Lawmakers grilled Robinhood Markets CEO Vlad Tenev about the company’s decision to pause purchases in GameStop Corp. stock and Robinhood's business model, including payments it receives for routing customer trades.
Tenev and others appeared before the House Financial Services Committee Thursday at a hearing on why GameStop shares jumped from about $20 a share to more than $400 last month as retail investors organized online to buy up the stock.
“None of this is healthy for our markets or good for investors,” Rep. Carolyn B. Maloney, D-N.Y., said. “What makes markets work fairly is when everyone knows the rules and that the rules remain consistent and predictable and are enforced. But because of Robinhood's actions, too many customers did not get that predictability.”
Robinhood, a mobile trading app, on Jan. 28 paused purchases of GameStop and other volatile shares, citing rising deposit requirements from its clearinghouse, the National Securities Clearing Corp. The clearinghouse, which ensures stock trades are executed properly even when there's a default, informed the company it owed about $3 billion in margin — 10 times the deposit requirement just three days before, Tenev said during the hearing.
The company has since raised $3.4 billion to protect against future volatility, Tenev said.
Maloney said the pause “came out of the blue '' and “appeared arbitrary.” The company’s customer agreement doesn’t include specifics of how or when the broker may restrict trading, and initial explanations from Robinhood leaned too heavily on volatility rather than a lack of capital, she said.
Democrats zeroed in on the company's reliance on a business model called "payment for order flow" as its largest source of revenue, which involves routing customer trades to certain brokerages. The setup allows Robinhood to offer customers commission-free trades, which have become the standard across the brokerage industry.
The intense questioning came after the company paid $65 million in December to settle charges by the Securities and Exchange Commission that it inadequately disclosed the funding model to its users and failed to secure the most favorable execution of trades for them.
Committee Chairwoman Maxine Waters, D-Calif., said the setup lacks transparency and places retail investors at a disadvantage, in a line of questions directed at Kenneth C. Griffin, the founder of Citadel Securities, a brokerage that pays Robinhood for orders.
“Citadel Securities pays Robinhood tens of millions of dollars to process trades by Robinhood's customers," she said. "This relationship gives Citadel … nonpublic information as to direction and volume of trades by retail investors."
Republicans joined Tenev and Griffin in defending payment for order flow practices for saving retail investors money and giving them access to markets. The brokerages can provide better prices on smaller trades than transactions executed directly on securities exchanges because they are subject to different regulations, Griffin responded.
“This has been very important to the democratization of finance,” Griffin told lawmakers. “It has allowed the American retail investor to have the lowest execution costs they've ever had in the history of the U.S. financial markets.”
Jennifer Schulp, director of Financial Regulation Studies for free-market advocate Cato Institute, said payment for order flow largely benefits retail investors, though she emphasized the importance of disclosure. Committee Republicans proposed Schulp's inclusion as a witness for the hearing.
“I think disclosure can always be better," she said. "People should understand that their broker still needs to make money, even if they're providing zero-commission trading service.”