Robinhood and Reddit CEOs to Testify to Congress on GameStop

The United States House of Representatives Financial Services Committee has scheduled a hearing on “Recent Market Volatility Involving GameStop [Corporation (GME)] “The hearing will be held virtually, starting at noon Eastern Time on Thursday, February 18, 2021. Among those called to testify are Vladimir Tenev, CEO of online trading firm Robinhood Markets, Inc., and Steve Huffman, CEO and co-founder of the social media community and online forum site Reddit.

The committee is chaired by Representative Maxine Waters, D-Calif. The press release announcing the hearing states: “Since becoming Chair of the House Financial Services Committee, MP Waters has transformed the committee to focus her agenda on fairness, consumer and investor protection and the responsibility of large financial institutions. She made it a practice to convene committee hearings with CEOs of large financial institutions and corporations to hold them accountable. “

Previous statement by Representative Waters

Representative Waters issued the following statement on January 28, 2021, in the wake of the GameStop stock controversy.In it, she presents hedge funds as the enemy of ordinary American savers and investors:

“Hedge funds have a long history of predatory behavior and this behavior is totally indefensible. The private funds that prey on the pension funds of hard-working Americans must be stopped. Private funds engaging in predatory short selling to the detriment of other investors must be stopped. funds engaged in vulture strategies that injure workers must be stopped.

“It is incumbent on lawmakers and securities regulators to address these predatory and manipulative behaviors, which are responsible for protecting investors and ensuring that our financial markets are fair, orderly and efficient.” As a first step, to curb these abusive practices, I will convene a hearing to examine recent activity around GameStop (GME) stocks and other impacted stocks, with a focus on short selling, trading platforms online, gamification and their systemic impact on our financial markets and retail investors.

“We need to deal with hedge funds whose unethical conduct has directly led to recent market volatility and we need to look at the market in general and how it has been manipulated by hedge funds and their financial partners to profit from it. while others pay the price. ”

Robinhood and payment for the order flow

In addition to criticizing hedge funds, Robinhood CEO Vladimir Tenev is likely to face hostile questions about his company’s actions in the GameStop affair. In particular, the committee’s memorandum notes that Payment for Order Flow (PFOF) has been Robinhood’s main source of income since its inception and that its decision to restrict trading in GameStop and other stocks may have been influenced by its trading links with investment firms that caught in short squeeze on these stocks.

The committee’s memorandum also notes: “In December 2020, the SEC accused Robinhood of making inaccuracies about the company’s receipt of payment for the flow of orders and for failing to comply with its duty to ensure that transactions of clients were executed in the best possible conditions. Robinhood’s failure to meet its best execution obligations resulted in more than $ 34 million in total client losses. Robinhood was censored and agreed to pay $ 65 million to settle the action. ”

Robinhood and gambling addiction

In addition to concerns about the impacts of payment on order flow, the committee’s memorandum also notes that “some attribute the current controversy itself to the ‘gamification’ of investing and the growing role of social media and marketing. technology in financial markets ”.

The memorandum adds: “Gamification involves tactics used to entice customers into transactions, such as the increasing use of notifications, pricing, and other psychological tools and design elements to increase quick transactions and short- termism, instead of a more cautious approach. Robinhood in particular has been accused of using gamification to increase the use of its app, possibly to the financial detriment of its clients. Examples include designs to attract young people users, including digital confetti to celebrate transactions, colorful artwork, and the ability for users to access 1000 times a day to improve their standing on the waitlist for Robinhood’s cash management function. leads to criticism that gamified online trading platforms such as Robinhood encourage behavior similar to a gambling addiction.

The memorandum concludes, “Regulators have expressed concern about Robinhood’s investment platform. On December 16, 2020, regulators in Massachusetts filed a lawsuit against Robinhood for its’ aggressive tactics to attract inexperienced investors, its use of strategies of gamification to manipulate clients and its failure. to avoid frequent failures and disruptions on its trading platform. ‘”

Importance for investors

It is possible that the hearings will result in additional legislation and regulation relating to the securities markets, but this is by no means certain. One thing’s for sure: In-depth questioning of the payment order flow, the incentives it creates, and the degree to which Robinhood engages in gamification are all topics that are sure to tarnish this company’s image, but not necessarily to deter a significant number of Robinhood’s customers or potential customers from using its platform.