By Matthew Turk
Executives from Robinhood, hedge funds and other firms related to the late-January GameStop trading frenzy found themselves on the defensive on Thursday when faced with several hours of questioning from the House Financial Services Committee.
Grilled on conflicts of interest, market manipulation and the details of order fulfillment, Robinhood chief executive officer (CEO) Vlad Tenev ’08 ended up apologizing for his company’s handling of January’s events.
“Look, I’m sorry for what happened,” Tenev said. “I apologize, and I’m 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.”
In January, a flurry of individual trading on Robinhood’s platform helped send the share price of video game retailer GameStop soaring above $480 from a relatively meager $18.84 at the beginning of this year. For regulatory reasons, Robinhood has said, the company was compelled to restrict trading on its platform. But the decision prompted bullish individual investors and politicians alike to probe into the integrity of U.S. markets and financial systems.
On Thursday, Tenev fielded the most questions: around half of the total 240 asked during the hearing. The subject matter generally stayed close to the inquiry into Robinhood’s fiduciary responsibilities to its customers, a quarter of whom are first-time investors. Lawmakers asked whether users were informed that trading could be restricted and accused the company of gamification of trading by showering digital confetti on-screen after purchases.
Chairwoman Maxine Waters opened the hearing by saying that the trading controversy had “reinforced” the beliefs of many retail investors that “the system is rigged against them.”
Early on, Tenev flatly rejected claims of conspiracy with hedge funds during last month’s events.
“Robinhood Securities put the restrictions in place in an effort to meet increased regulatory deposit requirements, not to help hedge funds,” he said. “We don’t answer to hedge funds.”
According to Tenev, the original clearinghouse bill had been reduced from $3 billion to $1.4 billion after the announcement of trading restrictions, but if this had not happened, then “we would have not been able to post the $3 billion in collateral,” he said.
But he also defended Robinhood’s benefits for its users, saying his platform has enabled an aggregate $35 billion in realized and unrealized gains. Tenev declined to specify whether customers could have made more by simply investing with other services.
During the hearing, Citadel’s involvement with Robinhood also came into question. In his prepared statement, Citadel CEO Kenneth Griffin said he had “no role in Robinhood’s decision to limit trading in GameStop or any of the other ‘meme’ stocks,” adding that he found out about the restrictions with everyone else when they were publicly announced.
The entity that executes Robinhood users’ trades is called Citadel Securities, which is separate from the multinational hedge fund, although Griffin founded both and is the principal shareholder of the latter. In the fourth quarter of 2020, Robinhood collected nearly $200 million from Citadel in payment for order flow — a relationship that has come under scrutiny from both Reddit users and members of Congress.
Rep. Brad Sherman criticized this earning model: “Everybody I’ve talked to in this industry says when your broker is being paid for order flow you get a worse execution,” he said. In response, Griffin defended the system, saying that it has “allowed the American retail investor to have the lowest execution cost they’ve ever had in the history of U.S. financial markets.”
At present, most trading platforms appear to facilitate transactions instantaneously, but behind the scenes, the process takes roughly two days to be completed due to regulations and the limits of the current technical infrastructure. Griffin admitted that these systems could be modernized, “including shortened settlement cycles and transparent capital models.”
There are several opportunities to quicken settlement cycles that would decrease the risk of default. Darrell Duffie Ph.D. ’84, professor of finance in the Graduate School of Business, explained that blockchain technology, for example, could utilize a distributed ledger to facilitate peer-to-peer digital payments without an intermediary. While faster settlement would leave less time for buyers to prepare the cash to pay for securities, Duffie wrote that this does not override “the benefits of faster settlement.”