US lawmakers found their target for GameStop recriminations: Robinhood

Less than a minute into Vlad Tenev’s opening statement, Maxine Waters was already impatient with the Robinhood chief executive and pounding on the gavel.

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

The very unusual interruption was the first sign that Tenev would be the main target for many members of the House, particularly the Democrats, in the first hearing into trading in video games retailer GameStop this January that inflicted deep losses for hedge funds and sent reverberations across the $46tn US stock market.

Over the course of the afternoon, lawmakers quizzed Tenev over his online trading platform’s business model, culture, and ties to some of the largest players on Wall Street, suggesting they clashed with his stated mission of democratising finance and repeatedly forcing the 34-year-old Bulgarian-born executive on the defensive. 

“Robinhood engaged in a track record of outages, design failures and most recently what appears to be a failure to properly account for your own internal risk,” said Alexandria Ocasio-Cortez, the liberal New York congresswoman who was one of the earliest critics of Robinhood’s decision to halt trading in GameStop. 

I don’t think you’re going to see stocks with the kinds of short interest levels we saw prior to this year. I don’t think investors like myself want to be susceptible to these types of dynamics

Representatives picked apart Robinhood and how it became the centre of the storm in January. Tenev ultimately admitted that the company did not have enough cash on hand to meet a capital call from its clearinghouse, seemingly contradicting an earlier statement to Waters that Robinhood had “always felt comfortable” with its liquidity.

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

Drawn out by Anthony Gonzalez, the Republican representative from Ohio, Tenev agreed that it would have been a “total catastrophe” if Robinhood failed to meet the capital call and faced liquidation of its clients’ positions.

“In a sense I love your company because it does, when correctly managed, provide investment opportunities for individuals who are currently frozen out of the markets,” Gonzalez said. But he added that “a vulnerability was clearly exposed in your business model and perhaps in the regime that governs your cap requirements”.

Robinhood has become one of the go-to trading platforms for Americans new to financial markets. Its rise has taken the brokerage industry by storm. Founded less than a decade ago, it now counts more than 13m customers. But Robinhood’s decision to restrict client trading in January to help protect its own business proved a catalyst for a broader dressing down of the company.

Cindy Axne of Iowa blasted the “gamification” of investing promoted by Robinhood, saying “everyone seemed to get involved” as shares started rising in GameStop and cinema chain AMC last month. “That includes people like my nephew and his two friends who stayed up until four in the morning to see if they could get a piece of this action.” 

Axne went on: “When people sign up, they get a scratch-off ticket to see what they get, confetti falls every time they place an order, they get push notifications . . . Why have you added specific gaming design elements to look like gambling to your app?”

But it was Carolyn Maloney, another New York congresswoman, who got Tenev to apologise, telling him Robinhood felt it had “the right to make up the rules as you go along”. “I’m sorry for what happened. I apologise,” Tenev responded. 

Tenev also apologised to the family of Alex Kearns — the 20-year-old man who died by suicide last summer after believing he had lost more than $750,000 trading options on the platform — after Emanuel Cleaver of Missouri pressed the Robinhood chief executive about the tragedy. 

“The passing of Mr Kearns was deeply troubling to me and to the entire company,” Tenev said. He added that Robinhood made numerous changes to the platform in the aftermath of Kearns’ passing, including tightening restrictions for riskier trading and adding live support for customers by phone for “acute” options cases.

Also under scrutiny was Robinhood’s relationship with Citadel Securities, the market maker founded by Ken Griffin, who is also the chief executive of hedge fund Citadel. Tenev repeatedly denied that he had been pressured by hedge funds to limit trading of GameStop shares, quashing a rumour that had proliferated after Griffin’s hedge fund invested $2bn in Melvin Capital, the group wrongfooted 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 adapt to the rise of retail investors.

“I don’t think you’re going to see stocks with the kinds of short interest levels we saw prior to this year,” he said. “I don’t think investors like myself want to be susceptible to these types of dynamics.”

As expected, payment for order flow was a big topic, with several regulators questioning the attendees on whether it creates a conflict of interest. Ocasio-Cortez asked Tenev if he would be willing to pass on the proceeds to Robinhood customers, a question he tried to avoid by saying that payment for order flow allowed it to provide free trading.

“If removing the revenues that you make from payment for order flow would cause the removal of free commissions, doesn’t that mean that trading on Robinhood isn’t actually free,” Ocasio-Cortez responded. 

Brad Sherman, a senior member of the committee, had another heated exchange, albeit with Griffin, over the controversial practice. Sherman repeatedly pressed Griffin over whether paying Robinhood to route trades to Citadel Securities really means Robinhood customers get the best execution terms as claimed, or if Citadel favours orders it does not pay for.

Griffin attempted to deflect to other factors that play a role in execution quality, such as the size of the order. After several rounds of back-and-forth, Sherman told Griffin: “You’re doing a great job of wasting my time. If you’re going to filibuster, you should run for the Senate.”

Subject to the least grilling was Steve Huffman, Reddit’s chief executive and co-founder, who spoke only occasionally, largely to commend the behaviour of day traders on the social media site’s WallStreetBets forum, aligning himself with users. “The fact that we are here today means they’ve managed to raise important issues about fairness and opportunity in our financial system,” he said in his opening remarks.

Later, he argued that the edgy platform’s own system of user-driven content moderation naturally rooted out misinformation while surfacing the most compelling posts, meaning investment advice on the platform was “probably among the best”.

He also attempted to shrug off complaints by Plotkin of Melvin Capital, who said he had been the target of anti-Semitism and racism on the platform. Huffman said that Reddit’s “anti-evil” team — content moderators that police the site for harassment and other rule-breaking speech — had searched “high and low” for such activity but only found a single comment that it took down.

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

After declaring himself “enormously fortunate” at the rise in GameStop shares he had helped drive at the expense of some of the largest short-sellers on Wall Street, he said he wanted to make a few things clear to the virtually assembled lawmakers.

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