GME Saga Continues in Washington

Robinhood CEO Vlad Tenev testified before Congress for over five hours Thursday (February 18) over the online brokerage firm’s role in the GameStop (GME) frenzy earlier this year. 

Tenev apologized for his company’s decision to halt trading on GME, BlackBerry (BB), Nokia (NOK), and other shares of companies discussed on subreddit WallStreetBets. 

The Robinhood CEO was joined by two hedge fund managers targeted by the Reddit group, Citadel CEO Kenneth Griffin and Melvin Capital CEO Gabriel Plotkin.  Reddit CEO Steve Huffman and Reddit investor Keith Gill were also present. 

Lawmakers questioned the group regarding the intersection of social media, hedge funds, and small investors. 

Robinhood’s links to Wall Street and its business practices during the GameStop surge sparked criticism from lawmakers.  Robinhood advertises free trading to small investors; however, it makes money by routing trades to hedge funds, including Citadel. Tenev confirmed that the company receives more than 50% of its income from hedge funds and market makers. 

Tenev denied being pressured by hedge funds to restrict GameStop’s trading and added that the trading halt was due to the company’s need to raise more capital due to clearinghouse requirements. 

Robinhood raised $3.4 billion from investors over four days to meet increased capital requirements. 

Tenev assured lawmakers, saying, “we don’t answer to hedge funds.”  When asked if he was pressured by Citadel or Melvin Capital to halt GameStop’s retail trading, Tenev replied, “Zero at all.”

In a January 28 blog post from Robinhood, the halt of GameStop trading was blamed on market volatility, without mentioning the need to raise additional funds for clearinghouse requirements.  Tenev responded with, “we will be reviewing everything about this.”

Rep. Brad Sherman pressed the group on whether institutional investors with commercial relationships with retailed trading platforms have an unfair advantage over retail traders. 

Rep. Rashida Tlaib, an outspoken critic of Wall Street, said lawmakers considered a small tax on securities trading.  Advocates of the financial transactions tax say it would dampen reckless speculation while raising billions of dollars in government revenue. 

Citadel CEO Griffin stated that a transaction tax “will injure Americans hoping to save for their retirement.”  

Rep. Juan Vargas criticized the company’s use of the historical character, Robin Hood.

Vargas stated the character “was supposed to steal from the rich and give to the poor, and here you almost have the opposite, where you steal from the small retail investor and give it to the large institutional investor.”

The Robinhood/GameStop saga delved into the “payment for order flow” system used by the trading app.  Robinhood steers its customers’ stock orders to larger trading firms for execution.  In turn, these larger firms pay Robinhood for sending the trades.  Tenev and Griffin defended the practice, noting that it is legal and approved by the SEC. 

But while the practice is legal, it is conflicting with Robinhood’s stated objectives, given that it makes money from large trading firms that may have different goals than small retail investors.  

Tenev and Griffin defended the practice by noting that it has allowed companies like Robinhood to offer commission-free trading to small investors. 

Griffin stated, “Payment for order flow has been approved by the SEC.  It is customary practice.”

Social media’s role in the GameStop war was questioned due to the promotion of GameStop and other small stocks gaining steam in WallStreetBets. Reddit CEO Huffman noted that his company does not require people to disclose their identities, saying, “they can choose to reveal as much or as little as they like.”

The question of identity plays a large part in the lawsuit targeting Redditor “Roaring Kitty,” who was sued for securities fraud after identifying himself as an amateur investor. Still, the lawsuit claims he is a licensed security professional. 

“Roaring Kitty’s” identity was confirmed as Keith Gill, who portrayed himself as an individual investor, but was vital in promoting GameStop. Gill stated, “I do find it’s an attractive investment at this price point.”

GameStop peaked at $483 in late January and closed this Thursday at $40.69.

Lawmakers welcomed the opportunity to learn more about the connection between retail trading firms, hedge funds, and small investors.  Some suggested additional regulation to protect small investors, while others opposed the notion. 

Rep. Patrick McHenry stated, “if you are wealthy, you are good to go. And if you aren’t, you’re too dumb to be trusted with your own money. It is easier to buy a lottery ticket than invest in Google.”  

Some Wall Street analysts are skeptical that any regulatory changes will emerge from the hearing.  

Jaret Seiberg of Cowen Washington Research Group told investors in a report, “the vast majority of Congress have little understanding of the inner working of the market.”