. I am not a fan of trial lawyers. I am just trying to
understand.
Mr. Tenev. Yes. I appreciate the question, Congressman. I
think the best thing I can do is get back to you after making
sure that we get you the right answer.
Mr. Stivers. That would be great. Thank you. That would be
helpful.
Mr. Plotkin, are you a frequent short seller, yes or no?
Mr. Plotkin. We run a long short portfolio. The majority of
our investments are long investments, but we also have short
investments to hedge out market risk.
Mr. Stivers. Thank you, Mr. Plotkin. Has Melvin Capital
ever engaged in short selling of Tesla stock?
Mr. Plotkin. We have shorted Tesla in the past, that is
correct.
Mr. Stivers. Did you see the tweet from Tesla CEO Elon Musk
about GameStop stock?
Mr. Plotkin. I did see that after market hours on--yes, on
the Tuesday.
Mr. Stivers. Do you believe that Mr. Musk's tweet had any
significant effect of driving the rise in GameStop stock?
Mr. Plotkin. I don't want to speculate on what the actions
of his tweet were. The stock did rise after hours.
Mr. Stivers. Then, do you believe that tweet was targeting
you because you had shorted Tesla stock in the past?
Mr. Plotkin. We had a very small short position years ago
in Tesla. That would be pure speculation as to his motives in
putting that tweet out.
Mr. Stivers. Okay. Thank you.
I will go back to Mr. Tenev. On the regulatory
requirements, do you believe that the SEC and the Depository
Trust & Clearing Corporation should modify any of their rules
as a result of what happened to your users because of capital
requirements?
Mr. Tenev. I believe--
Chairwoman Waters. The gentleman's time has expired. And
the SEC is not here today because they are in transition with a
temporary Chair, awaiting the confirmation of the person who
has been appointed by the President of the United States. This
is a serious hearing. Members are reminded not to impugn the
motives of others. Thank you.
Mr. Green, you are recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
Ms. Schulp, there is a reason for penalizing a market maker
for improperly trading its own accounts ahead of its clients'
accounts. Note that I said, ``improperly trading.'' I don't
want to go through the scenario of there being a time for
proper trading ahead of accounts. I would like for you to tell
us what that reason is, please.
Ms. Schulp. Trading ahead of customer accounts is illegal,
and it does not--
Mr. Green. I understand that it is illegal. I don't mean to
be rude, crude, and unrefined, but I have to ask this question
quickly. What can happen that can benefit the market maker? How
can that be monetized such that the market maker profits
greatly from doing it?
Ms. Schulp. If a market maker trades improperly ahead of
the customer accounts, he can get a better price and can move
the market in the process, depending on how big the trade is.
That is hurting the customer.
Mr. Green. And if this trade is huge, and you can see that
this trade that the client has is huge and will have an impact
on the market, how does that benefit the market maker to trade
ahead of the client?
Ms. Schulp. The market maker can get a better price for
himself before the price changes by the client's trade. He can
also engage in self-dealing that way as well.
Mr. Green. So, does it benefit a huge market maker to have
a great deal with, let's say, a Robinhood, because of the flow
that will be coming through that the market maker can take
advantage of?
Ms. Schulp. I don't think that they are necessarily
congruent situations. When you are trading ahead of a customer
order, which is something that is illegal and that the SEC does
monitor for, it is very different from having knowledge as to
the way that the market might be moving based on--
Mr. Green. I understand, but I want to talk about the
circumstance where it is improper, not where it is proper.
Remember, we started with improper trading. And here is my
point. Let me go to it quickly. The market maker, Citadel,
traded over-the-counter stocks for its own accounts in 2012,
from 2012 to 2014, while simultaneously delaying client orders
for the same shares and was fined for this.
Citadel has been naughty for some time: In 2014, Citadel
faced $800,000 in penalties; 2017, $22.6 million; 2018, $3.5
million; 2020, $97 million, and another 2020 of $700,000. This
seems like a lot of money. It is for me. More than $124
million.
But over the same period of time, Citadel had revenues
generated in the amount of $13.2 billion. It seems to me that
the punishment for these improper trades and improper extants
because it wasn't just trading. Citadel also did some other
things that were not proper. They messed with their clients. It
seems that the punishment is so small, given the amount of
revenue generated over this same period of time. It seems that
Citadel has at least an opportunity to build into its cost of
doing business paying penalties, and that concerns me.
It concerns me that the punishment doesn't seem to deter
Citadel. It concerns me because I know of circumstances wherein
persons who are not in the market do things that are much less
harmful, and they can possibly go to jail.
So the question that I have is this: What kinds of systems
do we have in place, and back to you again, ma'am, to prevent
the very things that I have called to the attention of my
colleagues?
Ms. Schulp. As a former enforcement attorney at FINRA, I
can say that regulators have the same concern with fines and
other punishments becoming just a cost of doing business, and
it is one of the things that is considered, along with the lack
of regulations around what can be punished.
Chairwoman Waters. The gentleman's time has expired.
Mr. Green. May I, for the record--
Chairwoman Waters. The gentleman's time has expired. Mr.
Green, as you know, we are going to have a series of hearings,
and our next panel will include a whole bevy of experts also on
some of these issues.
With that, Mr. Green--
Mr. Green. Madam, may I say something in the record,
please? I have--
Chairwoman Waters. Without objection, you may enter into
the record. Thank you.
Mr. Green. Thank you.
Chairwoman Waters. Mr. Barr, you are recognized for 5
minutes.
Mr. Barr. Thank you, Madam Chairwoman.
Mr. Griffin, I want to revisit this issue of payment for
order flow. Payment for order flow has been around for decades,
correct?
Mr. Griffin. I know it has been around for at least 1 or 2
decades. I can't answer before that period of time.
Mr. Barr. And it is a recognized and approved practice by
the SEC, correct?
Mr. Griffin. Yes, it is.
Mr. Barr. And payment for order flow is set by the
brokerage firm, not the wholesaler, right?
Mr. Griffin. It is ultimately a negotiated number, but it
is a number that is set by the brokerage firm and not by us as
the market maker.
Mr. Barr. As a market maker that provides execution
services to retail brokers, you are required to meet best-
execution requirements. Is that correct?
Mr. Griffin. Yes, it is.
Mr. Barr. In other words, market makers are required to
provide the same or better pricing than the exchanges, correct?
Mr. Griffin. That is correct.
Mr. Barr. And how can market makers offer that better
pricing to Mr. Sherman's line of questions?
Mr. Griffin. There are a number of drivers that permit us
to offer better pricing than what is available on exchanges.
The first is that exchanges have legally-mandated minimum tech
sizes of a penny. So if you look at a stock like AMC, that
trade's $5 bid, $5.01 offered, the exchange could trade with a
half-cent increment, it would probably trade $5 point 005 bid
501 offer or vice versa, but the exchanges are limited to a
$0.01 minimum tech size.
And we have been clear on the record in prior testimony
that exchanges should be permitted to have a smaller and more
competitive tech size. That's factor number one.
Mr. Barr. Okay.
Mr. Griffin. Number two, is that the average retail order
is much smaller in totality than the average order that goes on
to an exchange. Because this order is smaller--and I will share
a number with you, the typical Robinhood order is ballpark
about $2,000 in size. Because it's a small order, the amount of
risk that we need to assume in managing that order is
relatively small as compared to an order that we have to manage
from our on-exchange trading.
And as I'm sure you're well-aware, we are the largest
trader of stocks on exchanges in the United States--
Mr. Barr. Let me move to Mr. Tenev really quickly on that
point. What impact might greater restrictions on the payment
for order flow model have on your ability to offer zero-
commission trades?
Mr. Tenev. We do believe, Congressman, that that's an
important question and payment for order flow helps cover the
costs of running our business and offer commission-free trading
to customers. When we started, people didn't even think that
there was enough margin left to make this business work, but
we've been fortunate to make it work and to make it work for
our customers.
Mr. Barr. I'm talking about why Robinhood restricted
trades. I think your explanation about margin requirements
charged by your clearinghouse makes sense. Is your
clearinghouse supervised by the Fed and the SEC?
Mr. Tenev. I believe that--
Mr. Barr. Are the margin requirements charged by your
clearinghouse in turn approved by Federal regulators?
Mr. Tenev. Yes.
Mr. Barr. And did Federal regulators approve the value of
risk charge that was imposed on Robinhood?
Mr. Tenev. I believe, Congressman, the value of risk charge
is outlined in general terms in Dodd-Frank, but I'm not sure
who approved the specific implementation of that formula.
Mr. Barr. So if anyone has a problem with your decision to
halt trades, it's fair to say that their frustration should be
directed toward Federal regulation?
Mr. Tenev. Congressman, I'm not trying to throw anyone
under the bus in direct frustration anywhere. All I can say is
Robinhood Securities played this by the books and played it
basically the only way that we could remain in compliance with
our deposit requirements.
Mr. Barr. Mr. Plotkin, I appreciate your testimony that
Melvin always follows laws governing shorting stock, but Melvin
lost $6 billion in 20 trading days. Let me ask you about your
risk management. Did your short positions exceed float?
Mr. Plotkin. No, they did not.
Mr. Barr. Shorting has an important role to play in our
markets, allowing for legitimate hedging and price discovery,
but we are interested in naked shorting. And so, we would hope
that you would clarify that and how it is that you make sure
that you're first locating the borrower?
Chairwoman Waters. The gentleman's time has expired. Mr.
Cleaver, you're recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman, and I, too, would
like to thank you for this hearing. It's a question that a lot
of people are asking, probably many of us as we go through our
districts, but let me start with you, Mr. Tenev. I'm just
curious if you can answer, in a short period of time, how did
you come up with the name of your company?
Mr. Tenev. Absolutely. Thank you for that question,
Congressman. Robinhood stands for lowering the barrier to entry
and democratizing finance for all. The idea is the same tools
that institutions and wealthier, high-net-worth individuals
have had for a long time should be available to the people
regardless of their net worth or how much money they have.
Mr. Cleaver. Okay. I appreciate that answer. Because it's
something that I would also embrace; however, I have a 23-year-
old on the other side of the house whom I love dearly, but he
has no training, no income, and no qualifications. How in the
world could he get a million dollars worth of leverage?
Mr. Tenev. Thank you, Congressman. The leverage that we
provide to our customers, which less than 3 percent of our
customers actively use, is regulated strictly by requirements.
So, the only way to get that amount of leverage in a margin
account through borrowing is to deposit a similarly-sized
amount of capital.
Mr. Cleaver. Or by mistake?
Mr. Tenev. Congressman, I'm not sure what you're referring
to.
Mr. Cleaver. There's a record of a young man getting a
million dollars worth of leverage. He was only 20-years-old, so
I'm just saying if that's not a policy, that was an error.
Mr. Tenev. Congressman, I appreciate the opportunity to
address that really important point. You're referring to Mr.
Kearns.
Mr. Cleaver. I am.
Mr. Tenev. The man who, unfortunately, passed last year.
Mr. Cleaver. Yes.
Mr. Tenev. First of all, I'm sorry to the family of Mr.
Kearns for their loss. 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, including changing
the customer interface, adding more additional options,
education, as well as strengthening and tightening the
requirements for people getting options and adding a live
customer support line for acute options cases.
It was a tragedy, and we went into immediate action to make
sure that we made, not just the most accessible options trading
product for our customers, but the safest as well.
Mr. Cleaver. Okay. In my real life, I'm a United Methodist
Pastor and I read your statement after the tragedy of this
young 20-year-old, and I don't think you or I want to get into
litigating that right here today, but what improvements did you
make in the aftermath to your platform or were there
improvements?
Mr. Tenev. Thank you, Congressman. There were several
improvements. One, we added the ability to instant exercise as
well as exercise options positions in-app. We clarified the
display of buying power, specifically negative buying power, in
situations where one leg of a complex multi-leg options
transaction were to be assigned.
We also added an options education specialist. We also
added live phone base customer support for acute options cases,
which has gotten very great feedback from customers and is
something we're expanding to other use cases such as places
where customers' accounts have had off-platform hacking
incidents.
Mr. Cleaver. The last one is what I was concentrating on
because this young man was trying to get into your system to
find out what was going on. He was confused, he was scared, and
so he sent emails. And to be fair, there was a response, but it
was hours later. And, as I became more and more familiar with
this particular case--
Chairwoman Waters. The gentleman's time has expired.
Mr. Cleaver. Thank you, Madam Chairwoman. I appreciate it.
Chairwoman Waters. You're so welcome.
Mr. Hill, you're recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman, for holding this
hearing, and I want to thank our witnesses for their expertise
and their patience. Madam Chairwoman, I have a letter from the
American Securities Association I'd like to insert in the
record, please.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Hill. Thank you very much.
Mr. Tenev, what a treat to see you, and congratulations on
being part of the American Dream. I had the pleasure of working
for President Bush 41 in Sophia, Bulgaria, in 1990 and 1991 to
try to bring capitalism to Bulgaria after the wall fell, so I'm
glad to see you're an American citizen and innovating here in
our country.
Mr. Tenev. Thank you.
Mr. Hill. I think you've done a good job talking about
the--I'd say the acknowledged lesson that you've learned in
terms of these deposits for clearing and the important risk
management issue for your firm. So, I'd like to follow up on
some of the discussions about retail service that you've also
touched on today.
Do you have a call center generally for Robinhood
investors?
Mr. Tenev. Thank you for that question, Congressman. And I
want to start by saying customer service is fundamental to
everything that we do and it's one of the areas where we're
investing the most. We have customer service centers in a
number of States--Colorado, Florida, Texas, and Arizona, and
we're looking to expand aggressively--
Mr. Hill. Well, do you have a call center that I can call,
a 1-800 number if I'm having trouble in the middle of the
trading day?
Mr. Tenev. We do offer, Congressman, live phone support in-
app for certain use cases. We're expanding that as fast as we
can. As I mentioned earlier, options, advanced options cases,
as well as account takeovers, which typically happen through a
customer's email, personal email, who has been compromised, and
the feedback has been great. And we're looking to expand the
live phone channel, as well as make improvements to our email
channel and--
Mr. Hill. Thank you. Thank you. That's helpful.
And on the subject of margin and options, you've talked
about that today, but I've spent 40 years in this business and
been the general securities principal in three different firms,
and this issue of granting margin and option approval to retail
clients is always an important issue. You've addressed that
today, so I want to turn to a different topic that has not been
raised, which is low-dollar stocks.
As I understand it, your policy and procedure manual simply
says that you allow low-dollar stocks if they're on an
exchange, but many, many brokerage firms are very reticent to
allow retail investors to invest in stocks that are under $5.
Could you address that issue today?
Mr. Tenev. Yes, I'd be happy to Congressman. Robinhood
allows customers to trade in and invest in exchange-listed
securities, so that's the objective criteria that we use. And
it actually excludes several types of securities that customers
commonly request a trade in.
On Robinhood, you can't trade over-the-counter bulletin
boards except in limited cases where a listed stock falls to
over-the-counter. You can't trade pink sheets and, of course,
you can't short sell or enter undefined risk options trades.
Our objective criteria involve whether exchanges list these
securities.
Mr. Hill. Thank you. And I think that probably--I'm sure
you'll re-evaluate that after these effects.
Let me turn to Ms. Schulp. Thank you for being here. The
WallStreetBets Reddit platform--I'm curious when you think
about the obligation of this SEC pending investigation, based
on your FINRA background, do you think the SEC should look at
the bulletin board participants under Section 9a2 or
potentially inducing trading in a certain direction? Is that
worthy of their review?
Ms. Schulp. Thank you for the question, Congressman. I
think that there has been little evidence to this time that
there has been any sort of false or deceptive conduct taking
place on the WallStreetBets' forum. That does not mean, though,
that I think that the SEC should not take a deeper look.
Because of the anonymity in the forum, there could have been
people who were engaging in deceptive behavior that's not
readily apparent to the public.
So I do think the SEC should look, but to this point, I've
seen very little that would meet a test for manipulation, which
generally involves false or deceptive behavior.
Mr. Hill. Thank you. I appreciate that.
Mr. Tenev, I thought of another question for you. Would a
securities transaction tax be beneficial to retail investors in
the United States?
Mr. Tenev. Thank you, Congressman. I don't believe it
would.
Mr. Hill. Thank you.
Chairwoman Waters. The gentleman's time has expired.
Mr. Hill. Thank you, Madam Chairwoman.
Chairwoman Waters. We will take a short recess. The
committee stands in recess for 5 minutes. Thank you.
[brief recess]
Chairwoman Waters. The committee will come to order. Mr.
Perlmutter, you are recognized for 5 minutes.
Mr. Perlmutter. Thanks, Madam Chairwoman.
Mr. Gill, let's start with you, since you seemed to have
started all of this. You began analyzing GameStop in the summer
of 2019. Was that your testimony?
Mr. Gill. Congressman, I've been following GameStop for a
number of years. I started to buy into it in June of 2019, most
recently.
Mr. Perlmutter. So back then, what was the price of the
stock when you started investing in it?
Mr. Gill. At the time, it was in the ballpark of around $5
per share.
Mr. Perlmutter. Okay. And in your analysis, what did you
think that was a proper price for the share, because you
thought you were getting a good buy?
Mr. Gill. Sure. At the time, I thought that the value of
the business could be worth up to roughly $2 billion.
Mr. Perlmutter. But how much is that per share? Bring it
back to the--you bought at $5, you thought it was worth $10,
$20?
Mr. Gill. I felt as though that it could be worth at the
time in the range of, say, $20 to $25 per share.
Mr. Perlmutter. Okay. And you continued to invest on and
off through 2019 and 2020. Is that true?
Mr. Gill. Yes.
Mr. Perlmutter. Okay. And you bought some shares, but you
also did some options trading, did you not?
Mr. Gill. Correct. I did.
Mr. Perlmutter. And options trading is not really for the
novice investor, is it?
Mr. Gill. It is a riskier investment, yes.
Mr. Perlmutter. Okay. On January 27th, I think the stock
price hit $483 or something like that. Is that true?
Mr. Gill. I believe it was in that area, yes.
Mr. Perlmutter. In your analysis, back when you started
investing in the stock, did you ever see it being valued at
$483 per share?
Mr. Gill. At the time, I thought it was possible, but a
very low probability, I thought.
Mr. Perlmutter. Thank you. In terms of the platforms where
you visited and discussed this stock with others, one was the
Reddit, subreddit WallStreetBets' platform, correct?
Mr. Gill. Correct.
Mr. Perlmutter. And at any given time, how many people were
you talking to on that platform?
Mr. Gill. I wasn't so much talking to anyone individually,
but rather making posts on that public forum.
Mr. Perlmutter. That GameStop was an attractive stock?
Mr. Gill. Yes. Early on, I had felt that it was an
attractive investment opportunity and I had shared some of my
thoughts as to why that was.
Mr. Perlmutter. Did you discuss this on any other
platforms? Are there any other kinds of Reddit or other kinds
of platforms where you talked about the stock?
Mr. Gill. Yes, I have talked about the stock on some other
platforms.
Mr. Perlmutter. Okay. Did you ever talk about the short
sellers that had bet against this company?
Mr. Gill. Yes, the topic did come up.
Mr. Perlmutter. And about when did that occur?
Mr. Gill. Oh, since around the time I had begun investing
in it. Someone else thought it was an exceptional level of
short interest in the stock since the time I had started
investing in it.
Mr. Perlmutter. Okay. Let me turn my attention now to you,
Mr. Plotkin.
When did Melvin first take short position in GameStop?
Mr. Plotkin. Thank you, Congressman. That was in 2014,
really right at our inception of the fund.
Mr. Perlmutter. And when you did that, you continued to
maintain a short position?
Mr. Plotkin. That's correct.
Mr. Perlmutter. So you said you analyzed the value of the
stock, and by taking a short position, you, unlike Mr. Gill,
thought that the stock was overpriced. He thought it was
underpriced; you thought it was overpriced?
Mr. Plotkin. That's a good conclusion, yes.
Mr. Perlmutter. In your analysis when you started into the
short position, what did you think the stock was worth?
Mr. Plotkin. I don't remember exactly at the time. I think
when we launched it, it was probably $40 stock. I think we
believed the company had a lot of structural challenges. We've
seen their earnings go from, I think, north of $3 a share to
almost negative $3 a share, so it's been a lot of challenges
fundamentally.
Mr. Perlmutter. Last question for you, were you in a naked
position in your short position because this stock was
oversold?
Mr. Plotkin. No. Our systems won't even allow that, so that
would be impossible for us to do.
Mr. Perlmutter. Okay. Thank you. My time has expired. I
wanted to get some facts out for Mr. McHenry.
And I yield back.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired. I now recognize Mr. Zeldin for 5 minutes.
Mr. Zeldin. Thank you, Madam Chairwoman, and Ranking Member
McHenry, for holding this hearing. And thank you to the
witnesses for being here today. I represent the first
congressional district of New York, which encompasses much of
Suffolk County on Long Island. My home district is full of
people from all different walks of life and industries, and
having access to cost-efficient investing is crucial.
While there are always ways to make a system work better,
our capital markets are the envy of the world with their
liquidity and diversity of investment opportunities.
Innovations in securities trading brought by the private sector
have increased access for retail investors.
For better or for worse, this situation is a perfect
example. For example, one of our witnesses here, Mr. Gill, or
should I say, ``Roaring Kitty,'' turned $53,000 into almost $50
million, and that's what you would call some deep you-know-what
value. Of course, we know that not all those who invested in
these stocks share the same success story. However, I want to
highlight a potential vulnerability in these innovations.
I've been concerned for some time in general with the
sharing of U.S. individual user data with the Chinese Communist
Party (CCP). I sent a letter to the Treasury Department in
October 2019 expressing concern with the potential sharing of
user information by TikTok to its parent company, ByteDance,
and asked for a review by the Committee on Foreign Investment
in the United States (CFIUS).
Chinese companies are required by law to regulate online
behavior that deviates from the political goals of the CCP.
Obey the CCP's censorship directives and participate in China's
espionage.
These policies regulate companies like TikTok in the China
market, and increasingly, their overseas business. Webull and
Moomoo are two examples of broker-dealers that are subsidiaries
of Chinese parent companies.
According to Bloomberg, funds affiliated with Xiaomi Corp
own at least 14 percent of Webull. Xiaomi is a Chinese company
that risks being delisted from U.S. exchanges after the U.S.
Department of Defense put the company on a blacklist on January
14, 2021.
Moomoo is owned by Futu Holdings, which is a company that
received a significant investment from entities affiliated with
Tencent, a company with known ties to the CCP.
On December 8, 2020, Bloomberg Business Week ran an article
on Webull stating that the company, ``has increased its roster
of brokerage clients by about tenfold this year to more than 2
million by offering free stock trades with a slick online
interface.''
On January 29, 2020, the day after trading activity for
long trades on certain stocks discussed on Reddit threads were
limited, Bloomberg ran an article with the headline,
``Robinhood rival Webull sees 16 fold jump in new trading
accounts.'' It's clear that these apps have rapidly increased
their user base, which has me concerned.
Ms. Schulp, do you think we should be concerned about the
potential for Chinese entities with ties to the CCP receiving
personally identifiable information (PII) or other user data
from their subsidiary broker-dealers that are licensed and
registered in the United States?
Ms. Schulp. I think it's a potential national security
concern, which is a bit outside of my area of expertise. What I
can say is that the rules that the brokers have to apply and
comply with regarding personally identifiable information and
other material data should be applied equally to companies that
are based offshore and companies that are based onshore, and I
hope that that's the case with respect to Webull or any other
competitors that are not domestically-owned.
Mr. Zeldin. Having a diversity of choice for different
trading apps is generally good for market competition, however,
is it a good outcome for millions of Americans to flood into
trading apps that could be required to share user data to
parent companies that have ties to the CCP?
Ms. Schulp. Again, I think choice is key here, as well as
understanding from a consumer perspective what companies you
are choosing to do business with. Again, the national security
concerns are a bit outside of my area of expertise.
Mr. Zeldin. I thank you for being here. This is another
angle to this issue with these new options that are being
provided to average retail investors and we want these retail
investors to have as much information as possible to be set up
for success.
I yield back.
Chairwoman Waters. Thank you very much. Mr. Himes, you're
recognized for 5 minutes.
Mr. Himes. Thank you, Madam Chairwoman, and a big thank you
to our panel today for a very interesting conversation. One of
the chairwoman's ways of characterizing this hearing was who
wins and who loses, and I've spent a bunch of time in the last
couple of days looking at the various players here.
I'm pretty convinced that Citadel is one of the winners;
they make a lot of money. They're the casino in this story, and
the casino tends to win over time. Robinhood has a valuation of
$5.6 billion, and makes a lot of money from the casino, so who
loses? And I want to spend some time talking about the person
who usually loses, and that's the retail investor.
And while I have supported for many years the
democratization of finance, as we say, it's not just in
Washington, D.C., but on Wall Street. The retail investor is
known as, ``dumb money,'' and there are any number of
structures that are set up to take advantage of the retail
investor. And I think it's worth looking at that because as
much as we're celebrating Mr. Gill here, we're not talking very
much about Mr. Salvador Vergara, who was featured in a Wall
Street Journal story, who took out a $20,000 personal loan
through Robinhood and invested it in GameStop only to see the
value of his position go down 80 percent.
So, Mr. Vergara is out $16,000 he doesn't have, that he
owes to somebody else. And as much as I support the
democratization of finance, we need to be thoughtful about
this.
Mr. Tenev, my question is for you. You quoted a $35 billion
number as what I interpreted to be profits in excess of
deposited funds and securities. If you just look at your
customers who traded in GameStop over the period of its
increase and subsequent decrease, Mr. Tenev, how did your
customers in the aggregate do? Did they win or did they lose?
Mr. Tenev. Thank you, Congressman, for that question. I
don't have that particular cut of the data top of mind, so
maybe we can get back to you on that one.
Mr. Himes. You don't have that. But you do have a $35
billion figure. That figure doesn't mean a lot to me, because
it's just a dollar number. Help me convert that to a rate of
return. First of all, is that $35 billion gross or net? In
other words, is that actual profit or does it include margin
shares, or other forms of leverage that may not actually belong
to the account holder?
Mr. Tenev. It does include, Congressman, unrealized gains,
so it's the value of assets, both including positions in
securities and cryptocurrencies.
Mr. Himes. I get that, but, again, $35 billion doesn't mean
anything to me unless you can convert that into a rate of
return. So, do that for me? On what asset under management
number is that $35 billion unrealized against?
Mr. Tenev. The asset under management number is not one
that Robinhood has publicly shared--
Mr. Himes. Okay, but you can't share $35 billion--sorry,
Mr. Tenev. I just don't have a lot of time, and $35 billion is
a meaningless number. I need to know what that is in terms of
return. So, convert that for me into rate of return so I can
compare it to Treasury, so I can compare it to the S&P 500.
Mr. Tenev. Congressman, with respect, I think the proper
comparison is to customers not investing at all. Many of our
customers are investing for the first time and are taking money
that they, otherwise, would have spent or consumed and put--
Mr. Himes. Mr. Tenev, again, I don't want to be rude, but
it's my time. Again, you offered up the $35 billion number,
which as you and anybody else schooled in finance knows is
meaningless unless you convert it into a rate of return.
So, just please convert that $35 billion number, which to
the folks watching at home sounds like a lot of money, but what
does that actually convert to in terms of rate of return which
is what matters?
Mr. Tenev. Congressman, $35 billion is indeed a large
amount of money, especially for our customers who are mostly
small investors. It's more than most corporations, nearly all--
Mr. Himes. Mr. Tenev, don't make me be rude here. You and I
both know that $35 billion of unrealized gains, if that's on a
base of $100 billion, that's a 35 percent of return. If that's
on under a trillion dollars, it's a radically different rate of
return.
So what I'm trying to get at, Mr. Tenev, here is, you threw
out the number of $35 billion. I actually think the right
comparison is, what if your clients had simply invested in the
long run in an S&P index fund. Would that number be more than
$35 billion or less?
Mr. Tenev. Congressman, with respect, I don't believe the
right comparison is investing in an S&P index fund. I think the
right comparison is not having invested at all and having spent
that money and consumed it.
Mr. Himes. No, no. It's most certainly not, Mr. Tenev. I'm
out of time, but, again, you put out the $35 billion number, so
I think it's only decent, because you and I both know that a
hard-dollar number is meaningless unless you can convert is to
returns. So, I'm going to ask you to convert that--obviously,
I'm out of time--into a rate of return for us.
Chairwoman Waters. You're out of time.
Mr. Loudermilk, you're now recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman, and I
appreciate all of the members of the panel being here. I think
you've seen that there are occasions with some on the committee
here that if you're not giving them the answer that they want,
that they can use, they're just going to continue to push you.
So, I just encourage you to continue speaking the truth and
you'll always stand up head and shoulders above everyone.
Not surprisingly, the situation with GameStop trading has
resulted in commentators and even some of my colleagues
engaging in knee-jerk reactions calling for new laws and
regulations to be hastily enacted. It just seems to be a trend
in Washington, D.C., to never let a crisis go to waste. Some
have even spread conspiracy theories and alleged that crimes
were committed before knowing what even happened.
I can even testify to what was just being said--I know a
number of people, personal friends who have never invested
before, but because of Robinhood and other retail platforms,
many of them took the stimulus money that they received during
the CARES Act, which, because they were still working, they
didn't need, and they actually opened an account and started
investing.
So, yes, more and more people who have never invested
before are now investing using these platforms. This hearing is
a reminder that with complex situations, we should take time to
understand what actually did or did not happen, especially with
this GameStop situation.
Now, the SEC is the proper authority to determine if any
rules were broken, and they are looking into it. Congress has
already given the SEC broad authority to oversee the capital
markets and we do not need to rush to enact even more big
government regulations that could ultimately harm the
investors.
Mr. Tenev, can you remind us, again, why Robinhood
temporarily paused trading of GameStop and other stocks?
Mr. Tenev. Of course. Thank you, Congressman. Robinhood
paused trading temporarily or, I should say, paused buying of
about 13 securities on Thursday so that we could meet our
regulatory deposit and collateral requirements.
Mr. Loudermilk. Okay. So what you're saying is, you were
paused because you had to comply with regulations. Is that
true?
Mr. Tenev. Correct.
Mr. Loudermilk. Okay. It's ironic that the people who are
criticizing brokerage firms because they paused trading, which
they sometimes have to do to comply with regulations, these
same folks are now saying, we need to respond to this with more
regulations. I would say if people don't like brokers
occasionally having to pause trading, I suggest they look at
the regulations that required it.
At some point, we need to recognize that piling on more and
more regulations only increases complexity and does not help
investors.
Ms. Schulp, despite the volatility and the frenzy of media
and social media activity, it seems to me that the markets
functioned as they were supposed to do during this situation,
that the markets are not broken; in fact, they are working
well.
Do you agree with that?
Ms. Schulp. I agree with that.
Mr. Loudermilk. Okay. Thank you. I appreciate that. I think
most reasonable people who are listening to this would agree
that there are regulations in place, the SEC has those to pause
activities that could be harmful, not only to the markets, but
to the individual investors. And so what I'm understanding you
saying is that it did work in the way it was supposed to?
Ms. Schulp. As the facts that I know now, it does appear to
have worked the way it was supposed to. This is not a sign to
me that the market is broken.
Mr. Loudermilk. Thank you.
Mr. Griffin, what are some of the issues that policymakers
should consider in the T plus 2, T plus 1, T plus 0 debate?
Obviously, margin requirements exist to make sure firms have
enough capital to settle transactions, but faster settlement
and lower margin requirements can be positive for the retail
investors, and we need to balance those needs.
Can you address what some of the issues are in the T2, T1,
and T0 debate?
Mr. Griffin. Congressman, I cannot profess to be an expert
on these issues, but I will give you my perspectives from
having been in this for 30 years. We started at T5. We will one
day be at real-time settlement, and the question is, is how
long does that journey take?
From T2 to T1, which reduces the amount of capital required
by broker-dealers to meet the needs of their customers, that
reduction in capital would have been very helpful to Robinhood
during this period of time. It reduces counterparty risk
holistically, which is good for everybody in the market. We
should push for T1.
As we go to same-day settlement, you now bring into
question the complexity [inaudible] movement and you bring into
play the necessity for all systems to be functioning every
moment of every day with no room for error. On a T1 settlement
site--
Chairwoman Waters. The gentleman's time has expired. Let me
remind the Members that we're going to have a series of
hearings. Today is the first. There will probably be two more.
I didn't hear anyone here today say that they were ready to
pile on regulations, so let's make sure we know that our
statements are accurate.
Mr. Foster, you're recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and I thank our
witnesses for being here.
Mr. Tenev, I'd like to follow-up a little bit on payment
for order flow and best order execution issues. Democratization
of finances is a good and noble goal, but for democracy to
work, consumers need transparency and high-quality information.
And not only about fees, but about order execution quality.
Your customers actually don't care directly about who you
subcontract order execution to or any payment for order flow,
but they need a simple way to compare the execution quality
between your app and competing apps or other accounts, while
institutional investors can afford to run their own tests and
they do.
And I'm sure Mr. Griffin is quite often on the receiving
end of those tests, and trying to measure up to his competitors
to compete for market share there. The institutional investors
have the market power to demand best-execution statistics for
their prime brokers. And everyday investors do not get the same
transparency.
In fact, I believe there's an SEC rule, Rule 606, that
requires brokers to disclose at least some order execution data
to institutional investors, but this requirement does not apply
to retail investors.
So, Mr. Tenev, since Robinhood's mission is to democratize
finance for all, I ask, what are the mechanisms that you would
accept and support to provide transparent order execution
quality statistics so that your customers can engage in a
clean, apples to apples comparison between other brokers,
between your app and other peoples' apps in terms of the total
cost of trading?
Mr. Tenev. Thank you, Congressman, for that very important
question. I'm generally in favor of a greater amount of
transparency than what we've typically seen in the financial
industry, and recently, Robinhood, and me personally, have
engaged publicly on the topic of payment for order flow, short
selling, and, of course, T plus 2 and real-time settlement.
We do publish 606s via Robinhood Securities that detail our
payment for order flow arrangements with various market makers.
And just this past year, the industry implemented more detailed
606 requirements, which we, of course, conform to.
Also, back in December of 2020, we released a public page
on our website that provided detail about the execution
quality, including price improvement that our customers
received. And we're proud to announce that in 2020, our
customers received in aggregate over a billion dollars of price
improvement on their executions.
Mr. Foster. Right, but that's not a comparison to your
competitors. There are a lot of questions about the accuracy of
the best execution reference price, and independent of whether
it should be improved, it seems like, if I was a customer of
you or one of your competitors, what I'd want to see is, I just
executed a trade of $2,000, and on average, I got X percent
better or worse than a reference price.
And then over time, and seeing not only the trade that I
just executed, but perhaps a running average over the last
month or two that you can compare to the running average of
whether you're exceeding some benchmark for trade execution
quality that can really be compared with potential competitors.
And is that a workable system? Are there difficulties? Is
there a reason why industries should move that way in the name
of transparency to customers?
Mr. Tenev. Congressman, this is a very interesting topic to
me. I'd love to have the conversation. I don't know if this is
the right forum to necessarily ideate and brainstorm on all of
the solutions, but I just want to say I'd be happy to engage
with this in a detailed forum and figure out the right path.
Mr. Foster. Okay. We do intend to continue to engage with
the industry on this subject because it's very easy to make
payment for order flow sound really creepy. You're basically
selling a list of rubes to the sharks, okay?
On the other hand, you make part of an argument that this
can net out positive for consumers, but for it to fully net out
positive, they have to be able to make the apples to apples
comparison. That's really an important issue.
And I think that probably your reaction to that, if you
found your customers were leaving you because of poor execution
quality, you would do what large funds do, which is to split
your order flow between multiple order execution firms and then
demand of them the best order execution and move your business
to whomever does the best for your customers.
Mr. Tenev. Congressman, we already do that. We have seven--
Chairwoman Waters. The gentleman's time has expired. Mr.
Mooney, you're recognized for 5 minutes.
Mr. Mooney. Thank you, Madam Chairwoman.
Let me just start by saying that in the last Congress, 30
of my Democrat colleagues, 4 on this very committee,
cosponsored a bill that would impose a financial transaction
tax on the purchase of securities and certain derivatives.
And just recently, after the market volatility surrounding
GameStop in January, many Democrats renewed the call for a
financial transaction tax. On January 28th, Congresswoman Ilhan
Omar tweeted, ``How about this financial transaction tax now?''
Congressman Peter DeFazio is the lead sponsor of the bill. He's
already put the bill back in for this session of Congress. It's
now House Resolution 328--it's called the Wall Street Tax Act
of 2021. I actually have a copy of it from the last session
here. It's in again now. And Congressman DeFazio says that a
financial transaction tax would, ``help create a more level
playing field for Main Street.''
So with that background, Mr. Tenev, this question is
directed at you. The Robinhood platform has more than 13
million users and most of them are small-dollar retail
investors. If the Federal Government levied a .1 percent
transaction tax on the sale of securities--and I know one of my
colleagues, my good friend mentioned this earlier, and I want
to expand upon it a little more. How would that .1 percent
transaction tax on the sale of securities affect your platform
and the retail investors who are your customers?
Mr. Tenev. Thank you, Congressman. And we'd be happy to
engage in this discussion much more in the future. A 10 basis
point financial transaction tax would eat into the returns of
our customers, which, as you pointed out, are largely smaller
investors. And in that sense, it would be a cost to the retail
investor.
Of course, that would have to be weighed against the
potential benefits of this tax, and I know it's a more
complicated issue than meets the eye at first glance.
Mr. Mooney. Okay. Thank you for that answer. My next
question is actually for Jennifer Schulp. I know you spent your
career specializing in financial regulation. In your expert
opinion, would a financial transaction tax directly prevent
fraud or market manipulation?
Ms. Schulp. No. I don't think a financial transaction tax
would have an effect on fraud or manipulation. I also don't
think that it ultimately--financial transaction taxes often
fail to raise money, and they distort trading in a way that's
not necessarily foreseen initially by the tax.
And I'd like to just add in there as well that the
financial transaction taxes, while they initially might seem
like a small imposition on an individual investor, those taxes
often hurt individual investors and their long-term retirement
goals by affecting the institutions that also do the trading in
mutual funds and with retirement money. I don't think a
financial transaction tax is a good idea.
Mr. Mooney. And a quick follow-up to that, Ms. Schulp, do
you think that a financial transaction tax would have done
anything to prevent the market volatility and disruption we saw
just this past January?
Ms. Schulp. No, I don't think it's related here. There's
been some discussion that it might've decreased the amount of
trading and thus changed the volatility. It's my opinion that
that would not have had any effect in this particular
circumstance.
Mr. Mooney. Thank you. I only have a minute left, so let me
just summarize. The financial transaction tax supported by many
Democrats would do nothing to prevent market manipulation or
fraud, would have not prevented the market disruption in
January, and, most importantly, it would hurt retail investors,
yet Democrats are claiming that the events surrounding GameStop
and Robinhood in January make it imperative to implement this
financial transaction tax. It just doesn't add up.
A financial transaction tax would make it more expensive
for small retail investors to trade, and so much for looking
out for Main Street. I believe we should be working together to
find ways to open up markets to retail investors, not close
them. Instead of making trade more expensive with a burdensome
tax, let's look for ways to empower retail traders.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you very much. Mrs. Beatty, you're
recognized for 5 minutes.
Mrs. Beatty. Thank you, Madam Chairwoman, and thank you to
the witnesses. My first question is to Ken Griffin. In the
first 3 quarters of 2020, your company paid online brokerages
like Robinhood $700 million for their order flow.
Do you believe that brokers like Robinhood can serve the
best interests of their users while selling their order flow to
companies like yours? And that's a yes or a no.
Mr. Griffin. Congresswoman, I believe that Robinhood
actually goes further in the best interests of their customers
by, in fact, routing their order flow to Citadel. We give a
better price, a better execution for American retail investors
than the alternative of going to exchanges.
Mrs. Beatty. I'm going to take that as a yes, since you
said they go further. Then, can you tell me, why does your
company urge the SEC to ban the payment for order flow models
in a filing to the SEC?
Mr. Griffin. Congresswoman, that is a terrific question.
That filing relates to the U.S. options market--it was a filing
back, I believe, in 2004. And in the U.S. options market at the
time, trades were committed against listed quotes.
We were apprehensive about the direction in which the U.S.
options market was heading towards the existence of these price
improvement auctions which diminished the incentives to
aggressively provide bids and offers in the options market.
We felt that legislative or regulatory efforts to encourage
tight quoting, to discourage the existence of these auctions--
and this was being, in some sense, fueled by a series of
payment for order flow programs was in the best interest of
American institutional and retail investors.
Now, regretfully, we did not prevail in our reasoning. The
rise of price improvement auctions came into, in essence, the
day-to-day model for options trading in the United States. And
I do believe that this is a setback for our capital markets.
Mrs. Beatty. Because my clock is ticking, let me ask you
this: Are you saying that you no longer believe that the model
is anticompetitive and distorts order routing decisions?
Mr. Griffin. I think it's important to distinguish between
a market where you must trade on an exchange. In the options
market, we must print the trade on the exchange, versus a
market where you can trade off exchange, which would be the
U.S. equities market.
So just to be very clear, because your question's very
good, every single options trade must be executed on an
exchange. Equity trades do not. And because of that, I can save
Robinhood exchange fees, and offer a tighter bid-ask spread
than--
Mrs. Beatty. Clearly, we're going to have to have a further
discussion. Let me interrupt you only because my time is
running out, and I want to follow up with a question for
Robinhood's CEO.
Mr. Tenev, several of the brokers offered their users order
flow for the sale to the firm, like with the previous CEO at
Citadel. However, the price that Robinhood gets for the order
flow is much higher than any other brokers receive. And I could
go on and tell you we pulled the SEC filings, and that
Robinhood received 17 percent per 100 shares of stock traded,
and 58 percent to 100 shares, and I could go on. But the
question is, why do companies like Citadel pay a premium for
their order flows of Robinhood's users?
Mr. Tenev. Thank you, Congresswoman, for that very
important question. There are several reasons that may be the
case. One important one is that our model and formula for
payment for order flow works a little bit differently. We
actually receive payment for order flow as a percentage of the
bid-ask spread rather than on a per-share basis, and we do
believe that's the most optimal way to structure payment for
order flow arrangements.
Mrs. Beatty. Okay. Is it not because companies like Citadel
can make more money off of Robinhood users than others? And
that's a yes or a no, because my clock is going to run out.
Mr. Tenev. No.
Mrs. Beatty. I'm sorry. I yield back. My time is up.
Chairwoman Waters. Thank you very much. Next, we will have
Mr. Davidson.
Mr. Davidson, you are recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman. And I thank our
witnesses and I appreciate the work you've done today.
I just want to share that in May of 2020, the Depository
Trust & Clearing Corporation (DTCC) unveiled a working proof of
concept called Project Ion. In this project, DTCC said they
would examine the potential use of distributed ledger
technology in accelerating the clearing and settlement process.
Now, since Project Ion was publicly announced, we've received
little information pertaining to its progress.
As a long-time advocate for this emerging technology,
distributed ledger technology and blockchain, today I've sent a
letter to the DTCC to request that they provide an update on
the status of Project Ion. And I look forward to hearing back
from them, and hope to include them in our next hearing.
Mr. Griffin, with Project Ion in mind, could you briefly
state what would be your biggest concern if DTCC implements
same-day clearing and settlement?
Mr. Griffin. Same day clearing and settlement requires that
every bit of the workflow is perfectly synchronized across all
parties, and we have no time for recoverability or for the
error management that you have in the overnight batch process.
Mr. Davidson. Right. The technology makes that essential,
in my assessment, that is inherent for the architecture for
blockchain to move forward with each proof. And, so, I guess,
clearly, in your business, just to follow up there, the
technology exists for trading firms that are engaged in high
frequency trading, you measure success in the course of the day
in what, milliseconds for high frequency trading?
Mr. Griffin. As you know, we are the largest market maker
in the world and the largest in the United States in equities.
We put great emphasis on the performance of our systems. That
was one of the reasons that on the week of January 24th, we
were the only major market center for retail order flow that
was responsive every minute of every trading day.
Mr. Davidson. Perfect. I just wanted to make the point that
I think the technology exists, whether you use blockchain or
not, and I applaud you for having the ability to execute with
precision swiftly already, and I don't think it's a barrier.
I'd love to have more dialogue, but unfortunately, I have to go
to a few others.
Mr. Tenev, do you believe that the root cause of January
28th, for the problems that you and others experienced, were
market infrastructure-related, particularly related to T-2
versus T-0?
Mr. Tenev. Thank you, Congressman. I do believe if we had
real-time settlement capability and the infrastructure was
modernized, we would not have seen similar problems.
Mr. Davidson. Yes. And thanks for that. I think one of the
related things, and it's related to your mission at Robinhood
of more democratic access to capital--it's just not the ability
for more people and a broader portion of America to become
savers and investors. It's also to engage in corporate
governance, even. Do you believe that if market infrastructure
would guarantee--this is really related to the musical shares
where someone could be left with no share when the music stops,
mobile claims on a shorted stock. If the market infrastructure
would guarantee an investor could retain custody of their
shares so that the shares can't be lent to short sellers, there
could be a downside. How do you feel that only one claim on the
shares would resolve this, and that relates to proxy voting as
well or shareholders voting the shares?
Mr. Tenev. Congressman, I believe that's an important
question. It's one that Robinhood, and me, personally, have
engaged with. I do believe that the ability for the same share
to be shorted an indefinite number of times is somewhat of a
pathology, and that should be fixed. And I think step one of
that is modernizing the antiquated settlement infrastructure
that everything is built on. We simply don't have the ability
to properly track what shares have been shorted, and how many
times, as they're moving through our settlement system
currently.
Mr. Davidson. Yes. Thank you for that. And I appreciate
that you see the relationship. Hopefully, broadly we do, and we
provide the nudge the market needs.
I want to commend Vice Chancellor Travis Laster on the
Court of Chancery of the State of Delaware for his letter and
paper, ``The Blockchain Plunger,'' which explains how this
could be done, and I ask unanimous consent to submit that for
the record.
As my time expires, I want to commend you, Mr. Gill, for
just representing a large segment of the industry, in my view,
where savvy investors have had an opportunity to engage, and it
relates to people with diamond hands that hold. You might not
call yourself a holder, you might use the words, ``diamond
hands,'' but thanks, and congratulations for your success. I
yield back.
Chairwoman Waters. The gentleman's time has expired, and,
without objection, your submission is taken. Thank you.
Chairwoman Waters. Mr. Vargas, you are recognized for 5
minutes.
Mr. Vargas. Thank you very much, Madam Chairwoman.
First of all, I want to apologize to Mr. Plotkin. You spoke
of the anti-Semitic attacks that you suffered online. As a
person of color, I always feel the need to confront hate speech
and speak out, and I don't think there's ever been a more
hateful, evil, sinful event in human history than the
Holocaust, so I want to apologize to you and your family for
those attacks. You brought it up, and I think we owe you an
apology, so I want to apologize for that.
Sometimes, I think some of my colleagues on the other side
of the aisle are devoid of any contact with real people when
they say this is just political theater, or they don't want to
know the rate of return, when that's exactly what people want
to know. In fact, there's been a great deal of interest in this
hearing, and I think it speaks to a great distrust in our
society of government, markets, and institutions.
And then, along comes the story of GameStop, and it's a
story, really, of Robinhood turned on its head. And the reason
I say that is, and Mr. Luetkemeyer brought it up, Robinhood was
an English folk hero, in the 13th, 14th Century, and he was
supposed to steal--Robin of Loxley was supposed to steal from
the rich and give to the poor, and here, you almost have the
opposite. You have a situation where you have stealing from the
small retail investor and giving it to the large institutional
investor.
From an outsider's perspective, you have, at least, the
hedge funds and their armies of analysts and lawyers and
regular old suits attacking the trust [inaudible] GameStop by
shorting its stock. And to the rescue, here comes the retail
investors, and they're taking stock to these incredible levels.
And all of a sudden, Robinhood steps in, but not to help the
little guy. He steps in and says, I'm going to help the big
guy, and stops the sale, because no one knows how high this is
going to go. And who is getting it? Who is getting socked in
this thing? The bullies are, the hedge funds. And that's why
people were excited about this.
But all of a sudden, Robinhood steps in, and they say, No,
no. We had to do this because of other conditions, and my good
friends, the Republicans, say it was the government, really. It
was because the government regulations forced them to do this.
Well, that's not what the public thinks. The public thinks that
there was collusion, that the big guys, all of you guys were
figuring out how to do this, and, ultimately, come out ahead as
you always do. And it seems that my colleagues on the other
side want to help people.
Now, Mr. Griffin, if I could just ask you the first
question: How many people are in the room with you? If you
could just count how many people are in the room with you.
Mr. Griffin. There are five people, including myself in
this room, sir, Congressman.
Mr. Vargas. Thank you. So, I don't think my colleagues need
to help the CEOs or anybody else. They have plenty of help.
I have to ask this: You said that you didn't talk to
anybody at Citadel, Citadel Securities. Did anyone in your
organization, since January 1st, contact Robinhood?
Mr. Griffin. Are you asking if we've had contact with
Robinhood?
Mr. Vargas. With respect to GameStop, and what we're
obviously talking about.
Mr. Griffin. Congressman, we offered to have my colleague
who manages that relationship be here today instead. He has
firsthand knowledge. We, of course, are talking to Robinhood
routinely in the ordinary course of business. We manage a
substantial portion of their order flow.
Mr. Vargas. I understand that, but did you talk to them
about restricting or doing anything to prevent people from
buying, not selling, but buying GameStop?
Mr. Griffin. Let me--
Mr. Vargas. Anybody in your organization?
Mr. Griffin. Let me be perfectly clear: Absolutely not.
Mr. Vargas. So if we depose everyone in your organization,
we'll find that.
Mr. Griffin. That is correct.
Mr. Vargas. Okay. Thank you. I do want to ask you one
thing, and Mr. Sherman was pursuing this. How do you balance
the best execution for the order flow for your purchase from
Robinhood with the need to profit from the purchase order flow?
How do you do that?
Mr. Griffin. As a market maker, we have to provide to the
customer a better price than they can achieve on an exchange.
Order flow is routed to us on the merits of the execution
quality that we provide in contrast to our competitors with
whom we are competing.
Mr. Vargas. Okay. My time's about to expire, but I have to
say, Mr. Tenev, when you say that Robinhood has made $35
billion, and you don't say how much your people lost on
GameStop, people who invested with you, that's like taking the
Fifth. Thank you.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
Mr. Budd is recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman. And I also want to
thank the panel.
Now, I really care about a level playing field for retail
investors to access the market, and I have long been a
supporter of financial innovation in fintech, and the shared
goal of democratizing finance and making access to the
financial system easier for all.
So, Mr. Tenev, your company boasts that it's helping to
democratize finance and is at the forefront of innovation. Can
you talk a little bit more about what Robinhood is doing to
push innovation forward, and create a level playing field for
all investors, while at the same time, making sure that those
investors are well-informed?
Mr. Tenev. Absolutely, Congressman. Thank you for that very
important question. The first thing I should note is that many
of the witnesses and representatives here have stated that it's
never been a better time to be a retail investor in America
than it is right now. I think the combination of zero
commissions, no account minimums, and fractional shares,
really, things that Robinhood has helped make the industry
standard, have helped small investors, and helped level the
playing field for people to participate in the markets.
Over the past year, Robinhood has released fractional
shares, the ability to do dividend--automated dividend
reinvestments, recurring investments so that you could take $1
or $5 and create a habitual investment into a particular stock.
And the theme of this year for Robinhood is, how do we take a
first-time investor and turn them into a long-term habitual
investor? How do we make long-term investing accessible for
people around the country?
And we're making huge investments in education and customer
support, to support that. We recently released a revamped Learn
Portal, we call it Learn 2.0, with the aim of taking a customer
from basic concepts such as, what is a share? What is a stock?
What's an ETF? And taking them all the way through to more
advanced concepts. And we're continuing to invest more and more
on Learn as well as on Snacks, which is our popular podcast,
and all other forms of content that we distribute. Last year,
more than 3.2 million--
Mr. Budd. I want to interrupt you there. I know you have a
lot more things. These are great, and I know we could probably
talk for a lot longer than this, but I want to shift gears just
a bit. But I do want to keep talking about the retail investor,
and I want to switch to Ms. Schulp.
Ms. Schulp, back in December, there was an article that you
wrote prior to all of these events that we're having the
hearing on today. And in the article, I think that you said
that it's inappropriate to refer to these very retail investors
that we're talking about that are using these platforms like
Robinhood, that we're talking about, and referring to those
investors as, ``dumb money.'' I think that is pretty insulting,
and my colleague from across the aisle from Connecticut used
that term. I think it's insulting. And instead, retail
investors are, in fact, revolutionizing the stock market. So
would you elaborate on those views, Ms. Schulp?
Ms. Schulp. Absolutely. Thank you, Congressman. Retail
investors are often referred to as, ``dumb money,'' by Wall
Street, and it's because they don't have access to the same
level of research, or some use the term because they think
retail investors make dumb decisions. I think it's insulting. I
think that the term needs to go out the window. Retail
investors are investors who make their decisions based on the
information known to them, and we should focus on educating
people so that they can understand the risks and rewards of
investing.
Here, I think the GameStop situation is proof that the
retail investors are revolutionizing the market. No one would
have guessed, when I wrote that article in December, that
retail investors were going to initiate a sophisticated short
squeeze. I think the retail investors here are learning,
learning by doing, which is one of the best ways to learn, and
we should expend effort making sure that people are equipped
with the knowledge to understand the risks of being in the
market.
Mr. Budd. I appreciate that, and I would like to ask for
unanimous consent to insert that letter into the record, Madam
Chairwoman.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Budd. Thank you. I just want to look--Robinhood wrote
about the need for--and this is open to anyone. And I just have
a few seconds left, but I'd like for someone to talk aboutx, is
it possible for clearinghouses in real-time settlements on the
blockchain to exist? And I don't have time for that, but that's
something we can come back to at a further point. And, Madam
Chairwoman, I'll go ahead and yield back.
Chairwoman Waters. Thank you very much. And, without
objection, I want to make sure that that's in the record, that
your insertion was accepted. Thank you. With that, we'll turn
to Mr. Gottheimer.
Mr. Gottheimer, you are recognized for 5 minutes.
Mr. Gottheimer. Thank you, Madam Chairwoman, and thank you
to our witnesses for being here today. Before I begin, Mr.
Gill, I read your testimony, and I'd like to offer my heartfelt
condolences for the loss your family suffered last year.
It's not just Melvin Capital that lost money as part of the
frenzy around GameStop. Whether it's a security guard losing
$20,000, or a dog walker losing a few hundred dollars, everyday
retail investors were left holding the bag after GameStop's
stock fell back to earth. Not every investor lost money. Mr.
Gill, sitting before us here today, remains bullish on the
stock. Still, Bloomberg reported yesterday that he was served a
lawsuit accusing him of misrepresenting himself and his
motivations.
I'm not here to take sides in the litigation. However, it
does raise important questions about the role of social media
websites, like Reddit, especially in the context of the
volatility we experienced with GameStop, AMC, and numerous
other stocks last month.
Mr. Huffman, what kind of authentication exists for Reddit
users to confirm their identities to verify that they're even
real people?
Mr. Huffman. Reddit--and this an important quality of
Reddit, so thank you for the question--doesn't require people
to reveal their full identity to use the platform. One of our
pillars of privacy, and privacy is something that's critically
important to us, is that users should be masters of their own
identity, and they can choose to reveal as little or as much as
they would like.
I'll point out that there are two sides to this that are
really important. On one side, this allows Reddit to work.
Something like WallStreetBets would not exist if users had to
reveal their full identity, because in WallStreetBets, people
are revealing gains and losses. They're effectively revealing
their financial position in life, and we would not put that
burden on anybody to force them to do so.
I'd like to point out that other platforms have real
identity, and it doesn't do anything to improve their behavior.
Mr. Budd. Is there any way for a regular user of
WallStreetBets to know what content is genuine, written by
other users just like themselves, retail investors who are
looking for honest information to invest on? Is there any way
for that?
Mr. Huffman. There are a couple of aspects to this. The
first is that we, as a company, invest significant resources in
enforcing the veracity of our voting system. It's something
we've been doing for 15 years, long before events like this,
long before even the election and the politics of the last few
years where these things have become top of mind for everybody.
This has been critically important to us.
Also, our user base is exceptionally good at sniffing out
untruths, misinformation, and fake stories both within this
community and Reddit at large. So, in order for any piece of
content to be successful on Reddit, it has to be accepted by
that community and receive the same votes that anything else
would.
Mr. Budd. Okay. Do you have any heightened standards for
places like WallStreetBets or other investing subreddits where
people can manipulate content to their own financial gains?
Mr. Huffman. We keep a high standard across the entire
site. And with this particular community, over the past few
weeks, we've been looking especially closely, anticipating
these sorts of issues and questions. And, to date, we have not
found any nefarious behavior.
Mr. Budd. Got it. But we could have a situation where
thousands, possibly millions of dollars of retail investor
money may be being manipulated. We don't know that for sure.
Mr. Huffman. People in the United States talk about stocks
on Reddit. They talk about it on TV, in magazines. People can
say--in fact, they do, on television, all the time encourage
people to make what I would call bad investment decisions. On
Reddit, I think the investment advice is actually probably
among the best because it has to be accepted by many thousands
of people before getting that sort of visibility.
Mr. Budd. Do you see any difference between someone on
Reddit offering advice versus an analyst at a major bank or a
financial services firm?
Mr. Huffman. Absolutely. I think on Reddit, you're seeing
retail investors who are giving authentic advice based on their
knowledge, and you would not, I think, call into question what
their motivations are, or what large positions they may hold
before going on TV and talking about them.
Mr. Budd. Do you plan to do more in this space, and is this
something that's going to be a major priority of yours? And do
you think overall, social media companies, like yourself,
should be held to a different standard? Should you be
responsible for what happens in your content? If someone
manipulates something or if it's a bot, should that be on you,
or do you think that's just buyer beware?
Mr. Huffman. We take manipulation of Reddit incredibly
seriously. That is one of our, I think, first duties in all of
this is to ensure the authenticity of our communities, yes.
Mr. Budd. Yes. But do you think you should be held
responsible if somebody puts something--if there's some
collusion or if there is somebody who is a--it's a Russian,
it's a bot that's online. Do you think you should be on the
line, or this is just a site you offer for people to exchange
ideas?
Mr. Huffman. Reddit can be held responsible, and we do take
our responsibilities here incredibly seriously.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
Mr. Budd. Thank you. Thank you, Madam Chairwoman.
Chairwoman Waters. Mr. Kustoff is now recognized.
Mr. Kustoff. Thank you, Madam Chairwoman. And I want to
thank you and the ranking member for convening today's hearing.
If I could, Mr. Tenev, I'd like to echo what many of my
colleagues have said today. We do appreciate the fact that
you've created this platform. To a large extent, you've leveled
the playing field so that small, individual investors can have
a shot at the American Dream of investing. A lot has been said
about the situation that occurred in late January. My question
to you is, how did you misjudge your capital requirements to
prevent people from being able to trade during that period in
January?
Mr. Tenev. Thank you, Congressman. I wouldn't say we
misjudged our capital requirements. This was a 1-in-3.5 million
occurrence event, one that had never been seen before in
capital markets, and we had to play this by the book. Robinhood
Securities made the decision that we did so that we could
remain in compliance with our regulatory capital and deposit
requirements. Unfortunately, it required us to restrict the
buying of these securities for Thursday, and limit it to some
degree on subsequent days until additional capital came in that
allowed us to relax the restrictions.
Mr. Kustoff. It was Robinhood's mistake, though, correct?
Mr. Tenev. Robinhood owns what happened, certainly, and we
need to make sure it doesn't happen again, but Robinhood--
really, Robinhood Securities had limited options on how to
address this. And I fully support the team in making the
decision that they did, and I believe they did the right thing,
and the only thing.
Mr. Kustoff. You said at the beginning that you're
privately held. With that said, is your primary source of
revenue from the order flow payments that you receive from some
of the players we've talked about today?
Mr. Tenev. That is correct, Congressman. Payment for order
flows is one of our largest revenue sources.
Mr. Kustoff. Is it the largest?
Mr. Tenev. It's the largest, yes.
Mr. Kustoff. In both your written and oral testimony, you
talked about the settlement period, and we're probably capable
of doing it in real time, or instead of T plus 2, making it T
plus 1. If we had real-time settlement, would the situation
that occurred in January have been preventable? In other words,
that wouldn't have happened if we had real-time settlement?
Mr. Tenev. Congressman, if we were to have real-time
settlement, and of course, there's some implementation details
that would govern this, there would be less of a need for
collateral at clearinghouses because the cash and securities
transactions would be exchanged in real time. Collateral for
counterparty risk would be less necessary. So, real-time
settlement would lead to reduction, perhaps, and elimination in
some of these collateral requirements, a reduction in the money
that's sort of clogging up the plumbing of the system, and that
would have avoided some of these problems altogether.
Mr. Kustoff. Thank you very much. And just to be clear,
does the same answer apply if I asked you if settlement was T
plus 1 instead of same-day settlement, would your answer be the
same?
Mr. Tenev. Congressman, T plus 1 would be better, but it
doesn't--it reduces the scope of the problem, but it doesn't
eliminate it from a technology standpoint.
Mr. Kustoff. Thank you very much.
Mr. Huffman, I'd like to follow up on some of the questions
that my colleagues, Congressman Hill and Congressman
Gottheimer, asked. You've done an investigation into Reddit and
into WallStreetBets. You don't see anything--any bad actors--
I'm paraphrasing, but you don't see any bad actors that caused
any role in the GameStop frenzy. Am I characterizing that
correctly?
Mr. Huffman. Congressman, that's right.
Mr. Kustoff. You know that Congress is looking at amending
Section 230. What are your thoughts about that as it relates to
Reddit?
Mr. Huffman. Sure. Section 230, I think, is a critically
important law to the internet as we know it. And it was
created, in fact, to protect a forum in the early internet for
talking about stocks. Section 230, I think it's also important
to point out, doesn't protect platforms or companies like ours
from civil litigation, so there are mechanisms for coming after
companies like ours. What it does protect is our ability to
evolve the way we moderate our content, which we have done in
many ways over the last decade.
Chairwoman Waters. The gentleman's time has expired.
The gentleman from Texas, Mr. Gonzalez, is recognized for 5
minutes.
Mr. Gonzalez of Texas. Thank you, Madam Chairwoman, and
Ranking Member McHenry, and I want to thank everyone here with
us today.
This is for Citadel. Mr. Griffin, in 2020, Citadel violated
Regulation SHO, which governs short selling. Citadel is now
involved in another short-selling problem, and Robinhood routes
half of its customers' orders to you. Robinhood halts buying on
a position that you're long on, and you own the hedge fund and
the clearing broker. What is there to prevent you from taking
advantage of that situation and making sure you profit off of
the confusion and retail investors?
Mr. Griffin. Congressman, I'm trying to understand the
question.
Mr. Gonzalez of Texas. Let me give it to you again. In
2020, Citadel violated Regulation SHO, which governs short
selling. Citadel is now involved in another short-selling
problem, and Robinhood routes half of its customers to you, its
orders to you. Robinhood halts buying on a position that you're
long on, and you own the hedge fund and the clearing broker.
What is there to prevent you from taking advantage of that
situation and making sure you profit off of the confusion of
retail investors?
Mr. Griffin. In no particular order, I just do not
understand the reference to us owning a clearing broker. We do
not own DTCC. We do not control DTCC. We are not a party to the
discussion, dialogue, or demands between DTCC and Robinhood.
So, I do not understand the premise of the question, because we
have literally nothing to do with DTCC other than being a
member of DTCC for providing settlement services for us, and
for doing real-time trade affirmation and clearing.
Now, Citadel Securities owes a duty of best execution for
every order that comes from Robinhood, and I will tell you that
I'm incredibly proud of how seriously my team takes that duty
of best execution. Some of the most earnest, hard-working, and
thoughtful people that I've ever met in my life work on our
retail execution business here at Citadel, and take great pride
in the execution quality that we give to each and every trader,
not only at Robinhood, but at every single one of the--
Mr. Gonzalez of Texas. Thank you.
Mr. Griffin. --of the retail--
Mr. Gonzalez of Texas. Thank you for your response.
Mr. Gill, I understand that you made your position known on
GameStop as far back as 2019, and are lauded as a diamond hands
hero by the WallStreetsBets community. Have you ever previously
experienced or observed the type of restrictions Robinhood and
other applications performed on January 28th?
Mr. Gill. Thank you, Congressman. No, I have not.
Mr. Gonzalez of Texas. Thank you. That was it for the
question.
And, Mr. Huffman, I'm not a Redditer, but I do understand
the problems around social media and freedom of speech and the
tightrope act that goes on where these intersect. In the near
decade of WallStreetBets and subreddit, have they shown
themselves to be an exceptionally problematic forum, or just
one of the many eccentric communities that call Reddit home?
Mr. Huffman. Congressman, I think your latter description
is more accurate. They are an eccentric community, but they're
well within the bounds of our content policy. And though we do
have difficult decisions to make here and there regarding
specific communities, one of the things we look to first is
whether the community is trying and putting their best efforts
toward being a good citizen of Reddit. And towards that end,
we've had consistent communication with the moderators of that
community, and they've been doing, I think, an excellent job.
Mr. Gonzalez of Texas. Thank you. The last financial crisis
was caused when we turned a blind eye to the bad practices of
our financial institutions. Perhaps today, we've seen a warning
about the clearing process, and I hope today can be a jumping-
off point for us to take a hard look at our markets, and the
practices of these institutions.
In a two-day clearing process, the liability risk and
potential financial stress limited trading, but in a key time
in market, and, perhaps, in a way that materially affected
investors in these recent events. So, I'm hoping that we all
get to take a closer look at what is happening.
And with that, I yield back. Thank you.
Chairwoman Waters. Thank you very much.
Mr. Hollingsworth is now recognized for 5 minutes.
Mr. Hollingsworth. Thank you, Madam Chairwoman.
Mr. Griffin, I'm going to direct my questions to you,
specifically, but I'm hoping to talk a little more
philosophically about the market writ large, rather than just
Citadel itself. Certainly, there's been a significant amount of
evidence supporting the advantages that market makers offer
retail investors.
Through sophisticated infrastructure and high-speed
technology, bid-ask spreads have decreased from $0.33 to less
than a penny over the last 5 decades, and according to some
research, saved retail investors $1.6 billion just in the first
6 months of last year alone. None of our discussion after this,
and the questions I'm going to ask, is intended to be
pejorative to that reality, but I just wanted to pick your
brain, given your deep experience about some of the
implications of off-exchange trading, specifically. We've seen
this year that off-exchange trading has eclipsed nearly 50
percent of all trading.
Can you talk a little bit about what factors have
contributed to off-exchange trading's growth versus on-exchange
trading? Certainly, I want to talk about the concerns we may
have as market participants about that, but first, just the
factors that you think are driving that?
Mr. Griffin. I think one of the most significant drivers of
off-exchange trading is that exchanges are handcuffed in their
ability to fulsomely compete.
Mr. Hollingsworth. Can you talk a little bit more about
that? Is this just regulatory arbitrage?
Mr. Griffin. I hate the word, because it has a negative
connotation. I believe that the exchanges should have greater
latitude in setting their kick sizes in the most liquid
securities. That will allow order flow that's currently going
to dark pools to go to exchanges and to receive better
executions. So, let me just be very clear: It's not that we
want to inhibit dark pools, or market makers like Citadel, from
competing.
Mr. Hollingsworth. Right.
Mr. Griffin. It's that we want to enable and empower
exchanges to be better competitors. I started my career as a
retail investor in the day where I used to spend $0.25 in a
bid-ask spread if I was lucky. I know the days you're referring
to. We've come a long way. But to continue on this journey, the
next step is to allow exchanges to be more competitive in the
market.
Mr. Hollingsworth. I think you answered this question, but
just to put a fine point on it, there is public policy work
that needs to be done in order to help resolve some of this
challenge that exists in the movement of volume from on-
exchange to off-exchange. That's incumbent upon us. It's
incumbent upon regulators to find a better solution. Is that
what you're saying?
Mr. Griffin. Congressman, I'm saying that yes, it's
legislators or the SEC. I believe much of this can be done by
the SEC as a policy matter.
Mr. Hollingsworth. Right.
Mr. Griffin. Think of it as the next step forward in
regulation en masse.
Mr. Hollingsworth. Love it. Great. Thank you for all of
those answers. I want to highlight this further. Can you talk
about some of the challenges or deleterious impacts on the
market if more and more volume is off-exchange versus more--
versus [inaudible] trading? Can you talk a little bit about why
we should be concerned about that, to make sure we all
understand how important it is to make these changes to
empower, as you said, exchanges to be better competitors?
Mr. Griffin. I think there are three salient points I'd
like to make. First, price discovery is the most important part
of our capital market's function, because price discovery
combined with liquidity fuels our free enterprise system. It's
how companies raise capital. It drives down the cost of
capital. The more trading on-exchanges, the better price
discovery we have. That is good for our capital markets.
The second is that dark pools are often willing to engage
in business practices where they discriminate against one class
of investors versus another. I find it very unsettling that we,
in any way, prohibit discrimination against one group of
investors to the benefit, or at the expense of another in any
part of our capital markets. We want our capital markets to
represent the values of our country.
The third is that the dark pools themselves create a level
of concern and apprehension about the integrity and fairness of
our markets. And I believe that we should always be taking
steps to advance public confidence and the confidence of retail
investors and institutional investors that the United States
capital markets are a fair place in which to transact business.
Mr. Hollingsworth. Mr. Griffin, thank you for those
answers, and I would call upon my colleagues to recognize the
deep experience Mr. Griffin has in these areas, and how
important it is that we take the steps, either via agency or
via legislation, to help empower exchanges to compete on a
level playing to make sure that we create a public policy.
Chairwoman Waters. The gentleman's time has expired.
Mr. Lawson, you're recognized for 5 minutes.
Mr. Lawson. Thank you, Madam Chairwoman. Thank you to you
and Ranking Member McHenry for this hearing today, and I want
to thank the rest of the panel, the panelists too, for this
great forum.
One thing, Madam Chairwoman, I want to clarify for the
record is that one of my colleagues earlier said that when
people got their stimulus money, they went out and started
investing. I want to let them know that my people got their
stimulus money and were trying to pay the rent, trying to take
care of their kids, and I don't want the panel to think that we
worked so hard on the stimulus dollars so that people could run
out and invest their money. That's not the norm.
Mr. Plotkin, Wall Street is supposed to be tied to revenue
and property fundamentals. We saw these fundamental changes
when amateur investors gained control. They publicly stated
that this isn't about investing based on their fundamentals and
that this is an investment about making a profit in that way.
It's about making a profit to demonstrate that they can
manipulate the system, and if not, better than professionals
such as yourself.
The Reddit trade won, and Wall Street was losing billions
of dollars. Melvin Capital bet against GameStop, and was on the
verge of bankruptcy. Clearly, there is manipulation and
distrust within the system, and inequality in American finance.
Mr. Plotkin, do you believe that there is manipulation,
distrust, and overall inequality within American finance? And
what do you believe are the consequences to a big guy like
yourself, but, also, little guys in this process?
Mr. Plotkin. Thank you for the question. I really can't
speculate in terms of the broader system. I think Melvin--my
focus is on running our portfolio and building a great
organization and a strong team. I think some of the issues you
speak about are much greater societally, and it's not really my
area of expertise.
Mr. Lawson. Okay. One other thing, you guys have a Series
67 license and everything, but these amateur investors don't
have to go through those same standards. And because they do
not have to go through those same standards, how are they able
to go in and manipulate the market--maybe someone here can
answer--over people who have been involved in just research and
calculation and investors for so many years? Can anybody
answer, how are they able to go in and manipulate markets like
this and cause billions of dollars to be lost?
Mr. Plotkin. Sure. I think, as we've spoken about today,
the financial markets are changing. There's a lot of new
players. I think they saw an opportunity to drive the price of
the stock higher. And today, with social media and other means,
there's the ability to kind of collectively do so. That was a
risk factor that, up until recently, we had never seen.
I think sometimes with retail investors, they've been
really adept at this, investing in the internet or software
stocks or electric vehicles, ideas with big opportunities, and
they chase them because they believe in the fundamentals. I
think this was very different in that a lot of the mean stocks
were businesses with real challenges. But they exploited an
opportunity around short interest and the way that was
approached. And I think Melvin will adapt, and I think the
whole industry will have to adapt.
Mr. Lawson. I understand that. And I guess from our
standpoint, and I don't have much more time, but what do you
recommend to us to try to keep this from happening again?
Mr. Plotkin. I think to some degree, markets are self-
correcting, moving forward, stocks--I don't think you're going
to see stocks with the kind of short interest levels that we
saw prior to this year. I don't think investors like myself
want to be susceptible to these type of dynamics. I think there
will be a lot closer monitoring of message boards. There will
be software providers. We have a data science team that will be
looking at that. Whatever regulation that you guys come up
with, certainly, we'll abide by. And I look forward to helping,
if you guys want to have future conversations about that.
Mr. Lawson. Okay. Thank you.
Madam Chairwoman, my time is running out, so I yield back.
Chairwoman Waters. Thank you very much.
Mr. Gonzalez of Ohio, you're recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. I want
to thank Ranking Member McHenry for his leadership in calling
for this hearing today, and also you, Madam Chairwoman, for
bringing us together.
Mr. Tenev, I'm going to start my questions with you by
walking through a series of events from that day in January,
just to make sure we're all on the same page. In your
testimony, you mentioned that the automated deposit
requirements from DTCC came in at 5:11 a.m. Eastern time, and
it showed a $3 billion deficit, correct?
Mr. Tenev. I believe that's correct, yes.
Mr. Gonzalez of Ohio. At that point, 5:11 a.m., did you
have the liquidity to meet the additional $3 billion deposit
requirement?
Mr. Tenev. As I wrote in detail in my written testimony,
there were a series of steps that the Robinhood securities team
took to--
Mr. Gonzalez of Ohio. Reclaiming my time, sir. At that
exact moment, did you have the liquidity for $3 billion? At
5:11 a.m.?
Mr. Tenev. At that moment, we would not have been able to
post the $3 billion in collateral.
Mr. Gonzalez of Ohio. Okay. So when you said, and you've
said this multiple times, that you did, in fact, have the
liquidity, and you didn't have a liquidity problem, at that
moment in time, that is not necessarily true, correct? You had
to take steps to get there?
Mr. Tenev. Congressman, we did have to--the Robinhood
Securities team had to work with our relevant clearinghouses to
adjust the risk profile of the trading day in order to meet our
collateral requirements.
Mr. Gonzalez of Ohio. Right. And in order to do that, your
choice was to throttle trading to prevent your clients from
being able to purchase certain shares, correct?
Mr. Tenev. That's correct. Robinhood Securities had to
restrict buying in about 13 securities.
Mr. Gonzalez of Ohio. Okay. And if you had not been able to
de-risk the portfolio, you wouldn't have been able to raise the
money and get the bar requirement and the excess capital charge
waived to de-risk the portfolio, then DTCC would have stepped
in and liquidated the portfolio, correct?
Mr. Tenev. I'm not sure what exact steps that they would
have taken if we weren't in compliance with the deposit
requirements, but it would not have been a good situation for
the firm or the customers.
Mr. Gonzalez of Ohio. Reclaiming my time, I would draw
everyone's attention to the letter that Ranking Member McHenry
submitted for the record. I'll just read this, ``If a clearing
member fails to satisfy a margin call, it exposes other
clearing members to risk and can put NSCC out of compliance. In
a case of nonpayment, NSCC may cease to act for the clearing
member and liquidate its unsettled clearing portfolio.''
So, that was definitely in the cards. For my constituents
who are Robinhood clients, what would this have done to their
portfolios if it would have been forced liquidation as a result
of missing the capital call?
Mr. Tenev. Congressman, if there was forced liquidation, at
the very least, it would have resulted in a total lack of
access to the markets for your constituents, not just to the 13
securities that we restricted buying in.
Mr. Gonzalez of Ohio. Right. So, this would have been an
enormous catastrophe for Robinhood, correct, and the clients?
Mr. Tenev. That's correct. And not just Robinhood, but the
over 13 million customers that we serve.
Mr. Gonzalez of Ohio. Yes. And I think that's really sort
of the crux of the issue. In a sense, I love your company,
because it does, when correctly managed, provide investment
opportunities for individuals who are currently frozen out of
the markets for one reason or another. At the same time,
though, I believe a vulnerability was clearly exposed in your
business model, and, perhaps, in the regime that governs your
capital requirements, and we just can't live in a world where
my constituents could have their shares liquidated without
their consent, because you all aren't able to make a capital
call. I appreciate that you were able to ultimately satisfy it.
But the amount of time you had, from 5 a.m. to 10 a.m., to
figure this out is scary for the company. And, frankly, I care
more about my constituents than anything, and it was scary for
them, and, so, I hope we'll continue to look at that.
Beyond that, though, I also hope that this hearing
highlights a very real problem with our financial markets today
and how they're accessed by everyday investors. Today, the
Melvins and Citadels of the world, as well as major private
equity (PE) and venture capital (VC) funds have access to the
world's greatest investment opportunities on the planet,
whereas the retail investor world, of which Mr. Gill is a great
member, doesn't. It has access to an ever-diminishing set of
investment opportunities. While we're debating these
vulnerabilities, we're also serious about finding ways to
expand access for Main Street investors.
And with that, I yield back.
Chairwoman Waters. The gentleman's time has expired.
Mr. San Nicolas, you're recognized for 5 minutes.
Mr. San Nicolas. Good morning from Guam, Madam Chairwoman.
I've been with the hearing since 3 a.m. The sun is starting to
come up out here, but it's always a pleasure to be joining you
in these very, very important hearings that you call for the
American people. Thank you very much.
I wanted to first begin by congratulating everybody who
made money on the Robinhood trade. You guys found a low-float,
low-volume, massively-shorted stock, and you guys squeezed it.
And 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, and that was absolutely something
to behold, and Robinhood made that possible.
Mr. Tenev, you mentioned in your testimony that you've
secured $3 billion in funding to address the regulatory deposit
requirement situation that you faced. Where did that $3 billion
come from?
Mr. Tenev. Thank you, Congressman, for that question. To be
clear, we were in compliance with all regulatory net capital
and deposit requirements without the additional capital
infusion. It was simply to provide an extra cushion, allowing
us to unrestrict trading and be prepared for other black swan
events that might happen in the future. The capital came from
mostly existing venture capital investors that Robinhood
already had.
Mr. San Nicolas. So, basically, you had to further dilute
your position in Robinhood in order to make sure that you
secured all of the liquidity and customers affected [inaudible]
that additional $3 billion.
Mr. Tenev. That's correct, Congressman.
Mr. San Nicolas. That's why I have a serious concern, Mr.
Tenev, because not only was your business model designed to
profit off of order flow, which caused you to take
extraordinary risks in having 13 million customers with access
to large margin trading that facilitated the GameStop
situation, but you halted buys on that stock, and you allowed
sells in order to mitigate the capital requirement situation,
and you materially benefited from it. You materially benefited
from it because it reduced the amount that you would have had
to go out and raise in additional capital in order to prevent
these kinds of crises from recurring.
You took from your customers in order to minimize the $3
billion from being larger than it probably would have been
because you wanted to protect your position, and that is very
troubling. It's very troubling that the order flow model that
you built and the risk that you took on resulted in that halt,
and it's very troubling that that halt also materially
benefited both you and the existing shareholders by minimizing
the amount of additional capital you had to raise in order to
prevent that from happening again.
You basically took from the shareholders in order to do
that, and that's just--I don't know what to say about that. But
I think that this, Madam Chairwoman, presents a very serious
situation where we need to ensure that companies are not taking
advantage of customers in this way.
Mr. Tenev, you're quoted as saying in this hearing that,
``buying increases capital requirements; selling does not.''
So, it was something that you knowingly did. It was beyond just
trying to protect the existing customers. And at the end of the
day, while you had to raise an additional $3 billion, it
minimized that from being a larger sum. We have customers who
purchased the stock, who are now bag holders after the price
came down, because they couldn't continue going up with buying,
additional buying, and that was willful. That was intentional.
So I'm glad, Madam Chairwoman, that we've called this
hearing. I'm glad we're able to put these things on the record,
and I'm just very, very concerned with the implications of
this. And I only hope that at the end of the day, those bag
holders get a lot more than an apology.
Thank you, Madam Chairwoman, and I yield back.
Chairwoman Waters. Mr. Rose, you're recognized for 5
minutes.
Mr. Rose. Thank you, Madam Chairwoman, and thank you,
Ranking Member McHenry, for holding this important hearing
today, and thank you to our witnesses for your testimony and
your participation today and for the dedication of time that
you've made to this hearing.
There is still so much for us to learn from this market
event. Obviously, speculation has been rampant, and I believe
we should not get ahead of our skis, so to speak, and rush to
policy recommendations before we understand the full scope of
this situation. The committee investigation is barely underway,
and I would view a large majority of the policy proposals
suggested today as half-baked at this point.
At the end of the day, we should all want retail investors
to have access to the market and to ensure that they have the
information they need to participate in the market in an
informed way.
Mr. Griffin, my colleague, Representative Loudermilk, asked
you to explain the advantages of cutting down on the settlement
time, but you were cut off before you could complete your
answer. Would you like to finish your thought there?
Mr. Griffin. Congressman, to be brief, the issue in going
to real-time settlement is that everything has to work
perfectly in a world where there are still people involved in
many of the processes.
We'll get there one day as an industry. I just think it's a
bridge too far in the next couple of years.
Mr. Rose. And then, you were also cut off earlier when
answering my colleague, Mrs. Beatty's, question regarding the
difference between payment for order flow for the options
market versus the equities market. Would you like to continue
that explanation?
Mr. Griffin. I think we covered that reasonably well. I
think the salient difference is that in the options market,
every trade must take place on an exchange to start with.
In the equities market, the current market structure has
been arrived at with the blessing of the SEC as the best way to
give retail investors in America price improvement as compared
to the exchanges.
And to be succinct, we should make exchanges more
competitive, not make internalization or dark pools more
privileged.
Mr. Rose. Thank you.
And then finally, Mr. Griffin, earlier, Representative
Luetkemeyer asked about how we got to where GameStop was short
sold to 140 percent. Given that naked shorting is an illegal
practice, how did that happen, given current U.S. law?
Mr. Griffin. Clearly, a number of the purchasers of the
short sales--of the shares sold short--are institutions that
also lend their securities.
And it's very important to remember that institutional
investors earn substantial returns from participating in the
securities lending markets.
So if you are lending your GameStop stock out, for example,
over the period of the recent crisis, you may have been earning
an annualized rate of return of 25 or 30 percent on the shares
that you lent out. That accrues to the benefit of pension
plans, of ETFs, and of other pools of institutional lending
that participate in the securities lending market.
And keep in the back of your mind, when a bank lends money
to a business, that business may turn around and lend money to
its suppliers. Just because, in some sense, somebody can on-
lend what they've bought doesn't necessarily mean something has
gone wrong in the chain itself.
Mr. Rose. Would you see that as an area ripe for regulatory
adjustment or do you think that's not a problem?
Mr. Griffin. I think if we were to think about legislative
priorities to make our capital markets work better, this
doesn't make the top 100 list.
Mr. Rose. Thank you.
Despite the intense volume and exposures presented in the
markets, the broader infrastructure of our financial markets
has performed very well, I believe. My concern, like those of
my colleagues, is that forging ahead with new regulations at
this point would be harmful and have unforeseen consequences.
In the few moments that I have left, Ms. Schulp, can you
speak to what the potential dangers are of increased regulation
to retail investors?
Ms. Schulp. That's going to take me more than 12 seconds.
But there's a lot of potential for unintended consequences
here, and increased regulation can drive retail investors out
of the market. It can cause them to have less good prices.
Mr. Rose. I'm sorry not to give you more time. Maybe one of
my colleagues will give you a chance to complete that.
I yield back.
Chairwoman Waters. Thank you very much.
Next, we will have Mrs. Axne for 5 minutes.
Mrs. Axne. Thank you, Madam Chairwoman.
And thank you to the witnesses for being here today.
I just want to quickly follow up on a question that my
colleague, Mr. Foster, asked you earlier, Mr. Tenev.
You said that Rule 606 reports detail the arrangements you
have with firms like Citadel. However, those only detail the
payments you receive.
Are you saying that you're prepared to publicly disclose
the detailed terms of your payment for order flow with Citadel
and other market makers?
Mr. Tenev. Thank you for the question, Congresswoman.
The 606 reports do publicly detail the payment for order
flow arrangements we have with Citadel Securities and our other
market makers.
Mrs. Axne. Okay. I'll look forward to seeing those details
then. Will you make sure that you get those over to our
committee?
Mr. Tenev. Certainly. We can have that arranged.
Mrs. Axne. Okay. Thank you.
Last month, of course, as we saw this volatility with
GameStop and AMC and the stocks started to rally, everybody
seemed to get involved. And one survey recently said that 30
percent of Americans purchased one of those viral stocks. That
includes people like my nephew and his two friends who stayed
up until 4 a.m., to see if they could get a piece of this
action.
One of the most concerning pieces, though, of this whole
episode is how many people really felt like that's what they
needed to do to get ahead. To me, this just exemplifies the
income inequality across America and it's one that we need to
deal with.
And I do appreciate the opportunity for retail investing.
However, I want to make sure that it creates a good outcome for
the people who are using it. And right now what I'm seeing is
gambling on the stock market, and it's not a real solution to
that income inequality, and I don't think we should pretend
that it is.
Just last June, when Hertz declared bankruptcy, and after
that, Robinhood was actively pushing the stock on its site, it
was trending on Robinhood, and I don't think the promotion of
that worthless stock is good for investors. That's a gamble
that they shouldn't have taken. And that's just one example.
People having access to the stock market is nice, but if
they don't have the money to invest, then really it's not
democratization. And that's the real reason that 80 percent of
the stock market is owned by 10 percent of the people.
And, of course, those are people who don't have to put all
their money into healthcare or childcare or a car payment or
whatever it is that's just keeping them going through their
day-to-day.
Earlier, Mr. Tenev, you said that you couldn't tell us what
your clients' rate of return is, but generally, 99 percent of
short-term traders underperform the market.
So, Mr. Tenev, you say that Robinhood's mission is to
democratize finances. Is that correct?
Mr. Tenev. That's correct, Congresswoman. Yes.
Mrs. Axne. Okay. So I want to ask you then, you've invested
significantly in behavioral research. And just so you know, I
own a digital design firm with my husband, so I'm familiar with
what behavioral research can do for platforms and websites. And
that behavioral research has really shaped how your app is
designed. Is that correct?
Mr. Tenev. Congresswoman, like many technology companies,
we employ data scientists, user researchers, and designers to
provide a better customer experience and to understand our
customers' needs.
Mrs. Axne. So on the specifics, when people sign up, they
get a scratch-off ticket to see what they get, confetti falls
every time they place an order, they get push notifications,
and they're encouraged to trade. If a friend signs up, they get
a free stock, and on and on.
Why have you added specific gaming design developments to
look like gambling to your app? That encourages more frequent
trading.
Mr. Tenev. Congresswoman, as I mentioned earlier, we want
to get people what they want in a responsible, accessible way.
We don't believe in gamification. We know investing is serious.
And that's why most of our customers are buy and hold. A very
small percentage of our customers utilize margin.
Mrs. Axne. I appreciate that. But folks like my nephew
actually aren't your customers; they're your product. Your
customer is sitting right next to you, Mr. Griffin with
Citadel.
So when you don't pay as much for index funds or Apple or
anything like that, your app to me shows me that you're really
just trying to encourage more trade, which puts more money in
your pocket, not helping people build equity through smarter
investing.
Mr. Tenev, I'd ask two things. Who exactly do you believe
you're democratizing finance for? And how do you plan to
address these conflicts of interest?
Mr. Tenev. First of all, I believe in our business model,
Congresswoman. I believe our business model has become the
industry standard for a reason. It's because it's good for
customers, it's led to the democratization of the markets, and
it works.
And we're very proud to route to market makers on uniform
terms without taking into account any of the payments that we
generate from them in the routing and based purely on the
execution and quality we provide to our customers.
Chairwoman Waters. The time has expired.
Mr. Steil is recognized for 5 minutes. Thank you.
Mr. Steil. Thank you, Madam Chairwoman, and thank you for
holding today's hearing.
I'm concerned about investors in the State of Wisconsin and
across our country, to make sure that they have access to the
market, access that is fair and equal to the big banks and the
hedge funds and Wall Street.
We've seen great improvements in access, the
democratization in finance, and I'm concerned that these
hearings are going to lead us down the path of additional
regulations before we've fully investigated the facts.
It was stated earlier that that may not be the case. And
I'd like to insert in the record a Bloomberg article dated
January 28th, entitled, ``GameStop trades show need for more
regulation, Democrat says.''
Chairwoman Waters. Without objection, it is so ordered.
Mr. Steil. Thank you.
I think it'll be helpful for everyone to review that with
the concerns being that we're going to drift away from the
democratization of our finance systems.
I'm also a bit disappointed that we don't have
representation in our first hearing here today from the SEC or
the DTCC, especially in the early days of the Biden
Administration. I think that would be helpful. And hopefully,
we'll be able to have that participation in a future hearing.
If I can direct my first question to Mr. Gabe Plotkin at
Melvin Capital Management, there's obviously a lot of attention
that came pouring in on a stock, GameStop, that you held a
short position in. People were tweeting about it, things were
building.
Do you have any information as to why folks on Twitter and
on Reddit and others uniquely targeted that stock?
Mr. Plotkin. First of all, thank you for the question. I
think it's a really good one.
I think ultimately--I'm not sure how the momentum built
around that. There were certainly some signs, as we kind of
discovered after the fact. And there were even website names
bought, like nasty things about our firm, as far back as
November.
So I'm not sure how it started, but I think ultimately,
they saw an opportunity with a very high short interest stock
that a lot of people could relate to because it was a retail
experience, and that's sort of the genesis of it.
Mr. Steil. Thank you very much.
I'm going to shift gears over to Robinhood and Mr. Tenev,
if I can.
As my colleague, Mr. Gonzalez, was talking about, at some
point, it became clear that additional collateral would likely
be needed.
How many of your customers owned GameStop stock or options
on January 27th?
Mr. Tenev. I don't have the exact numbers--
Mr. Steil. Suffice it to say, had it increased dramatically
over the days leading up to the 27th?
Mr. Tenev. Yes. That's accurate.
Mr. Steil. That's fair. And you saw additional order flow
coming into this.
Was it reasonable to believe that there would be additional
capital requirements, and did you take any steps, either
internally or working in concert with the National Securities
Clearing Corporation, to mitigate the risk posed by the
volatility before the January 28th collateral call?
Mr. Tenev. We did. On January 21st, we went to 100 percent
market requirement for AMC, which requires all purchases for
those stocks to be fully paid for, so customers would have been
unable to use margins to buy those. And that was January 21st
in the case of AMC, and January 26th for GME.
Mr. Steil. But this was still insufficient ultimately, as
related to the collateral call that came in, in the early
morning hours of the 28th. Is that correct?
Mr. Tenev. That's correct. The limiting margin was
ultimately insufficient.
Mr. Steil. And as you look to your peers, do you know any
other brokerages that were putting in place limitations on
their buy orders?
Mr. Tenev. Yes, I do, Congressman. I think that's an
important question. Many brokerages put in place similar
limitations on buy orders for many of these securities.
Mr. Steil. For the record, I've heard conflicting reports
on that. I think that's something that this committee needs to
further look into, is the differential between what occurred
under your control at Robinhood, and some of the other
brokerages. I think it's a question that we should fully
investigate on this committee, and make sure we have all the
facts as we're moving forward.
Could you detail, Mr. Tenev, your plans going forward as it
relates to making sure that an event like this doesn't occur
again, and that you have the foresight to prevent these late
collateral needs?
Mr. Tenev. Absolutely, Congressman. Thank you for that
important question.
Certainly, the additional $3.4 billion helps provide a
significant cushion. In addition, you could see that between
Thursday and Friday, Robinhood replaced the PCO, which is a
position closing only setting, with a much more granular
position--
Chairwoman Waters. The gentleman's time has expired.
Mr. Casten, you're now recognized for 5 minutes.
Mr. Casten. Thank you, Madam Chairwoman.
And thank you so much to our witnesses.
There's a whole bunch of themes in today's hearing, and I
want to, if I can, just tie a couple of threads together that I
think are relevant that have been--we've had corners of.
In June 2020, Alex Kearns, who was 20-years-old at the
time, from Naperville, Illinois, killed himself, largely thanks
to a bug in the Robinhood system. The bug was that he turned on
the app, and it said that he owed $730,000 that he did not
have, because of options positions that he thought canceled
out, but didn't appear to.
He called the help line. The help line, of course, was not
manned, as we've discussed. He sent several panicked emails,
three to be precise, but did not receive a response.
Ultimately, there was a response in an email saying that, in
fact, his positions were covered, but by that point, it was too
late, because he had taken his own life.
This is a gentleman who was 20-years-old. Under Illinois
law, he was not allowed to buy a beer, but he was allowed to
take on $730,000 in positions and exposure that he did not have
the liquidity to cover.
Your mission, Mr. Tenev, is to democratize finance, but the
history of financial regulation is to protect people like Alex
Kearns from the system.
As the old joke goes, if you're playing poker and you can't
figure out who the fish is at the table, you should leave the
table because you're probably the fish.
And there's an innate tension in your business model
between democratizing finance, which is a noble calling, and
being a conduit to feed fish to sharks.
I want to cover a little bit of timeline.
In December 2019, Robinhood was assessed a $1.25 million
fine by FINRA for failing to disclose payment for order flow
agreements to your customers.
Six months after that, Alex Kearns committed suicide.
Six months after that, on December 20th, Robinhood paid a
$65 million fine to the SEC for, among other things, failing to
disclose payment for order flow agreements to your customers.
There is a tension in your model.
Now, along with that, according to your 606s, as has been
reported by CNBC, you attract a higher rate for equity trades
from payment for order flow than any of your competitors, 17
cents per hundred trades, versus about 11 cents for your
competitors, and even more, over 50 cents per hundred trades,
for options.
I would ask unanimous consent to enter the CNBC article
into the record.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Casten. Mr. Tenev, when did you start offering options
on your platform?
Mr. Tenev. Thank you, Congressman Casten. And first, let me
say--
Mr. Casten. We're tight on time. When did you start
offering options?
Mr. Tenev. Options trading was offered starting in Q1 of
2018.
Mr. Casten. Okay. Thank you.
That's relevant because prior to 2018, your revenue grew
basically linearly with user growth. Your revenue in a year,
your payment for order flow revenue was about $10 per user, per
year. In 2020, it got to $50 per user, per year.
So, your revenue model went from growing revenue by growing
users, to growing revenue by growing revenue earned on the back
of each user consistent with taking on options.
How many firms do you route options orders to, Mr. Tenev?
Mr. Tenev. Congressman, we have seven market makers. I can
get back to you with the precise number for options. It's under
seven.
Mr. Casten. According to your 606 disclosures, you only
list four--Citadel, Susquehanna, Wolverine, and Morgan Stanley.
Are there any others besides the ones listed in your 606
disclosures?
Mr. Tenev. If that's in the 606s, Congressman, I'm sure
it's accurate.
Mr. Casten. Okay. So, do you route options trades to anyone
with whom you do not have a payment for order flow agreement?
Mr. Tenev. Currently, we have, Congressman, uniform payment
for order flow arrangements with all of our market makers. So,
they would all be under the same arrangements.
Mr. Casten. Okay. So how do you ensure that you're getting
best pricing if every single firm you're ruling out anybody who
is not paying you for the privilege to trade?
Mr. Tenev. Congressman, we believe having uniform payment
for order flow arrangements with all market makers ensures
structurally that there is no conflict of interest, because it
prevents payment for order flow from being an input in
decision-making for where to route orders.
Mr. Casten. Okay. I'm almost out of time, but there is an
innate conflict in your model.
Let's imagine right now that we are today's version of Alex
Kearns. I'm nervous, I have an exposure, and I call your help
line now. Let's call and let's listen in the time we have
remaining to what I'm going to hear on the other end of the
phone.
[Audio recording played.]
Chairwoman Waters. Mr. Casten, you may wrap up.
Mr. Casten. I yield back my time.
Chairwoman Waters. You may wrap up. Go ahead, Mr. Casten.
Mr. Casten. I have no further questions, Madam Chairwoman.
Chairwoman Waters. Thank you very much.
I will now recognize Mr. Gooden for 5 minutes.
Is Mr. Gooden on the line?
Voice. Madam Chairwoman, Mr. Gooden is in Texas, and he's
unavailable.
Chairwoman Waters. Thank you very much.
I now recognize Mr. Timmons for 5 minutes.
Mr. Timmons. Thank you, Madam Chairwoman.
It seems we're here today to try to find culpability in the
events that transpired last month. I seem to spend a lot of my
time thinking about capital requirements and the time it takes
to execute these trades. So, I'm going to focus my questions
there.
Mr. Tenev, you have repeatedly invoked capital requirements
that both your company and your clearinghouse are required to
abide by in order to explain the restriction of trading last
month.
My friend and colleague, Mr. Barr, asked you about this
earlier, but I would like to hone in on this a little bit.
Could you explain what specifically about the nature or
volume of the trades being ordered by your customers caused
these increased capital requirements to be triggered? And how
did the level of collateral required compare to what you would
normally have to abide by?
Mr. Tenev. Thank you for that question, Congressman.
To give you a sense for the increase, our capital
requirements--our deposit requirements with NSCC from January
25th to January 28th, so a span of 3 days, increased tenfold.
Mr. Timmons. What is the most your capital requirements had
been prior to this event?
Mr. Tenev. I believe there was a table, Congressman, that I
provided in my written testimony that had the precise value at
risk and special charges in the prior days.
Mr. Timmons. But, obviously, it had never been close to
this amount. And now, you have additional capital that you've
raised, and so this should not happen again. Again, I think you
referenced one in three and a half million was the likelihood
of this situation occurring. Is that correct?
Mr. Tenev. That's correct. And that's not a Robinhood
number. That's actually a third-party industry number.
Mr. Timmons. Are you aware of the origin of these capital
requirements?
Mr. Tenev. I do believe that these capital requirements,
and specifically the NSCC deposit, was spelled out in Dodd-
Frank.
Mr. Timmons. So, the Dodd-Frank Wall Street Reform and
Consumer Protection Act is arguably to blame for what happened?
You would not have halted trading in this case but for this
exorbitant capital requirement that you were unable to meet?
I think that when we're searching for culpability, we need
to realize that the well-intentioned legislation from over 10
years ago is somewhat culpable in this entire conversation.
Ms. Schulp, will you elaborate on that? Do you agree that
Dodd-Frank is somewhat responsible for the situation in which
Robinhood found themselves?
Ms. Schulp. I think the capital requirements in Dodd-Frank
can be seen as responsible.
I think it's incumbent on us to evaluate those capital
requirements, and whether they are appropriate, given the
business models at issue. I think that's also a question of
settlement times and modernizing our system.
But I agree that the capital requirements here put into
place are one of the reasons that we're having these
conversations today.
Mr. Timmons. And you went to the next place I wanted to go,
which is the time it takes to settle these transactions.
So, 12 years ago, 10, 11 years ago, we never really
considered the whole concept of a Robinhood, of an app-based
trade platform that democratizes access to purchasing and
selling publicly traded companies.
So, I do think that needs to be revisited, especially
because it is unfair. There are other companies that have far
more resources that are not in the situation, and those
companies have larger investors. So, we really are picking on
the little guy in this entire conversation.
Between reconsidering capital requirements for retail
investor platforms, number one; and, number two, trying to find
a way to settle these transactions faster, those two things
seem to be the best way to achieve our objective of making sure
this doesn't happen again.
I do hope that we can hear from Michael Bodson from the
DTCC in the next hearing or perhaps someone from the NFC.
I'll end with this. One of my colleagues across the aisle
said the deck is stacked against the little guy, and I couldn't
agree more. But in this case, the very committee that is
conducting this hearing has more culpability, I would say, than
any of the witnesses whom we have brought before us today.
We need to make sure this doesn't happen again. I look
forward to working with my colleagues across the aisle.
With that, I yield back.
Chairwoman Waters. The gentleman yields back.
At the request of one of our witnesses, we will take a
short recess. The committee stands in recess for 5 minutes.
[brief recess]
Chairwoman Waters. The committee will come to order.
Mr. Torres, you are recognized for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman.
One of the concerns about payment for order flow is that it
creates a perverse incentive for a brokerage firm like
Robinhood to send detail orders not to the firms that provide
the best execution to retail investors, but rather to firms
that provide the highest payment to Robinhood.
There's a concern about a conflict between the interests of
brokers and the interests of retail investors, and that concern
seems to have been vindicated by the conduct of Robinhood.
The SEC previously found that Robinhood misled its
customers about how it makes its money. Both the SEC and FINRA
previously found that Robinhood failed to ensure the best
execution for retail customers, depriving those customers of
$34 million, resulting in a $65 million civil penalty from the
SEC.
My first question for the CEO of Robinhood, how much of
your revenue comes from payment for order flow?
Mr. Tenev. Thank you, Congressman.
Let me first state that regulatory compliance is at the
center of everything that we do--
Mr. Torres. I want to reclaim my time. How much of your
revenue comes from payment for order flow? Please answer the
question as asked, given the time constraints.
Mr. Tenev. Congressman, I don't recall the exact
percentage. It's over 50 percent.
Mr. Torres. And do you know how much of your order flow
revenue comes specifically from Citadel?
Mr. Tenev. Citadel is indeed an important counterparty.
It's our largest counterparty in terms of where we route orders
to, and I want to explain that a little bit, Congressman.
Mr. Torres. I want to move on, because I want to cover the
concerns about gamification.
The stated mission of Robinhood is the democratization of
finance, but I worry that the real world impact of Robinhood is
the democratization of financial addiction.
Robinhood has gaming features that seem to manipulate
retail traders into making rash and reckless and potentially
ruinous investments. We all know the tragic story of Alexander
Kearns.
According to a memo from the Financial Services Committee,
there's one feature in particular that encourages retail
investors to tap on the Robinhood app up to a thousand times a
day in order to improve their position on the wait list for
Robinhood's highly-coveted cash management feature.
Do you share my concern that a retail trader tapping on a
Robinhood app a thousand times a day is a sign of addiction?
Mr. Tenev. Congressman, that particular feature that you're
discussing was to get access to our debit card plus high yield
savings product, which is one of the many features targeting
passive investors that we've rolled out over the past--
Mr. Torres. Mr. Tenev, a thousand times a day? You are
encouraging your customers to tap on an app a thousand times a
day? That to me is a sign of addiction, and it worries me that
you fail to see it in the same light.
Mr. Tenev. Congressman, we didn't encourage anyone to tap
on anything. To get access to the debit card, people were
placed on a wait list. And we wanted to give our customers
delightful features so that they know that we're listening to
them and that we care about them, and this is just one example
of how we add great features, that customers love, to our
products.
Mr. Torres. Addictive trading might be bad for your
customers, but it's good for Robinhood. Addictive trading means
more trading, and more trading means more money for Robinhood.
There's a sense in which Robinhood monetizes addiction. You
make money from the quantity rather than the quality of
trading.
Much has been said about price improvement. One of the
arguments for payment for order flow is price improvement.
According to The Wall Street Journal, Citadel Securities claims
to have saved investors a total of $1.3 billion last year.
But I'm wondering, how can Citadel possibly know how much
it saves retail investors? Citadel does not transact directly
with retail investors; it transacts directly with brokers.
And even if you stipulate that there has been a cost
savings, it's unclear to me how much of that cost savings is
being passed on to the retail investors, and how much of that
cost savings is actually being pocketed by Robinhood as profit.
We know that there's no commission, there's no visible fee
at the front end of the transaction. But what is the hidden
cost to investors at the back end of the transaction? Can you
give me clarity about the hidden cost to investors?
Mr. Tenev. Congressman, I appreciate the question. I think
that's a very important question.
In 2020, Robinhood provided our customers in excess of $1
billion in price improvement. That price improvement is
measured relative to the National Best Bid and Offer (NBBO),
which is the reference price per security on all major LID
exchanges.
Mr. Torres. I ran out of time, so I will yield back.
Thank you, Madam Chairwoman.
Chairwoman Waters. Mr. Taylor, you're recognized for 5
minutes.
Mr. Taylor. I will point out that today and this week has
been very hard for my home State of Texas and for my district
in Collin County. We have faced a record-breaking freeze across
the State, which has crushed our power-generation capability.
And we have had some really heartbreaking stories of need.
In fact, during this hearing, I was called away to help a
mayor try to get power back to their water pumping stations to
make sure that they have water for their citizens in Anna,
Texas, today.
So, members of the committee, I encourage you to send your
thoughts and prayers to the people of Texas as they go through
this really challenging time.
On to the topic of this hearing. Mr. Tenev, I just wanted
to go--and I know there has been a lot of questions about the
margin call that you got on the morning of the 28th of January.
But I'm not sure that we really understand how the margin call
changed from $3 billion to $1.5 billion to $600 million.
Can you sort of go through, how did you negotiate the
margin call down? And these are very sizeable decreases, right,
50 percent, then 50 percent again, to something that you could
then in turn manage?
How did you decrease the margin call?
I'm sorry. You're on mute. You're still on mute. I haven't
been able to hear a word you said, unfortunately.
Mr. Tenev. How about now?
Mr. Taylor. I can hear you now.
Mr. Tenev. Congressman, I appreciate the question. And,
first, I want to send my thoughts and prayers to the people of
the great State of Texas. I appreciate you mentioning that.
I'd like to just refer to my written testimony, which gives
the details of everything that happened on, I believe, pages 9
to 11--
Mr. Taylor. I've read that. But did you go in and say,
``Hey, you need $3 billion, but I won't sell these stocks if
you reduce it,'' and that's how you got to the point where
people could only sell the stock, not buy it? Is that what you
did?
Mr. Tenev. I believe--
Mr. Taylor. Because that's not in your written testimony.
So, I'm just trying to get your answer.
Mr. Tenev. I don't believe we have made any decisions on
PCO'ing the stocks between the initial $3 billion request and
the subsequent $1.4 billion request.
But between the $1.4 billion and the roughly $700 million,
there was a discussion between our operational team at
Robinhood Securities and their relevant counterparts at NSCC
regarding what measures we intend to take to lower the risk of
our portfolio.
Mr. Taylor. Okay. So in other words, if you had $3 billion,
your customers would have been able to do everything they
wanted to do, including purchase more GameStop. Is that
correct?
Mr. Tenev. I don't want to speculate on that. If we had
infinite capital, certainly.
But I think it's also important to note, Congressman, that
this was an evolving situation. We hadn't seen it before. We
had no idea what Friday would have looked like had we been able
to allow customers to buy these securities unrestricted on
Thursday.
So, I think it's difficult to speculate exactly how things
would have been different.
Mr. Taylor. But isn't the reason they said you need $3
billion was because your customers wanted to buy GameStop and
then by saying, ``Hey, they can't buy it, they can only sell
it,'' that reduced the capital that you needed?
It seems to me that's what happened, but I'm just trying to
get--
Mr. Tenev. They weren't saying specifically that--nobody, I
believe, didn't want our customers to buy GameStop. These are
regulatorily-mandated deposit requirements, Congressman, that
we had to comply with, that were heavily influenced by the
concentrated activity in GameStop, AMC, and the other
securities.
Mr. Taylor. Wouldn't it be fair to say that your firm was
undercapitalized to allow your customers to do what it is that
you wanted them to be able to do?
Mr. Tenev. I think, Congressman, that in this case,
certainly if we had the additional capital, we would have been
able to ease restrictions, or perhaps, with sufficient capital,
unrestrict altogether.
I think it's important to note that lots of other firms did
essentially similar things, if not the same thing, in
restricting the buying. Sox, this was really more of a systemic
problem rather than a uniquely Robinhood problem.
Mr. Taylor. But didn't the fact that you went out and
raised more capital so that you can actually answer this
problem in the future--doesn't that also belie that you were
undercapitalized on the 28th of January?
Mr. Tenev. Again, Congressman, we met all of our regulatory
capital requirements and deposit requirements.
Mr. Taylor. Your customers wanted to buy the stock. You
wouldn't let them do it because you didn't have the capital to
allow them to do it, right?
Mr. Tenev. Yes. We didn't have the deposit requirements.
Mr. Taylor. I think that's really a core problem that I
think this committee hearing has shown me, is that you were,
unfortunately, undercapitalized to help your customers do what
they wanted to do.
I yield back.
Chairwoman Waters. Thank you very much.
Mr. Emmer, you're recognized for 5 minutes.
Mr. Emmer. Thank you, Madam Chairwoman. I appreciate it.
Mr. Gill, as was previously noted at this hearing, one of
your colleagues at the witness table has as many as five people
in the room with him.
I guess, Mr. Gill, my first question for you is, how many
people are in the room with you right now?
Mr. Gill. Zero, Congressman.
Mr. Emmer. That's what I thought, Mr. Gill.
And I just want to note for the entire committee that Mr.
Gill is actually appearing before our panel by himself while
many others are receiving significant [inaudible].
[Inaudible] underestimating the sophistication and the
independence of these individual investors.
Now, we've heard a lot of reasons for concern today, and
some are legitimate, but there have also been some proposed
overreactions by Members of Congress that could create even
more problems.
Attention has been given to the positive sides of this
story [inaudible] temporarily limiting its investors from
trading, which deserves an investigation.
What we saw was a movement of individuals investing to try
to make money. I don't see what's wrong with that, even if that
motivation is fueled by a desire to stick it to a hedge fund
they don't like.
Mr. Gill, you're the only retail investor involved in this
GameStop situation on our panel today--why, I don't know, but
you are--yet members on the committee have hardly asked you any
questions. We've heard from a lot of the companies whose funds
were involved in this event, but we've barely heard from the
people who made this happen.
Is there anything you would like to add to this hearing
that you haven't been able to add yet, given that we're past
the 4-hour mark on this hearing?
Mr. Gill. I appreciate that, Congressman. I do.
I don't have anything to add at this time, just that I
would be the first to acknowledge that investing in stocks and
options is incredibly risky and it's so important for people to
do their own thorough research before investing.
But that said, I tend to agree with you that folks should
be able to freely express their views on a stock and they
should be able to buy or not buy a stock based on those views
that they may have.
Mr. Emmer. Mr. Gill, on that note, how would you feel if
these brilliant people who are asking you these questions today
decided that you should not take the risks that you're making
these thoughtful decisions on? What do you think about that?
Mr. Gill. I would probably ask for an explanation,
Congressman, and to try to understand their viewpoint as to why
they might think that, and perhaps we'd be able to talk through
it.
Mr. Emmer. Right. I appreciate it, Mr. Gill. I think we
need to value the right of the individual to make decisions for
themselves.
And it's fantastic to see so many people getting involved
and participating in the greatest financial markets in the
world. We should be encouraging individual participation in the
market by you and others.
And we should want more people--more, not less. We don't
need the people from the mountaintop deciding who's capable and
who's incapable. We need more people having the opportunity to
develop financial literacy, to build their own portfolios, to
secure a safe and comfortable retirement, to grow their wealth
so they can send their kids to college.
And most importantly, in my opinion, we should strive for
individuals to have the autonomy to do all that they themselves
want to do without having to rely on others or, God forbid,
their government.
I also want to thank Mr. Budd for using his time to mention
blockchain technology applications in the post-trade
[inaudible] settlement and clearing process.
In light of this whole situation, it's important now more
than ever that we utilize the technology that we have access
to, and we do have access to technology that is decentralized
and can provide real-time trade settlements.
Mr. Lynch and I have a nonpartisan bill that we introduced
last [inaudible] reintroduce very soon that concerns this.
If we should exercise oversight of anything here, it's to
ensure that individuals maintain access to our markets,
individual investors. And discussions about over- and
undervalued companies only continue to increase.
Unfortunately, average investors were locked out of the
markets at a time of extreme volatility, while institutional
investors were not. While I understand that a lot of what
happened during this market frenzy came down to liquidity
issues, individual investors were in a vulnerable position and
were at the will of online brokerages.
We should be taking this time to discuss how to move
forward in a way that promotes market access to all investors,
just like we did last month. [Inaudible] clearly does not
understand what Reddit is and how you utilize social media and
catalyze the market's movement.
Chairwoman Waters. The gentleman's time has expired.
Mr. Emmer. We've significantly underestimated the
sophistication of America's retail investors and we've not been
focusing on improving market access.
Chairwoman Waters. The gentleman's time has expired.
Mr. Emmer. Thank you, Madam Chairwoman.
Chairwoman Waters. Mr. Lynch, you're recognized for 5
minutes.
Mr. Lynch. Thank you, Madam Chairwoman.
And speaking for the families of the Eighth Congressional
District, we just want the gentleman from Texas to know that we
are, indeed, praying for all of the good people of Texas and
hope you come out okay and get the power that you need.
I do want to follow up on Mr. Perlmutter's questions, Mr.
Gill. I represent the Eighth Congressional District, which
includes Brockton, Massachusetts, your home. So I figure I,
more than anyone, owe you the opportunity to respond.
You said earlier that you began your trading in GameStop
when it was around $5 a share, with the hope that it might go
to $20 or $25.
And I want to say, I accept your analysis, your initial
analysis that GameStop was undervalued, and I think your belief
was sincere, and I think it was fact based.
And, in your defense, we are talking about GameStop, right?
It's a shopping mall retailer. We all know it. It's a well-
known commodity.
But at some point the stock really takes off, right? It
goes from $5 to $100 to $200 to $300. It gains escape velocity,
as they say, and it ends up at almost $500 a share.
But we're still in the midst of a pandemic, right? And you
can land a jumbo jet in the parking lot of the Westgate Mall in
Brockton, or any major mall in America, right? No one's going
to the malls, nobody's feeding this company, and so, it's up
around $400, $500.
Is there a role for someone to play here, for you to play,
or the SEC, or Robinhood, to, say, okay, the price dislocation
has become detached from reality and a note of caution might be
given to other day traders and individuals, retail traders who
might get jammed if they get into this trade?
You have a unique perspective, so what do you think is the
proper thing that should have happened? At some point, this
thing got away from you and went totally into the stratosphere.
And I'm just wondering what your thoughts are on how this
should have worked?
Mr. Gill. Thank you, Congressman Lynch. I do know Westgate
Mall quite well.
I would say that, just to be clear, I had thought that
maybe roughly $20 or $25 per share, I had thought that at that
time, but investment theses evolve over time. As the
fundamental events change over time, it's important to update
theses accordingly.
And I had mentioned that it appeared as though the stock
price had gotten a little bit ahead of itself last month. But
there's a lot outstanding. There's a lot that has happened in
recent months to suggest that GameStop could indeed turn around
its business significantly.
And one big element of that is indeed one of the largest
investors in GameStop, Ryan Cohen. And he has brought in some
colleagues who could turn around this company. And their value
could indeed--
Mr. Lynch. I want to reclaim my time.
Mr. Gill. Sorry.
Mr. Lynch. Okay. I want to reclaim my time.
Ms. Schulp, I want to ask you, we have this convergence
between fintech, social media, and the traditional markets.
And, if anything, the GameStop incident and the convergence of
all this has demonstrated a certain vulnerability in our
markets.
And I'm just wondering, if a loosely associated association
of day traders could cause all of this upset in our markets,
isn't there a wider national security issue that's out there in
terms of other people who might be nefarious actors who are
actually intentionally trying to disrupt our markets?
Isn't there a national security dimension to all of this as
well?
Ms. Schulp. Again, I can say that national security is not
my area of expertise. But to the extent--
Mr. Lynch. Well, something more specific then.
You said earlier that you were with FINRA, and they're
under Regulation Systems Compliance and Integrity (Regulation
SCI.) Is it appropriate to put some of these trading platforms
under that same regulation, which requires them to develop
systems and policies that protect the integrity of their
systems.
Ms. Schulp. I think protecting the integrity of systems is
important for all trading platforms, not simply the Robinhoods
of the world. We need to look to make sure that there is
integrity on the platforms.
I would agree with that, not necessarily Regulation SCI in
particular, but having platforms that are strong is important
here.
Mr. Lynch. Okay. Thank you.
Madam Chairwoman, I yield back the balance of my time.
Thank you.
Chairwoman Waters. Thank you very much.
Ms. Adams, you are recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman. It's been a very
interesting hearing. I do want to thank you for organizing
this. I think it has certainly been very helpful.
Ms. Schulp, let me ask you, first of all, in the case of
GameStop and AMC stocks, the prevailing narrative has been that
a band of Reddit-inspired folks rose up against Wall Street,
and forced a short squeeze by professional hedge fund managers
who were forced to cover their negative bets or risk
catastrophic losses.
But, according to a JPMorgan analyst, several signs are
pointing to institutional investors as big drivers of the wild
price action on the way up.
In your opinion, and based on historical data on retail
investors' ability to move the markets, what is the likelihood
that GameStop and AMC's market volatility was largely driven by
institutional investors looking to ride the wave?
Ms. Schulp. I think these are questions that we are going
to find out the answers to as we get deeper into the data. But
I think that it's likely that at some point in this increase in
value for all of these stocks, institutional investors were
involved. Retail investors traditionally have not been able to
move markets in the same way.
But it's important to note here that these were not large
stocks to begin with. This was not a massive increase in price
in Apple or Google. It was GameStop, a much smaller company.
So, the ability of retail investors to have outsized influence
here is entirely possible as well.
Ms. Adams. Thank you, ma'am.
Mr. Griffin, or Mr. Plotkin, do you have any thoughts on
this likelihood as well?
Mr. Griffin. Congresswoman, I believe you are asking one of
the single most important questions posed today. I believe that
the decline in the short interest as reported over the 2-week
period of time--the U.S. updates short interest reporting every
other week--indicates that roughly--and I apologize for not
having the exact number--but roughly 35 to 40 million shares
were bought back by parties that were short the stock.
This would be a dramatic degree of short covering that
could cause a dramatic increase in the price of GameStop.
Ms. Adams. Okay. Thank you.
Mr. Plotkin?
Mr. Plotkin. Yes. Thank you for the question.
I don't have the exact answer to your question, but I do
think it's worth noting that as the stock price moved higher,
there was a 3-day period where it traded almost 11 times the
entire float.
And so, I think that kind of volume gave anyone who was
short ample opportunity to cover, and probably suggests
tremendous either frenzied buying or institutional buying or
some sort of combination.
We did look at some of the options activity in the stock,
and on Friday, January 22nd, there were options that were
expiring which would have equated to 35 to 40 million shares of
stock ownership.
So, I actually don't think the short covering was the
biggest driver of the stock when you kind of look at the
volume. I really think the biggest driver was the aggressive
options activity and then whether it was institutional retail
or just the collective buying.
Ms. Adams. Okay.
Mr. Griffin, prior to the GameStop volatility in January,
did Citadel have any investments in Melvin Capital? And, if so,
how much?
Mr. Griffin. We first invested in Melvin Capital on Monday
of the week in question. I want to say that it was the 24th of
January. And prior to that, we had had no investment with
Melvin Capital.
Obviously, Gabe Plotkin is, by reputation, one of the best
money managers of his generation, and is well-known to my
partners here at Citadel. Gabe actually trained one of my best
portfolio managers, who worked with me over the course of his
career. So, he is well-known to my colleagues here at Citadel.
Ms. Adams. Okay.
Mr. Plotkin, can you confirm that you worked at Citadel LLC
before--
Mr. Griffin. I'm sorry. He trained--my portfolio manager
worked for Gabe at a different firm and then joined Citadel
subsequently.
Ms. Adams. Okay.
Mr. Plotkin, can you confirm that you worked at Citadel LLC
before eventually starting your own hedge fund, Melvin Capital,
in 2014?
Mr. Plotkin. When I was 23-years-old, I worked at Citadel
for 1 year.
Ms. Adams. Okay. Did you solicit or receive any advice from
Mr. Griffin during the GameStop volatility that occurred in
January?
Mr. Plotkin. All of my conversations with Mr. Griffin
really centered around his investment in our firm.
Ms. Adams. Okay. And did you reach out to Citadel or
Point72 for significant investments?
Chairwoman Waters. The gentlewoman's time has expired.
Ms. Adams. Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. You're welcome.
Ms. Tlaib, you're recognized for 5 minutes.
Ms. Tlaib. Thank you, Madam Chairwoman.
Hello, everyone. I'm so glad that we're having this
hearing. And I'm super appreciative of the leadership of our
chairwoman, so that we can at least have some sort of
transparency in exactly what happened.
As we all know, the wealthiest 10 percent own 84 percent of
all stocks. In fact, 50 percent of American families own no
stock at all.
I say this to emphasize that, to many of my residents, the
stock market is simply a casino for the rich whose gambling
hurts pension and retirement funds. And when you all screw up,
the people end up paying the tab through losses or bailouts.
I want to talk about the high frequency trading. We know
about half of all stock trading in the U.S. is done by
computers. They analyze market activity and instantly complete
trades at a profit. This high frequency trading allows Wall
Street traders to get ahead of transactions done by pension
accounts and retirement funds.
Mr. Griffin, and this truly is a yes-or-no question, is
Citadel's trading algorithm programmed to identify and trade
ahead of large trades done by pension and retirement funds? Yes
or no?
Mr. Griffin. Congresswoman, today, virtually all trades
executed by institutional investors are in the form of program
trades such as volume-weighted average price (VWAP) and other
algorithmic trades.
Ms. Tlaib. So that's a yes, right, Mr. Griffin? Just so
it's clear.
Mr. Griffin. I'm answering the question. It's a very
complex question that deserves an appropriate level of answer.
Ms. Tlaib. Okay.
Mr. Griffin. These VWAP trades are not large trades that
you can--it's not like there's 10 million shares to be bought.
It is a trade that is sliced into small slices, 100 or 200
shares, and executed over the course of a day, a week, or a
month.
Ms. Tlaib. Help me out with this one. Does this increased
cost, this kind of algorithm or whatever program to identify
and trade the computers doing the trading, does this increase
costs for people who have pension and retirement funds? Yes or
no?
Mr. Griffin. Given that we, for example, manage money on
behalf of pensions--
Ms. Tlaib. There's no time. This is not out of disrespect.
We just have to limit the time.
Mr. Griffin. We use VWAP orders to execute on behalf of our
hedge fund and have generated exceptional returns for pension
plans and for endowments, so--
Ms. Tlaib. Well, I'm going to help you out, Mr. Griffin. In
effect, some estimates indicate that as a result of the high
frequency trading, pension and retirement accounts pay nearly
$5 billion in taxes. This means that Wall Street firms like
yours engaging in high frequency trades are actually making
money at the expense of my residents' retirement funds.
One way to ensure that this enormous wealth generated on
Wall Street actually reaches the real economy, what's happening
right here in our communities, and in my district, is to enact
and look at proposals like a financial transaction tax.
And let me tell you, according to recent polling, the
majority of Americans--all of you need to hear this--support
taxing Wall Street transactions. Taxing them at just 0.1
percent would actually raise $800 billion over 10 years which
could fund programs like helping my district expand healthcare,
nutrition, and public education.
I heard my friend from Texas--and we are all praying that
all of the families will be taken care of--talk about access to
water and electricity, but guess what? Right now, in my
community, it's so poor that I have families melting snow so
that they can flush their toilets, because they have no access
to water. So this tax, to me, would discourage risky and high
frequency trading, unfair high frequency trading.
Mr. Griffin, has Citadel's lobbyist right now been hired to
oppose Federal proposals of a financial transaction tax because
it would make high frequency trading less profitable?
Mr. Griffin. We firmly believe that a transaction tax will
injure Americans hoping to save for retirement. I believe that
Vanguard has publicly come out and said that we'd have to work
about 2\1/2\ years longer--
Ms. Tlaib. I want to make this--
Mr. Griffin. Let me finish my answer. I think it's
important to--
Ms. Tlaib. No, no, no. I'm reclaiming my time. The Hong
Kong stock market, Mr. Griffin, imposes a 0.2 percent tax on
transactions, and as a result, sees little high frequency
trading, but this hasn't stopped the Hong Kong stock market
from thriving or becoming the third-largest in the world, after
New York and London.
So just to be clear, let's not gaslight the American
people. You will all be fine with the tax. And it's fair,
because let me tell you, our folks are tired of bailing you all
out when you screw up and gamble with the retirement funds, and
that's exactly what happens every single moment. And that's the
reason why we're having this hearing, is that sometimes you are
irresponsible, and it's set up in a way that helps only the
wealthy and leaves people like my community here with this
large income inequality that I feel like never, ever gets the
bailout it deserves.
Thank you so much. I yield back.
Chairwoman Waters. Thank you very much.
Ms. Dean, you're recognized for 5 minutes.
Ms. Dean. Thank you, Madam Chairwoman, and I appreciate
this hearing for the opportunity to get detailed information
and to gather the facts as to what happened over the course of
these transactions.
Let me start by saying, and I saw that Members on both
sides of the aisle are interested in this question--that the
core question that I'm going to be asking is, what did the
customers know? What did the users know, and when did they know
it? That's the theme of what I want to ask.
Because I believe if we understand what happened, and what
they knew and what they didn't, we're going to be able to
prevent some of the harm in the future.
Let's go to the narrative. Mr. Tenev, I want to take a look
at your page 9. You said that at approximately 5:11 a.m.,
Robinhood Securities received the automated notice saying that
you had a deposit deficit of approximately $3 billion. You then
said that between 6:30 and 7:30 a.m., Eastern Standard Time,
Robinhood decided to impose the trading restrictions, meaning
no more purchases of GameStop. And you said in your testimony
that in conversations with NSCC staff, early that morning, you
notified NSCC of your intention.
In that time period from 5:11 a.m. to the time you were
having the conversations, what did you tell your users? What
notice did they have?
Mr. Tenev. Thank you, Congresswoman. I believe during that
time period, shortly after the restrictions on purchasing of
these relevant securities were made, we communicated to users,
to our customers, that these securities would be restricted
from purchasing. And then subsequently, we issued broad
communications and communication on social media explaining the
reason being enhanced deposit requirements due to high
volatility.
Ms. Dean. I'm going to ask you to be much more specific,
because in your testimony, you wrote that you offered three
different ways of notification. You said that first, the
notification to your customers was what they agreed to in their
customer opening agreement. That was your first backstop,
which, who knows what that boilerplate said or when customers
or users agreed to it.
Second, you said they were notified 2 days later by an SEC
alert, and we know what that SEC alert was. It was quite
general, much more vague.
And third, you said that you also list a more ambiguous
mention of targeted messages to customers.
When did you specifically send your customers an alert,
``This is what we have had to do, because we were short
capital?'' When did you do that? What time?
Mr. Tenev. I believe, Congresswoman, that happened at
several different points in time. There was a blog post that
was published in the afternoon, Pacific time. I don't recall
the specific time. Maybe it's in my written testimony.
Ms. Dean. Would it be after the SEC notice? It seems to me
that you didn't notify your customers for at least 2 days. You
relied upon the SEC notice 2 days later. Would I be correct?
Mr. Tenev. Congresswoman, that's inaccurate. Customers were
notified several times on that day, and they were notified of
other restrictions as they happened days prior to January 28th
as well.
Ms. Dean. But you don't say what those notifications were
in your testimony. What did you notify them? Specifically, what
would I, as a user, have heard from you immediately upon your
imposing the restrictions?
Mr. Tenev. Congresswoman, immediately upon imposing the
restrictions, customers would have received communications
saying that they would be prevented from opening further
positions in the relevant securities. Later in the day, on
January 28th, around early afternoon Pacific time, we published
a blog post which explained that the decision to restrict these
securities was due to collateral requirements at NSCC and
clearinghouses, and not at the direction of special interests
or hedge funds.
Ms. Dean. Forgive me. Let me interrupt you there. You
admitted to making mistakes. Specifically, what mistakes did
you make?
Mr. Tenev. I admit to always improving. And certainly,
we're not going to be perfect, and we want to improve and make
sure that we don't make the same mistakes twice.
Ms. Dean. But what were those mistakes? That's what we're
here to learn about.
Mr. Tenev. Thank you for the question. It's an important
question. On Thursday, we did restrict the buying of these
securities. On Friday, we imposed position limits, which I
believe was a much better long-term solution, one that we'll
have in the future if anything like this happens again. We also
raised $3.4 billion in capital to allow our customers to trade
what they want.
Ms. Dean. Thank you. I yield back. I think my time has
expired.
Thank you very much, Mr. Tenev.
Chairwoman Waters. Thank you very much.
With that, we'll go to Ms. Ocasio-Cortez for 5 minutes.
Ms. Ocasio-Cortez. Thank you so much, Madam Chairwoman.
Mr. Tenev, Robinhood has engaged in a track record of
outages, design failures, and most recently what appears to be
a failure to properly account for your own internal risk.
You've previously tried to blame clearinghouses for your need
and scrambled to raise some $3.4 billion in a matter of days.
But you've also blamed a lack of industry-wide real-time
settlement, or rather, a lack of that settlement of trades.
But Robinhood's requirements for margin have long been far
more lax than other brokers--in December, just a couple of
months ago, you bragged about having some of the most
competitive rates in the industry, and this is evidenced by
your recent decision to raise those requirements.
When Robinhood prohibited its customers from purchasing
additional shares of several stocks, other brokerages merely
adjusted the margin requirements on these stocks.
So Mr. Tenev, given Robinhood's track record, isn't it
possible that the issue is not clearinghouses but the fact that
you simply didn't manage your own book or failed to
appropriately manage your own margin rules or failed to manage
your own internal risks?
Mr. Tenev. Thank you for the question, Congresswoman. Let
me address the margin point, because I think this is an
important one that has been underdiscussed.
In December, when we lowered our margin rates to 2.5
percent, one of the details that I think was missed is that
most other brokerages have tiered margin rates where the
wealthier customers pay much lower margin rates than lower-net-
worth customers.
You'll have someone who has $10,000 paying 9 to 10 percent
for margin, whereas someone with a million dollars pays 2
percent. So, our approach was to give everyone a uniform rate
so that wealthier customers are not advantaged with lower rates
than lower-income customers, and I think that's a unique
approach in our industry and is representing--
Ms. Ocasio-Cortez. Thank you. I apologize. I have to
reclaim my time for questioning.
As many of my colleagues have also pointed out, Robinhood
generates much of its revenue from the payment for order flow
arrangements with market makers like Citadel, as well as Two
Sigma and VIRTU. And in 2016, the SEC highlighted ways that the
payment for order flow created a, ``potential conflict of
interest with the broker's duty of best execution.'' And then,
one of the ideas that the Commission floated in 2016 for
addressing these conflicts of interest was to require that
brokers pass on the proceeds of a payment for order flow.
Earlier, one of my colleagues, Representative San Nicolas,
said that Robinhood owes its customers a lot more than an
apology, and I happen to agree with him. I believe that the
decisions made by you and this company have harmed your
customers.
Mr. Tenev, would you be willing to commit today to
voluntarily pass on the proceeds of the payment for order flow
to Robinhood customers?
Mr. Tenev. Congresswoman, I appreciate that question. When
the statement you refer to was made, I believe in 2015 or 2016,
it was before Robinhood forced the entire industry to drop
commissions and replicate our business model which made--
Ms. Ocasio-Cortez. So, I should take that as a no, you're
not willing to pass on the proceeds of payment for order flow
to your customers?
Mr. Tenev. When the other brokers dropped--
Ms. Ocasio-Cortez. I'm just talking about today, right now.
Mr. Tenev. Payment for order flow, Congresswoman, allows
for commission-free trading in the context of trading
commissions. It's a much larger source of revenue in the past
than payment--
Ms. Ocasio-Cortez. Mr. Tenev, I apologize. I don't want to
be rude. I just have limited time.
But if removing the revenues that you make from payment for
order flow would cause the removal of free commissions, doesn't
that mean that trading on Robinhood isn't actually free to
begin with, because you're just hiding the cost, the cost in
terms of potentially poor execution or the cost of lost rebates
to your customers?
Mr. Tenev. Certainly, Congresswoman, Robinhood is a for-
profit business and needs to generate some revenue to pay for
the costs of running this business. People were initially
skeptical that the model, even with payment for order flow,
would work when you removed the commissions, and I think we've
proven that otherwise by making this the standard model by
which brokerages operate now.
Ms. Ocasio-Cortez. I see. Okay. Mr. Tenev, I have to move
on very quickly.
I have a timeline question here for Mr. Plotkin. Mr.
Plotkin, earlier today, you mentioned that Melvin Capital had
not engaged in a naked short of GameStop, and Melvin closed out
its position on GME on the--is that correct?
Chairwoman Waters. I'm sorry. The gentlelady's time has
expired. We have to go to Mr. Auchincloss for 5 minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman, and I want to
thank our panel for being with us through a very substantive
and long afternoon. I think I might be a welcome face for them
because I, as the most junior member, am the last one to ask
questions here.
And I want to talk with Mr. Tenev about options. I agree
with what other members of the committee have said in both
parties about the value of democratizing access to assets, and
we should give latitude for independent retail investors'
judgment.
But in fields where there is an information asymmetry
between the user of a product or a service and the provider of
it, there's always a professional code of ethics around that.
When you go to a doctor, when you go to a lawyer, there is a
code of ethics wrapped around that interaction which protects
someone who doesn't understand as much about the service being
provided. And in finance, as you're well aware, there's a
fiduciary responsibility to do what's right.
In Massachusetts, where there are 500,000 users of
Robinhood, we hold broker-dealers to a fiduciary standard, and
the Secretary of State Securities Division filed a complaint
against Robinhood for violating that fiduciary standard, and
some of it was premised on options. Two-thirds of customers
approved in Massachusetts for options trading identified as
having limited to no investment experience.
The first question I would ask you, Mr. Tenev, and please
take no more than a minute, is what do you think is the
appropriate amount of financial literacy that a user should
have before they should be allowed to trade options?
Mr. Tenev. Thank you for the question, Congressman. Let me
first say that Robinhood really pioneered commission free and
zero contract fee options trading, and I think our market
leadership in this space is due to the fact that we not only
provide that access but have improved upon the safety of our
product in several ways over the past few years. Number one, we
don't allow undefined risk options trades so no selling of
naked calls, no undefined risk.
Number two, we made several enhancements to the safety of
the product over the past year, including the ability to
perform an instant, in-app exercise of an options position,
clarifications around the user interface, and live customer
support by phone for urgent options cases. So, we've actually
proven and are committed to improving in the future the safety
of our options offering.
Mr. Auchincloss. But to be clear here, options are decaying
assets. They're binary in outcome, so they are qualitatively
and quantitatively different than stocks and bonds in the sense
that you can lose all your money very fast. You can make a lot
of money very fast as well, but this is getting very close to
gambling. And especially when you gamify the option-buying
experience as your app does, it can very quickly turn into a
casino-like feel.
So, I'd ask you just to address the question again. What
level of investment sophistication do you think a retail trader
should have before they're buying options?
Mr. Tenev. Sure. Congressman, I appreciate the follow-up. I
should first say there are strict FINRA rules and regulations
governing who gets access to options that, of course, Robinhood
complies with. I also should note we're in a competitive
market. Several others have mentioned Chinese-based brokerages,
and other brokerages that are essentially offering similar
products, all having to comply with these regulations.
We're certainly willing to engage in a discussion about how
rules should change, if at all. And as long as they're applied
uniformly and are fair to small investors and not just
benefitting high-net-worth individuals and institutions, we'd
be open to having that conversation.
Mr. Auchincloss. The standard for my constituents in
Massachusetts is not going to be what the Chinese regulators
think is appropriate. It's going to be a fiduciary standard.
I regret that you really haven't addressed the question,
and so I guess I would ask a separate one, which is, would you
commit here to offering a higher in-app threshold, including,
but not limited to, financial education before allowing people
to purchase options?
Mr. Tenev. Again, Congressman, I'd be happy to engage on
this topic substantively. I think as long as those requirements
are uniformly applied to all brokerages and not just startup
brokerages or brokerages catering to small investors, we're
open to having that conversation.
Mr. Auchincloss. The fiduciary standard is applied equally
to all brokerages, and yours is the one that was singled out by
the Massachusetts Securities Division as having violated, given
the way that your users are using the options.
I will cede the balance of my time, Madam Chairwoman, and I
thank you for arranging this hearing.
Chairwoman Waters. Thank you very much.
And with that, Mr. Garcia, you are recognized for 5
minutes.
Mr. Garcia of Illinois. Thank you Madam Chairwoman, and
Ranking Member McHenry. It has been a long day. I wanted to ask
Mr. Griffin some questions. Mr. Griffin, would you consider
your firm successful? This is an easy yes or no.
Mr. Griffin. Yes. I would consider Citadel to be
successful, and I would consider Citadel Securities to be
successful.
Mr. Garcia of Illinois. And, of course, I'd agree that
you've done pretty well for yourself. As you mentioned earlier
in your testimony, your company handles over 40 percent of
retail trading. Did I get that correct?
Mr. Griffin. Citadel Securities is the largest destination
for retail flow in the United States. It reflects the execution
quality that we give.
Mr. Garcia of Illinois. And Citadel is a leading market
marker for interest rate drops as well. Is that correct?
Mr. Griffin. Due to the great work of the House and Senate
on the back of Dodd-Frank, where we permitted competition to
exist in the interest rate swap market, and I am grateful for
that opportunity to compete in that market, we are now a swap
dealer at Citadel Securities and a significant participant in
that market, and I'd like to express my gratitude for Dodd-
Frank's derivatives reform.
Mr. Garcia of Illinois. Good. You're hedge fund managers.
Do you manage over $30 billion? Is that correct?
Mr. Griffin. Congressman, yes, that is correct. We manage
approximately $35 billion of assets for pension plans, for
endowments, for colleges, and for charities.
Mr. Garcia of Illinois. Very well. That's pretty
significant. I'd say that's a lot. It seems to me that your
company is systemically important to our financial system.
Would you agree with that?
Mr. Griffin. I believe that we play an important role in
the U.S. capital markets. I believe that our hedge fund would
not be in the category of systemically important. With $30-some
billion of equity, it is simply not at the scale or magnitude
of a JPMorgan, a Bank of America, or a Wells Fargo. And in
particular, having worked on these policy issues with members
of the Fed in various contexts, we don't have to make payroll
on Friday.
Mr. Garcia of Illinois. Okay. But you're doing pretty well,
and yes, you're not one of the big guys that we have visit us
frequently, at least a couple of times a year. Was Citadel
Securities fined recently by FINRA for trading ahead of
customer orders in the past? Is that what I heard from a couple
of questioners earlier today?
Mr. Griffin. I believe this was brought up earlier, that we
paid a fine to FINRA for trading ahead in the OTC market back
in the, let's say, roughly 2012 through 2014. It was due to a
systems failure. Now, we have no tolerance internally for
having made such a mistake. We, of course, have taken actions
to rectify such a mistake.
Mr. Garcia of Illinois. But that did occur.
Mr. Griffin. That did occur.
Mr. Garcia of Illinois. Okay. I appreciate that. It seems
to me that the retail investors using their savings are not
exactly an even match for a complex, deeply connected firm like
Citadel. Would you agree with that?
Mr. Griffin. I don't actually understand the premise of the
question. Retail investors who do good research, and I--one of
our fellow panelists said earlier, many retail investors have
understood the game-changing technologies unfolding before us,
electric cars, solar energy, and have done extraordinarily well
investing their assets into these newly emerging parts of the
economy.
Mr. Garcia of Illinois. Okay. And your firm has done and
you've personally done well during the pandemic, right? There
hasn't been much of an adverse effect on your firm?
Mr. Griffin. Congressman, we've all been adversely impacted
by the pandemic. I think all of us long for the return back to
life as it was a year-and-a-half ago.
Mr. Garcia of Illinois. But you haven't done badly, right?
Mr. Griffin. There are two dimensions to this. There's the
personal impact on everybody, and we've all had to deal with
family, with friends--
Mr. Garcia of Illinois. But in terms of your bottom line,
sir?
Mr. Griffin. Our bottom line over the course of the last
year has been successful, Congressman.
Mr. Garcia of Illinois. Okay. Good. That's what I thought.
Is it true that last year in Illinois, you were involved in an
effort, and you spent close to $50 million to defeat a tax
increase in Illinois that would have forced the big income
earners like yourself to pay more in taxes in Illinois, a
progressive tax?
Chairwoman Waters. The gentleman's time has expired.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman.
Chairwoman Waters. All Members on the platform today have
been heard and have had an opportunity to raise their
questions.
Before we get to closing statements, I would like to ask
unanimous consent to enter letters in the record from the
following entities: Bear Markets; Public Citizen; the
Depository Trust & Clearing Corporation; and Healthy Markets.
Without objection, it is so ordered.
I now yield 1 minute to the gentleman from Missouri, Mr.
Luetkemeyer, for brief closing remarks.
Mr. Luetkemeyer. Thank you, Madam Chairwoman, and I thank
all of the witnesses for being here today. I thought you all
did a great job, and we really thank you for spending time with
us and educating us on the market and all of the activities
surrounding GameStop investing in short selling.
I'd like to reiterate the ranking member's commitment that
the House Financial Services Committee Republicans stand ready
to work with the Majority to continue to provide oversight on
and investigation of the GameStop activities. And going
forward, I hope that we always have an eye towards protecting
and giving more choice and access to America's everyday
investors.
With that, Madam Chairwoman, I yield back.
Chairwoman Waters. I now yield myself 1 minute.
Today, the committee has heard firsthand from witnesses
about their roles in the market volatility in late January.
This hearing has allowed us to begin to assess what transpired
and whether our guard rails have not kept up with the rapid
changes the markets have experienced.
For example, I'm more concerned than ever that some
investors are being fleeced, and massive market makers like
Citadel may pose a systemic threat to the entire system. The
committee is going to continue to examine these issues.
Our next hearing will include securities market experts and
investor advocates to discuss the policy issues that are
involved, and potential solutions to problems with our system
that these events have illuminated.
I will also convene a hearing to hear testimony from the
regulators, including the Securities and Exchange Commission
(SEC) and the Financial Industry Regulatory Authority (FINRA).
All of these hearings will inform the committee's role and
help us to determine potential legislative steps to protect
investors and ensure Wall Street accountability.
With that, I'd like to thank our distinguished witnesses
for their testimony here today.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And I sincerely thank you, and I want all of us to pay
attention to what is happening in Texas and to do what is
necessary to be able to give assistance to all of our people,
all of the families in Texas who are experiencing this very,
very difficult time. Thank you so very much. This hearing is
adjourned.
[Whereupon, at 5:25 p.m., the hearing was adjourned.]
A P P E N D I X
February 18, 2021
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