US lawmakers have found their target for GameStop recriminations: Robinhood

Less than a minute after Vlad Tenev’s opening speech, Maxine Waters was already impatient with Robinhood’s CEO and hammering the hammer.

“I would like you to use your limited time to speak directly about what happened on January 28 and your involvement in it,” said the veteran California Democrat who chairs the House financial services committee.

The highly unusual hiatus was the first sign that Tenev would be the main target of many MPs, especially Democrats, during video game retailer GameStop’s first trade hearing last January, which inflicted heavy losses on hedge funds and caused reverberations. the US stock market of $ 46 billion.

Over the course of the afternoon, lawmakers quizzed Tenev about his online trading platform’s business model, culture, and ties to some of Wall Street’s biggest players, suggesting they were running into its declared mission to democratize finance and repeatedly force the 34-year-old. former leader of Bulgarian origin on the defensive.

“Robinhood has embarked on a history of breakdowns, design failures and, more recently, what appears to be a failure to properly account for your own internal risk,” said Alexandria Ocasio-Cortez, the Liberal MP. from New York which was one of the first reviews of Robinhood’s decision to stop trading on GameStop.

Representatives chose Robinhood and how it became the center of the storm in January. Tenev eventually admitted that the company did not have enough cash to meet a call for funds from its clearinghouse, which appears to contradict an earlier statement to Waters that Robinhood had “always felt comfortable” with its cash.

“At that point, we would not have been able to post the $ 3 billion in collateral,” Tenev told lawmakers Thursday.

Fired by Anthony Gonzalez, the Republican representative for Ohio, Tenev agreed that it would have been a “total disaster” if Robinhood had failed to meet the call for capital and was faced with the liquidation of its positions. clients.

“In a way, I like your business because it offers, when properly managed, investment opportunities for people who are currently excluded from the markets,” Gonzalez said. But he added that “a vulnerability was clearly exposed in your business model and possibly in the regime that governs your cap requirements.”

Robinhood has become one of the must-have trading platforms for Americans new to the financial markets. Its boom has taken the brokerage industry by storm. Founded less than ten years ago, it now has more than 13 million customers. But Robinhood’s decision to restrict trading with its clients in January to help protect its own business has proven to be a catalyst for a wider downsizing of the company.

Cindy Axne of Iowa lambasted the investment ‘gamification’ promoted by Robinhood, saying that ‘everyone seemed to be involved’ as shares started to rise on GameStop and the AMC movie channel last month . “This includes people like my nephew and his two friends who stayed up until four in the morning to see if they could get a share of this action.”

Axne continued, “When people sign up they get a scratch ticket to see what they get, confetti drops every time they place an order, they get push notifications. . . Why did you add specific game design elements to look like gambling in your app? “

But it was Carolyn Maloney, another member of Congress from New York, who asked Tenev to apologize, telling him that Robinhood felt she had “the right to make up the rules as they went.” “I’m sorry for what happened. I apologize, ”Tenev replied.

Tenev also apologized to the family of Alex Kearns – the 20-year-old man who committed suicide last summer after believing he had lost more than $ 750,000 in trading options on the platform. form – after Emanuel Cleaver of Missouri pressed Robinhood’s general manager on the tragedy. .

“The passing of Mr. Kearns has been deeply troubling to me and to the entire company,” Tenev said. He added that Robinhood made many changes to the platform after Kearns’ death, including tightening restrictions on riskier transactions and adding live customer support over the phone for cases. “treble” options.

Robinhood’s relationship with Citadel Securities, the market maker founded by Ken Griffin, who is also the CEO of the hedge fund Citadel, has also come under close scrutiny. Tenev has repeatedly denied being pressured by hedge funds to limit trading in GameStop shares, quashing a rumor that proliferated after Griffin’s hedge fund invested $ 2 billion in Melvin Capital, the evil group. taken by retail traders.

Melvin founder Gabe Plotkin said he was “humbled” after losing billions of dollars on his bet against GameStop and predicted that the hedge fund industry would have to adjust to the rise of retail investors.

“I don’t think you’re going to see stocks with the kinds of short interest levels we’ve seen before this year,” he said. “I don’t think investors like me want to be sensitive to this kind of dynamic.”

As expected, payment for the flow of orders was an important topic, with several regulators questioning participants about whether this creates a conflict of interest. Ocasio-Cortez asked Tenev if he would be willing to pass the product on to Robinhood customers, a question he tried to avoid by saying that paying for the order flow allows him to provide free exchanges.

“While removing the income you make from payment from the order flow would lead to the removal of free commissions, that doesn’t mean trading on Robinhood isn’t actually free,” Ocasio-Cortez replied.

Brad Sherman, a senior committee member, had another heated, albeit with Griffin, exchange over the controversial practice. Sherman has repeatedly insisted on Griffin whether paying Robinhood to route trades to Citadel Securities really means Robinhood’s clients get the best execution, or whether Citadel favors orders it doesn’t pay. .

Griffin attempted to look to other factors that play a role in the quality of execution, such as order size. After several rounds of back and forth, Sherman told Griffin, “You are doing a great job of wasting my time. If you want to filibuster, you should go to the Senate.

The least toasted was Steve Huffman, CEO and co-founder of Reddit, who spoke only occasionally, largely to praise the behavior of day traders on the social media site’s WallStreetBets forum, lining up with users. “The fact that we are here today means that they have succeeded in raising important questions regarding fairness and opportunities in our financial system,” he said in his opening speech.

He later argued that the forward-thinking platform’s user-oriented content moderation system naturally eliminates misinformation while making the most compelling posts appear, meaning investment advice on the platform -form were “probably among the best”.

He also tried to ignore complaints from Plotkin of Melvin Capital, who said he had been the target of anti-Semitism and racism on the platform. Huffman said Reddit’s “anti-evil” team – of content moderators who monitor the site for harassment and other rule-breaking speech – had searched “high and low” for such activity, but found only only one comment she had withdrawn.

While Tenev was the focus of most of the review, it was Keith Gill, the retail trader known as “Roaring Kitty,” who came up with an air of justification and a touch of comedy.

After declaring himself “extremely lucky” about the rise in GameStop shares that he helped drive at the expense of some of Wall Street’s biggest short sellers, he said he wanted to clear some things up to virtually assembled lawmakers. .

“I am not a cat. I am not an institutional investor, nor a hedge fund, ”he said. “I’m just an individual whose investment in GameStop and social media posts is based on my own research and analysis.” Gill concluded her statement with her signature: “I love 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