After more than five hours of testimony, the hearing has wrapped.
It seems to have been a tough day for Robinhood and Citadel Securities in particular, with lawmakers from both parties aggressively questioning both executives over whether their businesses do more harm than good.
Reddit and Keith Gill, however, got the opposite treatment.
At times, Gill was even directly praised by members of Congress for his success and his initiative. That may ultimately create a powerful narrative boost for him as he faces down a class-action lawsuit alleging that his YouTube videos constituted bad financial advice, a claim Gill refuted calmly and diplomatically by returning to his core talking point: He likes the stock.
Melvin Capital also received some scrutiny, but far less than Robinhood and Citadel. Between CEO Gabriel Plotkin’s bland office backdrop and his rather small size in the video frame, it sometimes appeared as if he were deliberately seeking to blend in with the environment in hopes of being forgotten. If so, it seemed to have worked.
Rep. Alexandria Ocasio-Cortez clashed with Robinhood CEO Vladimir Tenev over whether Robinhood investors are truly trading for free on the platform, alleging that the company is simply “hiding the cost” from retail investors by subsidizing it with payment for order flow.
“Would you be willing to commit to voluntarily pass on proceeds of payment for order flow to Robinhood customers?” Ocasio-Cortez asked.
Tenev balked at the question several times before ultimately pointing out that payment for order flow “allows for commission-free trading.”
The implication, Ocasio-Cortez said, was that trading on Robinhood isn’t truly free after all.
Tenev conceded that Robinhood is a “for-profit business and needs to generate some revenue to pay for the costs of running this business.” But, he claimed, Robinhood’s model has become the standard industrywide.
During his testimony, Robinhood CEO Vladimir Tenev admitted that the company made some mistakes during the meme stock trading frenzy. But he was somewhat evasive when Congresswoman Madeleine Dean asked him to elaborate.
“You admitted to making mistakes,” Dean said. “Specifically, what mistakes did you make?”
Congresswoman Rashida Tlaib and billionaire Ken Griffin got into a fiery exchange over whether or not to tax financial transactions.
Tlaib noted that such a tax would raise nearly $800 billion over 10 years, an estimate that is backed up by a 2018 report by the nonpartisan CBO. The idea is that revenue could then be invested in infrastructure or other programs aimed at reducing inequality.
Griffin, not surprisingly, is not a fan of a financial transaction tax. His high-speed trading firm, Citadel Securities, would be hurt by the levy.
“We firmly believe a financial transaction tax would injure Americans trying to save for retirement,” Griffin said.
Tlaib did not buy that explanation and criticized Wall Street broadly.
Under questioning from Rep. Ritchie Torres, Robinhood CEO Vlad Tenev disclosed two important stats that shed light on its underlying business model.
Robinhood CEO Vlad Tenev admitted that the app did not have the liquidity needed to meet an early-morning demand from its clearinghouse for $3 billion on January 28.
“At that exact moment we would not have been able to post the $3 billion in collateral,” Tenev said.
Within a few hours, Robinhood managed to persuade the clearinghouse to lower its request to $1.4 billion, and the app imposed controversial restrictions on GameStop and 12 other stocks.
Congressman Anthony Gonzalez pointed out that if Robinhood did not impose those restrictions, the clearinghouse would have stepped in and liquidated unsettled trades.
“It would not have been a good situation for the firm or the customers,” Tenev said, adding that it would have caused a “total lack of access to markets” for users.
Gonzalez said this would have been an “enormous catastrophe for Robinhood.”
“I believe a vulnerability was clearly exposed in your business model and perhaps in the regime that governs your capital requirements,” he said. “We just can’t live in a world where my constituents could have had their shares liquidated without their consent.”
Illinois Rep. Sean Casten took Robinhood to task with a polite but devastating critique, highlighting the suicide of investor Alex Kearns.
While the hearing is chugging along, the closing bell rung on Wall Street and it wasn’t a pretty day for GameStop (GME).
The company’s shares tumbled 11.4% and closed at $40.69, near the lowest point of the session. It was a worse performance than the broader market, including the small-cap Russell 2000 index that GameStop is a member of, which also closed in the red.
Melvin Capital learned a very painful lesson when the hedge fund was blindsided by an army of Reddit traders. GameStop shares went to the moon and Melvin Capital turned to rivals for a lifeline.
“Us at Melvin, we’ll adapt. And I think the whole industry will have to adapt,” Melvin Capital CIO Gabe Plotkin said.
How? Well, for starters, Plotkin is going to pay more attention to the chatter on WallStreetBets. “There will be closer monitoring of message boards,” he said.
Indeed, Wall Street is keeping very close tabs on WallStreetBets. Thinknum Alternative Data recently built and launched a tool that provides hedge funds and investment banks a ranking of the most-mentioned stocks on WallStreetBets.
That kind of intel could have allowed Melvin Capital to unwind its bets against GameStop before that company’s shares skyrocketed. Melvin ultimately accepted a $2.75 billion cash infusion (don’t call it a bailout, according to Plotkin) led by rival hedge funds Citadel and Point72.
At one point, the short interest on GameStop was an unthinkable 140% – a scenario that Plotkin said is unlikely to be repeated.
“I don’t think investors like myself want to be susceptible to these dynamics,” he said.
Congressman Michael San Nicholas, the Democrat from Guam, began his questioning by congratulating retail investors who made money trading GameStop (GME) last month.
“You guys found a low float, low volume, massively shorted stock and you squeezed it,” San Nicholas said. “I think that investors like Mr. Plotkin, large money managers, probably doubled down on their short positions thinking that they were going to win, and in the end, the massive communication networks that we have these days rallied the small to beat the large.”
San Nicholas called the success of small investors “something to behold” and said, “Robinhood made that possible.”
Reddit CEO Steve Huffman called out CNBC without saying those four letters.
“People in the United States talk about stocks on Reddit, they talk about it on TV, in magazines – in fact they do all the time on TV encourage people to make what I would call bad investment decisions,” Huffman testified.
You can trust advice you get on Reddit, though, he argued.
Fun moment in the hearing: Congressman Juan Vargas wanted to know if Citadel ever told Robinhood to ban orders of GameStop during the trading frenzy.
“Are you asking if we have contact with Robinhood?” Griffin asked.
“With respect to GameStop,” Vargas replied. “Did you talk to them about restricting? About buying – not selling – GameStop?”
“Let me be perfectly clear: Absolutely not,” Griffin said.
“So if we depose everyone in your organization we’ll find that?” Vargas asked.
“That is correct,” Griffin said.
GameStop’s short interest was greater than the number of shares on the market. That might not be such a good idea, Robinhood CEO said.
“I do believe the ability for the same share to be shorted an indefinite number of times is somewhat of a pathology that should be fixed,” Tenev said.
To make that fix, Tenev suggested modernizing the settlement infrastructure, which he called “antiquated.”
“We don’t have the ability to properly track what shares have been shorted,” he added.
To prevent Wall Street high-speed traders from gaining such an advantage over retail investors, progressive Democrats have proposed a financial transaction tax.
Robinhood CEO Vlad Tenev cautioned that it could hurt customers more than help — but he also acknowledged it could be beneficial overall.
But Jennifer Schulp, director of financial regulation at the conservative Cato Institute, thinks it’s a bad idea.
“No, I don’t think a financial transaction tax would have an affect on fraud or manipulation,” she said. “They often fail to raise money and distort trading.”
Robinhood said its customers have made $35 billion with the company. CEO Vlad Tenev said he has no idea whether his customers have made more or less money in aggregate than they would have if they invested in an S&P 500 ETF.
Tenev said that number includes the value of all customers’ assets, including unrealized gains and positions in cryptocurrencies. But he wouldn’t share data on how much its customers’ investments have grown compared to other investments.
“I don’t have that particular cut of the data top of mind,” he said. “Maybe I could get back to you on that.”
When Congressman Jim Himes asked customers’ rate of return vs. investing in the S&P 500, Tenev objected to the question, saying rate of return should be compared to not investing at all – for example “money they otherwise would have spent or consumed.”
Himes said it’s a lot of money, but it’s meaningless unless we know whether Robinhood traders have won or lost.
“It is indeed a large amount of money, especially for our customers who are mostly individual investors,” Tenev acknowledged.
Keith Gill, aka DeepF***ingValue, was early to GameStop mania, sharing his thoughts on the WallStreetBets subreddit that helped fuel the trading frenzy.
But even he didn’t think it was going to hit a high of $483 a share.
“At the time I thought it was possible but a very low probability,” Gill testified. “Early on I felt it was an attractive investment opportunity.”
Gill acknowledged that he discussed short-sellers, who became the target of redditors’ significant vitriol.
“Yes, the topic did come up,” he said, in the understatement of the year.
Reddit users’ stock trading activity on WallStreetBets likely would not meet the definition of market manipulation, according to Jennifer Schulp, a former enforcement official at the the Financial Industry Regulatory Authority.
Speaking at Thursday’s hearing, Schulp said the Securities and Exchange Commission should probably investigate to determine if any actors sought to engage in stock manipulation on WallStreetBets.
But, echoing the remarks of Reddit’s own CEO, Schulp said there is little apparent evidence of misbehavior.
“I do think the SEC should look,” she said, “but to this point I see very little that would meet a test for manipulation, which generally involves falsely deceptive behavior.”
Elon Musk isn’t involved directly in the GameStop hearing, but the Tesla CEO’s tweet — Gamestonk!! — in the midst of the January market frenzy caught the eye of Rep. Steve Stivers.
After the tweet, the red-hot GameStop stock soared even higher in after-hours trading, further squeezing hedge funds that shorted the stock.
“Do you believe that tweet was targeting you because you had shorted Tesla stock in the past?” Stivers asked Melvin Capital’s founder, Gabe Plotkin, during the hearing.
Plotkin demurred, saying he didn’t want to speculate about Musk’s motives or the potential impact it had on GameStop’s rise, which, incidentally, did cause Melvin to lose more than 50% in January.
Melvin’s short position on GameStop was so devastating the firm took a more-than-$2 billion capital infusion from fellow hedge funds.
Musk has a long history of taunting Tesla’s short-sellers, and regularly broadcasts his disdain for them on Twitter.
Robinhood’s CEO was asked about a 20-year-old options trader who killed himself after mistakenly believing he had a negative balance of $730,000.
College student Alex Kearns mistakenly believed he owed that sum of money and took his own life last June after his desperate pleas to Robinhood went unanswered, according to his family.
“First of all, I’m sorry to the family of Mr. Kearns for your loss,” Tenev testified. “The passing of Mr. Kearns was deeply troubling to me and the entire company.”
Tenev testified that the company has taken a number of steps to prevent something similar from happening again, including:
“It was a tragedy and we went into immediate action,” Tenev said.
The Kearns family is suing Robinhood for the wrongful death of their son, who — like a growing number of novice traders — turned to the free trading app for access to sophisticated financial instruments such as options.
Congressional hearings aren’t exactly known for fact-finding and informed inquiry, but we just got a bunch of really good questions directed at Robinhood executives.
From Congresswoman Nydia Velazquez:
– “Robinhood seems to have perfected the gamification of trading providing the user with the perception that investing through the Robinhood app offers recreational gain … with no downside risk. … How does Robinhood balance disclosures about the potential downside risk of investing, including substantial downside loss?”
Vlad Tenev’s response: “We know that investing is serious and we’re investing in all the educational tools and support to help people on their investing journey.”
From Congressman Blaine Luetkemeyer:
– “Do you think we need more legislation or did the system actually work? Was it self-correcting? The fact that someone like yourself was able to take advantage of shorting? Maybe there was over-aggressive investing that was taking place … they didn’t work because you outsmarted the system?”
Keith Gill’s response: “Increased transparency could help so someone like me could have a better understanding of how those things work could be quite beneficial to retail investors.”
– “You mentioned settling trades in real time … What are the unintended consequences if you did something like that?”
Tenev’s response: “Certain market participants rely on next-day settlement to be able to take advantage of intraday netting and run up larger one-sided positions in certain stock with the knowledge they can close those positions by the time settlements happen, and I understand that could be a limitation to some of these institutions. … I don’t think these are insurmountable challenges.”
