Feb 18, 2021
Robinhood CEO Testimony Transcript GameStop Hearing February 18
Robinhood CEO Vladimir Tenev testified before the House Financial Services Committee on February 18, 2021 during the GameStop hearing. Read the transcript of the full hearing here.
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Maxine Waters: (00:07)
… 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. This will minimize disturbances while members are asking questions of our witnesses. The staff have been instructed not to mute members, except where a member is not being recognized and there is inadvertent background noise.
Maxine Waters: (00:41)
Members are also reminded that they may only participate in one remote proceeding at a time. If you are participating today, please keep your cameras 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 that prevent them from having their videos working.
Maxine Waters: (01:14)
If members wish to be recognized during the hearing, please identify yourself by name to facilitate recognition. I would also ask that members be patient as the chair proceeds, given the nature of conducting committee business virtually.
Maxine Waters: (01:39)
So, this hearing is entitled Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide. I now recognize myself for three minutes to give an opening statement.
Maxine Waters: (01:57)
Good afternoon, everyone. This hearing will be the first in a series of hearings before 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 role 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.
Maxine Waters: (03:03)
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, 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 [inaudible 00:03:30] related to short selling disclosures were never implemented.
Maxine Waters: (03:33)
Many Americans feel that the system is stacked against them and, 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 beliefs that the system is rigged against them has been reinforced. Other’s have noted that there are winners and there are losers in every trade in our financial markets.
Maxine Waters: (04:06)
Our role as a financial services committee is to ensure fairness in our financial markets and system, robust protections for investors, and accountability of 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 witnesses represent played in the events we are examining today. Now I recognize the ranking member of the committee, the gentlemen from North Carolina, Mr. McHenry, for five minutes.
Patrick McHenry: (04:44)
Well, thank you, Madam Chair. And let me just begin by saying I believe Americans are far more sophisticated and 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, who in their eyes don’t know the difference between a [inaudible 00:05:26] point and the 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 to the crowd.
Patrick McHenry: (05:43)
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, 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.
Patrick McHenry: (06:52)
The sad truth is the K-shaped economy is nothing new in our capital markets because the structural core of our regulations literally enshrined in equity. 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 two 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, 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 invest in the next Google.
Patrick McHenry: (07:55)
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 who’s trading on Robinhood has the same access to equity shares in Robinhood, itself, as the white collar employees who work there. Same goes for Reddit and Reddit users, by the way. Both contributed to its success. Why can’t both share in its future success? So 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.
Patrick McHenry: (08:54)
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. So 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.
Maxine Waters: (09:24)
Thank you so very much. I’m so pleased that you are cooperating today and you were eagre to join with us when we called for this committee. So I want to welcome today the [inaudible 00:09:37] witnesses to the committee. Mr. Vlad Tenev is the chief executive officer of Robinhood Markets Incorporated, a company with a training app that, after increased trading activity in GameStock and certain other stocks, restricted trading of those stocks for a period of time. Mr. Kenneth C. Griffin is the chief executive officer of Citadel LLC, a fund which is one of Robinhood’s main customers and sources of revenue, 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.
Maxine Waters: (10:34)
Steve Huffman is a chief executive officer, co-founder of Reddit, 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. Mr. Keith Gill is a retail investor who posted on Reddit and YouTube regarding investing in GameStop and other stocks. Jennifer Schulp is a director of financial regulation studies at the Cato Institute.
Maxine Waters: (11:17)
Without objection, your written statements will be made part of the record. Each of you will have five minutes to summarize your testimony-
Brad Sherman: (11:24)
Madam Chair, Madam Chair. Sherman, here. I believe that there are only three 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.
Maxine Waters: (11:42)
Well, 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.
Brad Sherman: (11:58)
Thank you so much. Back in the day, the law school professor would create an exam where he’d weave 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 execution and price enhanced best execution? And are all traders being treated fairly and is payment for order flow free to the consumer?
Brad Sherman: (13:07)
We need to look at the plumbing where it takes two 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 two-day period? And finally, we need to look at the gamification and glorification of high-frequency trading.
Brad Sherman: (13:25)
I thank the chairwoman for the time and I hope that in the months to come we 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.
Maxine Waters: (13:41)
Thank you. The chair now recognizes the chairman of the subcommittee of oversight and investigations, the gentleman from Texas, Mr. Green, for one minute.
Al Green: (13:51)
Thank you very much, Madam Chair. I greatly appreciate the opportunity to express some concerns that I have. It is a fact that Citadel Securities has paid over a hundred million dollars in penalties and my concern is this. It deals with whether we can allow a market maker’s profits 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.
Maxine Waters: (14:41)
Thank you very much. And I will go back to the introduction of our witnesses. I left off with Jennifer Schulp, director of financial regulation studies at the Cato Institute. Without objection, your written statements will be made part of the record. Each of you will have five 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.
Maxine Waters: (15:18)
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?
Maxine Waters: (15:37)
Do you solemnly swear to affirm that the testimony you will give before 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?
Vlad Tenev: (15:53)
Maxine Waters: (15:55)
Kenneth C. Griffin: (15:57)
Maxine Waters: (15:57)
Mr. Plotkin? Mr. Plotkin?
Gabriel Plotkin: (16:08)
I was muted. I apologize. I do.
Maxine Waters: (16:10)
Thank you. Mr. Huffman.
Steve Huffman: (16:13)
Maxine Waters: (16:14)
Mr. Gill: (16:15)
Maxine Waters: (16:17)
Jennifer Schulp: (16:19)
Maxine Waters: (16:21)
Thank you very much. Let the record show that all off the witnesses answered in the affirmative. We will now begin with their oral testimonies. Mr. Tenev, you are recognized for five minutes to present your oral testimony.
Vlad Tenev: (16:37)
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 eight 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 but more than half of US households participate in it.
Maxine Waters: (17:16)
Mr. Tenev, Mr. Tenev, I would like you to use your limited time to talk directly to what happened January 28th and your involvement in it.
Vlad Tenev: (17:27)
Patrick McHenry: (17:28)
Madam Chair, Madam Chair, the witness has the opportunity to give their own testimony [crosstalk 00:17:34] time for your questioning.
Maxine Waters: (17:36)
Excuse me, you are not [crosstalk 00:17:37] You are not recognized, Mr… Please go right ahead and speak directly to the question.
Patrick McHenry: (17:45)
Maxine Waters: (17:46)
Mr. McHenry, yes, of course.
Vlad Tenev: (17:49)
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 five I immigrated with my family to America in search of a better life. I have benefited from all America has to offer and Robinhood’s mission to democratize finance for all has a very special significance for me.
Vlad Tenev: (18:17)
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, recurring investments, our customers can start with small amounts and grow their investments in blue chip stocks and 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.
Vlad Tenev: (19:02)
While markets fluctuate, this tells me our business model’s working for everyday Americans. The total value of our customer’s assets on Robinhood exceeds the net amount of money they have deposited with us by over $35 billion. This tells me 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, save for the future and we’re proud to serve them.
Vlad Tenev: (19:38)
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 clearing house deposit demands.
Vlad Tenev: (20:12)
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.
Vlad Tenev: (20:35)
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.
Vlad Tenev: (21:29)
And I want to highlight one more thing. The existing two-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.
Maxine Waters: (22:16)
Mr. Griffin, you are now recognized for five minutes to present your oral testimony.
Kenneth C. Griffin: (22:23)
Chairman Waters, Ranking Member McHenry, distinguished members of the committee, thank you for the opportunity to testify today in the recent market events. US 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% of Americans own stock right now. Citadel Securities, as the largest market maker in the US 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 game 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 US equities markets.
Kenneth C. Griffin: (23:36)
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 have been a leader in using technology to transform our markets, particularly for retail investors.
Kenneth C. Griffin: (24:17)
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 retailed 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 US equities market in 2019. The magnitude of the orders [inaudible 00:25:23] 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.
Kenneth C. Griffin: (25:37)
I could not be more proud of our team at Citadel Securities, my colleagues who were committed to ensuring that the interest of America’s retail investors were served during this extraordinary period. Once again, I appreciate the opportunity to appear today and I look forward to answering your questions.
Maxine Waters: (26:02)
Thank you, Mr. Griffin. Mr. Plotkin, you are now recognized for five minutes to present your oral testimony.
Gabriel Plotkin: (26:13)
Chairwoman Waters, Ranking Member McHenry and members of the committee, I would like to thank you for this opportunity to share Melvin Capital’s perspective on the recent trading activity in GameStop. I am 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.
Gabriel Plotkin: (26:39)
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 others make in our funds. 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 excess and we were not seeking a cash infusion.
Gabriel Plotkin: (27:28)
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 six 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.
Gabriel Plotkin: (27:58)
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.
Gabriel Plotkin: (29:03)
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 short GameStop since Melvin’s inception six 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.
Gabriel Plotkin: (29:51)
In January of 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 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.
Gabriel Plotkin: (30:28)
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.
Gabriel Plotkin: (30:56)
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.
Maxine Waters: (31:24)
Thank you, Mr. Plotkin. Mr. Huffman, you are now recognized for five minutes to present your oral testimony.
Steve Huffman: (31:32)
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’m 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, politics to internet culture to 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. Though we are small compared to the largest platforms, our communities provide an online home for millions of people every day.
Steve Huffman: (32:26)
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 are 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 comment mentioned in the previous testimony or anything like it.
Steve Huffman: (33:03)
For the specific comment 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 five 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 communities’ rules, which may be as strict as they like as long as they’re not in conflict with the platform-wide policies, and they have a variety of tools of enforcing these rules independently. Moderators are not paid employees, but rather users who are passionate about their communities. They have the context and judgment to make decisions no algorithm could.
Steve Huffman: (33:50)
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.
Steve Huffman: (34:21)
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 PersonalFinance, Investing, and FinancialIndependence.
Steve Huffman: (34:43)
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’re just as quick to support a fellow member after a big loss as they are to celebrate after a big gain.
Steve Huffman: (35:05)
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 conflict within WallStreetBets’ leadership.
Steve Huffman: (35:45)
We have since analyzed the 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 were 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.
Steve Huffman: (36:12)
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’m proud they use Reddit to do so. Thank you, and I look forward to your questions.
Rep. Maxine Waters: (36:42)
Thank you very much, Mr. Hoffman. Mr. Gill, you are now recognized for five minutes to present your oral testimony.
Keith Gill: (36:51)
Thank you, Chairwoman Waters, Ranking Member McHenry, 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. A few things, I am not. I’m not a cad. 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.
Keith Gill: (37:40)
I grew up in Brockton, Massachusetts. My family was not wealthy. My father was a truck driver and my mom a registered nurse. I was one of three kids and the first in my family to earn a four-year college degree when I graduated from Stonehill College in 2009, so it was not a good time to be looking for a job. From 2010 to 2017, I worked at a few startup 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.
Keith Gill: (38:17)
In 2019, after nearly two years unemployed, I accepted a marketing and financial education job at Mass Mutual. My wife, Caroline, and I were thrilled that I had an income and benefits. My job was to help develop financial education classes that advisors could present to prospective clients. I was not a stock broker or a financial advisor. I did not talk to clients, and I did not recommend stocks for them to buy.
Keith Gill: (38:46)
Before and after I joined Mass Mutual, 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 on 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 post 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.
Keith Gill: (40:59)
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 will go such a long way for us. We had an incredibly difficult 2020. Most difficult was the tragic and unexpected loss of my sister, Sarah, in June. I’m 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 at a potential turnaround for GameStop, and I remain invested in the company.
Keith Gill: (41:59)
Thank you. Cheers, everyone.
Rep. Maxine Waters: (42:02)
Thank you, Mr. Gill. Ms. Schulp, you are now recognized for five minutes to present your oral testimony.
Jennifer Schulp: (42:12)
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 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.
Jennifer Schulp: (43:08)
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.
Jennifer Schulp: (43:46)
Retail investors making up this new surge are different. Recent research by the FINRA Investor Education Foundation and 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, quote, a shift towards more equitable investment participation. These new opportunities for individuals to grow their wealth should be welcomed and expanded, not restricted.
Jennifer Schulp: (44:25)
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, quote, 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 spill-over effects on the wider market were mild and short-lived.
Jennifer Schulp: (45:09)
The fact that GameStop traded temporarily, and perhaps still trades above fair estimates of the company’s value, is not, by 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.
Jennifer Schulp: (45:59)
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 can not 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.
Rep. Maxine Waters: (46:43)
Thank you, Ms. Schulp. I now recognize myself five 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?
Vlad Tenev : (47:33)
Chairwoman Waters, I appreciate the opportunity to address that-
Rep. Maxine Waters: (47:36)
Just yes or no-
Vlad Tenev : (47:38)
We always felt comfortable with our liquidity, and the additional capital that Robinhood raised-
Rep. Maxine Waters: (47:43)
Please answer yes or no-
Vlad Tenev : (47:47)
We always felt comfortable with our- [crosstalk 00:47:47].
Rep. Maxine Waters: (47:50)
To get through my arguments, I don’t have time. I just need a yes or no answer.
Vlad Tenev : (47:51)
I stand by my statement. The additional capital we raised wasn’t to meet capital requirements or deposit requirements-
Rep. Maxine Waters: (47:58)
Does the gentleman-
Vlad Tenev : (48:01)
Rep. Maxine Waters: (48:02)
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 to testify its best execution obligations, and it misled its customers regarding its revenue sources. It seems retail investors often get a bad deal at Robinhood. Mr. Tenev, also, while you testified today that, quote, Robinhood’s customers benefit greatly from payment for auto-flow, quote, unquote. 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, sets inferior trade prices that cost your customers over 34 million. Is it your testimony, after Robinhood paid the SEC 65 million to settle those charges that this conflict of interest is in your customers’ best interest? Yes or no.
Vlad Tenev : (49:27)
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, on purpose- [crosstalk 00:49:37].
Rep. Maxine Waters: (49:37)
[inaudible 00:49:37] Answer go to that question.
Vlad Tenev : (49:40)
Citadel Securities is an important counterparty. Nobody’s denying that. The reason that-
Rep. Maxine Waters: (49:48)
Gentleman, can you answer yes or no? I’m reclaiming my time.
Rep. Maxine Waters: (49:51)
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 non-public 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% of all trades occurred in dark pools or via OTC off-exchange trades.
Rep. Maxine Waters: (50:37)
Your business strategy is designed intentionally to undermine market transparency and steal profits from companies and other investors. One problem, though, Mr. Griffin, is that we don’t really know how central your firm has become to the capital markets. Mr. Griffin, does Citadel handle 47% of the U.S.-listed retail volume? Please. Yes or no.
Ken Griffin: (51:00)
Excuse me. Chairman Waters. What percentage? I couldn’t hear that number.
Rep. Maxine Waters: (51:05)
Ken Griffin: (51:08)
Chairman Waters, to the best of my knowledge- [crosstalk 00:51:13].
Rep. Maxine Waters: (51:13)
Yes or no-
Ken Griffin: (51:13)
To the best of my knowledge, we handle in excess of roughly 40% of all retail volume.
Rep. Maxine Waters: (51:19)
Thank you very much. Reclaiming my time. Mr. Griffin, on January 27, did Citadel execute 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.
Ken Griffin: (51:38)
Chairman Waters, that was my written and oral testimony.
Rep. Maxine Waters: (51:44)
Thank you very much. And with that, I now recognize the distinguished Ranking Member, Mr. McHenry, for five minutes for questions.
Rep. Patrick McHenry: (51:53)
All right, 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. Let’s take a step back here. You get a call in the middle of the night, according to what I’ve heard you in interviews say, and based off that conversation with your compliance team, you decided to halt the buying of GameStop stock. Now, 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?
Vlad Tenev : (52:45)
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. Buying- [crosstalk 00:53:12]
Rep. Patrick McHenry: (53:11)
But why- [crosstalk 00:53:15]
Vlad Tenev : (53:16)
Buying securities- [crosstalk 00:53:17]
Rep. Patrick McHenry: (53:17)
But why- [crosstalk 00:53:18]
Vlad Tenev : (53:17)
Increases our collateral 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 customers were very upset and disappointed that we had to do this, I imagine it would have been significantly worse if we prevented customers from selling.
Rep. Patrick McHenry: (53:52)
Okay, so let me ask this question. Is payment for order flow legal?
Vlad Tenev : (53:59)
Yes. Payment for order flow is legal and regulated and a common industry practice.
Rep. Patrick McHenry: (54:06)
And is this disclosed to those users of your app?
Vlad Tenev : (54:11)
Yes. Payment for order flow is disclosed in multiple places, and moreover, 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.
Rep. Patrick McHenry: (54:30)
Okay, so 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?
Vlad Tenev : (54:52)
Not at all. Zero pressure from anyone. It was a collateral depository requirement decision made by our Robinhood securities president, and I fully stand by- [crosstalk 00:55:04]
Rep. Patrick McHenry: (55:04)
All right, so let me get into this other question. Let me get into 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?
Vlad Tenev : (55:24)
Robinhood is currently a private company, so that’s not possible. No.
Rep. Patrick McHenry: (55:30)
And so you mean to tell me that the people that use your platform, that make you a successful company, and I would say directly contributed to your company’s exponential growth and success, they don’t get the same access to equity shares as a Robinhood employee or your institutional investors. Is that correct?
Vlad Tenev : (55:49)
Currently, that is correct. Yes.
Rep. Patrick McHenry: (55:51)
All right. 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?
Jennifer Schulp: (56:05)
The SEC limits a lot of investment in private companies to those folks that 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.
Rep. Patrick McHenry: (56:31)
Okay, so let me just clear 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 that inequitable regulatory structure that DC has created, but I think we need to clear this up. Final thing, Madam Chair, 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 [crosstalk 00:57:09].
Rep. Maxine Waters: (57:09)
Will [inaudible 00:57:09] to order.
Rep. Patrick McHenry: (57:11)
All right. Thank you all, and look forward to getting to the facts on the matter today. [crosstalk 00:57:15]
Rep. Maxine Waters: (57:14)
Thank you. We’ll hear from other members. Ms. Maloney. You’re recognized.
Rep. Carolyn Maloney: (57:20)
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’s 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.
Rep. Carolyn Maloney: (58:07)
Beyond those possible losses, the actions of Robinhood and other trading platforms during the GameStop frenzy caused confusion, 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 28 to find that they could no longer buy and sell stocks the same way they could 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.
Rep. Carolyn Maloney: (59:12)
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 28, your financial requirements with your clearing house are not mentioned. You only mentioned 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 didn’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.
Rep. Carolyn Maloney: (01:00:10)
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?
Vlad Tenev : (01:00:36)
Congresswoman, I appreciate the question. To answer the second question … Look, I’m sorry for what happened. 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, 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’ll make sure of that.
Rep. Carolyn Maloney: (01:01:14)
Well, 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 treated unfairly. Your trading restrictions came out of the blue, and your communication was not clear. My next question, 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 retail customers don’t get the rug pulled out from under them at the last minute?
Vlad Tenev : (01:01:56)
Thank you for that question, Congresswoman. We’ll 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 prior to that week was much improved from Thursday.
Rep. Maxine Waters: (01:02:30)
Vlad Tenev : (01:02:30)
Continue to learn and improve upon this.
Rep. Maxine Waters: (01:02:34)
Ms. Wagner, you’re recognized for six minutes.
Rep. Ann Wagner: (01:02:38)
Thank you, Madam Chairwoman. I’d like to welcome our witnesses who are 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’ve witnessed in the last decade have improved the way that Americans and our businesses perform financial activities.
Rep. Ann Wagner: (01:03:36)
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, 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’s critical that Congress focus on reducing barriers, reducing barriers to market participation, which it is rarely, rarely wont to do, let me sadly say. And allowing Main Street Americans access to the financial instruments that can create long-term investment savings.
Rep. Ann Wagner: (01:04:31)
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 and that will 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.
Rep. Ann Wagner: (01:05:00)
Mr. Tenev, it appears at the time your company did not have enough money to meet the collateral requirements for that level of trading by your customers. In your view, A, were 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?
Vlad Tenev : (01:05:26)
Thank you for the question, Congresswoman. This event was a five sigma event, which is a one in 3.5 million event. To put that in context, there’ve only been tens of thousands of stock market days in the history of the U.S. stock market, so a one in 3.5 million event basically is unmodelable. That said, we can learn from it. And in this particular case, our risk management processes work appropriately to keep us in compliance with all of our deposit requirements and collateral requirements.
Rep. Ann Wagner: (01:06:02)
Well, Mr. Tenev, I really-
Vlad Tenev: (01:06:02)
… and collateral requirements.
Rep. Ann Wagner: (01:06:02)
Well, Mr. Tenev, I realize that you and I have spent countless hours stressing the importance of having qualified women in finance, so I’m 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 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 our markets function in an orderly manner? And did you see any broad failures of market function during these events, ma’am?
Jennifer Schulp: (01:06:39)
Sure. Thank you. Thank you for the compliment. The NSCC’s collateral requirements here serve the function to provide security for the stock settling process goes through. So while an investor thinks that what has happened is they’ve got a stock on the day that they make a trade, it really takes two days for the settlement process to clear. During that time, the brokerage firm, the DTCC, and the brokerage firm on the other side can remain at risk of that stock not actually clearing and the collateral requirements are in place in order to mitigate [inaudible 01:07:19] and 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 failure here. The DTCC collateral requirement was large, but understandable. I think things functioned largely correctly.
Rep. Ann Wagner: (01:07:42)
My time has expired. I thank you all for your testimony and I yield back Madam Chairwoman.
Chairwoman Maxine Waters: (01:07:46)
Rep. Ed Perlmutter: (01:07:48)
Madam Chairman, Madam Chairman, point of order.
Chairwoman Maxine Waters: (01:07:51)
[crosstalk 01:07:51] point of order.
Rep. Ed Perlmutter: (01:07:55)
Yeah, Perlmutter, just to remind people, when they’re not speaking to mute themselves because there’s a lot of feedback when the question is asked and the mic stays open and the people are answering the question. Just to remind everybody, mute when you’re not speaking. That’s all.
Chairwoman Maxine Waters: (01:08:11)
Thank you very much. You heard Mr. Perlmutter. I would hope that every member would certainly do that. Mr. Sherman, you’re recognized for five minutes.
Rep. Brad Sherman: (01:08:22)
Thank you very much. We’ve come to expect things on the internet to be free. When you’re not paying for it, it’s not free, you’re the product, someone else is the customer. When you go onto Facebook and it’s free, you’re the product being sold to the advertiser and your information is sold to God knows who. So we now have a system where we’re telling investors that it’s free to invest in, to buy and sell stock. There are two ways to pay the folks involved in Wall Street for buying and selling stock.
Rep. Brad Sherman: (01:09:05)
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’re paying a commission. The other way to do it is to give them a worse execution whenever there’s 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 5 cents.
Rep. Brad Sherman: (01:09:46)
So the issue is whether Robin had and other people who are being told, “You get it for free,” are really getting it for free. Mr. Griffin, you’re 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’re 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.
Rep. Brad Sherman: (01:10:25)
SEC rules require that people get the best execution, but I’ve recently learned that there’s best execution and enhanced pricing. So if you get an order from Fidelity and you get an order from Robinhood and you’re paying for the Robinhood order flow, is the Robinhood customer getting as good a price as the Fidelity customer, Mr. Griffin?
Kenneth Griffin: (01:10:56)
So Congressman, I believe that’s 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-
Rep. Brad Sherman: (01:11:16)
Don’t tell me that there are other factors involved and take us down another road. I’m asking you a clear question. Assuming, same size of order. One comes in from Robinhood, one comes in from Fidelity. Is it not true? That one is going to get an enhanced best execution and the other one is just going to get best execution?
Kenneth Griffin: (01:11:43)
So as I was trying to explain, because the Robinhood order comes from a community, a community of traders who tend to trade in smaller size-
Rep. Brad Sherman: (01:11:53)
That isn’t my question, sir. You’re evading my question by making up other questions. Let me repeat. Two identical orders come in, same stock, same quantity, one’s from Robinhood, one’s from Fidelity, what happens?
Kenneth Griffin: (01:12:08)
The quality of the execution varies by the channel of the order. This is a commonly understood phenomenon in economics that channels matter. So for example, when you go and get a mortgage, a mortgage from JP Morgan to their clientele has a different rate of interest than a mortgage from-
Rep. Brad Sherman: (01:12:24)
Okay, reclaiming my time, sir. Who gets the better deal? 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?
Kenneth Griffin: (01:12:47)
So as I said earlier, size of the order is only one factor-
Rep. Brad Sherman: (01:12:52)
You are doing a great job of wasting my time. If you’re going to filibuster, you should run for the Senate. Everyone else I’ve talked to in this industry says when your broker is being paid for order flow, you get a worse execution. Otherwise, you’re in a peculiar circumstance where you’re making more money on a Fidelity transaction than a Robinhood transaction, which would be [inaudible 01:13:25].
Chairwoman Maxine Waters: (01:13:28)
The gentleman’s time has expired. Mr. Lucas, you’re recognized for five minutes.
Rep. Frank D. Lucas: (01:13:36)
Thank you, Madam Chairman for holding this hearing and thank you to the witnesses for agreeing to testify. It’s been reported that approximately 20% of market volume is now attributable to retail customers, which I think is just fascinating considering that’s up from 10% in 2019, and that’s an overwhelmingly positive development allowing for more market liquidity, more stability, additional avenues for households to grow their wealth and it’s important to increase market access for retail customers. I don’t want to disrupt that if we possibly can.
Rep. Frank D. Lucas: (01:14:08)
So I would like to turn with my first question to Mr. Tenev. Let’s talk about the attention that this pay for order flow has received. You explained in your testimony, 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 and just expand in general on that if you would.
Vlad Tenev: (01:14:37)
Congressman, I’d be happy to. Thanks for giving me an opportunity. So, 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.
Vlad Tenev: (01:14:59)
Now Robinhood routes to market makers, including Citadel Execution Services. we’ve got seven in total across equities and options and we route without consideration for 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.
Vlad Tenev: (01:15:26)
So the reason Citadel gets a relatively high percentage of our customer order flow is because they provide superior execution quality for our customers. That’s first and foremost, the most important consideration that we look for, how our customer is 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.
Rep. Frank D. Lucas: (01:16:01)
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, [inaudible 01:16:11] times, major things can occur. I want to turn to Mr. Griffin. Now, could you also elaborate on how payment for order flow provides, whether it’s the best price to the retail investor from the market maker’s perspective? Could you expand on that as you outlined in-
Kenneth Griffin: (01:16:31)
Absolutely Congressman. So 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 how which orders are allocated, because we strongly believe that the 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.
Kenneth Griffin: (01:17:04)
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, having minimum 1 cent wide market, which for low price securities means that they are less competitive than they otherwise could be. We’re able-
Speaker 1: (01:17:26)
Why are you here and what are you doing?
Kenneth Griffin: (01:17:30)
Rep. Frank D. Lucas: (01:17:32)
That wasn’t either one of us. Continue Mr. Griffin.
Kenneth Griffin: (01:17:35)
All right. So we’re able to share our trading acumen with retail investors, and we’re able to give them a better price and we’re able to make payments for order flow to firms like Robinhood that allow them to have lower, or today, in most case, no commission. And of particular note, we’re 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 is allowed the American retail ambassador to have the lowest execution costs they’ve ever had in the history of the US financial market.
Rep. Frank D. Lucas: (01:18:16)
Mr. Tenev, in the Dodd-Frank process that the chairman 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.
Vlad Tenev: (01:18:37)
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 nothing to do with margin-
Rep. Frank D. Lucas: (01:18:53)
My time has expired unfortunately. Thank you, Madam Chair, I yield back.
Chairwoman Maxine Waters: (01:18:55)
[crosstalk 01:18:55] has expired. Mr. Mitch, you’re recognized for five minutes.
Rep. Gregory W. Meeks: (01:19:02)
Thank you Madam Chair for this hearing and Mr. Ranking Member. Let me ask a question to Mr. Tenev. I’ve been burnt once or twice in the market, but particularly since I’ve been a member of Congress. One of the things that I recall greatly was the financial crisis in 2008. We thought that opening the market up, 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 they didn’t look, there was no documents to look at what their incomes were or anything of that nature. So when those adjustable rates happen, 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.
Rep. Gregory W. Meeks: (01:20:13)
So I understand your model of trying to get more people, more democratization, but that means that there’s now a great responsibility of ensuring that your customers have all the information they need to assess riskier trades. Now, for me, the information has to be digestible and accessible. Now, one of the problems I have, for example, you’re allowing up to $1,000 to buy stocks on margin and borrowing on margin is risky. So how do you disclose this? How do you make the determination of individuals who are not the sophisticated investors and allowing them to buy these risky stocks that are on margin?
Vlad Tenev: (01:21:02)
Thank you, Congressman, for the opportunity to address that. Let me set the stage a little bit by saying that about 2% of our customers borrow on margin, about 13% on a monthly basis perform an options transaction, and a much smaller number, around 3%, 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.
Vlad Tenev: (01:21:32)
Now to clarify your point on the $1,000 margin, that’s actually something that we refer to as Robinhood Instant, and it’s provided as a courtesy. When a customer initiated a deposit, we allow them access to up to a $1000 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.
Vlad Tenev: (01:22:01)
As for margin specifically, borrowing money on margin, the rules are very ironclad industry-wide. Obviously Robinhood Securities conforms to all 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.
Rep. Gregory W. Meeks: (01:22:30)
So you say that everything is restrictive, but when you are going after the less sophisticated investor, it’s more than that. There’s 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 or not and they can be taken advantage of. Oftentimes, we find in the financial industry, it is those that have the least that are really taken advantage of so the big guys … it becomes a reverse Robinhood situation, which really concerns me.
Rep. Gregory W. Meeks: (01:23:11)
Let me get to this real quick because I was just … something else that you said in regards to liquidity, and you said that you didn’t borrow the money because you needed it at the time. But then later in the question you ask that … you raised the additional money, because I want to know how you spent the money, for future situations, which means 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’s the deal there?
Vlad Tenev: (01:23:49)
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 requirements. It was entirely to prepare for a future, even greater black Swan event and to unrestrict and remove restrictions on the trading and buying of these securities.
Chairwoman Maxine Waters: (01:24:22)
The gentleman’s time has expired. Mr. Huizenga, you’re next with five minutes.
Rep. Bill Huizenga: (01:24:27)
Thanks Madam Chair, and this would have been nicer 10 minutes ago when I was supposed to go, but I’m going to go back to Mr. Griffin and the Chairman of the Capital Markets Subcommittee. The ranking member, I think, was filibustering himself. I just wanted to make sure Mr. Griffin, you had that opportunity to feel comfortable with the explanation of that best execution and what was attempted apparently to try to be asked.
Kenneth Griffin: (01:24:56)
Congressman, I hope so. I think it’s 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 year in contrast to the executions that they would receive through other execution strategies.
Kenneth Griffin: (01:25:21)
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, we need to drive on the left side versus the right side, that’s fine with us. I do believe that payment for order flow has been an important source of innovation in the industry. As the CEO, Robin has testified, they drove the industry towards $0 commissions. This has been a big win for American investors
Rep. Bill Huizenga: (01:25:56)
Let me get to Ms. Schulp from 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 in the most part?
Jennifer Schulp: (01:26:14)
I think that there’s still ongoing studies, but I do think that payment for order flow and the price improvements have largely been good improvements for customers. 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’re providing a zero commission trading service.
Rep. Bill Huizenga: (01:26:40)
Yeah. Okay. All right. I’ve got about three 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’m going to dispense with that because it’s going to take too much time and I’ll provide the answer, political theater for the most part. That’s what this hearing is today. I mean, we’re on the business channels right now and on C-SPAN, I think I 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.
Rep. Bill Huizenga: (01:27:15)
One of the assertions that you’ve heard already today is that investing is ‘casino gambling’, it’s using monopoly funny money. 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.
Steve Huffman: (01:27:51)
No, I believe that investing is investing.
Rep. Bill Huizenga: (01:27:55)
Okay. Mr. Griffin?
Kenneth Griffin: (01:27:59)
I believe the vast, vast majority of retail participation are people saving to meet their dreams.
Rep. Bill Huizenga: (01:28:06)
All right, Mr. Tenev?
Vlad Tenev: (01:28:09)
Congressman, thank you. As I mentioned in my opening statement, Robinhood customers have essentially made over $35 billion in unrealized and realized gains on all of their assets-
Rep. Bill Huizenga: (01:28:23)
It’s been [inaudible 01:28:24] for them, correct?
Vlad Tenev: (01:28:26)
Absolutely. It’s investing and it’s building wealth.
Rep. Bill Huizenga: (01:28:29)
[crosstalk 01:28:29] go back to Mr. Gill.
Keith Gill: (01:28:31)
Yes, of course. I believe it’s an opportunity for investors to participate in the market just as institutionals participate.
Rep. Bill Huizenga: (01:28:39)
Okay. So actually, one the business channels had a good question from one of the Reddit readers, which is, so 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?
Keith Gill: (01:28:59)
Well, let me just say that investing can be risky and my particular approach to investing is rather aggressive than may not be suitable for anyone else, but for me personally, yes.
Rep. Bill Huizenga: (01:29:13)
So yes or no, are you buying the stock-
Keith Gill: (01:29:15)
For me personally, yes, I do find it’s an attractive investment at this price point.
Rep. Bill Huizenga: (01:29:21)
Quick question, did you invest in GameStop because you were not aware of payment for order flow? That’s one of the accusations, [inaudible 01:29:34] because they don’t know that.
Keith Gill: (01:29:37)
Sorry, could you repeat that question?
Rep. Bill Huizenga: (01:29:40)
Did you buy GameStop because you were not aware of the payment for order flow?
Keith Gill: (01:29:45)
My investment in GameStop was based on the fundamentals.
Rep. Bill Huizenga: (01:29:49)
Okay. I think that answers it and I believe my time has expired.
Chairwoman Maxine Waters: (01:29:53)
Ms. Velazquez, you’re recognized for five minutes.
Re.. Nydia M. Velazquez: (01:29:58)
Thank you, Chairwoman. Mr. Tenev, Robinhood seems to have perfected the gamification of trading, providing the user with the perception that investing through the Robinhood app offers a recreational game, playing with little or no downside risk. Of course, many of us understand that investing is not a game and carries significant risk. How does Robinhood balance disclosures around the potential downside risk of investing, including the risk of substantial loss and the more enticing claims of profitability and the ease of trading?
Vlad Tenev: (01:30:53)
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’re 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%, and less than 3% borrow on margin. So most people use Robinhood to build up portfolios over time and-
Re.. Nydia M. Velazquez: (01:31:31)
But can you answer my question, how do you balance disclosures around the potential downside risk?
Vlad Tenev: (01:31:43)
So we make lots of disclosures, Congresswoman. We’re 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.
Re.. Nydia M. Velazquez: (01:32:01)
So you don’t think that as a result of the emphasizing profitability and ease of trading over the risks of loss, that many investor, amateur investors, we’re aware of the situation they currently find themselves in?
Vlad Tenev: (01:32:25)
Well, 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.
Re.. Nydia M. Velazquez: (01:32:48)
Okay. Thank you, Mr. Plotkin, over the course of my time in Congress, I have been concerned and 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.
Re.. Nydia M. Velazquez: (01:33:25)
Large investors, including hedge funds like yours, have to disclose their long positions when they own 5% or more of the company’s shares, but no such disclosure is required for short positions. As we can see the reforms, is this type of disclosure for short positions something you will support? Mr. Plotkin?
Gabriel Plotkin: (01:33:59)
Yeah. Congresswoman, thank you very much for the question. I think it’s a really good question. Whatever regulation is put forth in the marketplace, we will obviously operate within those rules. It’s certainly something I’d be happy to follow up with-
Re.. Nydia M. Velazquez: (01:34:13)
But what about my question about short selling?
Gabriel Plotkin: (01:34:18)
Yeah. I think it’s a really good question. It’s not for me to decide, but if those are the rules, I’ll certainly abide by them.
Re.. Nydia M. Velazquez: (01:34:26)
Okay. Well, I’m glad to hear that answer. Mr. Gill, the following reports credit you with helping to start the GameStop craze by encouraging other amateur investors to bet against the short positions that Mr. Plotkin and others took, but the stock has now fallen from it’s 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 Maxine Waters: (01:35:03)
The gentle lady’s time has expired.
Re.. Nydia M. Velazquez: (01:35:06)
Okay, thank you. I yield back.
Chairwoman Maxine Waters: (01:35:08)
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 remembers are reminded not to appeal the motive of other members. Thank you. Mr. Luetkemeyer, you’re recognized for five minutes.
Rep. Blaine Luetkemeyer: (01:35:24)
Thank you, Madam Chair. My first question will go to Mr. Gill. Mr. Gill I guess the question is, you’re a very serious investor, somebody who does his homework, invests in the market your own personal funds. So I guess the question would be, here today we’re discussing the actions around Robinhood, all the transactions that took place. I guess, do you think we need more legislation as a result of what happened here or did the system actually work?
Rep. Blaine Luetkemeyer: (01:35:55)
And let me just make a couple of comments on that part. From the standpoint that did it work, was it self-correcting? Did the fact that somebody like yourself was able to invest and maybe take advantage of the over shorting positions by the hedge fund guys who were trying to really drive down the price of the stock for other reasons, whatever, did it point out perhaps that we had some companies, perhaps like Robinhood, well, I would argue that it was under-capitalized or unreserved, or maybe there was over aggressive, 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 come in on those sort of questions and how I formatted that?
Keith Gill: (01:36:40)
Thank you for the question, 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’m not so sure about legislation personally. 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.
Rep. Blaine Luetkemeyer: (01:37:06)
Thank you for that. I know that … Mr. Tenev, Robinhood is an interesting name. As I recall, the old story is take from the rich, give to the poor. I assume what you’re 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 other things would we have to look at? What other unintended consequences would there be, if you did something like that?
Vlad Tenev: (01:37:45)
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 intraday 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. I understand that would be a limitation to the trading activities of some of these institutions. So that’s certainly one area to consider.
Vlad Tenev: (01:38:20)
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’d be happy, as I mentioned earlier, to deploy our intellectual capital and our teams engineering resources to help solve these problems very quickly.
Rep. Brad Sherman: (01:38:44)
Thank you for that, Mr. Plotkin and Mr. Griffin, the question is for both of you here, whenever you’re short-selling, I understand that GameStop’s stock was short sold over 140%. Mr. Plotkin, you made the comment in your testimony a minute ago that you were not trying to manipulate stock …
Rep. Blaine Luetkemeyer: (01:39:03)
You made the comment in your testimony a minute ago that you were not trying to manipulate stock. Yet if you’re short selling a stock 140%, for me, on the outside looking in, it looks like that’s exactly what you’re doing. Explain to me why that’s not manipulating a stock.
Mr. Gabriel Plotkin: (01:39:18)
Thank you, Congressmen. For us, I can’t speak to other people that were shorted. Anytime we short a stock, we locate a borrow. Our systems actually force us to find a borrower. We always short stocks within the context of all the rules.
Rep. Blaine Luetkemeyer: (01:39:35)
Mr. Griffin, would you like to comment on that? You guys are both market makers and brokers and hedge fund guys. I mean, you do all of it. Why is this not considered manipulating a stock whenever you can short sell at 140%? Don’t you think there should be a limit on something like that?
Mr. Kenneth Griffin: (01:39:53)
I believe that the short interest in GameStop was exceptional. I’m not sure it’s 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 marketers, 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.
Chairlady Waters: (01:40:32)
[crosstalk 01:40:32] the gentleman’s time has expired. Mr. Scott, you’re recognized for five minutes.
Rep. David Scott: (01:40:37)
Thank you Chairlady Waters. let me just say Chairlady, that the people of this country appreciate you for calling this financial services hearing together, because this is a threat to the future of our financial system. We got to get to the bottom of it.
Rep. David Scott: (01:40:58)
Let me start with you Mr. Tenev. Let’s go through the sequence of events that led to the extreme rise in value of GameStop’s stock, and the subsequent market volatility originated through a Reddit discussion. Then that was fueled through social media. As the story gained traction, trades by well-known figures, with the influence to move markets, sent the stark value even higher and higher.
Rep. David Scott: (01:41:37)
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. Vlad Tenev: (01:41:56)
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.
Rep. David Scott: (01:42:29)
Well, Mr. Tenev, don’t you 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’re singled out and moved on social media. What do you do?
Mr. Vlad Tenev: (01:42:56)
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’re available to customers. [crosstalk 01:43:14]
Rep. David Scott: (01:43:13)
Let me try to get to a point here. Do you, Robinhood, do you 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 in regard to that?
Mr. Vlad Tenev: (01:43:49)
Absolutely. Congressmen, 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 had over 3.2 million people visiting in 2020.
Rep. David Scott: (01:44:07)
But don’t we need, do we not … I mean, you’re 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. We are looking on this committee of how we can protect our wonderful, precious, financial system. We need it from you. What about you, Mr. Huffman? Do you have anything? What steps has your company taken to guard against this? Anything at all?
Mr. Steve Huffman: (01:44:52)
Congressmen, we spend a lot of time at Reddit ensuring the authenticity of our platform. We’ve got 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. We make sure that is authentic and as unmanipulated as possible. In this specific case, we did not see any signs of manipulation.
Rep. David Scott: (01:45:18)
Madam Chairlady, I just want to conclude. I got maybe 10 seconds left, but this episode exposes a serious threat to our financial system. When tweets, social media posts, do more to move the market than material legitimate information, the risk is enormous.
Chairlady Waters: (01:45:44)
Thank you very much. Mr. Stivers, you now have five minutes.
Rep. Steve Stivers: (01:45:49)
Thank you, Madam Chair. I appreciate you calling this hearing. The American financial markets, I believe, are the envy of the world, but they’re still imperfect. I would have liked to see this committee have a meaningful discussion about capital requirements and the T+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’re left with what we have. That’s because I believe the majority is attempting to use this hearing to drive a narrative about the US capital markets being rigged. But I do have several questions.
Rep. Steve Stivers: (01:46:37)
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. Vlad Tenev: (01:46:53)
That’s correct. Yes. Deposit requirements with our clearing houses.
Rep. Steve Stivers: (01:47:00)
Those got resolved, but for a period of time, some of your users could only sell and not buy. 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 that is possible that could have happened?
Mr. Vlad Tenev: (01:47:22)
I shouldn’t speculate on what could have happened if-
Rep. Steve Stivers: (01:47:25)
If there’s more sellers than buyers, does the stock price go down or up?
Mr. Vlad Tenev: (01:47:29)
Well, to be clear, Robinhood, Congressmen, is a minority of trading activity in these securities.
Rep. Steve Stivers: (01:47:38)
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. Vlad Tenev: (01:47:49)
Rep. Steve Stivers: (01:47:50)
Among your users?
Mr. Vlad Tenev: (01:47:50)
-customers on our platform could only sell. There was no ability to it. That’s correct.
Rep. Steve Stivers: (01:47:55)
Great. I know, and 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. Vlad Tenev: (01:48:14)
Yes, that’s correct. Our arbitration is FINRA supervised and overseen. We do believe arbitration gives customers a fair and speedier resolution to their claims.
Rep. Steve Stivers: (01:48:28)
Thank you. Does your user agreement and your arbitration allow for group arbitration or only individual arbitration?
Mr. Vlad Tenev: (01:48:38)
Let me get back to you on that one.
Rep. Steve Stivers: (01:48:39)
[crosstalk 01:48:39] if a group was treated similarly and similarly effected or lost upside or lost money, can they do it as a group or is it only individual in your arbitration agreement?
Mr. Vlad Tenev: (01:48:48)
Well, Congressman I’m sure you’re familiar of the number of class action lawsuits filed against Robinhood for-
Rep. Steve Stivers: (01:48:56)
I’m not asking about a class action lawsuit. I’m asking in your arbitration system, can a group of people come together or as an individual? This is not a trick question. I’m not a fan of trial lawyers. I’m just trying to understand.
Mr. Vlad Tenev: (01:49:09)
Yeah, 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.
Rep. Steve Stivers: (01:49:17)
Great. Thank you. That’d be helpful.
Rep. Steve Stivers: (01:49:18)
Mr. Plotkin are you a frequent short seller? Yes or no?
Mr. Gabriel Plotkin: (01:49:24)
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.
Rep. Steve Stivers: (01:49:32)
Thank you. Mr. Plotkin, has Melvin Capital ever engaged in short selling of the stock Tesla?
Mr. Gabriel Plotkin: (01:49:39)
We have been short Tesla in the past. That’s correct.
Rep. Steve Stivers: (01:49:43)
Mr. Plotkin, also, this is a longer question. Did you see the tweet from Tesla CEO, Elon Musk, about GameStop stock?
Mr. Gabriel Plotkin: (01:49:52)
I did see that after market hours on a … Yes, on a Tuesday.
Rep. Steve Stivers: (01:49:57)
Do you believe that Mr. Musk’s tweet had any significant effect of driving the rise in GameStop stock?
Mr. Gabriel Plotkin: (01:50:05)
I don’t want to speculate on what the actions of his tweet were. The stock did rise after hours.
Rep. Steve Stivers: (01:50:10)
Let me ask you this, then. Do you believe that that tweet was targeting you because you had shorted Tesla stock in the past?
Mr. Gabriel Plotkin: (01:50:19)
We had a very small short position years ago in Tesla. That’d be pure speculation as to his motives of putting that tweet out.
Rep. Steve Stivers: (01:50:26)
Okay, thank you. I’ll 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. Gabriel Plotkin: (01:50:50)
I do believe-
Chairlady Waters: (01:50:53)
The gentleman’s time has expired and the SEC is not here today, because they’re in transition with a temporary chair, awaiting the confirmation of the person who’s been appointed by the President of the United States. This is a serious theory. Members are reminded not to impugn the motives of others. Thank you, Mr. Green, you’re recognized for five minutes.
Rep. Al Green: (01:51:15)
Thank you. Madam Chair. 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’d like for you to tell us what that reason is. Please.
Ms. Jennifer Schulp: (01:51:49)
What trading ahead of customer accounts is is illegal. It does not-
Rep. Al Green: (01:51:55)
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 if I’m doing it [crosstalk 01:52:13]?
Ms. Jennifer Schulp: (01:52:13)
If a market maker trades improperly ahead of their own customer accounts, he can get a better price and can move the market in the process, depending on how big the trade is, thus hurting the customer.
Rep. Al Green: (01:52:24)
Yes. 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. Jennifer Schulp: (01:52:42)
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.
Rep. Al Green: (01:52:52)
Okay. 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. Jennifer Schulp: (01:53:10)
I don’t think that they’re necessarily congruent situations. When you’re trading ahead of a customer order, which is something that is illegal and that the SEC does monitor for, it’s very different from having knowledge as to the way that the market might be moving based on [crosstalk 01:53:27]
Rep. Al Green: (01:53:27)
I understand, but I want to talk about the circumstance where it’s improper, not where it’s proper. Remember we started with improper trading. Here’s 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. It was fined for this. Citadel has been naughty for some time. 2012 … Pardon me. 2014, Citadel faced $800,000 in penalties, 2017, 22.6 million, 2018, 3.5 million, 2020, 97 million, another 2020 of 700,000.
Rep. Al Green: (01:54:28)
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 actions, because it wasn’t just trading. Citadel also did some other things that were not proper. They misled clients. Seems that the punishment is so small given the amount of revenue generated over this same period of time.
Rep. Al Green: (01:55:14)
It seems that Citadel has at least an opportunity to build into its cost of doing business paying penalties. 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, they do things that are much less harmful, and they can possibly go to jail. The question that I have is this: What kinds of systems do we have in place, and that’s back to you again, ma’am, to prevent the very things that I have called to the attention of my colleagues?
Ms. Jennifer Schulp: (01:56:06)
Well, as a former enforcement attorney at FINRA, I can say that that regulators have the same concern with fines and other punishments becoming just a cost of doing business. It’s one of the things that are considered along with the rules and regulations around what can be punished. [crosstalk 01:56:28].
Chairlady Waters: (01:56:28)
The gentleman’s time has been-
Rep. Al Green: (01:56:30)
May I, for the record- [crosstalk 01:56:34]
Chairlady Waters: (01:56:33)
Expired. Mr. Green, as you know, we are going to have a series of hearings. Our next panel will include a whole bevy of experts, also on some of these issues. With that, Mr. Barr, you’re recognized [crosstalk 01:56:47].
Rep. Al Green: (01:56:48)
Chairwoman, may I say something in the record please? I have [crosstalk 01:56:51] additional questions. [inaudible 01:56:52]
Chairlady Waters: (01:56:52)
[crosstalk 01:56:52] With that objection, you may enter into the record. Thank you.
Rep. Al Green: (01:56:55)
Chairlady Waters: (01:56:55)
Mr. Barr, you’re recognize for five minutes.
Rep. Andy Barr: (01:57:00)
Thank you, Madam Chair. Mr. Griffin, I want to revisit this issue of payment for order flow. Payment for order flow has been around for decades. Correct?
Mr. Kenneth Griffin: (01:57:11)
Sorry. I know it’s been around for at least one or two decades. I can’t answer before that period.
Rep. Andy Barr: (01:57:17)
It’s a recognized and approved practice by the SEC, correct?
Mr. Kenneth Griffin: (01:57:22)
Yes, it is.
Rep. Andy Barr: (01:57:24)
Payment for order flow is set by the brokerage firm, not the wholesaler. Right?
Mr. Kenneth Griffin: (01:57:33)
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.
Rep. Andy Barr: (01:57:43)
Well, as a market maker that provides execution services to retail brokers, you are required to meet best executional requirements. Is that correct?
Mr. Kenneth Griffin: (01:57:53)
Yes, it is.
Rep. Andy Barr: (01:57:54)
In other words, market makers are required to provide the same or better pricing than the exchanges. Correct?
Mr. Kenneth Griffin: (01:58:01)
That is correct.
Rep. Andy Barr: (01:58:03)
How can market makers offer that better pricing to Mr. Sherman’s quick line of questions?
Mr. Kenneth Griffin: (01:58:10)
There are a number of drivers that permit us to offer better pricing than what is available on exchange. The first is that exchanges have legally mandated minimum tick sizes of a penny. If you look at a stock like AMC, it trades $5, bid, $5.01 offered. If the exchange could trade with a half cent increment, it would probably trade $5.005, bid, $5.001 offer, or vice versa. But the exchanges are limited to a 1 cent minimum tick size. We have been clear on the record in prior testimony that exchanges should be permitted to have a smaller and more competitive tick size. That’s fact number one.
Rep. Andy Barr: (01:59:00)
Mr. Kenneth Griffin: (01:59:00)
Number two is that the average retail order is much smaller in totality than the average order that goes onto an exchange. Because this order is smaller, and I’ll 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. As I’m sure you’re well aware, we are the largest trader of stocks on exchanges in the United States. We’re-
Rep. Andy Barr: (01:59:45)
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 traits?
Mr. Kenneth Griffin: (01:59:57)
We do, believe Congressman, that’s an important question. 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.
Rep. Andy Barr: (02:00:21)
Well, let’s talk 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. Vlad Tenev: (02:00:37)
I believe that’s [crosstalk 02:00:40]
Rep. Andy Barr: (02:00:39)
Are the margin requirements charged by your clearing house in turn approved by federal regulators?
Mr. Vlad Tenev: (02:00:46)
Rep. Andy Barr: (02:00:48)
Did federal regulators approve the value of risk charge that was imposed on Robinhood?
Mr. Vlad Tenev: (02:00:56)
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.
Rep. Andy Barr: (02:01:09)
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. Vlad Tenev: (02:01:16)
Congressmen, 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.
Rep. Andy Barr: (02:01:32)
Mr. Plotkin, 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. Gabriel Plotkin: (02:01:50)
No, they did not.
Rep. Andy Barr: (02:01:52)
Well, shorting has an important role to play in our markets, allowing for legitimate hedging and price discovery. But we are interested in naked shorting. We would hope that you would to clarify that and how it is that you make sure that you’re first locating the borrow.
Mr. Gabriel Plotkin: (02:02:10)
Alright- [crosstalk 02:02:11].
Rep. Andy Barr: (02:02:10)
My time’s up.
Chairlady Waters: (02:02:13)
The Gentleman’s time has expired. Mr. Cleaver, you’re recognized for five minutes.
Rep. Emanuel Cleaver: (02:02:19)
Thank you, Madam Chair. 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 give it to me in a short period of time, how did you come up with your name for the company.
Mr. Vlad Tenev: (02:02:48)
Absolutely. Thank you for that question, Congressmen. 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.
Rep. Emanuel Cleaver: (02:03:11)
Okay. I appreciate that answer, because it’s something I would also embrace. However, I have a 23 year old on the other side of the house who I love dearly. But he has no training, no income, no qualifications. How in the world could he get a million dollars worth of leverage?
Mr. Vlad Tenev: (02:03:46)
Thank you, Congressman. The leverage that we provide to our customers, which less than 3% of our customers actively use, is regulated strictly by requirements. The only way to get that amount of leverage in a margin account through borrowing is to deposit a similarly sized amount of capital.
Rep. Emanuel Cleaver: (02:04:11)
Or by mistake.
Mr. Vlad Tenev: (02:04:17)
Congressman, I’m not sure what you’re referring to.
Rep. Emanuel Cleaver: (02:04:22)
Well, I mean, there is a record of a young man getting a million dollars worth of leverage. He was only 20 years old. I’m just saying if that’s not a policy, that was an error.
Mr. Vlad Tenev: (02:04:40)
Congressman, yeah, I appreciate the opportunity to address that really important point. You’re referring to Mr. Kearns?
Rep. Emanuel Cleaver: (02:04:47)
I am. I am.
Mr. Vlad Tenev: (02:04:50)
The man who unfortunately passed last year?
Rep. Emanuel Cleaver: (02:04:53)
Mr. Vlad Tenev: (02:04:54)
First of all, I’m sorry to the family of Mr. Kearns, for your loss. The passing of Mr. Kearns was deeply troubling to me and to the entire company. We have vowed to take a series of steps, very aggressive steps, to make our options product 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.
Rep. Emanuel Cleaver: (02:05:42)
Okay. I asked that question. In my real life, I’m a United Methodist pastor. I’ve red your statement after the tragedy of this young 20 year old. But I mean, I don’t think you nor I want to get into litigate that right here today. But what improvement did you make in the aftermath to your platform or were there improvements?
Mr. Vlad Tenev: (02:06:18)
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 option’s transaction were to be assigned. We also added an options’ education specialist. We also added live phone-based customer support for acute options cases, which has gotten very, very great feedback from customers and is something we’re expanding to other use cases, such as cases where customers’ accounts have had off-platform hacking incidents.
Rep. Emanuel Cleaver: (02:07:10)
Okay. The last one is where 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. He sent emails. To be fair, there was a response, but it was hours later. As I became more and more familiar with this particular case-
Chairlady Waters: (02:07:45)
The Gentleman’s time has expired.
Rep. Emanuel Cleaver: (02:07:48)
Thank you Madam Chair. I appreciate it.
Chairlady Waters: (02:07:50)
You’re so welcome. Mr. Hill, you’re recognized for five minutes.
Rep. French Hill: (02:07:55)
Well, thank you, Madam Chair for holding this hearing. I want to thank our witnesses for their expertise and their patience. Madam Chair, I have a letter from the American Securities Association I’d like to insert in the record, please.
Chairlady Waters: (02:08:08)
Without objection, such is the order.
Rep. French Hill: (02:08:11)
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, working in Sofia in 1990 and 1991 to try to bring capitalism to Bulgaria after the wall fell. I’m glad to see you’re an American citizen and innovating here in our country.
Mr. Vlad Tenev: (02:08:36)
Rep. French Hill: (02:08:37)
I think you’ve done a good job talking about, I’d say, the acknowledged lessons that you’ve learned in terms of these deposits for clearing and the important risk management issue for your firm. I’d like to turn 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. Vlad Tenev: (02:09:04)
Thank you for that question, Congressmen. 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. We’re looking to expand aggressively. [crosstalk 02:09:27]
Rep. French Hill: (02:09:26)
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. Vlad Tenev: (02:09:32)
We do offer, Congressmen, 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 has been compromised. The feedback’s been great. We’re looking to expand the live phone channel as well as make improvements to our email channel and even [crosstalk 02:10:02] upstream within the product.
Rep. French Hill: (02:10:03)
Thank you. Thank you. That’s helpful. On the subject of a margin and options, you’ve talked about that today, but I spent 40 years in this business and been the general securities principal in three different firms. This issue of granting margin and option approval to retail clients is always an important issue. You’ve addressed that today.
Rep. French Hill: (02:10:25)
I want to turn to a different topic that has not been raised, that’s low-dollar stocks. As I understand it, your policy and procedure manual simply said 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?
Rep. Blaine Luetkemeyer: (02:10:49)
Yes, I’d be happy to congressmen. Robinhood allows customers to trade in and invest in exchange-listed securities. That’s the objective criteria that we use. It actually excludes several types of securities that customers commonly request to 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.
Rep. French Hill: (02:11:28)
Thank you. I think that probably … I’m sure you’ll reevaluate that in after these effects. Let me turn to Ms. Schulp. Thank you for being here. The Wall Street Bets 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, on potentially inducing trading in a certain direction? Is that worthy of their review?
Rep. French Hill: (02:12:01)
… is that worthy of their review?
Ms. Jennifer Schulp: (02:12:04)
Thank you for the question, Congressman. I think that there’s been little evidence to this time that there’s 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 that 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.
Rep. French Hill: (02:12:46)
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. Vlad Tenev: (02:13:00)
Thank you, Congressman. I don’t believe it would.
Rep. French Hill: (02:13:03)
Rep. Maxine Waters: (02:13:04)
The gentleman’s time has expired.
Rep. French Hill: (02:13:05)
Thank you, Madam Chair, I yield back.
Rep. Maxine Waters: (02:13:08)
[crosstalk 02:13:08]. We will take a short recess. The committee stands in recess for five minutes. Thank you.
Rep. Ed Perlmutter: (02:20:46)
Thanks, Madam Chair. Mr. Gill, let’s start with you, since you seem to have started all of this. You began analyzing GameStop in the summer of 2019. Was that your testimony?
Mr. Keith Gill: (02:21:03)
Congressman, I’ve been following GameStop for a number of years. I started to buy into it in June of 2019 most recently.
Rep. Ed Perlmutter: (02:21:11)
So back then, what was the price of the stock when you started investing in it?
Mr. Keith Gill: (02:21:16)
At the time, it was in the ballpark of around $5 per share.
Rep. Ed Perlmutter: (02:21:19)
Okay. And in your analysis, what did you think a proper price for their share was, because you thought you were getting a good buy?
Mr. Keith Gill: (02:21:27)
Sure. At the time, I thought that the value of the business could be worth up to roughly $2 billion.
Rep. Ed Perlmutter: (02:21:35)
Okay, but how much is that per share? Just bring it back to the… you bought at 5, you thought it was worth 10, 20?
Mr. Keith Gill: (02:21:43)
I felt as though that it could be worth, at the time, in the range of, say, $20 to $25 per share. Okay.
Rep. Ed Perlmutter: (02:21:49)
Okay. And you continued to invest on and off through 2019 and 2020. Is that true?
Mr. Keith Gill: (02:21:58)
Rep. Ed Perlmutter: (02:21:59)
Okay. And you bought long, you bought some shares, but you also did some options trading, did you not?
Mr. Keith Gill: (02:22:06)
Correct, I did.
Rep. Ed Perlmutter: (02:22:08)
And options trading is not really for the novice investor, is it?
Mr. Keith Gill: (02:22:12)
It is a riskier investment, yes.
Rep. Ed Perlmutter: (02:22:16)
Okay. On January 27th, I think the stock price hit $483, or something like that. Is that true?
Mr. Keith Gill: (02:22:29)
I believe it was in that area, yes.
Rep. Ed Perlmutter: (02:22:32)
In your analysis, back when you started investing in the stock, did you ever see it being valued at $483 per share?
Mr. Keith Gill: (02:22:45)
At the time, I thought that it was possible, but a very low probability, I thought.
Rep. Ed Perlmutter: (02:22:51)
Okay, thank you. Just a couple more questions in terms of the platforms where you visited and discussed this stock with others. One was the Reddit subreddit WallStreetBets platform, correct?
Mr. Keith Gill: (02:23:13)
Rep. Ed Perlmutter: (02:23:14)
And at any given time, how many people were you talking to on that platform?
Mr. Keith Gill: (02:23:23)
I wasn’t so much talking to anyone individually, but rather making posts on that public forum.
Rep. Ed Perlmutter: (02:23:30)
That GameStop was an attractive stock.
Mr. Keith Gill: (02:23:33)
Yeah. 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.
Rep. Ed Perlmutter: (02:23:41)
Did you discuss this on any other platforms? Are there any other kinds of Reddit, or other kinds of platforms that you talked about the stock?
Mr. Keith Gill: (02:23:51)
Yes, I have talked about the stock on some other platforms.
Rep. Ed Perlmutter: (02:23:55)
Did you ever talk about the short sellers that had bet against this company?
Mr. Keith Gill: (02:24:01)
Yes, the topic did come up.
Rep. Ed Perlmutter: (02:24:03)
And about when did that occur?
Mr. Keith Gill: (02:24:05)
Oh, since around the time I had begun investing in it, it was… Someone else has [inaudible 02:24:13] an exceptional level of short interest in the stock since the time I had started investing in it.
Rep. Ed Perlmutter: (02:24:17)
Okay. Let me turn my attention now to you, Mr. Plotkin. When did Melvin first take a short position in GameStop?
Mr. Gabriel Plotkin: (02:24:31)
Thank you, Congressman. That was in 2014, really right at our inception of the fund.
Rep. Ed Perlmutter: (02:24:37)
And when you did that, did you continue to maintain a short position?
Mr. Gabriel Plotkin: (02:24:45)
Rep. Ed Perlmutter: (02:24:47)
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. Gabriel Plotkin: (02:25:04)
That’s a good conclusion, yes.
Rep. Ed Perlmutter: (02:25:06)
In your analysis, when you started into the short position, what did you think the stock was worth?
Mr. Gabriel Plotkin: (02:25:14)
I don’t remember exactly at the time. I think when we launched, it was probably a $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. It’s almost negative $3 a share, so there’s been a lot of challenges fundamentally.
Rep. Ed Perlmutter: (02:25:32)
Last question for you. Were you in a naked position in your short position, because the stock was oversold?
Mr. Gabriel Plotkin: (02:25:41)
No. Our systems won’t even allow that, so that would be impossible for us to do.
Rep. Ed Perlmutter: (02:25:46)
Okay. Well, thank you. My time is expired. I wanted to get some facts out for Mr. McHenry, And I yield back.
Rep. Maxine Waters: (02:25:54)
Thank you very much. The gentleman’s time has expired. [inaudible 02:25:59] for five minutes.
Rep. Lee M. Zeldin: (02:26:05)
Thank you, Madam Chair, Ranking Member McHenry for holding this hearing. Thank you to the witnesses for being here today. I represent the 1st 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, and this situation is a perfect example. For example, one of our witnesses here, Mr. Gill, or should I say RoaringKitty, 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.
Rep. Lee M. Zeldin: (02:27:15)
However, I want to highlight a potential vulnerability in these innovations. I’ve been concerned for some time in general with the sharing of US individual user data with the Chinese Communist Party. I sent a letter, for example, 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 CFIUS review. Chinese companies are required by law to regulate online behavior that deviates from the political goals of the CCP, obey the CCP’s censorships, 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% of Webull. Xiaomi is a Chinese company that risks being delisted from US exchanges after the US Department of Defense put the company on a blacklist on January 14, 2021.
Rep. Lee M. Zeldin: (02:28:32)
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 8th 2020, Bloomberg Businessweek ran an article on Webull, stating the company quote, “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 29th 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 or other user data from their subsidiary of broker dealers that are licensed and registered in the US?
Ms. Jennifer Schulp: (02:29:38)
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 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.
Rep. Lee M. Zeldin: (02:30:13)
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. Jennifer Schulp: (02:30:34)
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.
Rep. Lee M. Zeldin: (02:30:51)
Well, 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 the most amount of information as possible to be set up for success. I feel back to that. I yield back.
Rep. Maxine Waters: (02:31:09)
Thank you very much. Mr. Himes, you’re recognized for five minutes.
Rep. Jim A. Himes: (02:31:15)
Thank you, Madam Chair, 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 the wholesalers, 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 DC, 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.
Rep. Jim A. Himes: (02:32:21)
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, invested it in GameStop, only to see the value of his position go down 80%. 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. So 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. Vlad Tenev: (02:33:18)
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.
Rep. Jim A. Himes: (02:33:26)
All right, you don’t have that. So you do have a $35 billion figure. The 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… Is that gross, or net? In other words, is that actual profit or does it include margin shares, other forms of leverage that may actually not belong to the account holders?
Mr. Vlad Tenev: (02:33:46)
It does include, Congressman, unrealized gains, so it’s the value of assets, both including positions in securities and cryptocurrencies.
Rep. Jim A. Himes: (02:34:01)
I get that. 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. Vlad Tenev: (02:34:15)
The asset under management number is not one that Robinhood has publicly shared.
Rep. Jim A. Himes: (02:34:22)
Okay, but you can’t share $35 billion. Sorry, Mr. Tenev, I just don’t have a lot of time. $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. Vlad Tenev: (02:34:38)
Congressman, with respect, I think the proper comparison is to customers not investing at all. Much of our customers are investing for the first time, and are taking money that they otherwise would have spent or consumed and putting-
Rep. Jim A. Himes: (02:34:54)
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 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. Vlad Tenev: (02:35:18)
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 corporations-
Rep. Jim A. Himes: (02:35:30)
Mr. Tenev, again, don’t make me be rude here. You and I both know the $35 billion of unrealized gains, if that’s on a base of $100 billion, that’s a 35% 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, 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. Vlad Tenev: (02:36:05)
Congressmen, 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.
Rep. Jim A. Himes: (02:36:19)
No, no. It’s most certainly not. It’s most certainly not, Mr. Tenev, and so I’m going to ask you… 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 it to return, so I’m going to ask you to convert that, obviously I’m out of time, into a rate of return for us.
Rep. Maxine Waters: (02:36:39)
You’re out of time. Mr. Loudermilk, you’re now recognized for five minutes.
Rep. Barry Loudermilk: (02:36:46)
Thank you, Madam Chair, and I appreciate all 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 on you. And so I just encourage you to continue speaking the truth, and you will 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. Just seems to be a trend in Washington, DC 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.
Rep. Barry Loudermilk: (02:37:39)
I can even testify to what was just being said, as I know numbers 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 they were still working, they didn’t need, and they actually started 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. Now question, Mr. Tenev. Can you remind us again why Robinhood temporarily paused trading of GameStop and other stocks?
Mr. Vlad Tenev: (02:38:55)
Of course. Thank you, Congressman. Robinhood pause 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.
Rep. Barry Loudermilk: (02:39:13)
Okay. So what you’re saying is you were paused because you had to comply with regulations. Is that true?
Mr. Vlad Tenev: (02:39:19)
Rep. Barry Loudermilk: (02:39:20)
All right. So 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’d 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. A question for Ms. Schulp. Despite the volatility and the frenzy of media and social media activity, it seems to me like the markets functioned as they were supposed to during this situation, and that markets are not broken. In fact, they are working well.
Rep. Barry Loudermilk: (02:40:05)
Do you agree with that?
Ms. Jennifer Schulp: (02:40:06)
I agree with that.
Rep. Barry Loudermilk: (02:40:07)
Okay, thank you. I appreciate that. I think most reasonable people that 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. Jennifer Schulp: (02:40:30)
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.
Rep. Barry Loudermilk: (02:40:38)
Thank you. Mr. Griffin, what are some of the issues that policymakers should consider in the T+2, T+1, T+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 T+2, T+1, and T+0 debate?
Mr. Kenneth Griffin: (02:41:07)
So Congressman, I cannot profess to be an expert on these issues, but I will give you my perspectives from having been in the industry for 30 years. We started at T+5. We will one day be at real-time settlement, and the question is how long does that journey take? From T+2 to T+1, which reduces the amount of capital required by broker dealers to meet the needs of their customers, that reduction capital will be meaningful, would have been very helpful to Robinhood during this period of time, reduces counterparty risk holistically, which is good for everybody in the market. We should push for T+1. As we go to same-day settlement, you now bring into question the complexity of intraday [inaudible 02:41:53], and you bring into play the necessity for all systems to be functioning every moment of every day with no room for error. At a T+1 settlement-
Rep. Maxine Waters: (02:42:02)
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 be probably 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. Stir, you’re recognized for five minutes.
Rep. Bill Foster: (02:42:28)
Thank you, Madam Chair and to our witnesses. Mr. Tenev, I’d like to follow up a little bit on payment for order flow and best order execution issues. Democratization of finance 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. And while institutional investors can afford to run their own tests, and they do, and I’m sure Mr. Griffin normally 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.
Rep. Bill Foster: (02:43:33)
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 people’s apps in terms of the total cost of trading?
Mr. Vlad Tenev: (02:44:14)
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+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-
Mr. Vlad Tenev: (02:45:03)
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 in 2020, our customers received an aggregate over a billion dollars of price improvement on their executions.
Rep. Bill Foster: (02:45:20)
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 see not only the trade that I just executed, but perhaps a running average over the last month or two that you can compare it to the running average of whether you’re exceeding some benchmark for trade execution quality that can really be compared with potential competitors. Is that a workable system? Are there difficulties? Is there a reason why industry should move that way in the name of transparency to customers?
Mr. Vlad Tenev: (02:46:18)
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 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.
Rep. Bill Foster: (02:46:38)
Okay. Well, yeah, we do intend to continue to engage with the industry on the subject because it’s very easy to make payment for order flow sound really creepy. You’re basically selling a list of [inaudible 02:46:50] to the sharks. 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, and so that’s I think really, really an important issue. 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 whoever does the best for your customers.
Mr. Vlad Tenev: (02:47:29)
Yeah. Congressman we already do that. We have seven [crosstalk 02:47:33].
Madam Chairwoman: (02:47:33)
[crosstalk 02:47:33]. Mr. Mooney, you’re recognized for five minutes.
Rep. Alexander Mooney: (02:47:39)
Thank you, madam chairman. Let me just start by saying the last Congress, 30 of my Democrat colleagues, four of whom on this very committee, co-sponsored a bill that would impose a financial transaction tax on the purchase of securities and certain derivatives. Just recently after the market volatility surrounding GameStop in January, Democrats renewed the call, many Democrats anyway renewed the call for a financial transaction tax. On just January 28th, Congresswoman Ilhan Omar tweeted, “How about this? Financial transaction tax now.”
Rep. Alexander Mooney: (02:48:17)
Congressman Peter DeFazio’s is the lead sponsor of the bill. He’s already put the bill back in for this session of Congress. It’s now a House Resolution 328 of… 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.
Rep. Alexander Mooney: (02:48:41)
He says, Congressman DeFazio says that a financial transaction tax would, quote, help create a more level playing field for main street. With that background, Mr. Tenev, this question is directly 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% transaction tax on the sale of securities… and I know one of my colleagues, French Hill, my good friend mentioned this earlier, but I want to expand upon a little more… how would that .1% transaction tax on the sales securities affect your platform and the retail investors that are your customers?
Mr. Vlad Tenev: (02:49:28)
Thank you, congressman. 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. 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. I know it’s a more complicated issue than meets the eye at first glance.
Rep. Alexander Mooney: (02:50:08)
Okay. Well, thank you for that answer. My next question is actually for Jennifer Schulp. I know you’ve spent your career specializing in financial regulation. In your expert opinion, would a financial transaction tax directly prevent fraud or market manipulation?
Ms. Jennifer Schulp: (02:50:27)
No, I don’t think a financial transaction tax would have an effect on fraud or manipulation. I also don’t think that it… Financial transaction taxes often fail to raise money, and they distort trading in a way that’s not necessarily foreseen initially by the tax. I’d like to just add in there as well, that 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.
Rep. Alexander Mooney: (02:51:15)
A quick followup to that, Ms. Slough, do you think a financial transaction tax would have done anything to prevent the market volatility and disruption we saw just this past January?
Ms. Jennifer Schulp: (02:51:27)
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 change the volatility. It’s not my opinion that that would have had any effect on this particular circumstance.
Rep. Alexander Mooney: (02:51:42)
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, 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 chair. You’re back.
Madam Chairwoman: (02:52:34)
Thank you very much. Ms. Beatty, you’re recognized for five minutes. Ms. Beatty? [crosstalk 02:52:45].
Rep. Joyce Beatty: (02:52:44)
Thank you, madam chairperson, and thank you to the witnesses. My first question is to the CEO President Ken Griffin. In the first three 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 as the best interest of their users while selling their order flow to companies like yours? That’s yes or no.
Mr. Kenneth Griffin: (02:53:19)
Congressman, I believe that Robinhood actually goes further [inaudible 02:53:24] best interest to customers by, in fact, routing their order flow to sit it out. We give a better price, a better execution for American retail investors than the alternative of going to exchanges.
Rep. Joyce Beatty: (02:53:38)
I’m going to take that as a yes since you said they go further. Then can you tell me why did your company urge the SEC to ban the payment for order flow models in a filing to the SEC?
Mr. Kenneth Griffin: (02:53:54)
Congressman, that is a terrific question. That filing in 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 reform programs, was in the best interest of American institutional and retail investors. Now, regretfully, we did not prevail in our reasoning. The rise or 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 market.
Rep. Joyce Beatty: (02:55:07)
Because my clock is ticking, let me ask you this, so are you saying that you no longer believe that the motto is anti-competitive and distorts order routing decisions?
Mr. Kenneth Griffin: (02:55:20)
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. 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 [crosstalk 02:55:59].
Rep. Joyce Beatty: (02:55:58)
Okay, clearly we’re going to have a further discussion. Let me interrupt you only because my time is clicking in, and I want to follow up with a question for Robinhood’s CEO. Several of the brokers offer their users order flow for the sale to the firm, like with the previous CEO of Citadel. However, the price that Robinhood gets for the order flow is much higher than any other brokers receives. I could go on and tell you we’ve pulled the SEC filings that Robinhood received 17% per 100 shares stock of traded and 58% to 100 shares, and I could go on, but the question is why do companies like Citadel pay premium for their order flows of Robinhood’s users?
Mr. Vlad Tenev: (02:56:58)
Thank you congresswoman, for that very important question. There’s several reasons that may be the case. One important one is that our model in 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 that’s the most optimal way to structure payment for order flow arrangements.
Rep. Joyce Beatty: (02:57:31)
Okay, is it not because companies like Citadel can make more money off of Robinhood users than others, and that’s a yes or no because my clock is going to run out.
Mr. Vlad Tenev: (02:57:44)
Rep. Joyce Beatty: (02:57:46)
I’m sorry. I yield back. My time is up.
Madam Chairwoman: (02:57:49)
Thank you very much. Next though we will have Mr. Vargas. Excuse me. No, Mr. Davidson next, and then Mr. Vargas. Mr. Davidson, you’re recognized for five minutes.
Rep. Warren Davidson: (02:58:03)
Thank you, madam chairwoman. I thank our witnesses. I appreciate the work you’ve done today. I just want to share that in May of 2020, the Depository Trust Clearing Corporation 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.
Rep. Warren Davidson: (02:58:28)
Now, since Project Ion was publicly announced, we’ve received little information pertaining to its progress. As a longtime 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. I look forward to hearing back from them. 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 be?
Mr. Kenneth Griffin: (02:59:10)
Same-day clearing and settlement requires that every bit of the workflow is perfectly synchronized across all parties and we have no time to recoverability or for error management that you have in an overnight batch process.
Rep. Warren Davidson: (02:59:28)
Right, so the technology makes that essential in my assessment and many that that is inherent to the architecture for blockchain to prompt to move forward with each proof. I guess, clearly, in your business, just to follow up there, the technology exists where for trading firms that are engaged in high-frequency trading, you measure success in the course of the day and in, what, milliseconds for high-frequency trading?
Mr. Kenneth Griffin: (03:00:00)
As you know, we are the largest market maker in the world and the largest 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. We [crosstalk 03:00:21].
Rep. Warren Davidson: (03:00:21)
Perfect. I just wanted to make the point that I think the technology exists whether you use blockchain or not, and applaud you for having the ability to execute with precision swiftly already.
Mr. Kenneth Griffin: (03:00:33)
Rep. Warren Davidson: (03:00:33)
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 T2 versus T0?
Mr. Vlad Tenev: (03:00:52)
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.
Rep. Warren Davidson: (03:01:07)
Yeah. 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, is not just the ability for more people in a broader portion of America to become savers and investors. It’s also to engage in corporate governance even. Do you believe that that if market infrastructure would guarantee… and this is really related to the over musical shares where someone could be left with no share when the music stops multiple 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 linked to short sellers, there could be 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. Vlad Tenev: (03:02:00)
Congressman, I believe that 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. 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. Kenneth Griffin: (03:02:36)
Yeah. Thank you for that. I appreciate that you see the relationship. Hopefully, broadly we do, and we provide that nudge the market needs. I want to commend Vice Chancellor Travis Laster of the Delaware Chancery Court for his letter and paper. The blockchain plunger explains how this could be done and asked unanimous consent to submit that to 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, so you might not call yourself a holder, you might use the word diamond hands, but thank you, and congratulations for your success. [crosstalk 03:03:16].
Madam Chairwoman: (03:03:16)
The gentleman’s has expired, and without objection, your submission is taken. Thank you. Mr. Vargas, you’re-
Rep. Juan Vargas: (03:03:28)
Thank you very-
Madam Chairwoman: (03:03:29)
… [crosstalk 03:03:29] five minutes.
Rep. Juan Vargas: (03:03:29)
Thank you very [inaudible 03:03:29] chair. First of all, I want to [inaudible 03:03:31] Mr. Plotkin. You spoke of the antisemitic 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 painful, evil sinful event in human history than the Holocaust. I want to apologize to you and your family for those attacks. You brought it up, and I think we owe you an apology. I want to apologize for that.
Rep. Juan Vargas: (03:03:59)
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 has been a great deal of interest in this hearing. I think it [inaudible 03:04:20] great distrust in our society and government markets, institutions, and then along comes the story of GameStop. It’s a story, really, of Robinhood turned on its head. The reason I say that is Mr. [inaudible 03:04:35] brought it up, but Robin Hood is a English folk hero, 13, 14 century, and he was supposed to steal, Robin of Loxley was supposed to steal from the rich and give to the poor.
Rep. Juan Vargas: (03:04:48)
Here, you almost have the opposite. You have the situation where you have to steal from the small retail investor and giving it the large institutional investor. From an outsider’s perspective, you have the [inaudible 03:05:03] the hedge funds and their armies of analysts and lawyers and regular old suits attacking the trust [inaudible 03:05:09] GameStop by shorting its stock, and to rescue, here comes the retail investors, and they’re taking stock to these incredible levels.
Rep. Juan Vargas: (03:05:19)
All of a sudden, Robinhood steps in, but not the 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’s getting socked in this thing? The bullies are the hedge funds, and that’s why people were excited about this.
Rep. Juan Vargas: (03:05:39)
But all of a sudden Robinhood put steps in, and they said, “No, no, no. We had to do this because of other conditions, and [inaudible 03:05:45] good friends and Republicans say it was 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. It seems 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? You can just count how many people in the room with you.
Mr. Kenneth Griffin: (03:06:17)
There are five people including myself in this room, sir congressman.
Rep. Juan Vargas: (03:06:22)
Okay. Thank you. I don’t think my colleagues need to help the CEOs or anybody. They got plenty of help. Now, 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. Kenneth Griffin: (03:06:42)
Are you asking if we’ve had contact with [crosstalk 03:06:46]-
Rep. Juan Vargas: (03:06:46)
With respect to GameStop, and what we’re obviously talking about.
Mr. Kenneth Griffin: (03:06:57)
Congressmen, 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.
Rep. Juan Vargas: (03:07:12)
Well, I understand that, but did you talk to them about restricting or doing anything to prevent people from buying, not selling, but buying in game stock?
Mr. Kenneth Griffin: (03:07:23)
Let me be-
Rep. Juan Vargas: (03:07:24)
Anybody in your organization?
Mr. Kenneth Griffin: (03:07:26)
Let me be perfectly clear, absolutely not.
Rep. Juan Vargas: (03:07:33)
If we depose everyone in your organization, we will find that.
Mr. Kenneth Griffin: (03:07:37)
That is correct.
Rep. Juan Vargas: (03:07:40)
Okay. Thank you. I do want to ask you one thing, and Mr. [inaudible 03:07:45] was pursuing this, how do you balance the best execution for the order flow from your purchase from Robinhood with the need to profit from the purchase order flow. How do you do that?
Mr. Kenneth Griffin: (03:08:00)
As a market maker, we have to provide to the customer a better price than they can achieve on exchange. Order flow is routed to us on the merits of the execution quality that we provide in contrast to our competitors who we are competing with.
Rep. Juan Vargas: (03:08:22)
Okay. My time’s about to expire, but I have to say, Mr. Tenev, when you say that [inaudible 03:08:27] made $35 billion, and you don’t say [inaudible 03:08:30] much your people lost on [inaudible 03:08:33], people that are invested in you, that’s like taking the Fifth. Thank you.
Madam Chairwoman: (03:08:38)
Thank you. The gentleman’s time has expired. Mr. Budd.
Rep. Ted Budd: (03:08:48)
Thank you, chair-
Madam Chairwoman: (03:08:49)
[crosstalk 03:08:49] been recognized-
Rep. Ted Budd: (03:08:50)
Madam Chairwoman: (03:08:51)
Rep. Ted Budd: (03:08:51)
Thank you. I want to also thank the panel. Now, I really care about a level playing field for retail investors to access the market. I’ve been a long supporter of financial innovation and FinTech and the shared goal of democratizing finance and making access to the financial system easier for all. Mr. Tenev, your company, it boasts that it’s helping to democratize finance and is at the forefront of innovation. Can you talk a little 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. Vlad Tenev: (03:09:32)
Absolutely, congressman. Thank you for that very important question. The first thing I should note is 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, 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.
Mr. Vlad Tenev: (03:10:09)
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. The theme of this year for Robinhood is how do we take a first-time investor and turn them into a long-term mutual investor, how do we make long-term investing accessible for people around the country? We’re making huge investments in education and customer support to support that.
Mr. Vlad Tenev: (03:10:49)
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, all the way through to more advanced concepts. 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 [crosstalk 03:11:19]-
Rep. Ted Budd: (03:11:19)
I want to interrupt you there. I know you have a lot more things. These are great. 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. I want to switch to Ms. Schulp. Back in December, there was an article that you wrote prior to all these events that we’re even having [inaudible 03:11:39], 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’s pretty insulting. My colleague from across the aisle from Connecticut used that term. I think it’s insulting. Instead, retail investors are, in fact, revolutionizing the stock market. Would you elaborate on those views, Ms. Schulp?
Ms. Jennifer Schulp: (03:12:08)
Absolutely. Thank you, congressmen. 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.
Ms. Jennifer Schulp: (03:12:42)
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 spend effort making sure that people are equipped with the knowledge to understand the risks about being in the market.
Rep. Ted Budd: (03:13:16)
Well, I appreciate that. I would like to ask for unanimous consent to insert that letter into the record, madam chair.
Madam Chairwoman: (03:13:27)
Rep. Ted Budd: (03:13:28)
Thank you. I just want to look. At Robinhood wrote about the need for… and this is open to anyone. [inaudible 03:13:34] got a few seconds left, but I’d like for someone to talk about is it possible for clearing houses and real-time settlements on the blockchain to exist? I don’t have time for that, but that’s something we can come back to at a further point. Madam chair, I’ll go ahead and yield back.
Madam Chairwoman: (03:13:51)
Thank you very much, and without objection, I want to make sure that that’s in the record that your inception was accepted. Thank you. With that-
Rep. Ted Budd: (03:14:05)
Madam Chairwoman: (03:14:05)
… we’re going to return to Mr. Gottheimer. Mr. Gottheimer, you’re recognized for five minutes.
Rep. Josh Gottheimer: (03:14:07)
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 is a security guard losing $20,000 or a dog Walker losing a few hundred dollars, every day, 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.
Rep. Josh Gottheimer: (03:14:38)
Still, a Bloomberg report yesterday that he was served a lawsuit accusing of misrepresenting himself and his motivations. I’m not here today 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 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 they’re even real people?
Mr. Steve Huffman: (03:15:05)
Reddit… and this is 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 of this that are really important.
Mr. Steve Huffman: (03:15:28)
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. [crosstalk 03:15:46]-
Rep. Josh Gottheimer: (03:15:46)
Mr. Steve Huffman: (03:15:46)
… point out that other platforms have real identity, and it doesn’t do anything to improve their behavior.
Rep. Josh Gottheimer: (03:15:52)
[inaudible 03:15:52] question of that, is there any way for a regular user of WallStreetBets subreddit to know what content is genuine written by others users just like themselves, retail investors who are looking for honest information to invest on? Is there any way for that?
Mr. Steve Huffman: (03:16:06)
There are a couple aspects to this. The first is that 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 over 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, and 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.
Rep. Josh Gottheimer: (03:16:47)
All right, do you have any heightened standards for places like WallStreetBets or other investing subreddits where moderators, people who manipulate content to their own financial gains?
Mr. Steve Huffman: (03:16:57)
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. To date, we have not found any nefarious behavior.
Rep. Josh Gottheimer: (03:17:12)
Got it. But we could have a situation where thousands, possibly millions of dollars of retail investor money may be being manipulated, right? We don’t know that. [crosstalk 03:17:21].
Mr. Steve Huffman: (03:17:21)
People in the United States talk about stocks on Reddit. They talk about it on TV, in magazines. People can say… They can… 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 foot of visibility.
Rep. Josh Gottheimer: (03:17:45)
Do you see any difference between someone on Reddit offering advice versus an analyst at a major bank or in a financial services firm?
Mr. Steve Huffman: (03:17:56)
Absolutely. I think on Reddit, you’re seeing retail investors who are giving authentic advice based on their knowledge, and you would not-
Mr. Steve Huffman: (03:18:03)
… 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.
Rep. Josh Gottheimer: (03:18:11)
Do you plan to do more in this space? Is this something that’s going to be a major priority of yours? Do you think overall, social media companies like yourselves should be held to different standards? 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. Steve Huffman: (03:18:34)
We take manipulation of Reddit incredibly seriously. That is one of our, I think, first duties on all of this is to ensure the authenticity of our communities. Yes.
Rep. Josh Gottheimer: (03:18:46)
Got it, but do you think you should be held responsible if somebody put on something, if there’s some collusion, or if there is somebody who is, 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. Steve Huffman: (03:19:01)
Reddit can be held responsible and we do take our responsibilities here incredibly seriously.
Rep. Maxine Waters : (03:19:08)
Thank you, the gentleman’s time has expired.
Mr. Steve Huffman: (03:19:09)
[crosstalk 03:19:09] Thank you. Thank you, Madam Chairman.
Rep. Maxine Waters : (03:19:09)
Mr. Kustoff? Mr. Kustoff, your [crosstalk 03:19:13]
Rep. David Kustoff: (03:19:13)
Thank you, Madam Chairman. I want to thank you and the Ranking Member for convening today’s hearing.
Rep. David Kustoff: (03:19:24)
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 created this platform to a large extent you’ve leveled the playing field so that a small individual investors can have a shot at the American dream, that’s investing. Now, I do want to ask you though, and 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. Vlad Tenev: (03:20:07)
Thank you, Congressman. I wouldn’t say we misjudged our capital requirements. This was a one in 3.5 million occurrence event. One that had never been seen before in capital markets. But 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 limited to some degree on subsequent days until additional capital came in that allowed us to relax the restrictions.
Rep. David Kustoff: (03:20:51)
It was Robinhood’s mistake though, correct?
Mr. Vlad Tenev: (03:20:55)
Well, Robinhood owns what happened, certainly, and we need to make sure that it doesn’t happen again. But Robinhood Securities had limited options with how to address this. I fully support the team in making the decision that they did, and I believe they did the right thing and the only thing.
Rep. David Kustoff: (03:21:17)
I realize 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 that we’ve talked about today?
Mr. Vlad Tenev: (03:21:34)
That is correct, Congressman. Payment for order flow is one of our largest revenue sources.
Rep. David Kustoff: (03:21:39)
Is it the largest?
Mr. Vlad Tenev: (03:21:41)
It’s the largest. Yes.
Rep. David Kustoff: (03:21:43)
Now, in your testimony, in your written testimony, oral testimony, you talked about the settlement period and what we’re probably capable of doing in real time or instead of T plus two, maybe the T plus one. If we had real time settlement, would the situation would have occurred that did occur in January? Would that have been preventable? In other words, that wouldn’t have happened if we had real-time settlement?
Mr. Vlad Tenev: (03:22:12)
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 clearing houses because the cash and securities transactions would be exchanged in real time. Collateral for counterparty risk would be less necessary. Real-time settlement would lead to reduction perhaps and elimination in some of these collateral requirements, a reduction in the money that sort of clogging up the plumbing of the system, and that would have avoided some of these problems altogether.
Rep. David Kustoff: (03:22:54)
Thank you very much. Just to be clear, does the same answer apply if I if settlement was T plus one instead of same-day settlement? Would your answer be the same?
Mr. Vlad Tenev: (03:23:04)
Congressman, T plus one certainly would be better, but it reduces the scope of the problem. It doesn’t eliminate it from a technology standpoint.
Rep. David Kustoff: (03:23:18)
Thank you very much. Mr. Huffman, if I could, I’d like to follow up on some of the questioning that my colleagues, Congressman Hill and Congressmen Don Heimer, asked. You’ve done an investigation into Reddit into, in WallStreetBets. You don’t see 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. Steve Huffman: (03:23:47)
Congressman, that’s right.
Rep. David Kustoff: (03:23:50)
You know that Congress is looking at amending Section 230. What are your thoughts about that as it relates to Reddit?
Mr. Steve Huffman: (03:23:59)
Sure. Section 230, I think is a critically important law to the internet as we know it. 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. There are other mechanisms for coming after companies like ours. What it does protect is our ability to evolve the way we moderate our content and which we have done in many ways in the last decade.
Rep. David Kustoff: (03:24:32)
Rep. Maxine Waters : (03:24:32)
The gentleman’s time has expired. Mr. Gonzales, you’re recognize for five minutes.
Rep. Vincente Gonzalez: (03:24:38)
Thank you, Mrs. Speaker and Ranking Member. I want to thank everyone in the committee here with us today.
Rep. Vincente Gonzalez: (03:24:44)
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 the confusion and retail investors?
Mr. Kenneth Griffin: (03:25:18)
Congressman, I’m trying to understand the question.
Rep. Vincente Gonzalez: (03:25:23)
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 and 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 the confusion of retail investors?
Mr. Kenneth Griffin: (03:25:58)
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 party to the discussion, dialogue, or demands between DTCC and Robinhood. 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.
Mr. Kenneth Griffin: (03:26:45)
Citadel Securities owes a duty of best execution for every order that comes Robinhood. 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, hardworking, 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 retail-
Rep. Vincente Gonzalez: (03:27:27)
Thank you. Thank you for your response.
Rep. Vincente Gonzalez: (03:27:28)
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 WallStreetBets’ community. Have you ever previously experienced or observed the type of restrictions Robinhood and other applications performed on January 28th?
Mr. Keith Gill: (03:27:46)
Thank you, Congressmen. No, I have not.
Rep. Vincente Gonzalez: (03:27:50)
Thank you. That’s it. [inaudible 03:27:52].
Rep. Vincente Gonzalez: (03:27:53)
Mr. Huffman, I’m not a Reddit-er, but I do understand the problems around social media and freedom of speech and the tight rope act that goes on where these intersect. In the near decade of WallStreetBets and subreddit, have they shown themselves to be exceptionally problematic, an exceptionally problematic forum, or just one of the many eccentric communities that call Reddit home?
Mr. Steve Huffman: (03:28:17)
Congressmen, I think your latter description is more accurate. They are an eccentric community, but they’re well within the bounds of our content policy. 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 they’re putting their best efforts to be a good citizen of Reddit. Towards that end, we’ve had consistent communication with the moderators of that community and they’ve been doing, I think, an excellent job.
Rep. Vincente Gonzalez: (03:28:48)
Thank you. Well, 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. I’m hoping that we all get to take a closer look at what is happening.
Rep. Vincente Gonzalez: (03:29:27)
With that, I yield back. Thank you.
Rep. Maxine Waters : (03:29:28)
Thank you very much. Next on our list, we will have Mr. Hollingsworth for five minutes.
Rep. Trey Hollingsworth: (03:29:38)
Thank you. Madam Chairwoman.
Rep. Trey Hollingsworth: (03:29:40)
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.
Rep. Trey Hollingsworth: (03:29:50)
Certainly there’s been a significant amount of evidence supporting the advantages market-makers offer retail investors. Through sophisticated infrastructure and high-speed technology bid-ask spreads have decreased from 33 cents to less than a penny over the last five decades and, according to some research, saved retail investors 1.6 billion just in the first six months of last year alone.
Rep. Trey Hollingsworth: (03:30:12)
None of our discussion after this and the questions I’m going to ask are 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% of all trading. Can you talk a little bit about what factors have contributed to off-exchange tradings 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. Kenneth Griffin: (03:30:48)
I think one of the most significant drivers of off-exchange trading is that exchanges are handcuffed in their ability to fulsomely compete.
Rep. Trey Hollingsworth: (03:31:01)
Can you talk a little bit more about that? Is this just regulatory arbitrage?
Mr. Kenneth Griffin: (03:31:05)
It is. I hate the word because it has a negative connotation. I believe that the exchanges should have greater latitude in setting their [inaudible 03:31:14] 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. Let me just be very clear, it’s not that we want to inhibit dark pools or market makers like Citadel from competing, it’s that we want to enable and empower exchanges to be better competitors.
Mr. Kenneth Griffin: (03:31:43)
I started my career as a retail investor in the day where I used to spend 25 cents in a bid-ask spread if I was lucky. I know the days you’re referring to. We’ve come a long ways. But to continue on this journey, the next step is to allow exchanges to be more competitive in the market.
Rep. Trey Hollingsworth: (03:32:02)
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. Kenneth Griffin: (03:32:25)
Congressman, I am. 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.
Rep. Trey Hollingsworth: (03:32:34)
Mr. Kenneth Griffin: (03:32:34)
Think of it as the next step forward in regulation and in mass.
Rep. Trey Hollingsworth: (03:32:38)
Love it. Great. Thank you for all those interests. Just, 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 [inaudible 03:32:52] versus lit 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. Kenneth Griffin: (03:33:03)
I think there are three salient points I’d like to make. First, price discovery is the most important part of our capital markets 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 the 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, will have a discrimination against one group of investors for the benefit or at the expense of another in any [inaudible 03:33:51] of our capital markets. We want our capital markets to represent the values of our country.
Mr. Kenneth Griffin: (03:33:57)
The third is that the dark pools themselves create a level of concern and apprehension about the integrity and fairness of our markets. 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.
Rep. Trey Hollingsworth: (03:34:24)
Mr. Griffin, thank you for those answers. 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 field to make sure that we don’t create a public policy [inaudible 03:34:41].
Rep. Maxine Waters : (03:34:43)
The gentleman’s time has expired. Mr. Lawson, you’re recognized for five minutes.
Rep. Al Lawson: (03:34:48)
Thank you, Madam Chair, to you and Ranking Member McHenry for this forum today. I want to thank and welcome the panelists to is this great forum. One thing Madam Chair, I want to clarify for the record is one of my colleagues earlier said that when people got their stimulus money, they went and started investing it. I want to let them know that my people got their stimulus money, they were trying to pay their rent, trying to take care of their kids. I don’t want the panel to think that when we work so hard on stimulus dollars that that happened, that people were running out to invest their money. That’s not the norm.
Rep. Al Lawson: (03:35:33)
My question, I’m going to direct it to Mr. Plotkin. Wall Street is supposed to be tied to revenue and profit 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 isn’t 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 regulatory won. Now Wall Street was losing billions of dollars. Melvin Capital betted against GameStop and was on the verge of bankruptcy. Clearly there is a manipulation and distrust within the system and inequality in American financing.
Rep. Al Lawson: (03:36:34)
Mr. Plotkin, do you believe that there is manipulation, distrust and overall inequality within American finance? What do you believe are the consequences of big guys like yourself, but also little guys in this process?
Mr. Gabriel Plotkin: (03:36:51)
Well, 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.
Rep. Al Lawson: (03:37:14)
Okay. Well, one other thing, you guys have a Series 6, Series 7 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 there can answer, over people who have been involved in this research and calculation and investing for so many years? Can anybody answer? How are they able to go in and manipulate the market [inaudible 03:37:46] and cause billions of dollars to be lost?
Mr. Gabriel Plotkin: (03:37:47)
Sure. Look, 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 a stock higher. Today, with social media and other means, there’s an ability to kind of collectively do. That was a risk factor that up until recently we had never seen, I think.
Mr. Gabriel Plotkin: (03:38:13)
Sometimes with retail investors you think about, and 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 meme stocks, these were businesses with real challenges, but they exploited an opportunity around short interest and the way that was approached. I think, us at Melvin, we’ll adapt. I think the whole industry will have to adapt.
Rep. Al Lawson: (03:38:45)
Well, I understand that. I guess from my standpoint, and I know I don’t have much more time, but what do you recommend to us to try to keep from letting this happen again?
Mr. Gabriel Plotkin: (03:38:58)
Look, I think to some degrees markets are self-correcting. I know 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 types of dynamics. I think there’ll be a lot closer monitoring of message boards. There’ll be software providers. We have a data science team that’ll be looking at that. Whatever regulation that you guys come up with, certainly we’ll abide by. I look forward to helping if you guys want to have future conversations about that.
Rep. Al Lawson: (03:39:33)
Okay, thank you. Madam Chair, my time is running out, so I yield back.
Rep. Maxine Waters : (03:39:37)
Thank you very much. Mr. Gonzalez of Ohio, you’re recognized for five minutes?
Rep. Anthony Gonzalez: (03:39:43)
Thank you, Madam Chair. I want to thank Ranking Member McHenry for his leadership in calling for this hearing today and also you, Madam Chair, for bringing us together.
Rep. Anthony Gonzalez: (03:39:51)
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 AM Eastern and it showed a $3 billion deficit, correct?
Mr. Vlad Tenev: (03:40:11)
I believe that’s correct. Yes.
Rep. Anthony Gonzalez: (03:40:13)
Okay. At that point, 5:11 AM, did you have the liquidity to meet the additional $3 billion deposit requirement?
Mr. Vlad Tenev: (03:40:24)
As we wrote in detail in my written testimony, there were a series of steps that the Robinhood Securities team took to-
Rep. Anthony Gonzalez: (03:40:36)
Reclaiming my time. Sir, at that exact moment, did you have the liquidity for 3 billion? 5:11 AM.
Mr. Vlad Tenev: (03:40:44)
At that moment, we would not have been able to post the 3 billion in collateral.
Rep. Anthony Gonzalez: (03:40:49)
Okay. 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. Vlad Tenev: (03:41:04)
Congressmen, we did have to. The Robinhood Securities team had to work with our relevant clearing houses to adjust the risk profile of the trading day in order to meet our collateral requirements.
Rep. Anthony Gonzalez: (03:41:20)
Right. In order to do that, your choice was to throttle trading to prevent your clients from being able to purchase in certain shares, correct?
Mr. Vlad Tenev: (03:41:33)
That’s correct. Robinhood Securities had to restrict buying in about 13 securities.
Rep. Anthony Gonzalez: (03:41:39)
Okay. If you had not been able to de-risk the profile or the portfolio, excuse me, you wouldn’t have been able to raise the money, get the VAR requirement and the excess capital charge waived to de-risk the portfolio, then DTCC would have stepped in and liquidated the portfolio, correct?
Mr. Vlad Tenev: (03:42:01)
I’m not sure what the exact, Congressman, what the exact steps that they would take if we weren’t in compliance with the deposit requirements would be, but it would not have been a good situation for the firm or the customers.
Rep. Anthony Gonzalez: (03:42:16)
Reclaiming my time. The letter that Ranking Member McHenry submitted for the record, I would draw everyone’s attention to. 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 non-payment, NSCC may cease to act for the clearing member and liquidate it’s unsettled clearing portfolio.” That was definitely in the cards.
Rep. Anthony Gonzalez: (03:42:43)
For my constituents, who are Robinhood clients, what would this have done to their portfolio? If it would have been forced liquidation as a result of missing the capital call?
Mr. Vlad Tenev: (03:42:56)
Well, 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.
Rep. Anthony Gonzalez: (03:43:13)
Right. This would have been an enormous catastrophe for Robinhood, correct? And the clients?
Mr. Vlad Tenev: (03:43:19)
That’s correct. Not just Robinhood, but the over 13-million customers that we serve.
Rep. Anthony Gonzalez: (03:43:26)
Yeah. 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. 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 have from 5:00 AM to 10:00 AM to figure this out is scary for the company, and frankly I care more about my constituents than anything, and scary for them. I hope we’ll continue to look at that.
Rep. Anthony Gonzalez: (03:44:16)
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 Melvin and Citadels of the world, as well as major PE and 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, for lack of a better term, has access to ever diminishing set of investment opportunities. While we’re debating these vulnerabilities, we’re serious about finding ways to expand access for Main Street investors.
Rep. Anthony Gonzalez: (03:44:52)
With that, I yield back.
Rep. Maxine Waters : (03:44:53)
[crosstalk 03:44:53] The gentleman’s time has expired. Mr. San Nicolas, you’re recognized for five minutes.
Rep. Michael San Nicolas: (03:45:00)
Good morning from Guam, Madam Chair. I have been with the hearing since 3:00 AM. 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.
Rep. Michael San Nicolas: (03:45:14)
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. I think that investors like Mr. Plotkin, large money managers probably doubled down on their short positions, thinking that they’re going to win; and in the end, the massive communication networks that we have these days rallied the small to beat the large. That was absolutely something to behold, and Robinhood made that possible. Robinhood made that possible.
Rep. Michael San Nicolas: (03:45:52)
Mr. Tenev, you’ve mentioned in your testimony that you secured $3 billion in funding to address the regulatory deposit requirements situation that you faced. Where did that 3 billion come from?
Mr. Vlad Tenev: (03:46:07)
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 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.
Rep. Michael San Nicolas: (03:46:34)
Basically you had to further dilute your position in Robinhood in order to make sure that you secured all of your million customers effected through that additional 3 billion?
Mr. Vlad Tenev: (03:46:45)
That’s correct, Congressman.
Rep. Michael San Nicolas: (03:46:47)
Well, that’s where 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-requirements situation and you materially benefited from it.
Rep. Michael San Nicolas: (03:47:21)
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 crisis from reoccurring. 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. 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 the existing shareholders and yourself 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. I don’t know what to say about that, but I think that this, Madam Chair, presents a very serious situation where we need to ensure that companies are not taking advantage of customers in this way.
Rep. Michael San Nicolas: (03:48:36)
Mr. Tenant, you’re quoted as saying in this hearing, “Buying increases capital requirements, selling does not.” It was something that you knowingly did. It was something that you knowingly did. It was beyond just trying to protect the existing customers. At the end of the day, while you have to raise an additional 3 billion, it minimized that from being a larger sum. We have customers who purchased a stock who are now bag holders after the price came down because it couldn’t continue going up with buying, additional buying, and that was willful. That was intentional.
Rep. Michael San Nicolas: (03:49:23)
I’m glad, Madam Chair, that we’ve called this hearing. I’m glad that we’re able to put these things on the record. I’m just very, very concerned with the implications of this. I really hope that, at the end of the day, those bag holders get a lot more than an apology. Thank you, Madam Chair, and I yield back.
Rep. Maxine Waters : (03:49:44)
Mr. Rose, you’re recognized for five minutes.
Rep. John Rose: (03:49:49)
Thank you, Madam Chair, and thank you Ranking Member McHenry for holding this important hearing today, and thank you to our witnesses for your testimony and participation today and for the dedication of time that you’ve made to this hearing.
Rep. John Rose: (03:50:05)
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 they have the information they need to participate in the market in an informed way.
Rep. John Rose: (03:50:48)
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. Kenneth Griffin: (03:51:03)
Congressman, to be-
John Rose: (03:51:03)
Finish your thought there.
Kenneth Griffin: (03:51:03)
To be brief, the issue in going to real-time settlement is everything has to work perfectly in a world where there’s 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.
John Rose: (03:51:23)
And then, you were also cut off earlier when answering my colleague, Miss 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?
Kenneth Griffin: (03:51:42)
I think we covered that reasonably well. I think the salient difference is that 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.
John Rose: (03:52:20)
Thank you. And then finally, Mr. Griffin, earlier Representative Luke Meyer asked about how we got to where GameStop was short-sold to 140%. Given that naked shorting is an illegal practice, how did we… How did that happen, given current U.S. law?
Kenneth Griffin: (03:52:39)
So, 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 market. So if you were 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% on the shares that you lent out. That accrues to the benefit of pension plans, of ETFs, of other pools of institutional lending that participate in the securities lending market.
Kenneth Griffin: (03:53:28)
And keep it 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 unlend what they bought doesn’t necessarily means something has gone wrong in the chain itself.
John Rose: (03:53:47)
Would you see that as an area ripe for regulatory adjustment, or do you think that that’s not a problem?
Kenneth Griffin: (03:53:56)
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.
John Rose: (03:54:04)
Thank you. 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, Miss Schulp, can you speak to what the potential dangers are of increased regulation to retail investors?
Jennifer Schulp: (03:54:38)
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 have them have less good prices.
John Rose: (03:54:53)
I’m sorry not to give you more time. Maybe one of my colleagues will give you a chance to complete this. I yield back.
Rep. Waters, Chair: (03:55:01)
Thank you very much. Next, we will have Ms. Axne for five minutes.
Rep. Cindy Axne: (03:55:07)
Thank you, Chairwoman. And thank you to the witnesses for being here today. I just want to quickly follow up with a question my colleague, Mr. Foster, asked earlier to you, Mr. Tenev. Of 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?
Vlad Tenev: (03:55:38)
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.
Rep. Cindy Axne: (03:55:50)
Okay. Well, I’ll look forward to seeing those details, then. Will you make sure that you get those over to our committee?
Vlad Tenev: (03:55:59)
Certainly. We can have that arranged.
Rep. Cindy Axne: (03:56:01)
Okay. Thank you. Last month, of course, as we saw this volatility with GameStop, and AMC, and the stock started to rally, everybody seemed to get involved. And one survey recently said that 30% of Americans purchased one of those viral stocks. That includes people like my nephew and his two friends, who stayed up until four in the morning to see if they could get a piece of this action. So 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.
Rep. Cindy Axne: (03:56:35)
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. I want to make sure that it creates a good outcome, however, 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.
Rep. Cindy Axne: (03:57:01)
Just last June, when Hertz declared bankruptcy, after that Robinhood was actively pushing the stock on its site. It was trending on Robinhood, and the promotion of that worthless stock I don’t think is good for investors. That’s a gamble that they shouldn’t have taken. That’s just one example. But people having access to the stock market’s 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% of the stock market’s owned by 10% 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.
Rep. Cindy Axne: (03:57:48)
Earlier, Mr. Tenev, you said that you couldn’t tell us what your clients’ rate of return is, but generally 99% of short-term traders underperformed the market. So Mr. Tenev, you say Robinhood’s mission is to democratize finances. Is that correct?
Vlad Tenev: (03:58:07)
That’s correct, Congresswoman. Yes.
Rep. Cindy Axne: (03:58:09)
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?
Vlad Tenev: (03:58:33)
Congresswoman, like many technology companies, we employ data scientists, user researchers, and designers to provide a better customer experience to our customers, and to understand our customers’ needs.
Rep. Cindy Axne: (03:58:44)
Okay. 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. They’re encouraged to trade. If a friend signs up, they get a free stock. On and on. Why have you added specific gaming design elements to look like gambling to your app? That encourages more frequent trading.
Vlad Tenev: (03:59:07)
Congresswoman, as I mentioned earlier, we want to give 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. And-
Rep. Cindy Axne: (03:59:30)
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 fund, or Apple, or anything like that, your app to me shows me that you’re really just trying to encourage more trades, which puts more money in your pocket. Not helping people build equity through smarter investing. So I would ask you, 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?
Vlad Tenev: (04:00:08)
Well, 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 quality that we provide to our customers.
Rep. Waters, Chair: (04:00:37)
Mr. Steil is recognized for five minutes. Thank you.
Rep. Steil: (04:00:40)
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. And 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 fully investigated the facts. It was stated earlier that that may not be the case. And I’d like to have inserted into the record a Bloomberg article dated January 28, titled GameStop Trades Show Need for More Regulation, Democrat Says.
Rep. Waters, Chair: (04:01:25)
Without objection. Such is the order.
Rep. Steil: (04:01:27)
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 system. 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 that would be helpful, and hopefully we’ll be able to have their participation in a future hearing.
Rep. Steil: (04:01:53)
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, Game stock, that you held a short position in. People were tweeting about it. Things were building. Do you have any information as to uniquely why folks on Twitter, and on Reddit, and others uniquely targeted that stock?
Gabe Plotikn: (04:02:21)
First of all, thank you for the question. I think it’s a really good one. I think ultimately, I’m not sure kind of how the momentum built around that. There were certainly some signs, as we kind of diligenced after the fact. I mean there were even website names bought like… nasty things about our firm as far back as November. So I’m not sure kind of 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.
Rep. Steil: (04:02:56)
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?
Vlad Tenev: (04:03:18)
I don’t have the exact numbers. [crosstalk 04:03:20].
Rep. Steil: (04:03:20)
Suffice it to say, had it increased… Suffice it to say, had increased dramatically over the days leading up to the 27th?
Vlad Tenev: (04:03:28)
Yes. That’s accurate.
Rep. Steil: (04:03:29)
Fair. And you saw additional order flow coming into this. Did you take any steps, and 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?
Vlad Tenev: (04:03:54)
We did. So on January 21st, we went to a hundred percent market requirement for AMC. And that requires all purchases for those stocks to be fully paid for. So customers would have been unable to use margin to buy those. So that was January 21st in the case of AMC, and January 26th for GME.
Rep. Steil: (04:04:20)
But this was still insufficient, ultimately, as related to the collateral call that came in the early morning hours on the 28th. Is that correct?
Vlad Tenev: (04:04:28)
That’s correct. The limiting margin was ultimately insufficient.
Rep. Steil: (04:04:33)
And as you look to your peers, do you know any other brokerages that were putting in place limitations on their buy orders?
Vlad Tenev: (04:04:43)
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.
Rep. Steil: (04:04:56)
For the record, I’ve heard conflicting reports on that. I think it’s something that this committee needs to further look into, is to 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, make sure we have all the facts as we’re moving forward.
Rep. Steil: (04:05:14)
Can you detail, Mr. Tenev, your plans going forward as it relates to making sure that an event like this doesn’t occur, and that you have the foresight to prevent these late collateral needs?
Vlad Tenev: (04:05:27)
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 much more granular position limits [crosstalk 04:05:50].
Speaker 3: (04:05:50)
Vlad Tenev: (04:05:54)
Rep. Waters, Chair: (04:06:06)
The gentleman’s time has expired. The voice that you heard had nothing to do with what you were saying. I think it was a mistake. With that, the gentleman’s time has expired, and we’ll move on to Mr. Casten. You’re recognized for five minutes.
Rep. Casten: (04:06:14)
Thank you, Madam Chair. Thank you so much to our witnesses. I want to… 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.
Rep. Casten: (04:06:25)
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, said 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 helpline. The helpline, of course, was not manned, as we’ve discussed. He sent several panicked emails, three to be precise, did not receive a response. Ultimately, there was a response from 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.
Rep. Casten: (04:07:04)
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 see… figure out who the fish is at the table, you should leave the table because you’re probably the fish. And there is an innate tension in your business model between democratizing finance, which is a noble calling, and being a conduit to feed fish to sharks.
Rep. Casten: (04:07:43)
I want to cover a little bit of timeline. December 2019, Robinhood was assessed at $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, December ’20, Robinhood paid pay the $65 million fine to the SEC for, among other things, failing to disclose payment for order flow agreements to your customers. There a tension in your model.
Rep. Casten: (04:08:11)
Now, along with that, according to your 606s, those that have been reported by CNBC, you attract a higher rate for equity trades from payment for order flow from many of your competitors, excuse me. 17 cents per a hundred trades versus about 11 cents for your competitors. Even more, over 50 cents per a hundred trades for options. I’d ask unanimous consent to enter the CNBC article into the record.
Rep. Waters, Chair: (04:08:35)
Without objection, such is the order.
Rep. Casten: (04:08:38)
Question for you, Mr. Tenev. When did you start offering options on your platform?
Vlad Tenev: (04:08:47)
Thank you, Congressman Casten. And first, let me say…
Rep. Casten: (04:08:52)
I’m really… I’m just looking for… We’re tight on time. When did you start offering options?
Vlad Tenev: (04:08:57)
Options trading was offered starting in Q1 of 2018.
Rep. Casten: (04:09:03)
Okay, thank you. That’s relevant because prior to 2018, your revenue grew basically linearly with user growth. Your revenue… Any year payment for order flow was about $25 per user per year. 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?
Vlad Tenev: (04:09:33)
Congressman, we have seven market makers. I can get back to you with the precise number for options. Under seven.
Rep. Casten: (04:09:41)
Okay. 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?
Vlad Tenev: (04:09:52)
If that’s in the 606, Congressman, I’m sure it’s accurate.
Rep. Casten: (04:09:57)
Okay. So do you route options trades to anyone who you do not have a payment for order flow agreement with?
Vlad Tenev: (04:10:04)
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.
Rep. Casten: (04:10:15)
Okay. So you have… 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.
Vlad Tenev: (04:10:26)
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.
Rep. Casten: (04:10:42)
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 think I had 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.
Robinhood Help Line: (04:10:58)
Thanks for calling Robinhood. Please visit it us at robinhood.com or on our app for support. If you have an urgent trading need, please make sure to include details of the order in reaching out. Thanks and have a great day.
Rep. Waters, Chair: (04:11:15)
Mr. Casten, you may wrap up.
Rep. Casten: (04:11:19)
[inaudible 04:11:19] my time.
Rep. Waters, Chair: (04:11:20)
You may wrap up. Go ahead, Mr. Casten.
Rep. Casten: (04:11:25)
I have no further questions, Madam Chair.
Rep. Waters, Chair: (04:11:27)
Thank you very much. I will now call on Mr. Gooden for five minutes.
Speaker 3: (04:11:36)
Rep. Waters, Chair: (04:11:36)
Speaker 3: (04:11:38)
Rep. Waters, Chair: (04:11:45)
Is Mr. Gooden on the line?
Rep. Timmons: (04:11:48)
Madam Chair, Mr. Gooden’s in Texas, and he’s unavailable to…
Rep. Waters, Chair: (04:11:50)
Oh. Thank you. Thank you very much. Then let us hear from… I believe it would be at this time-
Speaker 3: (04:11:59)
Rep. Waters, Chair: (04:11:59)
Mr. Timmons. For five minutes.
Rep. Timmons: (04:12:05)
Thank you, Madam Chair. 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.
Rep. Timmons: (04:12:26)
Mr. Tenev, you have repeatedly invoked capital requirements that both your company and your clearing house 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 compared to what you would normally have to abide by?
Vlad Tenev: (04:12:59)
Thank you for that question, Congressman. So 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 three days, increased tenfold.
Rep. Timmons: (04:13:18)
What is the most your capital requirements have been prior to this event?
Vlad Tenev: (04:13:24)
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. So I’m happy to refer back to that.
Rep. Timmons: (04:13:39)
But obviously, it’d never been close to this amount. And now, you have additional capital that you’d raised and so this should not happen again. Again, I think you referenced one in 3.5 million was the likelihood of this situation occurring. Is that correct?
Vlad Tenev: (04:13:55)
That’s correct. And that’s not a Robinhood number. That’s actually a third party industry number.
Rep. Timmons: (04:14:03)
Are you aware of the origin of these capital requirements?
Vlad Tenev: (04:14:08)
I do believe that these capital requirements, and specifically the NSCC deposit, was spelled out in Dodd-Frank.
Rep. Timmons: (04:14:18)
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. So I think that when we’re searching for culpability, we need to realize that the well-intent… 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 that Robinhood had found themselves in?
Jennifer Schulp: (04:15:03)
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.
Rep. Timmons: (04:15:29)
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 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.
Rep. Timmons: (04:16:06)
So 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 objectives, making sure this doesn’t happen again.
Rep. Timmons: (04:16:27)
I do hope that we can hear from Michael Bodson from the DTCC in the next hearing, or perhaps someone from the NSC. I’m hearing something strange on my computer. I’m sorry. One second. Thank you. I’ll end with this. One of my colleagues across the aisle said the deck is stacked against this little guy, and I couldn’t agree more. But in this case, the very committee that is conducting this hearing has has more culpability, I would say, than any of the witnesses that we have brought before us today. So we need to make sure this doesn’t happen again, and I look forward to working with my colleagues across the aisle. With that, I yield back. Thank you.
Rep. Waters, Chair: (04:17:12)
[inaudible 04:17:12] has expired. At the request of one of our witnesses, we will take a short recess. The committee stands in recess for five minutes.
Madame Chair: (04:24:06)
We’ll come to order. Mr. Torres, you are recognized for five minutes.
Ritchie Torres: (04:24:12)
Thank you, Madam Chair. One of the concerns about payment forwarder is that it creates a perverse incentive for a brokerage firm like Robinhood to send retail 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 interest of brokers and the interest of retail investors. And that concern seems to have been vindicated by the conduct of Robinhood. SEC previously found that Robinhood misled its customers about how it makes its money. Both 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 forwarder flow?
Vlad Tenev: (04:25:06)
Thank you, Congressman. Let me first state, regulatory compliance is at the center of everything that we do. [crosstalk 04:25:14].
Ritchie Torres: (04:25:14)
I want to reclaim my time. [crosstalk 04:25:15]. How much of your revenue comes from payment forwarder flow? Answer the question as asked given the time constraints.
Vlad Tenev: (04:25:23)
Congressman, I don’t recall the exact percentage. It’s over 50%.
Ritchie Torres: (04:25:28)
Do you know how much of your order flow revenue comes specifically from Citadel?
Vlad Tenev: (04:25:36)
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-
Ritchie Torres: (04:25:47)
I want to move on because I want to cover the concerns about gamification. The state admission 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 Currens. 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 1,000 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 1,000 times a day is a sign of addiction?
Vlad Tenev: (04:26:44)
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-
Ritchie Torres: (04:26:59)
Mr. Tenev, 1, 000 times a day. You are encouraging your customers to tap on an app 1,000 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.
Vlad Tenev: (04:27:16)
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 futures 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.
Ritchie Torres: (04:27:41)
Look, 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 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 onto 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. 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?
Vlad Tenev: (04:28:58)
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. So that price improvement is measured relative to the NBBO, the national best bid and best offer, which is the reference price for security on all major lit exchanges.
Ritchie Torres: (04:29:21)
I ran out of time, so I will yield back. Thank you, Madame Chair.
Madame Chair: (04:30:37)
Okay. We were having a technical problem here, but I think it has been corrected. Mr. Taylor, you’re recognized for five minutes.
Van Taylor: (04:30:52)
We’ll 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 for those members of the committee, I encourage you to send your thoughts and prayers to the people at Texas as they go through this really challenging time. Onto the topic of this hearing, Mr. Tenev, I just wanted to go in, I know there’s 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 three billion to one and a half billion to 600 million.
Van Taylor: (04:31:53)
Can you sort of go through, how did you negotiate the margin call down? And these are very sizable decreases. They’re sort of 50% and then 50% 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.
Vlad Tenev: (04:32:32)
How about now?
Van Taylor: (04:32:33)
I can hear you now. Madame Chair, can I have 30 seconds back for that?
Vlad Tenev: (04:32:39)
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 detailed tick-tock of everything that happened. I believe pages nine to 11.
Van Taylor: (04:33:01)
I’ve read that. But did you go in and say, “Hey, you need three billion, but I won’t sell these stocks if you’d 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?
Vlad Tenev: (04:33:15)
Van Taylor: (04:33:17)
Because that’s not in your written testimony. I’m just trying to get your answer.
Vlad Tenev: (04:33:22)
I don’t believe we had made any decisions on PCOing the stocks between the initial three 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 the relevant counterparts at NSCC regarding what measures we intend to take to lower the risk of our portfolio.
Van Taylor: (04:33:55)
Okay. So in other words, if you had three billion, your customers would have been able to do everything they wanted to do, including purchase more GameStop. Is that correct?
Vlad Tenev: (04:34:05)
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.
Van Taylor: (04:34:34)
But I mean, isn’t the reason they said you need three billion 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? I mean, it seems to me that’s what happened, but I’m just trying to get…
Vlad Tenev: (04:34:48)
They weren’t saying specifically that… Nobody, I believe, didn’t want our customers to buy GameStop. These are regulatory 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.
Van Taylor: (04:35:10)
Wouldn’t it be fair to say that that your firm was under-capitalized to allow your customers to do what it is that you wanted them to be able to do?
Vlad Tenev: (04:35:18)
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, lots of other firms did essentially similar things, if not the same thing, in restricting the buying. So this was really more of a systemic problem rather than a uniquely Robinhood problem.
Van Taylor: (04:35:47)
But didn’t the fact that you went out, raised more capital so that you could actually answer this problem in the future, doesn’t that also belie that you were under-capitalized on the 28th of January?
Vlad Tenev: (04:35:57)
Again Congressman, we met all of our regulatory capital requirements and deposit requirements-
Van Taylor: (04:36:04)
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?
Vlad Tenev: (04:36:10)
Yes, we didn’t have the deposit requirements.
Van Taylor: (04:36:15)
I think that’s really a core problem that I think this committee hearing should have made is that you were unfortunately under-capitalized to help your customers do what they wanted to do. I yield back.
Madame Chair: (04:36:28)
Thank you very much, Mr. Emmer, you’re recognized for five minutes.
Tom Emmer: (04:36:36)
I appreciate it. Am I right side up? I believe I am. 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.
Keith Gill: (04:37:09)
Tom Emmer: (04:37:14)
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 profits [inaudible 04:37:29], underestimating the sophistication and the independence of these individual investors. Now, we’ve heard a lot of reasons for concern of it. Some are legitimate. But also some proposed overreactions by members of Congress that can create even more problems. Attention has been given to the positive sides of this story.
Tom Emmer: (04:37:55)
[inaudible 04:37:55] 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 heard from a lot of the companies and funds involved in this event, but we’ve barely heard from the people that 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 four hour mark on this hearing?
Keith Gill: (04:38:41)
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.
Tom Emmer: (04:39:10)
Mr. Gill, on that note, so how would you feel if these brilliant people that 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?
Keith Gill: (04:39:27)
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.
Tom Emmer: (04:39:41)
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 mountain top 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 would want to do without having to rely on others, or God forbid their government.
Tom Emmer: (04:40:31)
I also want to thank Mr. Bud for using his time to mention blockchain technology applications in the post-trade 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 don’t have access to technology. And we do, I’m sorry, 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 and plan to reintroduce very soon that concerns this. If we should exercise oversight on anything, it’s to ensure that individuals maintain access to our markets, individual investors and discussions about over an undervalued companies [inaudible 04:41:18] to increase.
Tom Emmer: (04:41:20)
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 brokerage. 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. Chris clearly does not understand [inaudible 04:41:51] and how you utilize social media and catalyze the market movement.
Madame Chair: (04:41:53)
The gentleman’s time has expired.
Tom Emmer: (04:41:56)
We’ve significantly underestimated the sophistication of America’s retail investors, and we’ve not been focusing on improving the market access.
Madame Chair: (04:42:02)
The gentleman’s time has expired. You’re recognized for five minutes, Mr. Lynch.
Stephen Lynch: (04:42:11)
Thank you, Madame Chair. 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 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. But you earlier said 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. 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. It goes from $5 to $100 to $200 to $300. It gains escape velocity, as they say, and it ends up almost $500 a share.
Stephen Lynch: (04:43:39)
But we’re still in the midst of a pandemic. And you can land a jumbo jet in the parking lot of the Westgate Mall in Brockton, or any major mall in America. So, 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 individual retail traders who might get jammed if they get into this trade.” From your perspective. I mean, you’ve got a unique perspective. 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.
Keith Gill: (04:44:54)
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 to $25 per share, I had thought that at that time. But investment theses, they 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 got 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, Brian Cohen. And he has brought in some colleagues that could help him turn around this company. And value could indeed… Sorry.
Stephen Lynch: (04:45:42)
Okay. I’m going to reclaim my time. Ms. Schulp, I want to ask you, so we get 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 association of a 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?
Jennifer Schulp: (04:46:36)
Again, I can say that national security is not my area of expertise. But to the extent that the markets-
Stephen Lynch: (04:46:45)
[crosstalk 04:46:45]. So FINRA you said earlier that you were with FINRA. They’re under 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?
Jennifer Schulp: (04:47:06)
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. And I would agree with that, not necessarily SCI in particular, but having platforms that are strong is important here.
Stephen Lynch: (04:47:36)
Okay. Thank you. Madame Chair, I yield back the balance of my time. Thank you.
Madame Chair: (04:47:39)
Thank you very much. We have a few technical difficulties and we’ll be right back. And we are back. Thank you very much. Ms. Adams, you are recognized for five minutes.
Alma Adams: (04:47:57)
Thank you, Madame Chair. It’s been a very interesting meeting. I did want to thank you for organizing this. I think it’s been certainly 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, forced the short squeeze by professional hedge fund managers who were forced to cover their negative bets or risk catastrophic losses. But according to a JP Morgan 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?
Jennifer Schulp: (04:49:00)
Look, 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.
Alma Adams: (04:49:39)
Thank you, ma’am. Mr. Griffin, Mr. Plotkin, do you have any thoughts on this likelihood as well?
Kenneth Griffin: (04:49:47)
Congresswoman, I believe you were asking one of the single most important questions posed today. And I believe that the decline in the short interest as reported over the two week period of time, that the US updates short interest reporting every other week, indicates that roughly, and I apologize for not having an exact number, but roughly 35 to 40 million shares were bought back by parties that were short in stock. This would be a dramatic degree of short covering that could cause a dramatic increase in the price of GameStop.
Alma Adams: (04:50:25)
Okay. Thank you. Mr. Plotkin.
Gabriel Plotkin: (04:50:30)
Yeah. Hi. Thank you for the question. I don’t have the exact answer to your question. I do think it’s worth noting that as the stock price moved higher, there was a three-day period where it traded almost 11 times the entire float. And so I think that kind of volume gave anyone who is 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 was options that were expiring that 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 or retail, just the collective buying.
Alma Adams: (04:51:27)
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.
Kenneth Griffin: (04:51:36)
So we first invested in Melvin Capital the Monday of the week in question. I want to say that that was the 24th of January. And prior to that, we’d had no investment with Melvin Capital. Obviously, Gabe Plotkin, by reputation, one of the best money managers of this generation, well known to my partners here at Citadel, Gabe actually trained one of my best portfolio managers that worked with me over the course of his career. So, well known to my colleagues here at Citadel.
Alma Adams: (04:52:10)
Okay. Mr. Plotkin, can you confirm that you worked at Citadel LLC before-
Kenneth Griffin: (04:52:16)
Excuse me. My portfolio manager worked for Gabe at a different firm and then joined Citadel subsequently.
Alma Adams: (04:52:25)
Okay. All right. So Mr. Plotkin, can you confirm that you worked at Citadel LLC before eventually starting your own hedge fund, Melvin Capital, in 2014?
Gabriel Plotkin: (04:52:37)
When I was 23 years old, I worked at Citadel for one year.
Alma Adams: (04:52:43)
Okay. Did you solicit or receive any advice from Mr. Griffin during the GameStop volatility that occurred in January?
Gabriel Plotkin: (04:52:52)
All my conversations with Mr. Griffin really centered around his investment in our firm.
Alma Adams: (04:52:58)
Okay. Did you reach out to Citadel or 172 for the significant investments?
Madame Chair: (04:53:08)
The gentlewoman’s time has expired.
Alma Adams: (04:53:09)
Thank you, Madame Chair. I yield back.
Madame Chair: (04:53:11)
You’re welcome. Ms. Tlaib, you’re recognized for five minutes.
Rashida Tlaib: (04:53:16)
Thank you, Madame Chair. Hello everyone. I’m so glad that we’re having this hearing. I’m super appreciative of the leadership of our chairwoman, at least having some sort of transparency on exactly what happened. As we all know, the wealthiest 10% own 84% of all stocks. In fact, 50% of American families own no stock at all. I say 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. So I want to talk about the high-frequency trading. We know about half of all stock trading in the US is done by computers that analyze market activity and instantly complete trades at a profit. So this high-frequency trading allows Wall Street traders to get ahead of transactions done by pension accounts and retirement funds. So 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.
Kenneth Griffin: (04:54:35)
Congresswoman, today, virtually all trades executed by institutional investors are in the form of program trades such as VWAP and other algorithm trades.
Rashida Tlaib: (04:54:45)
So that’s a yes, right Mr. Griffin? Just so it’s clear.
Kenneth Griffin: (04:54:48)
I’m answering the question. It’s a very complex question that deserves an appropriate level of answer. Because VWAP trades are not large trades that you can… It’s not like there’s 10 million shares about be bought. It is tradable is sliced into small slices of 100 or 200 shares and executed over the course of a day, a week or a month.
Rashida Tlaib: (04:55:12)
Well, help me out with this one. Does this increase cost, this kind of algorithm or whatever program to identify and trade? The computer is doing the trading. Does this increase cost for people who have pension and retirement funds? Yes or no.
Kenneth Griffin: (04:55:26)
So given that we, for example, manage money on behalf of pension-
Rashida Tlaib: (04:55:31)
Really, because they’re so timed, this is not out of disrespect. We’ve just got a limited time.
Kenneth Griffin: (04:55:36)
We use VWAP orders to execute on behalf of our hedge fund and have generated exceptional returns for pension plans and for endowments, so-
Rashida Tlaib: (04:55:45)
I’m going to help you out. I’m going to help you out, Mr. Griffin. In effect, some estimates indicate that as a result of the high-frequency trading though, pension and retirement accounts pay nearly $5 billion in a tax. 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. So one way to ensure that this enormous wealth generated on Wall Street actually reaches the real economy, y’all, what’s happening right here in our communities and in my district is to enact and look at proposals like a financial transaction tax.
Rashida Tlaib: (04:56:20)
And let me tell you, according to recent polling, the majority of Americans, all of you need to hear this, and it’s going to grow, the majority of Americans support taxing Wall Street transactions. Taxing them at just 0.1% would actually raise $800 billion over 10 years, which could fund programs like helping my district expand healthcare, nutrition, public education. I heard my friend from Texas, who we all are praying all the families will be taken care of, talk about access to water and electricity. But guess what? Right now, my community is so poor that I have families melting snow so 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.
Rep. Tlaib: (04:57:03)
… discourage risky and high-frequency trading, unfair high-frequency trading. Mr. Griffin, does Citadel’s lobbyist right now been hire to oppose federal proposals to a financial transaction tax because it would make high frequency trading less profitable?
Mr. Griffin: (04:57:18)
We firmly believe that a transaction tax will injure Americans hoping to save the retirement. I believe that Vanguard has publicly come out and said that we’d have to work about two and a half years longer [crosstalk 04:57:31]
Rep. Tlaib: (04:57:30)
Well, I want to make this.
Mr. Griffin: (04:57:32)
I’d like to finish my answer. I think it’s important [crosstalk 04:57:34]
Rep. Tlaib: (04:57:33)
Oh, no, no. I’m reclaiming my time. The Hong Kong Stock Market, Mr. Griffin, imposes 0.2% tax on transactions as a result and 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.
Rep. Tlaib: (04:57:53)
Just to be clear, let’s not gaslight the American people, y’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 fund. 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.
Rep. Tlaib: (04:58:12)
It’s set up in a way that helps only the wealthy. It leaves people, like my community here, with this large income inequality that I feel like never ever gets the bail out it deserves. Thank you so much. I yield.
Rep. Waters: (04:58:34)
Thank you very much. Ms. Dean, you recognize for five minutes.
Rep. Dean: (04:58:39)
Thank you, Chairwoman, and I appreciate this opportunity for this hearing to get detailed information and to gather the facts as to what happened over the course of these transactions.
Rep. Dean: (04:58:49)
Let me start by saying, and I saw that members on both sides of the aisle are interested in this question. 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.
Rep. Dean: (04:59:15)
Let’s go to the narrative, Mr. Tenev, I want to take a look at your page nine. You said that at approximately 5:11 AM, Robinhood Securities received the automated notice saying that you had a deposit deficit of approximately $3 billion. You then said between 6:30 and 7:30, Eastern Standard Time, Robinhood decided to impose the trading restrictions, meaning no more purchases of GameStop.
Rep. Dean: (04:59:47)
You said in your testimony, in conversations within NSCC staff early that morning, you notified NSCC of your intention. In that time period, from 5:11 to the time you were having the conversations, what did you tell your users? What notice did they have?
Mr. Tenev: (05:00:08)
Thank you, Congresswoman. I believe during that time period, shortly after the restrictions on purchasing of these relevant securities were made, we communicated to our customers that these securities would be restricted from purchasing. Then subsequent, we issued odd communications and communications on social media explaining the reason being enhanced deposit requirements due to high volatility.
Rep. Dean: (05:00:35)
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 boiler plate said, or when customers or users agreed to it.
Rep. Dean: (05:00:59)
Number two, you said they were notified two days later by SEC alert, and we know what that SEC alert was. It was quite general, much more vague. Than number three, you said 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? What’s the clock?
Mr. Tenev: (05:01:31)
I believe, Congresswoman, that that happened at several different points in time.
Rep. Dean: (05:01:37)
No [inaudible 05:01:38].
Mr. Tenev: (05:01:37)
There was a blog post that was published in the afternoon, Pacific Time.
Rep. Dean: (05:01:42)
Mr. Tenev: (05:01:44)
I don’t recall the specific time. Maybe it’s in, perhaps it’s in my written testimony.
Rep. Dean: (05:01:49)
Would it be after the SEC notice? It seems to me, you didn’t notify your customers for at least two days. You relied upon the SEC notice two days later, would I be correct?
Mr. Tenev: (05:01:58)
Congresswoman, that’s inaccurate. Customers were notified several times on that day, and they were notified of other restrictions as they happen days prior to January 28th as well.
Rep. Dean: (05:02:11)
But you don’t say what those notifications were in your testimony. What did you notify them? Specifically, what would I, a user, have heard from you immediately upon your imposing the restriction?
Mr. Tenev: (05:02:23)
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 on the day on January 28th, around early afternoon, Pacific Time, we published a blog post that explained that the decision to restrict these securities was due to collateral requirements at NSCC and clearing houses and not on the direction of special interests or hedge funds.
Rep. Dean: (05:02:58)
Forgive me, let me interrupt you there. You admitted to making mistakes. Specifically, what mistakes did you make?
Mr. Tenev: (05:03:06)
I admit to always improving, and certainly, we’re not going to be public. We’re not going to be perfect and we want to improve and make sure that-
Rep. Dean: (05:03:21)
Mr. Tenev: (05:03:21)
… we don’t make the same mistakes twice.
Rep. Dean: (05:03:23)
But what are those mistakes? That’s what we’re here to learn about.
Mr. Tenev: (05:03:30)
I think that, 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 [crosstalk 05:03:57]
Rep. Dean: (05:03:57)
Thank you. I yield back. I see my time has expired. Thank you very much, Mr. Tenev.
Rep. Waters: (05:04:02)
Thank you very much. With that, we’ll go to Ms. Ocasio-Cortez for five minutes.
Rep. Ocasio-Cortez: (05:04:08)
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 clearing houses for your need and scramble to raise some $3.4 billion in a matter of days, but you’ve also blamed the lack of industry wide, real time settlement, or rather a lack of that settlement of trades.
Rep. Ocasio-Cortez: (05:04:42)
But Robinhood’s requirements for margin have long been far more lax than other brokers for a long time with, in December, just a couple of months ago, you bragged about having some of the most competitive rates in the industry. 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.
Rep. Ocasio-Cortez: (05:05:13)
Mr. Tenev, given Robinhood’s track record, isn’t it possible that the issue is not clearing houses, 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: (05:05:29)
Thank you for this question, Congresswoman. Let me address the margin point, because I think this is an important one that has been under discussed. In December, when we lowered our margin rates to 2.5%, 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.
Mr. Tenev: (05:05:56)
You’ll have someone that has $10,000 paying nine to 10% for margin, whereas someone with a million dollars pays 2%. Our approach was give everyone a uniform rate, so that wealthier customers are not advantaged with lower rates than lower income customers. I think that’s a unique approach in our industry and is representative of [crosstalk 05:06:19]
Rep. Ocasio-Cortez: (05:06:19)
Thank you. I have to 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 Virtue.
Rep. Ocasio-Cortez: (05:06:37)
In 2016, the SEC highlighted ways that the payment for order flow created a “potential conflict of interest with a broker’s duty of best execution.” 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.
Rep. Ocasio-Cortez: (05:06:57)
Now, earlier one of my colleagues, Rep. 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: (05:07:25)
Congresswoman, I appreciate that question. When the statement you refer to was made, I believe 2015 or 2016, it was before Robinhood forced the entire industry to drop commissions and replicate our business model, which made payment for [crosstalk 05:07:43]
Rep. Ocasio-Cortez: (05:07:45)
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: (05:07:51)
When the other brokers dropped payment [crosstalk 05:07:58]
Rep. Ocasio-Cortez: (05:07:57)
No, I’m just talking about today, right now.
Mr. Tenev: (05:07:57)
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 payments for order flows.
Rep. Ocasio-Cortez: (05:08:08)
I see. 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 a 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 costs, the cost in terms of potentially poor execution, or the cost of loss rebates to your customers.
Mr. Tenev: (05:08:35)
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 remove commissions. I think we’ve proven that otherwise by making this the standard model by which brokerages operate now.
Rep. Ocasio-Cortez: (05:09:01)
I see. Mr. Tenev, I have to move on very quickly. I have a timeline question here for Mr. Plotkin. I see that, earlier your testimony today was that… Hello? Earlier, I-
Speaker 4: (05:09:17)
Rep. Ocasio-Cortez: (05:09:17)
… your testimony today was that Melvin Capital had not engaged in…
Rep. Waters: (05:09:26)
[inaudible 05:09:26] not.
Rep. Ocasio-Cortez: (05:09:27)
Sorry, Madam Chairwoman, I’m sorry. I think you’re not muted. Sorry about that.
Rep. Ocasio-Cortez: (05:09:33)
Mr. Plotkin, earlier today, you mentioned that Melvin Capital had not engaged in a naked short of GameStop. Melvin closed out its position on GME on the [crosstalk 05:09:45] correct?
Rep. Waters: (05:09:47)
I’m sorry. The gentle lady’s time has expired. We have to Mr. Auchincloss for five minutes.
Rep. Auchincloss: (05:09:56)
Thank you, Madam Chair, 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, I’m the last one to ask questions here, and I want to talk with Mr. Tenev about options.
Rep. Auchincloss: (05:10:16)
I agree with what other members of the committee have said in both parties about the value of democratizing access to assets, and that 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.
Rep. Auchincloss: (05:10:40)
When you go to the doctor, when you go to the lawyer, there is a code of ethics wrapped around that interaction that protects someone who doesn’t understand as much about the service being provided. In finance, as you’re well aware, there’s a fiduciary responsibility to do what’s right.
Rep. Auchincloss: (05:10:56)
In Massachusetts, where there’s 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. Some of it was premise on options.
Rep. Auchincloss: (05:11:15)
Two-thirds of customers approved in Massachusetts for options trading identified as having limited to no investment experience, and so the first question I would ask you, Mr. Tenev, I’ve 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: (05:11:39)
Thank you for the question, Congressman. Let me first say that Robinhood really pioneered commission-free and zero contract fee options trading. 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.
Mr. Tenev: (05:12:01)
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, live customer support by phone for urgent options cases. We’ve actually proven, and are committed to improving in the future, the safety of our options offering.
Rep. Auchincloss: (05:12:38)
But to be clear here, options are decaying assets, they’re binary in outcome. They are qualitatively and quantitatively different than stocks and bonds, in the sense that you can lose all your money very fast and you can make a lot of money very fast as well, but this is getting very close to gambling. Especially when you game-ify the options buying experience as your app does, it can very quickly turn into a casino like field.
Rep. Auchincloss: (05:12:59)
I’d asked you just to address the question again, what level of investment sophistication do you think a retail trader should have before they are buying options?
Mr. Tenev: (05:13:09)
Sure. Congressmen, I appreciate the follow-up. I should first say there’s 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, other brokerages that are essentially offering similar products, all having to comply with these regulations.
Mr. Tenev: (05:13:36)
We’re certainly willing to engage in a discussion about how rules should change, if at all. As long as they’re applied uniformly and are fair to small investors, and not just benefiting high net worth individuals and institutions, we’d be open to having that conversation.
Rep. Auchincloss: (05:13:56)
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 is a separate one, which is, would you commit here to offering in a higher in-app threshold, including, but not limited to, financial education before allowing people to purchase options?
Mr. Tenev: (05:14:21)
Again, Congressmen, I’d be happy to engage in 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.
Rep. Auchincloss: (05:14:39)
Well, 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 that, 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.
Rep. Waters: (05:14:56)
Thank you very much, and with that, Mr. Garcia, you are recognized for five minutes.
Rep. Garcia: (05:15:04)
Thank you, Madam Chair, and ranking member [inaudible 05:15:08] it’s a long day. I wanted to ask some questions to Mr. Griffin. Would you consider, Mr. Griffin, your firm successful? This an easy yes or no.
Mr. Griffin: (05:15:27)
Yes, I would consider Citadel to be successful and I would consider Citadel Securities to be successful.
Rep. Garcia: (05:15:34)
Of course, I would agree that you’ve done pretty well for yourself. As you mentioned earlier in your testimony, your company handles over 40% of retail trading. Did I get that correct?
Mr. Griffin: (05:15:50)
Citadel Securities is the largest destination for retailer flow in the United States. It reflects the execution quality that we give.
Rep. Garcia: (05:16:00)
Citadel is a leading market marker for interest rate swaps as well. Is that correct?
Mr. Griffin: (05:16:08)
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’m 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. I’d like to express my gratitude-
Rep. Garcia: (05:16:30)
Mr. Griffin: (05:16:31)
… for Dodd-Frank’s derivatives reform.
Rep. Garcia: (05:16:34)
Good. Your hedge fund managers, do you manage over 30 billion, is that correct?
Mr. Griffin: (05:16:47)
Congressman, yes. That is correct. We manage approximately $35 billion of assets-
Rep. Garcia: (05:16:53)
Mr. Griffin: (05:16:54)
… for pension plans, for endowments, for colleges, for charities [crosstalk 05:16:59]
Rep. Garcia: (05:16:59)
Very, 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: (05:17:12)
I believe that we play an important role in the US capital markets. I believe that our hedge fund would not be in the category of systemically important. With 30-some billion dollars of equity it is simply not at the scale or magnitude of a JP Morgan, a Bank of America or Wells Fargo. 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. If Bank of America doesn’t make payroll-
Rep. Garcia: (05:17:42)
Okay. You’re doing pretty well, and yes, you’re not of the big guys that we have visit us frequently, at least a couple of times a year. Is Citadel Securities … You were 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: (05:18:09)
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 mistake, and if [crosstalk 05:18:35].
Rep. Garcia: (05:18:36)
That did occur, just…
Mr. Griffin: (05:18:37)
That did occur and we are always [crosstalk 05:18:38] markets.
Rep. Garcia: (05:18:40)
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: (05:18:59)
I don’t actually understand the premise of the question. Retail investors who do good research, and 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.
Rep. Garcia: (05:19:22)
Okay, and your firm has done, and you’ve personally done well, during the pandemic. There hasn’t been much of an adverse effect on your firm.
Mr. Griffin: (05:19:34)
Congressmen, 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.
Rep. Garcia: (05:19:42)
But you haven’t done badly, right?
Mr. Griffin: (05:19:46)
There are two dimensions to this. There’s the personal impact on everybody, and we’ve all had to deal with loved ones, with family, with [crosstalk 05:19:52]
Rep. Garcia: (05:19:52)
But in terms of your bottom line, sir.
Mr. Griffin: (05:19:54)
Our bottom line over the course of the last year has been successful, sir, Congressman.
Rep. Garcia: (05:19:59)
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.
Rep. Waters: (05:20:29)
The gentleman’s time has expired.
Rep. Garcia: (05:20:33)
Thank you, Madam Chair.
Rep. Waters: (05:20:36)
I believe that all members on the platform today have been heard and had an opportunity to raise their questions. Before we brought to closing statements, I would like to ask unanimous consent to enter letters into the record from the following entities, Bear Markets, Public Citizen, Depository Trust and Clearing Corporation, and Healthy Markets. Without objection, it is so ordered. I now yield one minute to the gentleman from Missouri, Mr. Luetkemeyer, for brief closing remarks.
Rep. Luetkemeyer: (05:21:14)
Thank you, Madam Chair, and thank all our 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.
Rep. Luetkemeyer: (05:21:27)
I like to reiterate the ranking members commitment that the House Financial Services Committee Republicans stand ready to work with the majority to continue to provide oversight on an investigation of the GameStop activities. 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 Chair, I yield back.
Rep. Waters: (05:21:51)
I now yield myself one minute. Today, the committee has heard firsthand [inaudible 05:21:57] group of witnesses about their roles in the market volatility in late January. This hearing has allowed us to began to assess what transpired and whether our guardrails have not kept up with the rapid changes the markets have experienced.
Rep. Waters: (05:22:16)
For example, I’m more concerned than ever that retail 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, investor advocates to discuss the policy issues that are involved and potential solutions to problems with our system that these events have illuminated.
Rep. Waters: (05:22:47)
I will also convene a hearing to hear testimony from the regulators, including the Securities and Exchange Commission and the Financial Industry Regulatory Authority that is 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.
Rep. Waters: (05:23:09)
With that, I’d like to thank our distinguished witnesses for their testimony here today. Without objection, all members will have five legislative days if they wish to submit additional written questions for the witnesses to the chair, which will be forwarded to the witnesses for their response. I ask our witnesses to please respond as properly as you’re able.
Rep. Waters: (05:23:33)
Without objection, all members will have five legislative days within which to submit these extraneous materials to the chair for inclusion in the record. 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 that are experiencing this very, very difficult time.
Rep. Waters: (05:24:03)
Thank you so very much. This hearing is adjourned.