Robinhood, Citadel CEOs spar with lawmakers over retail trading

At a Financial Services Committee hearing, House Democrats pressed the leaders of Robinhood and Citadel on whether they're profiting at the expense of retail investors

House Democrats sparred with the leaders of Robinhood Markets and Citadel Thursday, with lawmakers pressing the firms on whether they’re profiting at the expense of retail investors and complaining that they got few satisfying answers.

At a closely watched hearing before the Financial Services Committee, Robinhood’s Vlad Tenev and Citadel’s Ken Griffin took fire on issues ranging from trading halts provoked by capital shortfalls to whether “free trades” are really free. At times, the chief executives’ long responses were cut off and met with derision. They were both adamant that their businesses have helped small-time investors access markets that were long the domain of Wall Street.

“You are doing a great job of wasting my time,” Rep. Brad Sherman, a California Democrat, told Griffin as he demanded the hedge fund billionaire provide a more succinct answer on whether the brokers Citadel pays for orders get the best deals for their clients.

Tenev, whose brokerage has attracted young investors with a simple mobile phone app and offer of commission-free trades, was accused of not fully informing its inexperienced clientele of the risks they are taking. The firm, said Democratic Rep. Carolyn Maloney of New York, needs to “ensure retail customers don’t get the rug pulled out from under them.”

The exchange elicited a mea culpa from Tenev, who admitted the brokerage fell short of meeting its customers’ needs. “I’m sorry for what happened,” he said. “I’m not going to say that Robinhood did everything perfect and that we haven’t made mistakes in the past. But what I commit to is making sure that we improve from this.”

WILD PERIOD

The hearing, designed to get to the bottom of one of the wildest periods for the U.S. stock market in recent memory, shed little light on the confluence of events that gripped Wall Street and Washington last month. Individual investors had banded together on Reddit to drive GameStop and other stocks to astronomical levels, triggering volatility that caused some hedge fund short sellers to lose billions, while Robinhood and other online brokerages were forced to temporarily prevent their clients from buying.

The saga triggered questions about the fairness of markets and whether stock prices detached from reality pose a threat to financial stability.

“Many Americans feel that the system is stacked against them, and no matter what Wall Street always wins,” said Chairwoman Maxine Waters, a California Democrat who noted that the GameStop saga has put a spotlight on Wall Street and “the predatory ways” of some hedge funds. She pledged to hold a series of hearings on the matter and said the panel would also seek testimony from market regulators.

For many of the panel’s members, the testimony was more about scoring political points against the most prominent firms involved in the controversy than drilling down into the minutia of the stock market. Republicans on the committee were happy to point that out.

Rep. Bill Huizenga, a Michigan Republican, said the hearing was “political theater, for the most part.” He complained some of colleagues “were playing to the cameras.”

And there is unlikely to be a major policy response to the saga since getting legislation through the closely divided Congress will be near impossible.

NEW RULES?

Still, some issues are certain to gain attention at regulatory agencies like the Securities and Exchange Commission. That includes potential additional protections for the millennial investors who have been drawn to Robinhood. The SEC and the Justice Department are also investigating whether any traders illegally manipulated the prices of GameStop and other stocks.

[More: Finra zeroes in on online brokerage apps]

Many of the committee members also made clear that they’re siding with the small investors who pushed GameStop to record highs, despite concerns raised by ex-regulators and some finance executives that the wild trading exposed those fueling the surge to potentially crippling losses. Many experts noted that GameStop’s jump to as high as $483 last month was not grounded in financial analysis. Shares in the unprofitable video-game retailer have now plunged below $50.

Rep. Patrick McHenry, the committee’s top Republican, attributed the unusual trading to “a fundamental change” in markets occurring as retail investors harness new technologies. What happened in January was partly the result of these traders being denied access to markets for years, he said.

While a few Democrats took the opportunity to bash hedge funds, Gabe Plotkin, whose Melvin Capital Management was hit with huge losses after betting against GameStop faced few questions.

SWIRLING CONSPIRACIES

Though conspiracy theories have swirled about whether faltering hedge funds demanded the late January trading stoppage, all the executives testifying said there was no truth to the story. “We don’t answer to hedge funds,” Tenev told the panel.

The Robinhood CEO explained that the firm was forced to halt the purchases in late January because it was forced to pony up more than $3 billion in extra capital. The number was later reduced but the broker needed to reach out to additional investors for the funds.

The focus on Citadel and Robinhood also took some heat off of Roaring Kitty, a retail trader named Keith Gill who gained notoriety by posting a series of videos online urging investors to jump on the GameStop bandwagon. Gill insisted that he’s just a regular guy who believes in the video-game company, adding that he’s not a financial adviser and wasn’t part of any effort to manipulate share prices.

“I do not have clients and I do not provide personalized investment advice for fees or commissions,” said Gill, who’s become a multimillionaire betting on GameStop. “I did not belong to any groups trying to create movements in the stock price. I have never had a financial relationship with any hedge fund.”

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