Congress hits out at Robinhood for lack of transparency around GameStop action spikes

GameStop stock price has skyrocketed at the end of January, while traders from r / The WallStreetBets Reddit community took on Wall Street investors who would bet against the success of the struggling video game retailer. Soon, GameStop’s action was reaching all-time highs, jumping over 2,600% year-to-date, before crumble. Market volatility has caught the attention of Congress, who now says he wants to understand what happened and if there was a criminal act.

California Representative Maxine Waters said the House Financial Services Committee hearing was “an opportunity for this committee to learn about the role played by each of the entities represented by the witnesses in the events we are considering today. ‘hui “. Its title, Game Stopped? Who wins and loses when short sellers, social media and retail investors collide, this point emphasized.

The CEOs of Reddit, Robinhood, Citadel and Melvin Capital were in attendance, as well as the Reddit poster that led the GameStop buying frenzy were all in attendance. there by videoconference and gave answers under oath. But, on several occasions, committee members have complained that some CEOs do not give sufficiently straightforward answers. And at the end of the hearing of more than 5 hours, the members of the committee found themselves at a loss for details. (Although Keith Gill, the Reddit trader also known as “RoaringKitty” on YouTube, confirmed to Congress that he was not, in fact, a cat.)

What Congress has learned instead is that the entire market process, from the way trades are settled to how Robinhood and other brokerages may offer trades free of charge, is extremely opaque. Committee members regularly asked questions about the market forces that led to trade issues at the height of the drama and how these issues were communicated to users at different times.

Another big topic of the session was whether sophisticated negotiating mechanisms, like short selling, are suitable for individual investors. Committee members tried to find out whether Robinhood’s efforts to “democratize finance” for the public are more harmful than good. Members have repeatedly voiced concerns like the story of Alex Kearns, a 20-year-old man who committed suicide after the app appears to have told him he racked up around $ 730,000 in trading losses on the app. His family is pursue Robinhood.

The question line suggests that at least some lawmakers will be looking at the FinTech sector and even passing legislation that brings more regulation. Some members of the Republican committee, however, said the overall market response was appropriate and rejected the need for more regulations.

“We don’t have the facts – we need the facts, not just salacious snippets or nasty comments on Reddit,” said North Carolina Rep Patrick McHenry, who instead pleaded for more lax regulations on Reddit. ‘investment. “Instead of excluding the American public with new regulations, new forms of taxation or so-called protections, let’s take this opportunity to side with them instead.”

Robinhood in the spotlight

Robinhood, in particular, captured much of the committee’s attention. Its application was at the center of what happened, making it easier for new investors to access trading accounts by offering commission-free transactions and more favorable loan terms. But it also drew the user’s anger when he stopped buying GameStop shares Thursday, January 28, accusing the company of market manipulation as prices began to fall.

Robinhood CEO Vlad Tenev has denied the accusations, instead saying Robinhood has taken these steps in response to market restrictions demanding the company have more money in its coffers to help cover its users’ transactions. . Tenev said that since then Robinhood has secured more capital to make sure this doesn’t happen again.

When asked if Robinhood wasn’t properly prepared for the GameStop drama in the first place, Tenev said there was a one in 3.5 million chance of a GameStop situation happening, calling it a “Black Swan event”.

Still, committee members continued to hit him with questions, asking him for details on how Robinhood communicates with users and how he informs them about the market. And some have lost patience with him and his apparent elusive responses.

“You admitted to making mistakes,” Pennsylvania Rep. Madeline Dean told Tenev at one point. “Specifically, what mistakes did you make?

“I admit that I am constantly improving,” Tenev replied.

Waters, who is chairman of the committee, said more hearings on GameStop’s spike in stocks were scheduled.