Less than a minute after Vlad Tenev’s opening statement, Maxine Waters was already impatient with the director of Robinhood and pounded on the gavel.
“I would like you to use your limited time to talk directly about what happened on January 28 and your involvement in it,” said the veteran California Democrat who chairs the House’s financial services committee.
The very unusual hiatus was the first sign that Tenev would be the prime target for many members of the House, especially the Democrats, at the first hearing on the video game retailer GameStop’s trade in January, which caused huge losses for hedge funds and resonated with caused. the $ 46 trillion US stock market.
Over the course of the afternoon, lawmakers asked Tenev about his online trading platform’s business model, culture, and ties to some of the biggest players on Wall Street, suggesting they clashed with his stated mission to democratize finances, and repeatedly the 34 -year-old Bulgarian-born executive on the defensive.
“Robinhood has a track record of outages, design flaws and recently what appears to have failed to properly account for your own internal risk,” said Alexandria Ocasio-Cortez, the liberal New York congressman who was one of the first critics of Robinhood’s decision. to stop trading GameStop.
Representatives picked Robinhood apart and how it became the center of the storm in January. Tenev eventually admitted that the company did not have enough cash on hand to meet a capital call from its clearinghouse, seemingly contradicting an earlier statement to Waters that Robinhood had “always been comfortable” with its liquidity .
“At the time, we couldn’t have posted the $ 3 billion in collateral,” Tenev told lawmakers Thursday.
Pulled out by Anthony Gonzalez, the Republican Representative from Ohio, Tenev agreed it would have been a “total catastrophe” if Robinhood failed to comply with the capital call and faced liquidation of its clients’ positions.
“In a way, I like your company because, when properly managed, it provides investment opportunities for individuals who are currently frozen from the markets,” Gonzalez said. But he added that “a vulnerability has been clearly exposed in your business model and perhaps the regime that governs your cap requirements.”
Robinhood has become one of the most popular trading platforms for Americans who are new to the financial markets. The rise has taken the brokerage industry by storm. It was founded less than ten years ago and now has more than 13 million customers. But Robinhood’s decision to restrict customer trade in January to protect his own business proved to be a catalyst for broader business resolution.
Iowa-based Cindy Axne surprised the “gamification” of investing promoted by Robinhood by saying “everyone seemed to be in it” when shares in GameStop and the AMC cinema chain started to soar last month. “That includes people like my cousin and his two friends who stayed up until 4 in the morning to see if they could get a piece of this action.”
Axne continued, “When people sign up they get a scratch card to see what they get, confetti falls every time they place an order, they get push notifications. Why did you add specific game design elements to your app to look like? to be seen as gambling? “
But it was Carolyn Maloney, another New York congressman, who prompted Tenev to apologize and tell him that Robinhood felt it had “a right to make up the rules along the way.” “I’m sorry what happened. My apologies,” Tenev replied.
Tenev also apologized to the family of Alex Kearns – the 20-year-old man who died of suicide last summer after thinking he lost more than $ 750,000 in trading options on the platform – after Missouri’s Emanuel Cleaver Robinhood CEO pressed on the tragedy. .
“Mr. Kearns’ death was a major concern for me and the entire company,” said Tenev. He added that in the wake of Kearns’ death, Robinhood has made numerous changes to the platform, including tightening restrictions on riskier trading and adding live customer support by phone for “acute” options.
Also examined was Robinhood’s relationship with Citadel Securities, the market maker founded by Ken Griffin, who is also the CEO of hedge fund Citadel. Tenev repeatedly denied being pressured by hedge funds to restrict trading in GameStop stock, quashing a rumor that spread after Griffin’s hedge fund invested $ 2 billion in Melvin Capital, the group that was misled by retailers.
Melvin founder Gabe Plotkin said he was “humble” after losing billions of dollars on his bet against GameStop, predicting that the hedge fund industry would have to adjust to the rise of private investors.
“I don’t think you’re going to see stocks with the kind of short-term interest rates we saw before this year,” he said. “I don’t think investors like me want to be susceptible to these kinds of dynamics.”
As expected, payment for the order flow was a big topic, with several regulators asking visitors if this creates a conflict of interest. Ocasio-Cortez asked Tenev if he would be willing to pass the proceeds on to Robinhood clients, a question he tried to avoid by saying that payment for order flow made it possible to trade for free.
“If removing the income you make from the order flow payment would result in the removal of free commissions, it doesn’t mean trading on Robinhood isn’t really free,” Ocasio-Cortez replied.
Brad Sherman, a senior member of the committee, had another heated discussion, albeit with Griffin, about the controversial practice. Sherman has repeatedly pressured Griffin whether paying Robinhood to direct transactions to Citadel Securities really means Robinhood clients get the best execution times, as claimed, or whether Citadel favors orders it doesn’t pay for.
Griffin tried to deviate from other factors that play a role in the quality of the execution, such as the size of the order. After several rounds of back and forth, Sherman said to Griffin, “You’re doing a great job wasting my time. If you’re going to be filibuster, you have to run for Senate.”
Steve Huffman, the chief executive and co-founder of Reddit, was grilled the least and spoke only occasionally, mainly to praise the behavior of day traders on the social media site’s WallStreetBets forum, tuning in to the users . “The fact that we are here today means that they have managed to raise important issues about fairness and opportunity in our financial system,” he said in his opening remarks.
He later argued that the edgy platform’s proprietary system of user-driven content moderation naturally erased misinformation while at the same time highlighting the most compelling messages, meaning investment advice on the platform was “probably among the best.”
He also tried to shake off complaints from Melvin Capital’s Plotkin, who said he had been the target of anti-Semitism and racism on the platform. Huffman said Reddit’s “ anti-evil ” team – content moderators who monitor the site for harassment and other rule-breaking speeches – had searched “ high and low ” for such activity, but found only one comment that was removed.
While Tenev was the focus of most of the investigation, it was Keith Gill, the retailer known as “Roaring Kitty,” who came in with an air of justification and a hint of comedy.
After declaring himself “extremely happy” with the surge in GameStop stock he helped drive at the expense of some of the biggest short sellers on Wall Street, he said he wanted to make a few things clear to the practically assembled lawmakers .
“I am not a cat. I am neither an institutional investor nor a hedge fund, ”he said. “I’m just an individual whose investment in GameStop and social media posts was based on my own research and analysis.” Gill concluded his statement with his signature line, “I like the stock.”
By James Politi in Washington, Eric Platt, Ortenca Aliaj, Colby Smith and Aziza Kasumov in New York, and Hannah Murphy and Miles Kruppa in San Francisco