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+ - GAME STOPPED? WHO WINS AND LOSES WHEN SHORT SELLERS, SOCIAL MEDIA, AND RETAIL INVESTORS COLLIDE
+
+[House Hearing, 117 Congress]
+[From the U.S. Government Publishing Office]
+
+
+ GAME STOPPED? WHO WINS AND LOSES
+ WHEN SHORT SELLERS, SOCIAL MEDIA,
+ AND RETAIL INVESTORS COLLIDE
+=======================================================================
+
+ VIRTUAL HEARING
+
+ BEFORE THE
+
+ COMMITTEE ON FINANCIAL SERVICES
+
+ U.S. HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED SEVENTEENTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ FEBRUARY 18, 2021
+
+ __________
+
+ Printed for the use of the Committee on Financial Services
+
+ Serial No. 117-3
+
+[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
+
+ __________
+
+ U.S. GOVERNMENT PUBLISHING OFFICE
+43-966 PDF WASHINGTON : 2022
+
+-----------------------------------------------------------------------------------
+
+ HOUSE COMMITTEE ON FINANCIAL SERVICES
+
+ MAXINE WATERS, California, Chairwoman
+
+CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
+NYDIA M. VELAZQUEZ, New York Ranking Member
+BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
+GREGORY W. MEEKS, New York BILL POSEY, Florida
+DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
+AL GREEN, Texas BILL HUIZENGA, Michigan
+EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
+ED PERLMUTTER, Colorado ANN WAGNER, Missouri
+JIM A. HIMES, Connecticut ANDY BARR, Kentucky
+BILL FOSTER, Illinois ROGER WILLIAMS, Texas
+JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
+JUAN VARGAS, California TOM EMMER, Minnesota
+JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
+VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
+AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
+MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
+CINDY AXNE, Iowa TED BUDD, North Carolina
+SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
+AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
+RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
+STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
+ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
+RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
+MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
+ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
+JESUS ``CHUY'' GARCIA, Illinois
+SYLVIA GARCIA, Texas
+NIKEMA WILLIAMS, Georgia
+JAKE AUCHINCLOSS, Massachusetts
+
+ Charla Ouertatani, Staff Director
+
+
+ C O N T E N T S
+
+ ----------
+ Page
+Hearing held on:
+ February 18, 2021............................................ 1
+Appendix:
+ February 18, 2021............................................ 93
+
+ WITNESSES
+ Thursday, February 18, 2021
+
+Gill, Keith Patrick, GameStop Investor........................... 13
+Griffin, Kenneth C., Chief Executive Officer, Citadel LLC........ 8
+Huffman, Steve, Chief Executive Officer and Co-Founder, Reddit,
+ Inc............................................................ 11
+Plotkin, Gabriel, Chief Executive Officer, Melvin Capital
+ Management LP.................................................. 9
+Schulp, Jennifer J., Director, Financial Regulation Studies, Cato
+ Institute...................................................... 14
+Tenev, Vladimir, Chief Executive Officer, Robinhood Markets, Inc. 6
+
+ APPENDIX
+
+Prepared statements:
+ Gill, Keith Patrick.......................................... 94
+ Griffin, Kenneth C........................................... 99
+ Huffman, Steve............................................... 102
+ Plotkin, Gabriel............................................. 105
+ Schulp, Jennifer J........................................... 108
+ Tenev, Vladimir.............................................. 114
+
+ Additional Material Submitted for the Record
+
+Budd, Hon. Ted:
+ Business Insider article by Jennifer J. Schulp entitled,
+ ``Retail Investors are Revolutionizing the Stock Market. So
+ Stop Calling Them `Dumb Money.''', dated December 19, 2020. 127
+Casten, Hon. Sean:
+ CNBC article entitled, ``Here's how Robinhood is raking in
+ record cash on customer trades despite making it free'',
+ dated August 13, 2020...................................... 130
+Davidson, Hon. Warren:
+ Keynote speech of Vice Chancellor J. Travis Laster before the
+ Council of Institutional Investors, dated September 29,
+ 2016....................................................... 138
+Hill, Hon. French:
+ Written statement of the American Securities Association
+ (ASA)...................................................... 162
+McHenry, Hon. Patrick:
+ Written statement of the Depository Trust & Clearing
+ Corporation (DTCC)......................................... 167
+ Written statement of the Security Traders Association (STA).. 173
+Griffin, Kenneth C.:
+ Written responses to questions for the record from Chairwoman
+ Waters..................................................... 186
+ Written responses to questions for the record from
+ Representative Beatty...................................... 179
+ Written responses to questions for the record from
+ Representative Green....................................... 180
+ Written responses to questions for the record from
+ Representative Lynch....................................... 184
+ Written responses to questions for the record from
+ Representative Sherman..................................... 185
+Plotkin, Gabriel:
+ Written responses to questions for the record from
+ Representative Beatty...................................... 193
+ Written responses to questions for the record from
+ Representative Sherman..................................... 193
+Schulp, Jennifer J.:
+ Written responses to questions for the record from
+ Representative Roger Williams.............................. 194
+*Tenev, Vladimir:
+ Written responses to questions for the record from Chairwoman
+ Waters..................................................... 196
+ Written responses to questions for the record from
+ Representative Beatty...................................... 213
+ Written responses to questions for the record from
+ Representative Sherman..................................... 217
+ Written responses to questions for the record from
+ Representative Steil....................................... 221
+ Written responses to questions for the record from
+ Representative Roger Williams.............................. 223
+*Additional information provided by Robinhood is contained in
+ Committee files.
+
+
+ GAME STOPPED? WHO WINS AND LOSES
+ WHEN SHORT SELLERS, SOCIAL MEDIA,
+ AND RETAIL INVESTORS COLLIDE
+
+ ----------
+
+
+ Thursday, February 18, 2021
+
+ U.S. House of Representatives,
+ Committee on Financial Services,
+ Washington, D.C.
+ The committee met, pursuant to notice, at 12:01 p.m., via
+Webex, Hon. Maxine Waters [chairwoman of the committee]
+presiding.
+ Members present: Representatives Waters, Maloney,
+Velazquez, Sherman, Meeks, Scott, Green, Cleaver, Perlmutter,
+Himes, Foster, Beatty, Vargas, Gottheimer, Gonzalez of Texas,
+Lawson, San Nicolas, Axne, Casten, Torres, Lynch, Adams, Tlaib,
+Dean, Ocasio-Cortez, Garcia of Illinois, Garcia of Texas,
+Auchincloss; McHenry, Lucas, Luetkemeyer, Wagner, Huizenga,
+Stivers, Barr, Hill, Emmer, Zeldin, Loudermilk, Mooney,
+Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose,
+Steil, Timmons, and Taylor.
+ Chairwoman Waters. The Financial Services Committee will
+come to order. Without objection, the Chair is authorized to
+declare a recess of the committee at any time.
+ As a reminder, I ask all Members to keep themselves muted
+when they are not being recognized by the Chair. This will
+minimize disturbances while Members are asking questions of our
+witnesses. The staff has been instructed not to mute Members,
+except when a Member is not being recognized by the Chair and
+there is inadvertent background noise.
+ Members are also reminded that they may only participate in
+one remote proceeding at a time. If you are participating
+today, please keep your camera on. And if you choose to attend
+a different remote proceeding, please turn your camera off.
+ Today, we will make an exception and allow Members from
+Texas to participate without their video function if they are
+experiencing power outages which prevent them from having a
+working video.
+ If Members wish to be recognized during the hearing, please
+identify yourself by name to facilitate recognition by the
+Chair. I would also ask that Members be patient as the Chair
+proceeds, given the nature of conducting committee business
+virtually.
+ Today's hearing is entitled, ``Game Stopped? Who Wins and
+Loses When Short Sellers, Social Media, and Retail Investors
+Collide.''
+ I now recognize myself for 3 minutes to give an opening
+statement.
+ Good afternoon, everyone. This hearing is the first in a
+series of hearings for the committee to examine the recent
+market volatility involving GameStop and other stocks. I want
+to know how each of the witnesses here today and the companies
+they represent contributed to the historic trading events in
+January.
+ This recent market volatility has put a national spotlight
+on institutional practices by Wall Street firms and prompted
+discussion about the evolving roles of technology and social
+media in our markets. These events have illuminated potential
+conflicts of interest and the predatory ways that certain funds
+operate, and they have demonstrated the enormous potential
+power of social media in our markets.
+ They've also raised issues involving gamification of
+trading, potential harm to retail investors, and the business
+models of apps with retail investors as their users.
+ All of this is why we have witnesses from many of the key
+players here to testify today, including witnesses representing
+Wall Street firms, Melvin Capital and Citadel; social media
+company, Reddit; and trading app, Robinhood; as well as one of
+the retail investors involved.
+ In subsequent hearings, we will hear from regulators and
+other experts regarding these events, including why Dodd-Frank
+Act rulemakings related to short selling disclosures were never
+implemented.
+ Many Americans feel that the system is stacked against
+them, and that no matter what, Wall Street always wins. In this
+instance, many retail investors appeared motivated by a desire
+to beat Wall Street at its own game.
+ And given the losses that many retail investors have
+sustained as a result of volatility in the system, there are
+many whose belief that the system is rigged against them has
+been reinforced.
+ Others have noted that there are winners and there are
+losers in every trade in our financial markets.
+ Our role, as the Financial Services Committee, is to ensure
+fairness in our financial markets and systems, robust
+protections for investors, and accountability for Wall Street.
+ Today, we will hear firsthand from the witnesses regarding
+these events. The hearing will be an opportunity for this
+committee to get the facts about the role each of the entities
+the witnesses represent played in the events we are examining
+today.
+ I now recognize the ranking member of the committee, the
+gentleman from North Carolina, Mr. McHenry, for 5 minutes.
+ Mr. McHenry. Thank you, Madam Chairwoman.
+ And let me just begin by saying, I believe Americans are
+far more sophisticated, informed, and capable than people in
+D.C. give them credit for.
+ When I called for this hearing last month, I wanted this to
+be a fact-finding mission. We have speculation, we have
+headlines and finger pointing, but we don't have the facts. We
+need facts, not just the salacious bits or nasty comments on
+Reddit. And, look, there's plenty of that. We need the facts
+today.
+ Now, some on the left are already floating new restrictions
+or things to, ``protect,'' these so-called uninformed retail
+investors whom, in their eyes, don't know the difference
+between a dogecoin and a Dow Jones without Congress telling
+them.
+ I think if we've learned anything from the past few weeks,
+it's that these average, everyday investors are pretty darn
+sophisticated. There is wisdom in the crowd.
+ So, let's zoom out on that idea just for a moment. The
+GameStop story represents a larger truth: A fundamental change
+is happening. Like never before, everyday investors can
+communicate, access more information, and work collectively to
+move markets--all in real time.
+ Technology is fueling this revolution. Congress cannot put
+technology back in the box. GameStop is a culmination of years
+of pent-up frustration. That frustration is now paired with
+faster, cheaper, and better technology.
+ Consider for a moment that for every story of someone being
+able to pay off their student debt from the GameStop trade, or
+conversely, every story of somebody who lost money, there were
+stories of those who said they were investing in protest. They
+would gladly risk losing money just to prove a point.
+ And while no one should ever risk investing money that they
+cannot afford to lose, let's tell the truth of why someone
+would do something like that. The sad truth is the K-shaped
+economy is nothing new in our capital markets because the
+structural core of our regulations literally enshrined
+inequity.
+ Policies, like the, ``accredited investor,'' definition,
+blatantly pick winners and losers. If you're wealthy, you're
+good to go. And if you're not, you're deemed too dumb to be
+trusted with your own money. So, a privileged few get to invest
+alongside Ivy League endowments, getting early access in
+private markets to the greatest returns of the last 2
+generations.
+ But not so fast for the average, everyday investor. In the
+eyes of our government, you need to be protected, protected
+from your own decisions, protected from your own money, and
+protected from more opportunities.
+ So, you're left with a savings account which pays no
+interest. And if you need more money than that, well, we
+created a world where it's easier to go buy a lottery ticket
+than it is to invest in the next Google.
+ Is it any wonder why the unhealthy dynamics of GameStop
+happened?
+ It's time we get serious about equity and ownership in the
+American economy. We should live in a world where the
+construction worker or Uber driver trading on Robinhood has the
+same access to equity shares in Robinhood itself as the white-
+collar employees who work there. The same goes for Reddit and
+Reddit users, by the way. Both contributed to its success. Why
+can't both share in its future success?
+ I'll conclude with a reminder for some of my colleagues who
+want to regulate more and more. In the 1980s, Massachusetts
+State regulators barred citizens from investing in what The
+Wall Street Journal called, ``the latest in a cascade of stocks
+of high-technology companies,'' that occurred that year. What
+IPO was too risky in the eyes of the government? Apple.
+ So instead of shutting the American public out through new
+regulations, new forms of taxation, or so-called protections,
+let's use this opportunity instead to side with them.
+ I'll begin where I started: Americans are far more
+sophisticated, informed, and capable than folks in D.C. give
+them credit for, and it's time our securities laws treat them
+that way.
+ I look forward to the hearing, and I yield back.
+ Chairwoman Waters. Thank you so very much.
+ I'm so pleased that you're cooperating today, and you were
+able to join with us when we called for this hearing.
+ I want to welcome today's witnesses to the committee.
+ Vladimir Tenev is the chief executive officer of Robinhood
+Markets, Inc., a company with a trading app that after
+increased trading activity in GameStop and certain other
+stocks, restricted trading of those stocks for a period of
+time.
+ Kenneth C. Griffin is the chief executive officer of
+Citadel LLC, a firm which is one of Robinhood's main customers
+and sources of revenue, and which also provided financial
+support to Melvin Capital Management LP, when Melvin faced
+significant losses over GameStop and other trades.
+ Gabriel Plotkin is the chief executive officer of Melvin
+Capital Management LP, which held a significant short position
+in GameStop and other stocks and experienced significant losses
+due to its positions.
+ Steve Huffman is the chief executive officer and co-founder
+of Reddit, Inc., a social media platform which is home to the
+subreddit WallStreetBets, where retail investors discuss
+trading and where a large number of members discussed the
+purchase of GameStop and other stocks which experienced
+volatility.
+ Keith Gill is a retail investor who posted on Reddit and
+YouTube regarding investing in GameStop and other stocks.
+ Jennifer Schulp is the director of financial regulation
+studies at the Cato Institute.
+ Each of you will have 5 minutes to summarize your
+testimony.
+ And without objection, your written statements will be made
+a part of the record.
+ Mr. Sherman. Madam Chairwoman? Brad Sherman here. I believe
+that there were only 3 minutes of Democratic opening statements
+with the idea that the subcommittee chair on the Democratic
+side would be called as well. That's what I was told by your
+staff.
+ Chairwoman Waters. Thank you very much. If that is the
+order that has been organized, I will cease my introductions,
+and I will call on you, Mr. Sherman, to please go ahead and
+make an opening statement. Thank you.
+ Mr. Sherman. Thank you so much.
+ Back in the day, the law school professor would create an
+exam where he weaved together a story that would exemplify each
+of the issues in that area of the law. But never did the
+professor do as good a job as the GameStop saga, which
+identifies most of the issues facing our capital markets.
+ Short selling: should there be limits or required
+additional disclosures?
+ What do we do with market participants, whether they be on
+Reddit or on Wall Street, who are shorting a stock or buying a
+stock for the purpose of influencing its price?
+ What is this payment for order flow model?
+ And what does it mean when some participants get best
+execution and some get enhanced best executions and price-
+enhanced best execution?
+ And are all traders being treated fairly and is payment for
+order flow free to the consumer?
+ We need to look at the plumbing where it takes 2 days to
+settle a transaction, but also why is it the broker's capital
+rather than the customer's capital that is posted during the 2-
+day period?
+ And finally, we need to look at the gamification and
+glorification of high-frequency trading.
+ I thank the chairwoman for the time. And I hope that in the
+months to come, we will have several hearings to explore these
+issues and that we're able to pass legislation this year to
+deal with each of them.
+ And I yield back.
+ Chairwoman Waters. Thank you.
+ The Chair now recognizes the gentleman from Texas, Mr.
+Green, who is also the Chair of our Subcommittee on Oversight
+and Investigations, for 1 minute.
+ Mr. Green. Thank you very much, Madam Chairwoman. I greatly
+appreciate the opportunity to express some concerns that I
+have.
+ It is a fact that Citadel Securities has paid over $100
+million in penalties. And my concern is this: It deals with
+whether we can allow a market maker's profit from misleading
+clients and improperly trading ahead of clients to become
+something as simple as the cost of doing business. The risk of
+punishment for violations must always exceed the rewards to
+deter the risk.
+ I'm concerned, and my hope is that we'll get some
+additional intelligence on how these punishments have impacted
+the rewards that have been received.
+ I yield back.
+ Chairwoman Waters. Thank you very much.
+ And I will go back to the introduction of our witnesses. I
+left off with Jennifer Schulp, the director of financial
+regulation studies at the Cato Institute.
+ Each of the witnesses will have 5 minutes to summarize your
+testimony. You should be able to see a timer on your screen
+that will indicate how much time you have left, and a chime
+will go off at the end of your time. I would ask you to be
+mindful of the timer and quickly wrap up your testimony if you
+hear the chime.
+ And without objection, your written statements will be made
+a part of the record.
+ Now, before we begin with your oral testimonies, I would
+like to swear in the witnesses. I will call each of your names
+individually to respond.
+ Would you please raise your hands?
+ Do you solemnly swear to affirm that the testimony you will
+give for this committee in the matters now under consideration
+will be the truth, the whole truth, and nothing but the truth,
+so help you God?
+ Mr. Tenev?
+ Mr. Tenev. I do.
+ Chairwoman Waters. Mr. Griffin?
+ Mr. Griffin. I do.
+ Chairwoman Waters. Mr. Plotkin?
+ Mr. Plotkin. I do.
+ Chairwoman Waters. Mr. Huffman?
+ Mr. Huffman. I do.
+ Chairwoman Waters. Mr. Gill?
+ Mr. Gill. I do.
+ Chairwoman Waters. Ms. Schulp?
+ Ms. Schulp. I do.
+ Chairwoman Waters. Thank you very much.
+ Let the record show that all of the witnesses have answered
+in the affirmative. We will now begin with their oral
+testimony.
+ Mr. Tenev, you are now recognized for 5 minutes to present
+your oral testimony.
+
+TESTIMONY OF VLADIMIR TENEV, CHIEF EXECUTIVE OFFICER, ROBINHOOD
+ MARKETS, INC.
+
+ Mr. Tenev. Chairwoman Waters, Ranking Member McHenry,
+members of the committee, my name is Vlad Tenev and I'm the
+chief executive officer and co-founder of Robinhood. Thank you
+for the invitation to speak about Robinhood and the millions of
+people we serve.
+ Almost 8 years ago, Baiju Bhatt and I founded Robinhood. We
+believed then, as we do now, that the financial system should
+be built to work for everyone, not just a select few. We
+dreamed of making investing more accessible, especially for
+people without a lot of money. The stock market is a powerful
+wealth creator in which more than half of U.S. households
+participate.
+ Chairwoman Waters. Mr. Tenev, I would like you to use your
+limited time to talk directly to what happened on January 28th
+and your involvement in it.
+ Mr. Tenev. Certainly.
+ Mr. McHenry. Madam Chairwoman, the witness has the
+opportunity to give their own testimony.
+ Chairwoman Waters. Excuse me. You are not recognized.
+ Mr. McHenry. [inaudible]--time for your questioning.
+ Chairwoman Waters. You are not recognized.
+ Mr. Tenev, please go right ahead and speak directly to the
+question.
+ Mr. Tenev. We created Robinhood to economically empower all
+Americans by opening financial markets to them.
+ I was born in Bulgaria, a country with a financial system
+that was on the verge of collapse. At the age of 5, I
+immigrated with my family to America in search of a better
+life. I have benefited from all that America has to offer, and
+Robinhood's mission to democratize finance for all has a very
+special significance for me.
+ Robinhood's platform allows people from all backgrounds to
+invest with no account minimums and zero commissions. Contrary
+to some very misleading and highly uninformed reports, we see
+evidence that most of our customers are investing for the long
+term. With features like fractional shares, dividend
+reinvestment, and recurring investments, our customers can
+start with small amounts and grow their investments in blue
+chip stocks and exchange-traded funds (ETFs) over time.
+ We've always recognized the responsibility that comes with
+helping people invest. We'll continue to enhance our
+educational platform to help customers no matter where they are
+in their financial journey. Hundreds of free educational
+resources are available to everyone on our Learn website right
+now.
+ While markets fluctuate, the total value of our customers'
+assets on Robinhood exceeds the net amount of money they have
+deposited with us by over $35 billion. This tells me that our
+business model is working for everyday Americans, the Robinhood
+community. Many people say that Robinhood has helped them to
+pay car loans, reduce student loan debt, meet daily bills, and
+save for the future, and we're proud to serve them.
+ You've invited me today to discuss the events of last
+month, and I welcome this opportunity.
+ In late January, many brokerage firms saw a massive
+increase in trading activity in a handful of stocks. Prices
+were moving dramatically day to day, even hour to hour.
+ One specific day, January 28th, proved to be a completely
+unprecedented event. The spike in trading activity and
+volatility meant that Robinhood Securities, our clearing
+broker, had to hold the line and post additional firm capital
+as collateral to support our clearinghouse deposit demands.
+ To put it in perspective, on January 28th, our daily
+deposit requirement was 10 times more than on January 25th.
+ As a result, Robinhood Securities, along with many other
+firms, imposed temporary trading restrictions on certain
+securities. We began allowing limited buys of these securities
+the following day, and we have since lifted the restrictions
+entirely.
+ There are two points I want to make clear about these
+temporary restrictions.
+ First, Robinhood Securities put the restrictions in place
+in an effort to meet increased regulatory deposit requirements,
+not to help hedge funds. We don't answer to hedge funds. We
+serve the millions of small investors who use our platform
+every day to invest.
+ Second, Robinhood immediately secured additional funds.
+Altogether, through capital raising and other measures, we've
+increased our liquidity by more than $3 billion to cushion
+ourselves against increased collateral requirements and related
+market stress in the future.
+ Despite the unprecedented market conditions in January, at
+the end of the day, what happened is unacceptable to us. To our
+customers, I'm sorry, and I apologize. Please know that we are
+doing everything we can to make sure this won't happen again.
+ And I want to highlight one more thing. The existing 2-day
+period to settle trades exposes investors and the industry to
+unnecessary risk. There is no reason why the greatest financial
+system in the world cannot settle trades in real time.
+ I believe we can and should act now to deploy our
+intellectual capital and our engineering resources to move to
+real-time settlement. Together, we can solve this.
+ Before I close, I want to sincerely thank the millions of
+customers who continue to use Robinhood to access the markets
+every day. We are grateful and committed to you.
+ Members of the committee, I appreciate the opportunity to
+answer your questions.
+ [The prepared statement of Mr. Tenev can be found on page
+114 of the appendix.]
+ Chairwoman Waters. Mr. Griffin, you are now recognized for
+5 minutes to present your oral testimony.
+
+ TESTIMONY OF KENNETH C. GRIFFIN, CHIEF EXECUTIVE OFFICER,
+ CITADEL LLC
+
+ Mr. Griffin. Chairwoman Waters, Ranking Member McHenry, and
+distinguished members of the committee, thank you for the
+opportunity to testify today on the recent market events.
+ The U.S. capital markets are the envy of the world. Our
+nation's ability to allocate capital to its best and highest
+use creates jobs, drives innovation, and fuels our economy.
+America's retail investors play an important role in our
+capital markets.
+ According to Gallup, about 55 percent of Americans own
+stock right now. Citadel Securities, as the largest market
+maker in the U.S. equities market, executes more trades on
+behalf of retail investors than any other firm.
+ As I will discuss shortly, Citadel Securities played an
+important role in meeting the needs of retail investors during
+the week of January 24th.
+ Before doing so, I want to be perfectly clear: We had no
+role in Robinhood's decision to limit trading in GameStop or
+any of the other, ``meme,'' stocks. I first learned of
+Robinhood's trading restrictions only after they were publicly
+announced. All of us at Citadel Securities are committed to the
+healthy functioning of the U.S. equities markets.
+ I first participated in the financial markets as a retail
+investor. In the late 1980s, while attending college, I traded
+stocks and options from my dorm room.
+ My passion for investing led to my founding of Citadel in
+1990. Today, Citadel is one of the world's leading alternative
+investment managers. Our capital partners include pension
+plans, colleges, hospitals, foundations, and research
+institutions.
+ In 2002, my partners and I founded Citadel Securities.
+Today, Citadel Securities is one of the world's preeminent
+market makers. We've been a leader in using technology to
+transform our markets, particularly for retail investors.
+Citadel Securities invests hundreds of millions of dollars each
+year to serve the needs of our customers.
+ In the last week of January, the importance of this
+investment was on full display. During the period of frenzied
+retail equities trading, Citadel Securities was able to provide
+continuous liquidity every minute of every trading day.
+ When others were unable or unwilling to handle the heavy
+volumes, Citadel Securities was there. On Wednesday, January
+27th, we executed 7.4 billion shares on behalf of retail
+investors.
+ To put this into perspective, on that day, Citadel
+Securities executed more shares for retail investors than the
+entire average daily volume of the entire U.S. equities market
+in 2019. The magnitude of the orders routed to Citadel
+Securities reflects the confidence of the retail brokerage
+community in our firm's ability to deliver in all market
+conditions and underscores the critical importance of our
+resilient and stable systems.
+ I could not be more proud of our team at Citadel
+Securities--my colleagues who were committed to ensuring that
+the interests of America's retail investors were preserved
+during this extraordinary period.
+ Once again, I appreciate the opportunity to appear today,
+and I look forward to answering your questions.
+ [The prepared statement of Mr. Griffin can be found on page
+99 of the appendix.]
+ Chairwoman Waters. Thank you, Mr. Griffin.
+ Mr. Plotkin, you are now recognized for 5 minutes to
+present your oral testimony.
+
+ TESTIMONY OF GABRIEL PLOTKIN, CHIEF EXECUTIVE OFFICER, MELVIN
+ CAPITAL MANAGEMENT LP
+
+ Mr. Plotkin. Chairwoman Waters, Ranking Member McHenry,
+members of the committee, I would like to thank you for this
+opportunity to share Melvin Capital's perspective on the recent
+trading activities in GameStop.
+ As the founder and chief investment officer of Melvin
+Capital, I'm humbled by these unprecedented events. Many
+investors on all sides have experienced losses. I am here today
+to share my own personal experience and to be helpful in this
+conversation.
+ I understand that part of the focus of this hearing is the
+decision of stock trading platforms to limit trading in
+GameStop. I want to make clear at the outset that Melvin
+Capital played absolutely no role in those trading platform
+decisions. In fact, Melvin closed out all of its positions in
+GameStop days before the platforms put those limitations in
+place. Like you, we learned about those limits from news
+reports.
+ I also want to make clear at the outset that, contrary to
+many reports, Melvin Capital was not, ``bailed out,'' in the
+midst of these events. Citadel proactively reached out to
+become a new investor, similar to the investments that others
+make in our fund. It was an opportunity for Citadel to buy low
+and earn returns for its investors if and when our fund's value
+went up.
+ To be sure, Melvin was managing through a difficult time,
+but we always had margin access and we were not seeking a cash
+infusion.
+ I'm here testifying today far removed from my background. I
+grew up in a middle-class family in Portland, Maine. I went to
+a public high school. I studied hard and got into a good
+college. Upon graduation, I did not have a job.
+ Today, I'm married with four children, and my time is spent
+with my family, and on Melvin Capital, which I founded 6 years
+ago. I named Melvin after my grandfather who ran a convenience
+store. I wanted the firm to represent his values: integrity;
+hard work; taking care of customers and employees; and
+commitment to excellence.
+ Melvin Capital manages a hedge fund. Investors such as
+academic institutions, medical research and other charitable
+foundations, pension funds, retirees, and others, invest with
+us. We have 36 employees and hundreds of investors, and I feel
+a personal duty to all of them.
+ Melvin specializes in the consumer and technology sector,
+including companies like GameStop, AutoZone, and Expedia.
+ Most of our investments are long. In other words, we buy
+stock in companies that create jobs, grow the economy, and
+develop new products for consumers. We do this after extensive
+fundamental research, sometimes literally for years.
+ When our research convinces us that a company will grow
+relative to expectations, we make a long-term investment. When
+our research suggests a company will not live up to
+expectations, and its stock price is overvalued, we might short
+a stock.
+ Like with our long positions, our practice is to short a
+stock for the long term after extensive research. We also short
+stocks because when the markets go down, we have a duty to
+protect our investors' capital. There are laws governing
+shorting stock, and, of course, we always follow them.
+ In addition, it's very important to understand that
+absolutely none of Melvin's short positions are part of any
+effort to artificially depress or manipulate downward the price
+of a stock. Nothing about our short position prevents a company
+from achieving its objectives. It is just Melvin's view about
+whether it will.
+ Specific to GameStop, we had a research-supported view well
+before the recent events. In fact, we've been shorting GameStop
+since Melvin's inception 6 years earlier, because we believed
+and still believe that its business model--selling new and used
+video games in physical stores--is being overtaken by digital
+downloads through the internet.
+ And that trend only accelerated in 2020 when, because of
+the pandemic, people were downloading video games at home. As a
+result, the gaming industry had its best year ever, but
+GameStop had significant losses.
+ In January 2021, a group on Reddit began to make posts
+about Melvin's specific investments. They took information
+contained in our SEC filings and encouraged others to trade in
+the opposite direction. Many of these posts were laced with
+anti-Semitic slurs directed at me and others. The posts said
+things like, ``It's very clear that we need a second Holocaust;
+the Jews can't keep getting away with this.'' Others sent
+similarly profane and racist text messages to me.
+ In the frenzy during January, GameStop stock rose from $17
+to a peak of $483. I do not think anyone would claim that the
+price had any relationship to the intrinsic value of the
+business.
+ The unfortunate part of this episode is that ordinary
+investors who were convinced by a misleading frenzy to buy
+GameStop at $100, $200, or even $483 have now lost significant
+amounts.
+ When this frenzy began, Melvin started closing out its
+position in GameStop at a loss, not because our investment
+thesis had changed, but because something unprecedented was
+happening. We also reduced many other Melvin positions at
+significant losses, both long and short, that were the subject
+of similar posts.
+ I'm personally humbled by what happened in January.
+Investors in Melvin suffered significant losses. It is now our
+job to earn it back. And while I do not think that anyone could
+have anticipated these events, I've learned much from them and
+I'm taking steps to protect our investors from anything like
+this happening in the future.
+ I look forward to answering your questions.
+ [The prepared statement of Mr. Plotkin can be found on page
+105 of the appendix.]
+ Chairwoman Waters. Thank you, Mr. Plotkin.
+ Mr. Huffman, you are now recognized for 5 minutes to
+present your oral testimony.
+
+ TESTIMONY OF STEVE HUFFMAN, CHIEF EXECUTIVE OFFICER AND CO-
+ FOUNDER, REDDIT, INC.
+
+ Mr. Huffman. Thank you. Madam Chairwoman, Mr. Ranking
+Member, honorable members of the committee, my name is Steve
+Huffman. I am the co-founder and CEO of Reddit, and I am
+pleased to talk with you today about how Reddit works and what
+we have seen on our site in the past few weeks.
+ Reddit's mission is to bring community and belonging to
+everyone in the world. What started in 2005 as a single
+community has since evolved into a vast network of many
+thousands of communities. They range from standard topics like
+news, sports, and politics, to internet culture, and support.
+For example, our unemployment community has become a source of
+support for hundreds of thousands of Americans who have turned
+to Reddit after losing their jobs during the pandemic.
+ Our communities are created and run by our users. Because
+of this, we describe Reddit as the most human place on the
+internet. Although we are small compared to the largest
+platforms, our communities provide an online home for millions
+of people every day.
+ I'd like to share a bit about how content moderation on
+Reddit works. Reddit's moderation system starts with our
+content policy, the platform-wide rules which all communities
+must follow. Among other things, these rules prohibit hate,
+harassment, bullying, and illegal activity on Reddit, and
+they're enforced by Reddit's Anti-Evil team, which is composed
+of engineers, data scientists, and other specialists.
+ This team also ensures the integrity of the site, and we
+have continuously honed our methods to stay ahead of bad actors
+to protect Reddit from manipulation, spam, and other threats.
+ This team searched high and low for the specific comments
+mentioned in the previous testimony or anything like it. The
+closest we could find was a single comment that received no
+votes and was deleted within 5 minutes. Such speech is not
+tolerated on Reddit, and we will, of course, investigate any
+further claims of this nature.
+ Centralized moderation is common, but Reddit additionally
+uses a governance structure akin to a Federal democracy, where
+the aforementioned policies and teams represent the Federal
+Government, and the communities themselves represent States.
+ All communities, or subreddits, are created by users that
+we call moderators. They set the community's rules, which may
+be as strict as they like as long as they are not in conflict
+with the platform-wide policies, and they have a variety of
+tools to enforce these rules independently.
+ Moderators are not paid employees, but rather users who are
+passionate about their communities. They have the context and
+judgement to make decisions no algorithm could.
+ The members of each community contribute both the content
+itself and the ranking of it by voting up or down on any post
+or comment. Unlike other platforms where a submission has a
+built-in audience through the author's follower count, every
+piece of content on Reddit, no matter how famous the author,
+starts at zero and has to earn its visibility.
+ Through their votes, the community itself enforces not just
+the explicit rules of their community, but also the unwritten
+rules that define their culture. This layered approach has
+helped our users create the most authentic communities online.
+ The specific community we'd like to talk about today is
+WallStreetBets. It's important to understand that
+WallStreetBets is one of many finance- and investing-related
+communities on Reddit. This particular community specializes in
+higher-risk, higher-reward investments than what you might find
+in other, more conservative financial communities on Reddit,
+with such names as personal finance, investing, and financial
+independence.
+ I will stress that WallStreetBets is, first and foremost, a
+real community. The self-deprecating jokes, the memes, the
+crass-at-times language all reflect this. If you spend any time
+on WallStreetBets, you'll find a significant depth to this
+community exhibited by the affection its members show one
+another. They are just as quick to support a fellow member
+after a big loss as they are to celebrate after a big gain.
+ A few weeks ago, we saw the power of community in general,
+and of this community in particular, when the traders of
+WallStreetBets banded together at first to seize an investment
+opportunity not usually accessible to retail investors, but
+later, more broadly, to defend all retail investors against the
+criticism of the financial establishment.
+ With the increase in attention, WallStreetBets
+unsurprisingly faced a surge in traffic and new users. At
+Reddit, our first duty in these situations is to our
+communities, and our role in this moment was to keep
+WallStreetBets online.
+ Working around the clock, we scaled our infrastructure,
+made technology changes to help this community withstand the
+onslaught of traffic, and we acted as diplomats to help resolve
+conflicts within WallStreetBets' leadership.
+ We have since analyzed activity in WallStreetBets to
+determine whether bots, foreign agents, or other bad actors
+played a significant role. They have not.
+ In every metric we checked, the activity in WallStreetBets
+was well within normal parameters, and its moderation tools are
+working as expected. We will, of course, cooperate with valid
+legal requests from Federal and State regulators. That said, we
+do believe that this community was well within the bounds of
+our own policies.
+ To conclude, I would like to reiterate why it is important
+to protect online communities like WallStreetBets.
+WallStreetBets may look sophomoric or chaotic from the outside,
+but the fact that we're here today means they've managed to
+raise important issues about fairness and opportunity in our
+financial system. I am proud they use Reddit to do so.
+ Thank you, and I look forward to your questions.
+ [The prepared statement of Mr. Huffman can be found on page
+102 of the appendix.]
+ Chairwoman Waters. Thank you very much, Mr. Huffman.
+ Mr. Gill, you are now recognized for 5 minutes to present
+your oral testimony.
+
+ TESTIMONY OF KEITH PATRICK GILL, GAMESTOP INVESTOR
+
+ Mr. Gill. Thank you, Chairwoman Waters, Ranking Member
+McHenry, and members of the committee. I'm happy to discuss
+with the committee my purchases of GameStop shares and my
+discussions of their fair value on social media.
+ It is true that my investment in that company multiplied in
+value many times. For that, I feel enormously fortunate. I also
+believe the current price of the shares demonstrates that I've
+been right about the company.
+ There are a few things I am not. I am not a cat. I am not
+an institutional investor. Nor am I a hedge fund. I do not have
+clients and I do not provide personalized investment advice for
+fees or commissions. I'm just an individual whose investment in
+GameStop and posts on social media were based upon my own
+research and analysis.
+ I grew up in Brockton, Massachusetts. My family was not
+wealthy. My father was a truck driver and my mom was a
+registered nurse. I was one of 3 kids, and the first in my
+family to earn a 4-year college degree when I graduated from
+Stonehill College in 2009. That was not a good time to be
+looking for a job.
+ From 2010 to 2017, I worked for a few start-up companies,
+but there were significant periods when I was unemployed. I
+took an interest in the stock market, and even though I had
+very little money, I used those times to educate myself and
+learn more about investing.
+ In 2019, after nearly 2 years unemployed, I accepted a
+marketing and financial education job at MassMutual. My wife
+Caroline and I were thrilled that I had an income and benefits.
+My job was to help develop financial education classes that
+advisers could present to prospective clients. I was not a
+stockbroker or a financial adviser. I did not talk to clients,
+and I did not recommend stocks for them to buy.
+ Before and after I joined MassMutual, I studied and
+followed stocks. One of those was GameStop. In early June of
+2019, the price of GameStop stock declined below what I thought
+was its fair value. I invested in GameStop in 2019 and 2020
+because, as I studied the company, I became more and more
+confident in my analysis.
+ Two important factors, based entirely on publicly available
+information, gave me confidence that GameStop was undervalued.
+First, the market was underestimating the prospects of
+GameStop's legacy business and overestimating the likelihood of
+bankruptcy. I grew up playing video games and shopping at
+GameStop, and I plan to continue shopping there. GameStop
+stores still provide real value to consumers and reliable
+revenue for GameStop.
+ Second, I believe that GameStop has the potential to
+reinvent itself as the ultimate destination for gamers within
+the rapidly-growing $200 billion gaming industry. GameStop has
+a unique opportunity to pivot toward a technology-driven
+business. By embracing the digital economy, GameStop may be
+able to find new revenue streams that vastly exceed the value
+of its business. I am hardly the only person who has advocated
+these points.
+ When I wrote and spoke about GameStop in social media with
+other individual investors, our conversations were no different
+from people in a bar or on a golf course or at home talking or
+arguing about a stock.
+ Hedge funds and other Wall Street firms have teams of
+analysts working together to compile research and analyze
+shares of companies. Individual investors do not have those
+resources.
+ Social media platforms like Reddit, YouTube, and Twitter
+are leveling the playing field. The idea that I used social
+media to promote GameStop stock to unwitting investors and
+influence the market is preposterous. My posts did not cause
+the movement of billions of dollars into GameStop shares.
+ It is tragic that some people lost money, and my heart goes
+out to them. But what happened in January just demonstrates,
+again, that investing in public securities is extremely risky.
+ As I said earlier, I consider myself and my family
+fortunate with our investment. When the stock price broke $20
+in December, I knew my investment was a success. I was so happy
+to visit my family in Brockton for the holidays. The money
+would go such a long way for us.
+ We had an incredibly difficult 2020. Most difficult was the
+tragic and unexpected loss of my sister, Sara, in June. I am
+grateful to be in a position to give back to and support my
+family.
+ As for what happened in January, others will have to
+explain it. It's alarming how little we know about the inner
+workings of the market. And I am thankful that this committee
+is examining what happened.
+ I also want to say that I support retail investors' right
+to invest in what they want, when they want. I support the
+right of individuals to send a message based on how they
+invest.
+ As for me, I like the stock. I'm as bullish as I've ever
+been on a potential turnaround for GameStop, and I remain
+invested in the company.
+ Thank you. Cheers, everyone.
+ [The prepared statement of Mr. Gill can be found on page 94
+of the appendix.]
+ Chairwoman Waters. Thank you, Mr. Gill.
+ Ms. Schulp, you are now recognized for 5 minutes to present
+your oral testimony.
+
+TESTIMONY OF JENNIFER J. SCHULP, DIRECTOR, FINANCIAL REGULATION
+ STUDIES, CATO INSTITUTE
+
+ Ms. Schulp. Chairwoman Waters, Ranking Member McHenry, and
+distinguished members of the Committee on Financial Services,
+my name is Jennifer Schulp, and I'm the director of financial
+regulation studies at the Cato Institute's Center for Monetary
+and Financial Alternatives. Thank you for the opportunity to
+take part in today's hearing.
+ Before addressing the GameStop phenomenon specifically, I'd
+like to talk about the participation of retail or individual
+investors in our public equities markets. Retail participation
+has ebbed and flowed over the years, but the recent upward
+trend accelerated sharply during the pandemic. Most point to
+zero-commission trading, but several other factors also likely
+attracted retail investors, including fractional share trading,
+low account minimums, and easy app-based platforms. More time
+at home during the pandemic probably even played a role.
+ Retail participation in our equities markets is important.
+The fact that retail investors behave differently from
+institutional ones, and differently from each other, can be
+particularly valuable in times of market stress. In fact,
+individual investors may have helped stabilize the market in
+March 2020.
+ Importantly, investing in the stock market also provides a
+path to wealth for individual investors. But stock ownership
+traditionally has been skewed towards the already-wealthy and
+it is highly correlated with race, education, and age.
+ Retail investors making up this new surge are different.
+Recent research by the Financial Industry Regulatory Authority
+'s (FINRA's) Investor Education Foundation, and the National
+Opinion Research Center (NORC) at the University of Chicago
+found that investors who opened accounts for the first time in
+2020 were younger, had lower incomes, and were more racially
+diverse. These new investors also held lower account balances.
+This may portend, as one of the researchers noted, ``a shift
+towards more equitable investment participation.''
+ These new opportunities for individuals to grow their
+wealth should be welcomed and expanded, not restricted.
+ Now, I'll turn to GameStop. At the outset, I will note that
+it is difficult to analyze the impact of the trading in
+GameStop and other stocks because many facts are unknown.
+ But some things seem clear. Importantly, the temporary
+volatility in these stocks did not present a systemic risk to
+market function. As the Treasury Department recognized, the
+market's, ``core infrastructure was resilient during high
+volatility and heavy trading volume.''
+ This is not surprising. Despite the huge trading volume and
+rapid increase in value, only a small part of the market was
+affected, and spillover effects on the wider market were mild
+and short-lived.
+ The fact that GameStop traded temporarily and perhaps still
+trades above fair estimates of the company's value is not in
+itself a reason for concern. Stock prices move in and out of
+alignment all the time and markets are no strangers to bubbles.
+If a company is valued by the market differently than a review
+of its fundamentals suggests, it might indicate that the
+analysis is missing relevant information about a company's
+prospects, or it might indicate that the company's stock price
+is due for a correction.
+ The market's mechanisms, including the tool of short
+selling, generally work well to handle these circumstances.
+Stepping in to prevent trading where a stock price moves
+contrary to conventional wisdom could deprive the market of
+important information.
+ The SEC, among a host of others, is reviewing the relevant
+trading and conducting a study of the events. The SEC will have
+access to far more information than has been made publicly
+available, and I believe it has the tools necessary to address
+any harmful misconduct that may have occurred.
+ I cannot opine on whether any regulatory changes are
+warranted on this incomplete record. I tend to believe the
+answer will be no, in light of the minimal impact on the
+market's function, but if regulators learn more, there may be
+areas identified for improvement.
+ By no means, though, should these events lead to
+restrictions on retail investors' access to the markets.
+ Thank you, and I welcome any questions that you may have.
+ [The prepared statement of Ms. Schulp can be found on page
+108 of the appendix.]
+ Chairwoman Waters. Thank you, Ms. Schulp.
+ I now recognize myself for 5 minutes for questions.
+ The market volatility surrounding GameStop and other
+securities has highlighted how many people feel that the cards
+are stacked against them, and that market participants, like
+our witnesses, hide the ball.
+ Mr. Tenev, you explained that Robinhood restricted
+transactions in certain securities to meet demands coming from
+your clearinghouse, and yet, on January 28th, you represented
+to the media that there was no liquidity problem.
+ Isn't it true that being concerned about having enough
+capital to meet deposit requirements--isn't that a liquidity
+problem? Could you just answer yes or no?
+ Mr. Tenev. Chairwoman Waters, I appreciate the opportunity
+to address that.
+ Chairwoman Waters. Just yes or no.
+ Mr. Tenev. We always felt comfortable with our liquidity
+and the additional capital that Robinhood raised--
+ Chairwoman Waters. Please answer yes or no.
+ Mr. Tenev. We always felt--
+ Chairwoman Waters. Reclaiming my time, I don't have time, I
+just need a yes-or-no answer.
+ Mr. Tenev. I stand by my statement. The additional capital
+we raised wasn't to meet capital requirements or deposit
+requirements--
+ Chairwoman Waters. Does the gentleman--
+ Mr. Tenev. Excuse me?
+ Chairwoman Waters. I'm reclaiming my time.
+ This liquidity problem had real consequences for your
+customers, but I wonder if they were all that surprised.
+Between December 2019 and December 2020, Robinhood customers
+experienced monetary losses due to system outages. Customer
+accounts were reportedly compromised. The firm repeatedly
+failed at its best execution obligations, and it misled its
+customers regarding its revenue sources. It seems that retail
+investors often get a bad deal at Robinhood.
+ Mr. Tenev, while you testified today that, ``Robinhood's
+customers benefit greatly from payment for order flow,'' in
+December 2020, the SEC charged Robinhood for not disclosing
+that it was getting paid to send customer trades to Citadel
+Securities and other market makers and for not seeking the best
+terms for its customers' orders. Robinhood provided such
+inferior trade prices that it cost your customers over $34
+million.
+ Is it your testimony that after Robinhood paid the SEC $65
+million to settle those charges, this conflict of interest is
+in your customers' best interest, yes or no?
+ Mr. Tenev. Chairwoman Waters, first, let me say, regulatory
+compliance is at the center of everything that we do. We've
+made mistakes in the past. I'm not claiming that I'm perfect--
+ Chairwoman Waters. But could you answer yes or no to that
+question?
+ Mr. Tenev. Citadel Securities is an important counterparty.
+Nobody's denying that. The reason that--
+ Chairwoman Waters. The gentleman cannot answer yes or no.
+I'm reclaiming my time.
+ Meanwhile, Mr. Griffin, Citadel's role in this event also
+raises significant questions for policymakers. Citadel
+Securities pays Robinhood tens of millions of dollars to
+process trades by Robinhood's customers. This relationship
+gives Citadel Enterprise key nonpublic information as to
+direction and volume of trades by retail investors. Your firm
+makes use of private exchanges called dark pools and other off-
+exchange trading to trade large sizes without moving the market
+against you.
+ In fact, at some point last month, 50 percent of all trades
+occurred in dark pools or via over-the-counter (OTC) off-
+exchange trades. Your business strategy is designed
+intentionally to undermine market transparency and skim profits
+from companies and other investors. One problem, though, Mr.
+Griffin, is that we don't really know how central your forum
+has become to the capital markets,
+ Mr. Griffin, does Citadel handle 47 percent of the U.S.-
+listed retail volume? Please, yes or no?
+ Mr. Griffin. Excuse me, Chairwoman Waters. What percentage?
+I couldn't hear that number.
+ Chairwoman Waters. 47 percent.
+ Mr. Griffin. Chairwoman Waters, to the best--
+ Chairwoman Waters. Yes or no?
+ Mr. Griffin. To the best of my knowledge, we handle in
+excess of roughly 40 percent of all retail volumes.
+ Chairwoman Waters. Thank you very much. Reclaiming my time,
+Mr. Griffin, on January 27th, Citadel executed 7.4 billion
+shares for retail investors, which would be more trades than
+the average daily volume of the entire United States equities
+market in 2019, yes or no?
+ Mr. Griffin. Chairwoman Waters, that was in my written and
+oral testimony.
+ Chairwoman Waters. Thank you very much.
+ And with that, I now recognize the distinguished ranking
+member, Mr. McHenry, for 5 minutes for questions.
+ Mr. McHenry. Thank you.
+ Mr. Tenev, I'm going to come to you first. I just want to
+get to what happened on that day in January.
+ So, let's take a step back here. You get a call in the
+middle of the night, according to what I've heard you say in
+interviews, and based on that conversation with your compliance
+team, you decided to halt the buying of GameStop stock.
+ People were furious. We'll get into the regulations and the
+settlement parts of that today. We will get to that. But this
+is what I think needs to be answered about your decision. Why
+did Robinhood restrict the buying but not the selling of
+GameStop? And why did folks get locked out on the buy side
+only?
+ Mr. Tenev. Ranking Member McHenry, I appreciate the
+opportunity to address that.
+ The reason that Robinhood--first of all, let me say,
+Robinhood is always committed to providing access. It's in our
+name. It's in everything that we do.
+ The decision to restrict GameStop and other securities was
+driven purely by deposit and collateral requirements imposed by
+our clearinghouses. So, buying--
+ Mr. McHenry. But why--
+ Mr. Tenev. --securities--
+ Mr. McHenry. But why--
+ Mr. Tenev. --in pieces are [inaudible] requirements.
+Selling does not.
+ Moreover, preventing customers from selling is a very
+difficult and painful experience, where customers are unable to
+access their money. So, we don't want to impose that type of
+experience on our customers unless we have no other choice.
+ And even though I recognize that customers were very upset
+and disappointed that we had to do this, I imagine it would
+have been significantly worse if we had prevented customers
+from selling.
+ Mr. McHenry. Okay. Let me ask this question: Is payment for
+order flow legal?
+ Mr. Tenev. Yes. Payment for order flow is legal and
+regulated and is a common industry practice.
+ Mr. McHenry. And is this disclosed to users of your app?
+ Mr. Tenev. Yes. Payment for order flow is disclosed in
+multiple places.
+ Mr. McHenry. Okay.
+ Mr. Tenev. Moreover, payment for order flow enables
+commission-free trading. And that's why it's become the
+industry standard model as other brokerages have replicated our
+model and started offering commission-free trading to their
+customers as well.
+ Mr. McHenry. Okay. So to that, to this greater point of
+what happened that day and the model that you're using, let's
+be crystal clear. That decision you made to restrict the buying
+but not the selling of GameStop was based--was it based on
+pressure from anyone on the witness panel here today?
+ Mr. Tenev. Not at all. Zero pressure from anyone. It was a
+collateral depository requirement decision made by our
+Robinhood Securities president, and we stand by it.
+ Mr. McHenry. Let me get in this question. You want to
+democratize finance. You want to open up Wall Street to retail
+investors. You say that Robinhood's mission is to democratize
+finance for all. So, let's talk about that.
+ Yes or no, can a Robinhood customer invest in Robinhood,
+the company?
+ Mr. Tenev. Robinhood is currently a private company, so
+that's not possible, no.
+ Mr. McHenry. Do you mean to tell me that the people who use
+your platform, who make you a successful company, and I would
+say directly contribute to your company's exponential growth
+and success, don't get the same access to equity shares as a
+Robinhood employee or your institutional investors. Is that
+correct?
+ Mr. Tenev. Currently, that is correct, yes.
+ Mr. McHenry. Okay.
+ Ms. Schulp, let me pivot to you. Why is that? Why is it
+that everyday investors on the Robinhood app, people that I
+would argue contributed to its success, can't invest in
+Robinhood itself?
+ Ms. Schulp. The SEC limits a lot of investment in private
+companies to those folks who are known as accredited investors.
+And to become an accredited investor, you have to meet a wealth
+test of earning at least $200,000 a year or having a net worth
+of over a million dollars. The vast majority of people in this
+country don't meet that standard and are unable to invest in
+most private companies.
+ Mr. McHenry. Okay. So, let me just be clear on this.
+ Mr. Tenev, I don't blame you for the restriction you've put
+on your customers not being able to invest in equity. I'd like
+to have more opportunity to ask Mr. Gill his thoughts on this.
+But let me just say this: I don't fault you for the inequitable
+regulatory structure that D.C. has created, but I think we need
+to clear this up.
+ Final thing, Madam Chairwoman. For the record, I'd like to
+submit a letter from the DTCC, which is the clearing company
+that was not on the panel today, and your staff has this
+letter.
+ Chairwoman Waters. Without objection, it is so ordered.
+ Mr. McHenry. Thank you all, and I look forward to getting
+to the facts of the matter--
+ Chairwoman Waters. The gentleman's time has expired.
+ Mrs. Maloney is now recognized for 5 minutes.
+ Mrs. Maloney. Thank you, Chairwoman Waters and Ranking
+Member McHenry, for convening this hearing. I hope today's
+hearing sheds light on how our markets are working, or in many
+cases, are not working for smaller investors and ways we can
+fix that.
+ The events of late January saw tremendous volatility and
+stock prices that were totally divorced from market
+fundamentals. The whole enterprise was viewed by some as a
+giant video game, trading stocks instead of properties in
+monopoly money. But it is not all fun and games because people
+can lose their life savings, their hard-earned cash, and
+tragically, last summer, we know of at least one suicide linked
+to potential trading losses.
+ Beyond those possible losses, the actions of Robinhood and
+other trading platforms during the GameStop frenzy caused
+confusion and anger, and undermined investor confidence in the
+fundamental fairness of our capital markets. None of this is
+healthy for our markets or good for investors. 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. Many retail investors woke up on
+January 28th to find that they could no longer buy and sell
+stocks the same way they could in the days prior, and they were
+being treated differently than other market participants who
+could still buy and sell those same stocks. So, I don't blame
+them for thinking that things were stacked against the little
+guy.
+ Mr. Tenev, you stated in your testimony that Robinhood
+restricted trading for certain securities, including GameStop,
+in order to meet your financial requirements with your
+clearinghouse. But when I go to Robinhood's website and the
+blog post you initially released on January 28th, your
+financial requirements with your clearinghouse are not
+mentioned. You only mention market volatility.
+ And when I review the Robinhood customer agreement, you
+don't include specifics on how and when you may decide to
+restrict trading which you did. And you don't include any
+language or disclosures regarding your capital requirements. It
+only includes vague language that at any time, and in its sole
+discretion, Robinhood can restrict trading. In other words, you
+seem to reserve the right to make up the rules as you go along.
+ I have two questions for you. First, do you think you owe
+your customers more disclosure and transparency than you gave
+them?
+ And, second, do you believe your lack of candor with your
+customers might have contributed to the wild speculation and
+confusion that resulted in the aftermath of your trading
+restrictions?
+ Mr. Tenev. Congresswoman, I appreciate the questions.
+ To answer the second question, look. I am sorry for what
+happened. I apologize. And I am 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, we learn from it, and we don't make the same mistakes in
+the future. And Robinhood as an organization will learn from
+this and improve to make sure it doesn't happen again, and I
+will make sure of that.
+ Mrs. Maloney. I expect we will experience future events
+with increased volatility, and Robinhood's recent actions
+appeared arbitrary, which is why I don't blame customers for
+feeling as though they were treated unfairly. Your trading
+restrictions came out of the blue, and your communication was
+not clear.
+ Mr. Tenev, looking forward, what operational changes is
+Robinhood making to better respond to future market volatility,
+to improve transparency with your customers, and to ensure that
+retail customers don't get the rug pulled out from under them
+at the last minute?
+ Mr. Tenev. Thank you for that question, Congresswoman. We
+will be committing to reviewing absolutely everything about
+this, but the $3.4 billion that we raised I think goes a long
+way to cushioning the firm from future market volatility and
+other similar black swan events.
+ And I believe that even throughout this process, we
+improved our risk management processes and strengthened them so
+that the experience customers had that week was much improved
+from Thursday.
+ Chairwoman Waters. Thank you very much.
+ Mr. Tenev. We continue to learn and improve upon this.
+ Chairwoman Waters. Mrs. Wagner, you are recognized for 5
+minutes.
+ Mrs. Wagner. Thank you, Madam Chairwoman. I would like to
+thank our witnesses for testifying today to discuss the late
+January market volatility that took place, along with what I
+hope is a broader discussion on market functions and their
+effect on everyday investors.
+ Since I was very first elected, I have advocated for
+America's Main Street investors and worked tirelessly to ensure
+that all Americans, especially those low- and middle-income
+savers, are given the investment choice, access, and
+affordability that they deserve. Retail investors are the
+strength of our stock market, and I have fought throughout my
+career for their best interests in the financial markets, and
+this hearing today is no different.
+ The advances in financial technology that we have witnessed
+in the last decade have improved the way that Americans and our
+businesses perform financial activities.
+ In just the past year, we have seen retail investors'
+market participation more than double, and I think this is
+great. I believe in the wisdom of the retail investor, and I
+will say that I believe in the First Amendment, too.
+ This increase is attributed to Robinhood and other trading
+brokerages who are lowering account minimums, permitting
+fractional share trading, and implementing zero-commission
+trading. It is critical that Congress focus on reducing
+barriers to market participation, they rarely want to do, let
+me sadly say, and allowing Main Street Americans access to the
+financial instruments that can create long-term investment
+savings.
+ All of these changes have given millions of Americans the
+ability to invest better for their families and their future.
+My hope is that the Majority does not use this hearing as an
+excuse to once again add new Federal regulatory burdens to an
+industry that is already heavily regulated, which would prevent
+people from participating in our capital markets. Letting
+existing regulations work is key, not burdening everyday
+investors with new and more costly barriers to entry.
+ Mr. Tenev, it appears that at the time, your company did
+not have money to meet the collateral requirements for that
+level of trading by your customers. In your view, were the
+collateral requirements from the DTCC unreasonably high, was
+the amount of trading on your platform unforeseeable, or was
+your company undercapitalized, given its risk profile?
+ Mr. Tenev. Thank you for the question, Congresswoman.
+ This event was a Phi Sigma event, which is a 1-in-3.5-
+million event. To put that in context, there have only been
+tens of thousands of stock market days in the history of the
+U.S. stock market, so, a 1-in-3.5-million event is basically
+unmodelable.
+ That said, we can learn from it, and in this particular
+case, our risk management processes worked appropriately to
+keep us in compliance with all of our deposit requirements and
+collateral requirements.
+ Mrs. Wagner. Mr. Tenev, I realize that you are doing a full
+review of your practices and such. I encourage you to do that.
+And certainly, communication with your investors is going to be
+key to that because you didn't communicate with them early on.
+ Let me just say, as the ranking member on our Diversity and
+Inclusion Subcommittee, I am delighted to be speaking with our
+witness, Ms. Jennifer Schulp. Ranking Member McHenry and I have
+spent countless hours stressing the importance of having
+qualified women in finance, so I am pleased to have you here
+today to lend your expertise.
+ Ms. Schulp, we now know that it was the daily collateral
+demands set by the National Securities Clearing Corporation
+(NSCC) that were the reason Robinhood had to temporarily
+restrict trading. Can you briefly explain the purpose of these
+capital requirements and their overall relationship to ensuring
+that our markets function in an orderly manner? And did you see
+any broad failures of market function during these events,
+ma'am?
+ Ms. Schulp. Sure. Thank you. And thank you for the
+compliment.
+ The NSCC's collateral requirements serve the function to
+provide security for the stock-selling process. So while an
+investor thinks that what has happened is they bought a stock
+on the day that they make a trade, it really takes 2 days for
+the settlement process to clear. During that time, the
+brokerage firm, the Depository Trust & Clearing Corporation
+(DTCC), and the investor on the upper side can remain at risk
+of that stock not actually clearing. And the collateral report
+is in place to mitigate the risk that the brokerage firm will
+not be able to make good on its promises to sell or buy.
+ I didn't see any broad-scale failures. The DTCC's
+collateral requirement was long, but understandable, and I
+think it functioned correctly, for the most part.
+ Mrs. Wagner. My time has expired. I thank you all for your
+testimony, and I yield back, Madam Chairwoman.
+ Chairwoman Waters. I thank the gentlewoman.
+ Mr. Perlmutter. Madam Chairwoman, point of order.
+ Chairwoman Waters. Point of order
+ Mr. Perlmutter. Just to remind people that when they are
+not speaking, to mute themselves, because there's a lot of
+feedback when a question is asked and the microphone stays
+open, and the people are answering the question. Just remind
+everybody to mute when you're not speaking. That is all.
+ Chairwoman Waters. Thank you very much. You heard Mr.
+Perlmutter. I would hope that every Member would certainly do
+that.
+ Mr. Sherman, you are recognized for 5 minutes.
+ Mr. Sherman. Thank you very much.
+ We have come to expect things on the internet to be free.
+Just because you are not paying for it, it is not free. You are
+the product. Someone else is the customer. When you go onto
+Facebook and it is free, you are the product being sold to the
+advertiser, and your information is sold to God-knows-whom.
+ So, we now have a system where we are telling investors
+that it is free to buy and sell stock. There are two ways to
+pay the folks involved in Wall Street for buying and selling
+stock.
+ One is a commission, and you know what it is. So, we
+discourage investors a little bit from buying and selling stock
+because they have to pay a commission, and they know they are
+paying a commission.
+ The other way to do it is to give them a worse execution.
+Whenever there is, say, a stock being purchased and sold, the
+market maker, perhaps Citadel, might be willing to sell the
+stock for $10.05, but will buy it for only $10. The difference
+is $0.05. And so, the issue is whether Robinhood and other
+people who are being told you get it for free are really
+getting it for free.
+ Mr. Griffin, you are a market maker. You pay some brokers
+for order flow. You don't pay others for order flow. So when
+you pay for order flow, you are not making as much on the
+transaction. You have to pay some of that back to the broker.
+The amount of that is hidden from the customer. The fact that
+it exists has perhaps recently been disclosed.
+ SEC rules require that people get the best execution, but I
+have recently learned that there is best execution and enhanced
+pricing. So if you get an order from Fidelity, and you get an
+order from Robinhood, and you are paying for the Robinhood
+order flow, is the Robinhood customer getting as good a price
+as the Fidelity customer?
+ Mr. Griffin?
+ Mr. Griffin. Congressman, I believe that is an excellent
+question. The execution quality that we can provide as measured
+in terms of price improvement is heavily related or correlated
+to the size of the order that we receive. So if I were to
+speculate--
+ Mr. Sherman. Don't tell me that there are other factors
+involved and take us down another road. I am asking you a clear
+question.
+ Assuming same size of order, one comes in from Robinhood,
+and one comes in from Fidelity, isn't it true that one is going
+to be getting enhanced best execution, and the other one is
+just going to get best execution?
+ Mr. Griffin. As I was trying to explain, because the
+Robinhood order comes from a community of traders who tend to
+trade in smaller size--
+ Mr. Sherman. That isn't my question, sir. You are evading
+my question by making up other questions. Let me repeat: Two
+identical orders come in; same stock, same quantity. One is
+from Robinhood, one is from Fidelity. What happens?
+ Mr. Griffin. The quality of the execution varies by the
+channel of the order. This is a commonly-understood phenomena
+in economics, that channels matter. For example, when you go
+get a mortgage, a mortgage from JPMorgan to their clientele has
+a different rate of interest than a mortgage--
+ Mr. Sherman. Okay. Reclaiming my time, sir, who gets the
+better deal, the one that comes from a broker who is being paid
+for order flow, and one not? Can you testify that on balance,
+there is no difference, assuming the same size of the order?
+ Mr. Griffin. As I said earlier, the size of the order is
+only one factor.
+ Mr. Sherman. You are doing a great job of wasting my time.
+If you are going to filibuster, you should run for the Senate.
+ Everyone else I have talked to in this industry says that
+when your broker is being paid for order flow, you get a worse
+execution. And otherwise, you are in a peculiar circumstance
+where you are making more money on a Fidelity transaction than
+a Robinhood transaction which would be an absurd business
+practice.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Lucas, you are recognized for 5 minutes.
+ Mr. Lucas. Thank you, Madam Chairwoman, for holding this
+hearing, and thank you to the witnesses for agreeing to
+testify.
+ It has been reported that approximately 20 percent of
+market volume is now attributable to retail customers, which I
+think is just fascinating, considering that is up from 10
+percent in 2019, and that is an overwhelmingly positive
+development, allowing for more market liquidity, more
+stability, and additional avenues for households to grow their
+wealth. It is important to increase market access for retail
+customers, and I don't want to disrupt that, so I would like to
+turn with my first question to Mr. Tenev.
+ Let's talk about the attention that this payment for order
+flow has received. You explained in your testimony that
+Robinhood's relationship with market makers is important for
+Robinhood's ability to offer commission-free trading. So
+expand, if you would, on how that process benefits the everyday
+investor. Just expand in general on that, if you would?
+ Mr. Tenev. Congressman, I'd be happy to. Thanks for giving
+me an opportunity.
+ As I mentioned in my written testimony, payment for order
+flow enables commission-free trading. Prior to Robinhood
+changing the industry standard model to be commission-free,
+most brokers collected a commission on top of the payment for
+order flow on every transaction.
+ Now, Robinhood routes to market makers. Including Citadel
+Execution Services, we have seven in total across equities and
+options, and we route without consideration of payment for
+order flow. All payment for order flow arrangements are uniform
+across the market makers, and our system routes orders based on
+who provides the best execution quality for our customers.
+ So, the reason Citadel gets a relatively high percentage of
+our customer order flow is because they provide superior
+execution quality for our customers, and that is first and
+foremost, the most important consideration that we look for:
+How are customers getting the best execution quality?
+ If another market maker were to improve upon the execution
+quality that Citadel Execution Services provides on any subset
+of orders, our system is set up to automatically route more
+traffic to that market maker.
+ Mr. Lucas. Continuing down this line, because clearly, this
+is one of the things that my colleagues and the public has a
+very strong interest in, and having lived through Dodd-Frank
+before, I have seen worse times. Major things can occur. I want
+to turn to Mr. Griffin.
+ Could you also elaborate on how payment for order flow
+provides, whether it is the best price to the retail investor
+from the market maker's perspective? Could you expand on that--
+ Mr. Griffin. Congressman--
+ Mr. Lucas. --as you outlined in--
+ Mr. Griffin. Absolutely, Congressman. As the CEO of
+Robinhood just set forth clearly, the orders that are allocated
+amongst the market makers today are allocated principally on
+the basis of price improvement. We have fought for 15 years to
+make that the basis by which orders are allocated because we
+strongly believe that Citadel is able to provide a better
+execution for retail orders in the long run. We make a huge
+investment in our team and our technology to do so.
+ How is it that we are able to provide better execution
+quality than exchanges? Because exchanges are limited in their
+ability to do business by regulatory mandate. Exchanges, by
+law, have a minimum $0.01 wide market, which for low-price
+securities means that they are less competitive than they
+otherwise could be. We're able to share our trading acumen with
+retail investors, and we are able to give them a better price,
+and we are able to make payments for order flow to firms like
+Robinhood that allow them to have lower, or today, in most
+cases, no commission. And of particular note, we are able to
+help Robinhood and other brokers pay exchange fees to the
+exchanges at the time of execution. This has been very
+important to the democratization of finance. It has allowed the
+American retail investor to have the lowest execution costs
+they have ever had in the history of the U.S. financial market.
+ Mr. Lucas. Mr. Tenev, in the Dodd-Frank process that the
+chairwoman and I went through a decade ago plus, there was much
+discussion about margin requirements. Give us just a discussion
+for an instant about when you discovered you had a $3 billion
+additional margin call?
+ Mr. Tenev. Thank you, Congressman. I believe the full play
+by play of that situation was described in detail in my written
+testimony. Just to clarify, though, this decision had--
+ Mr. Lucas. My time has expired, unfortunately.
+ Thank you, Madam Chairwoman. I yield back.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Meeks, you are recognized for 5 minutes.
+ Mr. Meeks. Thank you, Madam Chairwoman, and Mr. Ranking
+Member, for this hearing,
+ Let me ask a question to Mr. Tenev. I have been burned once
+or twice in the market, but particularly since I have been a
+Member of Congress, one of the things that I recall greatly was
+the financial crises in 2008.
+ And we thought that opening the market up to where people
+had adjustable rate mortgages, et cetera, they were able to get
+into the market, people who may not have been before, but a lot
+of disclosure had not happened. So we didn't look, nor were
+there any documents to look at what their incomes were or
+anything of that nature.
+ So when those adjustable rates happened, many individuals
+lost their homes. Many people who bought those mortgages or who
+initially agreed to those mortgages sold them immediately
+because they did know that the people would not be able to
+afford them, and they would default shortly thereafter.
+ I understand your model of trying to get more people, more
+democratization, but that means that there is now a greater
+responsibility for ensuring that your customers have all of the
+information they need to access riskier trades. For me, the
+information has to be digestible and accessible.
+ One of the problems I have, for example, is you are
+allowing up to $1,000 to buy stocks on margin, and buying on
+margin is risky. So, how do you disclose this? How do you make
+the determination of individuals who are not the most
+sophisticated investor and allow them to buy these risky stocks
+that are on margin?
+ Mr. Tenev. Thank you, Congressman, for the opportunity to
+address that. Let me set the stage a little bit by saying that
+about 2 percent of our customers borrow on margin, about 13
+percent on a monthly basis perform an options transaction, and
+a much smaller number, around 3 percent, perform a multi-leg
+options transaction. So, the vast majority of our customers are
+engaging in buy and hold activities and long-term investing on
+our platform.
+ To clarify your point on the $1,000 margin, that is
+actually something that we refer to as Robinhood Instant, and
+it is provided as a courtesy. When a customer initiates a
+deposit, we allow them access to up to $1,000 of that deposit
+immediately. Similar to how, if you deposit a check at a bank,
+as a courtesy, they might provide access to those funds or a
+portion of them before that check clears.
+ As for margins specifically, borrowing money on margin, the
+rules are very ironclad industry-wide. Obviously, Robinhood
+Securities conforms to all of the applicable rules. And
+Robinhood's product is in many ways more restrictive than that
+of our competitors, because in order to even qualify for
+borrowing on margin, you have to be a Robinhood Gold Customer,
+which involves paying $5 a month for the service.
+ Mr. Meeks. You say that everything is restrictive, but when
+you are going after the less sophisticated investor, it is more
+than that. There is a greater responsibility that you have
+because they could lose. And when they lose, it could make a
+determination of whether or not they can pay their mortgage or
+their rent, and they could be taken advantage of.
+ Oftentimes, we find in the financial industry, it is those
+who have the least, who are really taken advantage of. So, the
+big guys--it becomes a reverse Robinhood situation which really
+concerns me.
+ Let me get to this really quickly because it was something
+that you said in regards to liquidity. You said that you didn't
+borrow the money because you needed it at the time, but later
+in the question, you raised the additional money, and I want to
+know how you spent the money for future situations, which says
+to me that you did have a liquidity problem or you anticipated
+possibly having a liquidity problem or would have one in future
+transactions. What is the deal there?
+ Mr. Tenev. I appreciate that question. I stand by what I
+said. Robinhood was able to meet our deposit requirements. We
+were in compliance with firm net capital obligations throughout
+the period, and that additional capital, the $3.4 billion,
+wasn't to service our existing requirements. It was entirely to
+prepare for a future, even greater black swan event, and to
+unrestrict and remove restrictions on the trading and the
+buying of these securities.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Huizenga, you are next for 5 minutes.
+ Mr. Huizenga. Thanks, Madam Chairwoman. And this would have
+been a little nicer 10 minutes ago, when I was supposed to go,
+but I am going to go back to Mr. Griffin and the Chair of the
+Capital Markets Subcommittee. The ranking member, I think, was
+filibustering himself, and I just wanted to make sure, Mr.
+Griffin, that you had the opportunity to feel comfortable with
+the explanation of that best execution, and what was attempted,
+apparently, to try to be asked.
+ Mr. Griffin. Congressman, I hope so. I think it is
+important to emphasize that we have vigorously advocated for
+execution quality to be one of the dominant decision-making
+factors in the routing of order flow in the United States. This
+has saved retail investors billions of dollars over the years
+in contrast to the executions that they would receive through
+other execution strategies.
+ Mr. Huizenga. Okay.
+ Mr. Griffin. With respect to payment for order flow, we
+simply play by the rules of the road. Payment for order flow
+has been expressly approved by the SEC. It is a customary
+practice within the industry. If they choose to change the
+rules of the road, if we need to drive on the left side versus
+the right side, that is fine with us.
+ I do believe that payment for order flow has been an
+important source of innovation in the industry. As the CEO of
+Robinhood has testified, they drove the industry towards zero
+dollar commissions. This has been a big win for American
+investors.
+ Mr. Huizenga. I am going to Ms. Schulp from the Cato
+Institute. I know that Greenwich Associates had a study, and
+others are out there. Do you concur that this has been good for
+consumers, for the most part?
+ Ms. Schulp. I think that there are still ongoing studies,
+but I do think that payment for order flow and the price
+improvements have largely been good for customers. And I agree
+with Mr. Griffin that this has helped drive innovation in the
+industry.
+ I think disclosure can always be better, and I think people
+should understand that their broker still needs to make money,
+even if they are providing a zero-commission trading service.
+ Mr. Huizenga. Okay. I have about 3 minutes left. I was
+going to start, actually, with this and ask each one of you why
+you thought you were here today, but I am going to dispense
+with that because it is going to take too much time, and I will
+provide the answer. Political theater for the most part. That
+is what this hearing is today. And we are on the business
+channels right now and on C-SPAN. I think you will see a few of
+my colleagues playing to the cameras.
+ But we need to have some of these fundamental and important
+questions answered at the end of the day. And one of the
+assertions that you have heard already today is that investing
+is, ``casino gambling, it is using monopoly funny money,'' and
+I guess I want to know, is individual retail participation in
+the marketplace gambling, casino gambling, or using funny
+money?
+ Mr. Gill, why don't we just start with you? Very quickly.
+ I don't hear him. So, Mr. Huffman, let's move to you.
+ Mr. Huffman. No. I believe that investing is investing.
+ Mr. Huizenga. Okay. Mr. Griffin?
+ Mr. Griffin. I believe the vast, vast majority of retail
+participants are people saving to meet their dreams.
+ Mr. Huizenga. Mr. Tenev?
+ Mr. Tenev. Congressman, thank you. As I mentioned in my
+opening statement, Robinhood customers have essentially made
+over $35 billion in unrealized and realized gains--
+ Mr. Huizenga. Very quickly.
+ Mr. Tenev. --on all of their assets.
+ Mr. Huizenga. It has been a good thing for them, correct?
+ Mr. Tenev. Absolutely. It is investing, and it is building
+wealth.
+ Mr. Huizenga. I'll go back to Mr. Gill.
+ Mr. Gill. Yes. I believe it is an opportunity for investors
+to participate in the market just as institutionals
+participate.
+ Mr. Huizenga. Okay. So actually, the business channels had
+a good question from one of the Reddit readers, which is, you
+recommended GameStop before. Would you buy their stock now at
+roughly $45? It started at $48 earlier today. You were talking
+about buying it and being happy when it hit cross 20. So are
+you buying that stock today?
+ Mr. Gill. Let me just say that investing can be risky, and
+my particular approach to investing is rather aggressive and
+may not be suitable for anyone else, but for me personally,
+yes.
+ Mr. Huizenga. So, yes or no, are you buying the stock,
+and--
+ Mr. Gill. For me personally, yes. I do find it is an
+attractive investment at this price point.
+ Mr. Huizenga. A quick question, did you invest in GameStop
+because you were not aware of the payment for order flow? That
+is one of the accusations that people bought into this because
+they don't know that.
+ Mr. Gill. Sorry. Could you repeat that question?
+ Mr. Huizenga. Did you buy GameStop because you were not
+aware of the payment for order flow?
+ Mr. Gill. My investment in GameStop was based on the
+fundamentals.
+ Mr. Huizenga. Okay. I think that answers it. I believe my
+time has expired.
+ Chairwoman Waters. Ms. Velazquez, you are recognized for 5
+minutes.
+ Ms. Velazquez. Thank you, Madam Chairwoman.
+ Mr. Tenev, Robinhood seems to have perfected the definition
+of trading, providing the user with a perception that investing
+through the Robinhood app offers a recreational game, playing
+with little or downside risk. Of course, many of us understand
+that investing is not a game and carries significant risk.
+ How does Robinhood balance disclosures and the potential
+downside risk of investing, including the risk of substantial
+loss and the more enticing claims of profitability and the ease
+of trading?
+ Mr. Tenev. Congresswoman, I appreciate that question.
+Giving people what they want in a responsible way is what
+Robinhood is about. We don't consider that gamification. We
+know that investing is serious, and we are investing in all of
+the educational tools and customer support to help people on
+their investing journey.
+ What we see is most of our customers are buy and hold. A
+very small percentage are trading options, about 13 percent,
+and less than 3 percent borrow on margin. So, most people use
+Robinhood to build up portfolios over time, and--
+ Ms. Velazquez. But can you answer my question? How do you
+balance disclosures and the potential downside risk of it?
+ Mr. Tenev. We make lots of disclosures, Congresswoman. We
+are also a self-directed brokerage, so that means we don't
+provide advice, and we don't make recommendations for what
+customers should or should not invest in.
+ Ms. Velazquez. So, you are saying that as a result of
+emphasizing profitability and ease of trading over the risk of
+loss, many amateur investors were unaware of the situation in
+which they could find themselves?
+ Mr. Tenev. I want to mention again, as in my opening
+statement, Robinhood customers have earned more than $35
+billion in unrealized and realized gains on top of what they've
+deposited.
+ So, I think this shows us that the product is working for
+customers, and our mission is working.
+ Ms. Velazquez. Okay. Thank you.
+ Mr. Plotkin, over the course of my time in Congress, I have
+been concerned and have spoken out about the dangers of short
+selling. While I understand that short selling can be used for
+legitimate purposes, too often, I have seen abuse, and it ends
+up harming ordinary workers and families.
+ I first saw it against the people of Puerto Rico, and now
+we are seeing it here against GameStop. Large investors,
+including hedge funds like yours, have to disclose their long
+positions when they own 5 percent or more of the company's
+shares, but no such disclosure is required for short positions.
+ As we consider reforms, is this type of disclosure for
+short positions something you will support? Mr. Plotkin?
+ Mr. Plotkin. Yes. Congresswoman, thank you very much for
+the question. I think it is a really good question. Whenever
+regulation is put forth in the marketplace, we will obviously
+operate within those rules. It is certainly something I would
+be happy to follow up with the committee on.
+ Ms. Velazquez. What about my question about short selling?
+ Mr. Plotkin. Yes. I think it is a really good question. It
+is not for me to decide, but if those are the rules, I will
+certainly abide by them.
+ Ms. Velazquez. Okay. I am glad to hear that answer.
+ Mr. Gill, public reports credit with you helping to start
+the GameStop craze by encouraging other amateur investors to
+bet against the short position that Mr. Plotkin and others
+took. But the stock has now fallen from its high, and many
+amateur investors have lost hundreds of thousands of dollars.
+It is my understanding that you are a registered broker. Is
+that correct?
+ Chairwoman Waters. The gentlelady's time has expired.
+ Ms. Velazquez. Okay. Thank you. I yield back.
+ Chairwoman Waters. Thank you. And I appreciate all of the
+Members who are participating today. This is not political
+theater at all. This is serious oversight responsibility, and
+Members are reminded not to impugn the motive of other Members.
+Thank you.
+ Mr. Luetkemeyer, you are recognized for 5 minutes.
+ Mr. Luetkemeyer. Thank you, Madam Chairwoman. My first
+question will go to Mr. Gill.
+ Mr. Gill, you are a very serious investor, somebody who
+does his homework, and invests in the market your own personal
+funds. We are discussing the actions around Robinhood, all of
+the transactions that took place. Do you think we need more
+legislation as a result of what happened here, or did the
+system actually work?
+ And let me just make a couple of comments on that part.
+From the standpoint that it did work, was it self-correcting?
+Did the fact that somebody like yourself was able to invest and
+maybe take advantage of the overshorting positions by the hedge
+fund guys who were trying to really drive down the price of
+stock for other reasons, whatever, or did it point out perhaps
+that we had some companies, perhaps like Robinhood, where I
+would argue it was undercapitalized or underreserved, or maybe
+there was overaggressive other types of investing that was
+taking place.
+ The algorithms that were there, the different business
+models, they didn't work because you outsmarted the system, so
+to speak. Would you like to comment on these questions and how
+I formatted that?
+ Mr. Gill. Thank you for the questions, Congressman. I would
+say my expertise is in analyzing the business, the fundamentals
+of the business, not so much on the inner workings of the
+market. I am not so sure about legislation, per se. What I
+would say is that increased transparency could help, that if
+someone like me could have a better understanding of how those
+types of things work, I feel as though it would be quite
+beneficial to retail investors.
+ Mr. Luetkemeyer. Thank you for that.
+ Mr. Tenev, Robinhood has an interesting name. As I recall,
+the old story is to take from the rich, and give to the poor. I
+assume what you are doing is allowing the poor to compete with
+the rich, which is interesting.
+ You made the comment in your testimony, Mr. Tenev, about
+settling this in real time. We have the electronic ability to
+do this. I think that would probably help the situation that
+occurred here, but what other problems occur when you do this
+in real time? What are the things we have to look at? What
+other unintended consequences would there be if you did
+something like that?
+ Mr. Tenev. Thank you, Congressman, for the question. I
+believe that right now, certain market participants rely on
+next-day settlement to be able to take advantage of intra-day
+netting and run up larger, one-sided positions in certain
+stocks with the knowledge that they can close those positions
+or reduce them by the time settlement happens.
+ And I understand that would be the limitation to the
+trading activities of some of these institutions, so that's
+certainly one area to consider.
+ The other is around securities lending. We would have to
+make changes to how securities lending works. I don't think any
+of these are insurmountable challenges, and I would be happy,
+as I mentioned earlier, to deploy our intellectual capital and
+our team's engineering resources to help solve these problems
+very quickly.
+ Mr. Luetkemeyer. Thank you for that.
+ Mr. Plotkin and Mr. Griffin, the question is for both of
+you here. Whenever you are short selling--I understand that
+GameStop stock was short sold at 140 percent. And, Mr. Plotkin,
+you made the comment in your testimony a minute ago that you
+were not trying to manipulate stock. Yet, if you are short
+selling a stock 140 percent, for me, on the outside looking in,
+it looks like that is exactly what you are doing. Explain to me
+why that is not manipulating the stock?
+ Mr. Plotkin. Thank you, Congressman. I can't speak to other
+people who were shorting. For us, any time we short a stock, we
+locate a borrower. Our systems actually force us to find a
+borrower. We always short stocks within the context of all of
+the rules.
+ Mr. Luetkemeyer. Mr. Griffin, would you like to comment on
+that? You guys are both market makers, and brokers and hedge
+fund guys. You do all of it. Why is this not considered
+manipulating the stock whenever you can short sell at 140
+percent? Don't you think there should be a limit on something
+like that?
+ Mr. Griffin. I believe that the short interest in GameStop
+was exceptional, and I am not sure it is worth us delving into
+legislative corrections for a very unique situation in terms of
+the extreme size of the short interest.
+ I will say that all of the large markets, in fact, every
+bank, every hedge fund does have to comply with the requirement
+to borrow shares to short shares in the course of their day in
+and day out business. The practice of naked shorting was
+largely curtailed by SEC mandate years ago.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Scott, you are recognized for 5 minutes.
+ Mr. Scott. Thank you, Chairwoman Waters. And let me just
+say that the people of this country appreciate you for pulling
+this Financial Services hearing together because this is a
+threat to the future of our financial system, and we have to
+get to the bottom of it.
+ Let me start with you, Mr. Tenev. Let's go through this.
+The sequence of events that led to the extreme rise in value of
+GameStop stock and the subsequent market volatility originated
+through a Reddit discussion, and then that was fueled through
+social media. And as the story gained traction, tweets by well-
+known figures with the influence to move markets sent the stock
+value even higher and higher.
+ Let me start with you, Mr. Tenev. What policies does
+Robinhood have in place to monitor what happened on social
+media and how it drives the use of your trading platforms?
+ Mr. Tenev. Thank you for the question, Congressman.
+Currently, Robinhood does not perform any sort of moderation of
+social media. We simply don't have the data that the social
+media platforms have at their disposal to tie these posts to
+identities. We do, however, within Robinhood Securities conform
+to all regulatory requirements around monitoring and trade
+surveillance and all things of that nature.
+ Mr. Scott. Mr. Tenev, don't you see something has gone
+terribly wrong here? What do you do to monitor the trades in
+individual stocks, particularly when in the case of GameStop,
+they are singled out and moved on social media? What do you do?
+ Mr. Tenev. I appreciate the question. Our priority
+throughout the exceptional market conditions in January and
+early February was to maintain the uptime and performance of
+our platform and make sure that we are available to customers--
+ Mr. Scott. Let me try to get to a point here. Do you,
+Robinhood, have any policies in place to ensure that investors
+are making trades based on legitimate material financial
+information and not the influence of social media, the design
+of trading platforms, or any other superfluous information? Do
+you have anything, any guards up?
+ Mr. Tenev. Absolutely. Congressman, we provide educational
+resources to our customers, including our redesigned Robinhood
+Learn Portal, which is not just available to Robinhood
+customers but to the general public, and it had over 3.2
+million people visiting in 2020.
+ Mr. Scott. But you are at the center of this. Don't you see
+and agree that something very wrong happened here and that you
+are at the center of it? And we are looking on this committee
+at how we can protect our wonderful, precious financial system.
+We need it from you.
+ What about you, Mr. Hoffman. Do you have anything?
+ Mr. Huffman. Congressman--
+ Mr. Scott. What steps is your company taking to guard
+against this, anything at all?
+ Mr. Huffman. Congressman, we spend a lot of time at Reddit
+ensuring the authenticity of our platform, so we have a large
+team dedicated to this exact task. Everything on Reddit, all of
+the content is created by users, voted on by users, and ranked
+by users, and we make sure that it is authenticated and as
+unmanipulated as possible. And in this specific case, we did
+not see any signs of manipulation.
+ Mr. Scott. Madam Chairwoman, I just want to conclude, I
+have maybe 10 seconds left. But this episode exposes a serious
+threat to our financial system when tweets and social media
+posts do more to move the market than material, legitimate
+information, and this is enormous.
+ Chairwoman Waters. Thank you very much.
+ Mr. Stivers, you are now recognized for 5 minutes.
+ Mr. Stivers. Thank you, Madam Chairwoman. I appreciate you
+calling this hearing. The American financial markets, I
+believe, are the envy of the world, but they are still
+imperfect. I would have liked to seen this committee have a
+meaningful discussion about capital requirements and the T plus
+2 clearing rules that may have contributed to some of
+Robinhood's customers not being able to purchase stock,
+including GameStop, for a period of time.
+ But because the Majority didn't include the SEC, the
+Depository Trust & Clearing Corporation, or the National
+Securities Clearing Corporation to testify, we are left with
+what we have. That is because I believe the Majority is
+attempting to use this hearing to drive a narrative about the
+U.S. capital markets being rigged. But I do have several
+questions.
+ Mr. Tenev, you decided to stop allowing your users to buy
+GameStop and other stocks as a result of capital requirements
+on Robinhood securities. Is that correct?
+ Mr. Tenev. That is correct, yes, deposit requirements with
+our clearinghouses.
+ Mr. Stivers. And those got resolved, but for a period of
+time, some of your users could only sell and not buy, and that
+could have contributed to the stock actually not going up as
+fast because some of your users were prohibited from buying. Do
+you think it is possible that that could have happened?
+ Mr. Tenev. I shouldn't speculate on what could have
+happened.
+ Mr. Stivers. If there are more sellers than buyers, does
+the stock price go down or up?
+ Mr. Tenev. Congressman, to be clear, Robinhood is a
+minority of trading activity in--
+ Mr. Stivers. I understand.
+ Mr. Tenev. --these securities.
+ Mr. Stivers. I understand. But if your buyers can only sell
+and not buy, then it clearly keeps you from putting upward
+pressure on the stock price. Is that correct?
+ Mr. Tenev. On Thursday--
+ Mr. Stivers. Among your users.
+ Mr. Tenev. --customers on our platform could only sell.
+ Mr. Stivers. Correct.
+ Mr. Tenev. There was no ability to buy, that is correct.
+ Mr. Stivers. Right. You said earlier--by the way, I know
+some people have attacked your arbitration agreements, but I
+want you to be clear. If your users were harmed as a result of
+these actions, they can recover through arbitration. Is that
+correct, yes or no?
+ Mr. Tenev. Yes. That is correct, and our arbitration is
+FINRA-supervised and overseen, and we do believe arbitration
+gives customers a fair and speedier resolution to their claims.
+ Mr. Stivers. Thank you. Does your user agreement and your
+arbitration allow for group arbitration or only individual
+arbitration?
+ Mr. Tenev. Let me get back to you on that.
+ Mr. Stivers. If a group was treated similarly and similarly
+affected or lost upside or lost money, can they do it as a
+group, or is it only individuals in your arbitration agreement?
+ Mr. Tenev. Congressman, I am sure you are familiar with the
+number of class action lawsuits filed against Robinhood for--
+ Mr. Stivers. And I am not asking about a class action
+lawsuit. I am asking in your arbitration system, can a group of
+people come together as an individual? And this is not a trick
+question. I am not a fan of trial lawyers. I am just trying to
+understand.
+ Mr. Tenev. Yes. I appreciate the question, Congressman. I
+think the best thing I can do is get back to you after making
+sure that we get you the right answer.
+ Mr. Stivers. That would be great. Thank you. That would be
+helpful.
+ Mr. Plotkin, are you a frequent short seller, yes or no?
+ Mr. Plotkin. We run a long short portfolio. The majority of
+our investments are long investments, but we also have short
+investments to hedge out market risk.
+ Mr. Stivers. Thank you, Mr. Plotkin. Has Melvin Capital
+ever engaged in short selling of Tesla stock?
+ Mr. Plotkin. We have shorted Tesla in the past, that is
+correct.
+ Mr. Stivers. Did you see the tweet from Tesla CEO Elon Musk
+about GameStop stock?
+ Mr. Plotkin. I did see that after market hours on--yes, on
+the Tuesday.
+ Mr. Stivers. Do you believe that Mr. Musk's tweet had any
+significant effect of driving the rise in GameStop stock?
+ Mr. Plotkin. I don't want to speculate on what the actions
+of his tweet were. The stock did rise after hours.
+ Mr. Stivers. Then, do you believe that tweet was targeting
+you because you had shorted Tesla stock in the past?
+ Mr. Plotkin. We had a very small short position years ago
+in Tesla. That would be pure speculation as to his motives in
+putting that tweet out.
+ Mr. Stivers. Okay. Thank you.
+ I will go back to Mr. Tenev. On the regulatory
+requirements, do you believe that the SEC and the Depository
+Trust & Clearing Corporation should modify any of their rules
+as a result of what happened to your users because of capital
+requirements?
+ Mr. Tenev. I believe--
+ Chairwoman Waters. The gentleman's time has expired. And
+the SEC is not here today because they are in transition with a
+temporary Chair, awaiting the confirmation of the person who
+has been appointed by the President of the United States. This
+is a serious hearing. Members are reminded not to impugn the
+motives of others. Thank you.
+ Mr. Green, you are recognized for 5 minutes.
+ Mr. Green. Thank you, Madam Chairwoman.
+ Ms. Schulp, there is a reason for penalizing a market maker
+for improperly trading its own accounts ahead of its clients'
+accounts. Note that I said, ``improperly trading.'' I don't
+want to go through the scenario of there being a time for
+proper trading ahead of accounts. I would like for you to tell
+us what that reason is, please.
+ Ms. Schulp. Trading ahead of customer accounts is illegal,
+and it does not--
+ Mr. Green. I understand that it is illegal. I don't mean to
+be rude, crude, and unrefined, but I have to ask this question
+quickly. What can happen that can benefit the market maker? How
+can that be monetized such that the market maker profits
+greatly from doing it?
+ Ms. Schulp. If a market maker trades improperly ahead of
+the customer accounts, he can get a better price and can move
+the market in the process, depending on how big the trade is.
+That is hurting the customer.
+ Mr. Green. And if this trade is huge, and you can see that
+this trade that the client has is huge and will have an impact
+on the market, how does that benefit the market maker to trade
+ahead of the client?
+ Ms. Schulp. The market maker can get a better price for
+himself before the price changes by the client's trade. He can
+also engage in self-dealing that way as well.
+ Mr. Green. So, does it benefit a huge market maker to have
+a great deal with, let's say, a Robinhood, because of the flow
+that will be coming through that the market maker can take
+advantage of?
+ Ms. Schulp. I don't think that they are necessarily
+congruent situations. When you are trading ahead of a customer
+order, which is something that is illegal and that the SEC does
+monitor for, it is very different from having knowledge as to
+the way that the market might be moving based on--
+ Mr. Green. I understand, but I want to talk about the
+circumstance where it is improper, not where it is proper.
+Remember, we started with improper trading. And here is my
+point. Let me go to it quickly. The market maker, Citadel,
+traded over-the-counter stocks for its own accounts in 2012,
+from 2012 to 2014, while simultaneously delaying client orders
+for the same shares and was fined for this.
+ Citadel has been naughty for some time: In 2014, Citadel
+faced $800,000 in penalties; 2017, $22.6 million; 2018, $3.5
+million; 2020, $97 million, and another 2020 of $700,000. This
+seems like a lot of money. It is for me. More than $124
+million.
+ But over the same period of time, Citadel had revenues
+generated in the amount of $13.2 billion. It seems to me that
+the punishment for these improper trades and improper extants
+because it wasn't just trading. Citadel also did some other
+things that were not proper. They messed with their clients. It
+seems that the punishment is so small, given the amount of
+revenue generated over this same period of time. It seems that
+Citadel has at least an opportunity to build into its cost of
+doing business paying penalties, and that concerns me.
+ It concerns me that the punishment doesn't seem to deter
+Citadel. It concerns me because I know of circumstances wherein
+persons who are not in the market do things that are much less
+harmful, and they can possibly go to jail.
+ So the question that I have is this: What kinds of systems
+do we have in place, and back to you again, ma'am, to prevent
+the very things that I have called to the attention of my
+colleagues?
+ Ms. Schulp. As a former enforcement attorney at FINRA, I
+can say that regulators have the same concern with fines and
+other punishments becoming just a cost of doing business, and
+it is one of the things that is considered, along with the lack
+of regulations around what can be punished.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Green. May I, for the record--
+ Chairwoman Waters. The gentleman's time has expired. Mr.
+Green, as you know, we are going to have a series of hearings,
+and our next panel will include a whole bevy of experts also on
+some of these issues.
+ With that, Mr. Green--
+ Mr. Green. Madam, may I say something in the record,
+please? I have--
+ Chairwoman Waters. Without objection, you may enter into
+the record. Thank you.
+ Mr. Green. Thank you.
+ Chairwoman Waters. Mr. Barr, you are recognized for 5
+minutes.
+ Mr. Barr. Thank you, Madam Chairwoman.
+ Mr. Griffin, I want to revisit this issue of payment for
+order flow. Payment for order flow has been around for decades,
+correct?
+ Mr. Griffin. I know it has been around for at least 1 or 2
+decades. I can't answer before that period of time.
+ Mr. Barr. And it is a recognized and approved practice by
+the SEC, correct?
+ Mr. Griffin. Yes, it is.
+ Mr. Barr. And payment for order flow is set by the
+brokerage firm, not the wholesaler, right?
+ Mr. Griffin. It is ultimately a negotiated number, but it
+is a number that is set by the brokerage firm and not by us as
+the market maker.
+ Mr. Barr. As a market maker that provides execution
+services to retail brokers, you are required to meet best-
+execution requirements. Is that correct?
+ Mr. Griffin. Yes, it is.
+ Mr. Barr. In other words, market makers are required to
+provide the same or better pricing than the exchanges, correct?
+ Mr. Griffin. That is correct.
+ Mr. Barr. And how can market makers offer that better
+pricing to Mr. Sherman's line of questions?
+ Mr. Griffin. There are a number of drivers that permit us
+to offer better pricing than what is available on exchanges.
+The first is that exchanges have legally-mandated minimum tech
+sizes of a penny. So if you look at a stock like AMC, that
+trade's $5 bid, $5.01 offered, the exchange could trade with a
+half-cent increment, it would probably trade $5 point 005 bid
+501 offer or vice versa, but the exchanges are limited to a
+$0.01 minimum tech size.
+ And we have been clear on the record in prior testimony
+that exchanges should be permitted to have a smaller and more
+competitive tech size. That's factor number one.
+ Mr. Barr. Okay.
+ Mr. Griffin. Number two, is that the average retail order
+is much smaller in totality than the average order that goes on
+to an exchange. Because this order is smaller--and I will share
+a number with you, the typical Robinhood order is ballpark
+about $2,000 in size. Because it's a small order, the amount of
+risk that we need to assume in managing that order is
+relatively small as compared to an order that we have to manage
+from our on-exchange trading.
+ And as I'm sure you're well-aware, we are the largest
+trader of stocks on exchanges in the United States--
+ Mr. Barr. Let me move to Mr. Tenev really quickly on that
+point. What impact might greater restrictions on the payment
+for order flow model have on your ability to offer zero-
+commission trades?
+ Mr. Tenev. We do believe, Congressman, that that's an
+important question and payment for order flow helps cover the
+costs of running our business and offer commission-free trading
+to customers. When we started, people didn't even think that
+there was enough margin left to make this business work, but
+we've been fortunate to make it work and to make it work for
+our customers.
+ Mr. Barr. I'm talking about why Robinhood restricted
+trades. I think your explanation about margin requirements
+charged by your clearinghouse makes sense. Is your
+clearinghouse supervised by the Fed and the SEC?
+ Mr. Tenev. I believe that--
+ Mr. Barr. Are the margin requirements charged by your
+clearinghouse in turn approved by Federal regulators?
+ Mr. Tenev. Yes.
+ Mr. Barr. And did Federal regulators approve the value of
+risk charge that was imposed on Robinhood?
+ Mr. Tenev. I believe, Congressman, the value of risk charge
+is outlined in general terms in Dodd-Frank, but I'm not sure
+who approved the specific implementation of that formula.
+ Mr. Barr. So if anyone has a problem with your decision to
+halt trades, it's fair to say that their frustration should be
+directed toward Federal regulation?
+ Mr. Tenev. Congressman, I'm not trying to throw anyone
+under the bus in direct frustration anywhere. All I can say is
+Robinhood Securities played this by the books and played it
+basically the only way that we could remain in compliance with
+our deposit requirements.
+ Mr. Barr. Mr. Plotkin, I appreciate your testimony that
+Melvin always follows laws governing shorting stock, but Melvin
+lost $6 billion in 20 trading days. Let me ask you about your
+risk management. Did your short positions exceed float?
+ Mr. Plotkin. No, they did not.
+ Mr. Barr. Shorting has an important role to play in our
+markets, allowing for legitimate hedging and price discovery,
+but we are interested in naked shorting. And so, we would hope
+that you would clarify that and how it is that you make sure
+that you're first locating the borrower?
+ Chairwoman Waters. The gentleman's time has expired. Mr.
+Cleaver, you're recognized for 5 minutes.
+ Mr. Cleaver. Thank you, Madam Chairwoman, and I, too, would
+like to thank you for this hearing. It's a question that a lot
+of people are asking, probably many of us as we go through our
+districts, but let me start with you, Mr. Tenev. I'm just
+curious if you can answer, in a short period of time, how did
+you come up with the name of your company?
+ Mr. Tenev. Absolutely. Thank you for that question,
+Congressman. Robinhood stands for lowering the barrier to entry
+and democratizing finance for all. The idea is the same tools
+that institutions and wealthier, high-net-worth individuals
+have had for a long time should be available to the people
+regardless of their net worth or how much money they have.
+ Mr. Cleaver. Okay. I appreciate that answer. Because it's
+something that I would also embrace; however, I have a 23-year-
+old on the other side of the house whom I love dearly, but he
+has no training, no income, and no qualifications. How in the
+world could he get a million dollars worth of leverage?
+ Mr. Tenev. Thank you, Congressman. The leverage that we
+provide to our customers, which less than 3 percent of our
+customers actively use, is regulated strictly by requirements.
+So, the only way to get that amount of leverage in a margin
+account through borrowing is to deposit a similarly-sized
+amount of capital.
+ Mr. Cleaver. Or by mistake?
+ Mr. Tenev. Congressman, I'm not sure what you're referring
+to.
+ Mr. Cleaver. There's a record of a young man getting a
+million dollars worth of leverage. He was only 20-years-old, so
+I'm just saying if that's not a policy, that was an error.
+ Mr. Tenev. Congressman, I appreciate the opportunity to
+address that really important point. You're referring to Mr.
+Kearns.
+ Mr. Cleaver. I am.
+ Mr. Tenev. The man who, unfortunately, passed last year.
+ Mr. Cleaver. Yes.
+ Mr. Tenev. First of all, I'm sorry to the family of Mr.
+Kearns for their loss. The passing of Mr. Kearns was deeply
+troubling to me and to the entire company, and we have vowed to
+take a series of steps, very aggressive steps, to make our
+options products safer for our customers, including changing
+the customer interface, adding more additional options,
+education, as well as strengthening and tightening the
+requirements for people getting options and adding a live
+customer support line for acute options cases.
+ It was a tragedy, and we went into immediate action to make
+sure that we made, not just the most accessible options trading
+product for our customers, but the safest as well.
+ Mr. Cleaver. Okay. In my real life, I'm a United Methodist
+Pastor and I read your statement after the tragedy of this
+young 20-year-old, and I don't think you or I want to get into
+litigating that right here today, but what improvements did you
+make in the aftermath to your platform or were there
+improvements?
+ Mr. Tenev. Thank you, Congressman. There were several
+improvements. One, we added the ability to instant exercise as
+well as exercise options positions in-app. We clarified the
+display of buying power, specifically negative buying power, in
+situations where one leg of a complex multi-leg options
+transaction were to be assigned.
+ We also added an options education specialist. We also
+added live phone base customer support for acute options cases,
+which has gotten very great feedback from customers and is
+something we're expanding to other use cases such as places
+where customers' accounts have had off-platform hacking
+incidents.
+ Mr. Cleaver. The last one is what I was concentrating on
+because this young man was trying to get into your system to
+find out what was going on. He was confused, he was scared, and
+so he sent emails. And to be fair, there was a response, but it
+was hours later. And, as I became more and more familiar with
+this particular case--
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Cleaver. Thank you, Madam Chairwoman. I appreciate it.
+ Chairwoman Waters. You're so welcome.
+ Mr. Hill, you're recognized for 5 minutes.
+ Mr. Hill. Thank you, Madam Chairwoman, for holding this
+hearing, and I want to thank our witnesses for their expertise
+and their patience. Madam Chairwoman, I have a letter from the
+American Securities Association I'd like to insert in the
+record, please.
+ Chairwoman Waters. Without objection, it is so ordered.
+ Mr. Hill. Thank you very much.
+ Mr. Tenev, what a treat to see you, and congratulations on
+being part of the American Dream. I had the pleasure of working
+for President Bush 41 in Sophia, Bulgaria, in 1990 and 1991 to
+try to bring capitalism to Bulgaria after the wall fell, so I'm
+glad to see you're an American citizen and innovating here in
+our country.
+ Mr. Tenev. Thank you.
+ Mr. Hill. I think you've done a good job talking about
+the--I'd say the acknowledged lesson that you've learned in
+terms of these deposits for clearing and the important risk
+management issue for your firm. So, I'd like to follow up on
+some of the discussions about retail service that you've also
+touched on today.
+ Do you have a call center generally for Robinhood
+investors?
+ Mr. Tenev. Thank you for that question, Congressman. And I
+want to start by saying customer service is fundamental to
+everything that we do and it's one of the areas where we're
+investing the most. We have customer service centers in a
+number of States--Colorado, Florida, Texas, and Arizona, and
+we're looking to expand aggressively--
+ Mr. Hill. Well, do you have a call center that I can call,
+a 1-800 number if I'm having trouble in the middle of the
+trading day?
+ Mr. Tenev. We do offer, Congressman, live phone support in-
+app for certain use cases. We're expanding that as fast as we
+can. As I mentioned earlier, options, advanced options cases,
+as well as account takeovers, which typically happen through a
+customer's email, personal email, who has been compromised, and
+the feedback has been great. And we're looking to expand the
+live phone channel, as well as make improvements to our email
+channel and--
+ Mr. Hill. Thank you. Thank you. That's helpful.
+ And on the subject of margin and options, you've talked
+about that today, but I've spent 40 years in this business and
+been the general securities principal in three different firms,
+and this issue of granting margin and option approval to retail
+clients is always an important issue. You've addressed that
+today, so I want to turn to a different topic that has not been
+raised, which is low-dollar stocks.
+ As I understand it, your policy and procedure manual simply
+says that you allow low-dollar stocks if they're on an
+exchange, but many, many brokerage firms are very reticent to
+allow retail investors to invest in stocks that are under $5.
+Could you address that issue today?
+ Mr. Tenev. Yes, I'd be happy to Congressman. Robinhood
+allows customers to trade in and invest in exchange-listed
+securities, so that's the objective criteria that we use. And
+it actually excludes several types of securities that customers
+commonly request a trade in.
+ On Robinhood, you can't trade over-the-counter bulletin
+boards except in limited cases where a listed stock falls to
+over-the-counter. You can't trade pink sheets and, of course,
+you can't short sell or enter undefined risk options trades.
+Our objective criteria involve whether exchanges list these
+securities.
+ Mr. Hill. Thank you. And I think that probably--I'm sure
+you'll re-evaluate that after these effects.
+ Let me turn to Ms. Schulp. Thank you for being here. The
+WallStreetBets Reddit platform--I'm curious when you think
+about the obligation of this SEC pending investigation, based
+on your FINRA background, do you think the SEC should look at
+the bulletin board participants under Section 9a2 or
+potentially inducing trading in a certain direction? Is that
+worthy of their review?
+ Ms. Schulp. Thank you for the question, Congressman. I
+think that there has been little evidence to this time that
+there has been any sort of false or deceptive conduct taking
+place on the WallStreetBets' forum. That does not mean, though,
+that I think that the SEC should not take a deeper look.
+Because of the anonymity in the forum, there could have been
+people who were engaging in deceptive behavior that's not
+readily apparent to the public.
+ So I do think the SEC should look, but to this point, I've
+seen very little that would meet a test for manipulation, which
+generally involves false or deceptive behavior.
+ Mr. Hill. Thank you. I appreciate that.
+ Mr. Tenev, I thought of another question for you. Would a
+securities transaction tax be beneficial to retail investors in
+the United States?
+ Mr. Tenev. Thank you, Congressman. I don't believe it
+would.
+ Mr. Hill. Thank you.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Hill. Thank you, Madam Chairwoman.
+ Chairwoman Waters. We will take a short recess. The
+committee stands in recess for 5 minutes. Thank you.
+ [brief recess]
+ Chairwoman Waters. The committee will come to order. Mr.
+Perlmutter, you are recognized for 5 minutes.
+ Mr. Perlmutter. Thanks, Madam Chairwoman.
+ Mr. Gill, let's start with you, since you seemed to have
+started all of this. You began analyzing GameStop in the summer
+of 2019. Was that your testimony?
+ Mr. Gill. Congressman, I've been following GameStop for a
+number of years. I started to buy into it in June of 2019, most
+recently.
+ Mr. Perlmutter. So back then, what was the price of the
+stock when you started investing in it?
+ Mr. Gill. At the time, it was in the ballpark of around $5
+per share.
+ Mr. Perlmutter. Okay. And in your analysis, what did you
+think that was a proper price for the share, because you
+thought you were getting a good buy?
+ Mr. Gill. Sure. At the time, I thought that the value of
+the business could be worth up to roughly $2 billion.
+ Mr. Perlmutter. But how much is that per share? Bring it
+back to the--you bought at $5, you thought it was worth $10,
+$20?
+ Mr. Gill. I felt as though that it could be worth at the
+time in the range of, say, $20 to $25 per share.
+ Mr. Perlmutter. Okay. And you continued to invest on and
+off through 2019 and 2020. Is that true?
+ Mr. Gill. Yes.
+ Mr. Perlmutter. Okay. And you bought some shares, but you
+also did some options trading, did you not?
+ Mr. Gill. Correct. I did.
+ Mr. Perlmutter. And options trading is not really for the
+novice investor, is it?
+ Mr. Gill. It is a riskier investment, yes.
+ Mr. Perlmutter. Okay. On January 27th, I think the stock
+price hit $483 or something like that. Is that true?
+ Mr. Gill. I believe it was in that area, yes.
+ Mr. Perlmutter. In your analysis, back when you started
+investing in the stock, did you ever see it being valued at
+$483 per share?
+ Mr. Gill. At the time, I thought it was possible, but a
+very low probability, I thought.
+ Mr. Perlmutter. Thank you. In terms of the platforms where
+you visited and discussed this stock with others, one was the
+Reddit, subreddit WallStreetBets' platform, correct?
+ Mr. Gill. Correct.
+ Mr. Perlmutter. And at any given time, how many people were
+you talking to on that platform?
+ Mr. Gill. I wasn't so much talking to anyone individually,
+but rather making posts on that public forum.
+ Mr. Perlmutter. That GameStop was an attractive stock?
+ Mr. Gill. Yes. Early on, I had felt that it was an
+attractive investment opportunity and I had shared some of my
+thoughts as to why that was.
+ Mr. Perlmutter. Did you discuss this on any other
+platforms? Are there any other kinds of Reddit or other kinds
+of platforms where you talked about the stock?
+ Mr. Gill. Yes, I have talked about the stock on some other
+platforms.
+ Mr. Perlmutter. Okay. Did you ever talk about the short
+sellers that had bet against this company?
+ Mr. Gill. Yes, the topic did come up.
+ Mr. Perlmutter. And about when did that occur?
+ Mr. Gill. Oh, since around the time I had begun investing
+in it. Someone else thought it was an exceptional level of
+short interest in the stock since the time I had started
+investing in it.
+ Mr. Perlmutter. Okay. Let me turn my attention now to you,
+Mr. Plotkin.
+ When did Melvin first take short position in GameStop?
+ Mr. Plotkin. Thank you, Congressman. That was in 2014,
+really right at our inception of the fund.
+ Mr. Perlmutter. And when you did that, you continued to
+maintain a short position?
+ Mr. Plotkin. That's correct.
+ Mr. Perlmutter. So you said you analyzed the value of the
+stock, and by taking a short position, you, unlike Mr. Gill,
+thought that the stock was overpriced. He thought it was
+underpriced; you thought it was overpriced?
+ Mr. Plotkin. That's a good conclusion, yes.
+ Mr. Perlmutter. In your analysis when you started into the
+short position, what did you think the stock was worth?
+ Mr. Plotkin. I don't remember exactly at the time. I think
+when we launched it, it was probably $40 stock. I think we
+believed the company had a lot of structural challenges. We've
+seen their earnings go from, I think, north of $3 a share to
+almost negative $3 a share, so it's been a lot of challenges
+fundamentally.
+ Mr. Perlmutter. Last question for you, were you in a naked
+position in your short position because this stock was
+oversold?
+ Mr. Plotkin. No. Our systems won't even allow that, so that
+would be impossible for us to do.
+ Mr. Perlmutter. Okay. Thank you. My time has expired. I
+wanted to get some facts out for Mr. McHenry.
+ And I yield back.
+ Chairwoman Waters. Thank you very much. The gentleman's
+time has expired. I now recognize Mr. Zeldin for 5 minutes.
+ Mr. Zeldin. Thank you, Madam Chairwoman, and Ranking Member
+McHenry, for holding this hearing. And thank you to the
+witnesses for being here today. I represent the first
+congressional district of New York, which encompasses much of
+Suffolk County on Long Island. My home district is full of
+people from all different walks of life and industries, and
+having access to cost-efficient investing is crucial.
+ While there are always ways to make a system work better,
+our capital markets are the envy of the world with their
+liquidity and diversity of investment opportunities.
+Innovations in securities trading brought by the private sector
+have increased access for retail investors.
+ For better or for worse, this situation is a perfect
+example. For example, one of our witnesses here, Mr. Gill, or
+should I say, ``Roaring Kitty,'' turned $53,000 into almost $50
+million, and that's what you would call some deep you-know-what
+value. Of course, we know that not all those who invested in
+these stocks share the same success story. However, I want to
+highlight a potential vulnerability in these innovations.
+ I've been concerned for some time in general with the
+sharing of U.S. individual user data with the Chinese Communist
+Party (CCP). I sent a letter to the Treasury Department in
+October 2019 expressing concern with the potential sharing of
+user information by TikTok to its parent company, ByteDance,
+and asked for a review by the Committee on Foreign Investment
+in the United States (CFIUS).
+ Chinese companies are required by law to regulate online
+behavior that deviates from the political goals of the CCP.
+Obey the CCP's censorship directives and participate in China's
+espionage.
+ These policies regulate companies like TikTok in the China
+market, and increasingly, their overseas business. Webull and
+Moomoo are two examples of broker-dealers that are subsidiaries
+of Chinese parent companies.
+ According to Bloomberg, funds affiliated with Xiaomi Corp
+own at least 14 percent of Webull. Xiaomi is a Chinese company
+that risks being delisted from U.S. exchanges after the U.S.
+Department of Defense put the company on a blacklist on January
+14, 2021.
+ Moomoo is owned by Futu Holdings, which is a company that
+received a significant investment from entities affiliated with
+Tencent, a company with known ties to the CCP.
+ On December 8, 2020, Bloomberg Business Week ran an article
+on Webull stating that the company, ``has increased its roster
+of brokerage clients by about tenfold this year to more than 2
+million by offering free stock trades with a slick online
+interface.''
+ On January 29, 2020, the day after trading activity for
+long trades on certain stocks discussed on Reddit threads were
+limited, Bloomberg ran an article with the headline,
+``Robinhood rival Webull sees 16 fold jump in new trading
+accounts.'' It's clear that these apps have rapidly increased
+their user base, which has me concerned.
+ Ms. Schulp, do you think we should be concerned about the
+potential for Chinese entities with ties to the CCP receiving
+personally identifiable information (PII) or other user data
+from their subsidiary broker-dealers that are licensed and
+registered in the United States?
+ Ms. Schulp. I think it's a potential national security
+concern, which is a bit outside of my area of expertise. What I
+can say is that the rules that the brokers have to apply and
+comply with regarding personally identifiable information and
+other material data should be applied equally to companies that
+are based offshore and companies that are based onshore, and I
+hope that that's the case with respect to Webull or any other
+competitors that are not domestically-owned.
+ Mr. Zeldin. Having a diversity of choice for different
+trading apps is generally good for market competition, however,
+is it a good outcome for millions of Americans to flood into
+trading apps that could be required to share user data to
+parent companies that have ties to the CCP?
+ Ms. Schulp. Again, I think choice is key here, as well as
+understanding from a consumer perspective what companies you
+are choosing to do business with. Again, the national security
+concerns are a bit outside of my area of expertise.
+ Mr. Zeldin. I thank you for being here. This is another
+angle to this issue with these new options that are being
+provided to average retail investors and we want these retail
+investors to have as much information as possible to be set up
+for success.
+ I yield back.
+ Chairwoman Waters. Thank you very much. Mr. Himes, you're
+recognized for 5 minutes.
+ Mr. Himes. Thank you, Madam Chairwoman, and a big thank you
+to our panel today for a very interesting conversation. One of
+the chairwoman's ways of characterizing this hearing was who
+wins and who loses, and I've spent a bunch of time in the last
+couple of days looking at the various players here.
+ I'm pretty convinced that Citadel is one of the winners;
+they make a lot of money. They're the casino in this story, and
+the casino tends to win over time. Robinhood has a valuation of
+$5.6 billion, and makes a lot of money from the casino, so who
+loses? And I want to spend some time talking about the person
+who usually loses, and that's the retail investor.
+ And while I have supported for many years the
+democratization of finance, as we say, it's not just in
+Washington, D.C., but on Wall Street. The retail investor is
+known as, ``dumb money,'' and there are any number of
+structures that are set up to take advantage of the retail
+investor. And I think it's worth looking at that because as
+much as we're celebrating Mr. Gill here, we're not talking very
+much about Mr. Salvador Vergara, who was featured in a Wall
+Street Journal story, who took out a $20,000 personal loan
+through Robinhood and invested it in GameStop only to see the
+value of his position go down 80 percent.
+ So, Mr. Vergara is out $16,000 he doesn't have, that he
+owes to somebody else. And as much as I support the
+democratization of finance, we need to be thoughtful about
+this.
+ Mr. Tenev, my question is for you. You quoted a $35 billion
+number as what I interpreted to be profits in excess of
+deposited funds and securities. If you just look at your
+customers who traded in GameStop over the period of its
+increase and subsequent decrease, Mr. Tenev, how did your
+customers in the aggregate do? Did they win or did they lose?
+ Mr. Tenev. Thank you, Congressman, for that question. I
+don't have that particular cut of the data top of mind, so
+maybe we can get back to you on that one.
+ Mr. Himes. You don't have that. But you do have a $35
+billion figure. That figure doesn't mean a lot to me, because
+it's just a dollar number. Help me convert that to a rate of
+return. First of all, is that $35 billion gross or net? In
+other words, is that actual profit or does it include margin
+shares, or other forms of leverage that may not actually belong
+to the account holder?
+ Mr. Tenev. It does include, Congressman, unrealized gains,
+so it's the value of assets, both including positions in
+securities and cryptocurrencies.
+ Mr. Himes. I get that, but, again, $35 billion doesn't mean
+anything to me unless you can convert that into a rate of
+return. So, do that for me? On what asset under management
+number is that $35 billion unrealized against?
+ Mr. Tenev. The asset under management number is not one
+that Robinhood has publicly shared--
+ Mr. Himes. Okay, but you can't share $35 billion--sorry,
+Mr. Tenev. I just don't have a lot of time, and $35 billion is
+a meaningless number. I need to know what that is in terms of
+return. So, convert that for me into rate of return so I can
+compare it to Treasury, so I can compare it to the S&P 500.
+ Mr. Tenev. Congressman, with respect, I think the proper
+comparison is to customers not investing at all. Many of our
+customers are investing for the first time and are taking money
+that they, otherwise, would have spent or consumed and put--
+ Mr. Himes. Mr. Tenev, again, I don't want to be rude, but
+it's my time. Again, you offered up the $35 billion number,
+which as you and anybody else schooled in finance knows is
+meaningless unless you convert it into a rate of return.
+ So, just please convert that $35 billion number, which to
+the folks watching at home sounds like a lot of money, but what
+does that actually convert to in terms of rate of return which
+is what matters?
+ Mr. Tenev. Congressman, $35 billion is indeed a large
+amount of money, especially for our customers who are mostly
+small investors. It's more than most corporations, nearly all--
+ Mr. Himes. Mr. Tenev, don't make me be rude here. You and I
+both know that $35 billion of unrealized gains, if that's on a
+base of $100 billion, that's a 35 percent of return. If that's
+on under a trillion dollars, it's a radically different rate of
+return.
+ So what I'm trying to get at, Mr. Tenev, here is, you threw
+out the number of $35 billion. I actually think the right
+comparison is, what if your clients had simply invested in the
+long run in an S&P index fund. Would that number be more than
+$35 billion or less?
+ Mr. Tenev. Congressman, with respect, I don't believe the
+right comparison is investing in an S&P index fund. I think the
+right comparison is not having invested at all and having spent
+that money and consumed it.
+ Mr. Himes. No, no. It's most certainly not, Mr. Tenev. I'm
+out of time, but, again, you put out the $35 billion number, so
+I think it's only decent, because you and I both know that a
+hard-dollar number is meaningless unless you can convert is to
+returns. So, I'm going to ask you to convert that--obviously,
+I'm out of time--into a rate of return for us.
+ Chairwoman Waters. You're out of time.
+ Mr. Loudermilk, you're now recognized for 5 minutes.
+ Mr. Loudermilk. Thank you, Madam Chairwoman, and I
+appreciate all of the members of the panel being here. I think
+you've seen that there are occasions with some on the committee
+here that if you're not giving them the answer that they want,
+that they can use, they're just going to continue to push you.
+So, I just encourage you to continue speaking the truth and
+you'll always stand up head and shoulders above everyone.
+ Not surprisingly, the situation with GameStop trading has
+resulted in commentators and even some of my colleagues
+engaging in knee-jerk reactions calling for new laws and
+regulations to be hastily enacted. It just seems to be a trend
+in Washington, D.C., to never let a crisis go to waste. Some
+have even spread conspiracy theories and alleged that crimes
+were committed before knowing what even happened.
+ I can even testify to what was just being said--I know a
+number of people, personal friends who have never invested
+before, but because of Robinhood and other retail platforms,
+many of them took the stimulus money that they received during
+the CARES Act, which, because they were still working, they
+didn't need, and they actually opened an account and started
+investing.
+ So, yes, more and more people who have never invested
+before are now investing using these platforms. This hearing is
+a reminder that with complex situations, we should take time to
+understand what actually did or did not happen, especially with
+this GameStop situation.
+ Now, the SEC is the proper authority to determine if any
+rules were broken, and they are looking into it. Congress has
+already given the SEC broad authority to oversee the capital
+markets and we do not need to rush to enact even more big
+government regulations that could ultimately harm the
+investors.
+ Mr. Tenev, can you remind us, again, why Robinhood
+temporarily paused trading of GameStop and other stocks?
+ Mr. Tenev. Of course. Thank you, Congressman. Robinhood
+paused trading temporarily or, I should say, paused buying of
+about 13 securities on Thursday so that we could meet our
+regulatory deposit and collateral requirements.
+ Mr. Loudermilk. Okay. So what you're saying is, you were
+paused because you had to comply with regulations. Is that
+true?
+ Mr. Tenev. Correct.
+ Mr. Loudermilk. Okay. It's ironic that the people who are
+criticizing brokerage firms because they paused trading, which
+they sometimes have to do to comply with regulations, these
+same folks are now saying, we need to respond to this with more
+regulations. I would say if people don't like brokers
+occasionally having to pause trading, I suggest they look at
+the regulations that required it.
+ At some point, we need to recognize that piling on more and
+more regulations only increases complexity and does not help
+investors.
+ Ms. Schulp, despite the volatility and the frenzy of media
+and social media activity, it seems to me that the markets
+functioned as they were supposed to do during this situation,
+that the markets are not broken; in fact, they are working
+well.
+ Do you agree with that?
+ Ms. Schulp. I agree with that.
+ Mr. Loudermilk. Okay. Thank you. I appreciate that. I think
+most reasonable people who are listening to this would agree
+that there are regulations in place, the SEC has those to pause
+activities that could be harmful, not only to the markets, but
+to the individual investors. And so what I'm understanding you
+saying is that it did work in the way it was supposed to?
+ Ms. Schulp. As the facts that I know now, it does appear to
+have worked the way it was supposed to. This is not a sign to
+me that the market is broken.
+ Mr. Loudermilk. Thank you.
+ Mr. Griffin, what are some of the issues that policymakers
+should consider in the T plus 2, T plus 1, T plus 0 debate?
+Obviously, margin requirements exist to make sure firms have
+enough capital to settle transactions, but faster settlement
+and lower margin requirements can be positive for the retail
+investors, and we need to balance those needs.
+ Can you address what some of the issues are in the T2, T1,
+and T0 debate?
+ Mr. Griffin. Congressman, I cannot profess to be an expert
+on these issues, but I will give you my perspectives from
+having been in this for 30 years. We started at T5. We will one
+day be at real-time settlement, and the question is, is how
+long does that journey take?
+ From T2 to T1, which reduces the amount of capital required
+by broker-dealers to meet the needs of their customers, that
+reduction in capital would have been very helpful to Robinhood
+during this period of time. It reduces counterparty risk
+holistically, which is good for everybody in the market. We
+should push for T1.
+ As we go to same-day settlement, you now bring into
+question the complexity [inaudible] movement and you bring into
+play the necessity for all systems to be functioning every
+moment of every day with no room for error. On a T1 settlement
+site--
+ Chairwoman Waters. The gentleman's time has expired. Let me
+remind the Members that we're going to have a series of
+hearings. Today is the first. There will probably be two more.
+I didn't hear anyone here today say that they were ready to
+pile on regulations, so let's make sure we know that our
+statements are accurate.
+ Mr. Foster, you're recognized for 5 minutes.
+ Mr. Foster. Thank you, Madam Chairwoman, and I thank our
+witnesses for being here.
+ Mr. Tenev, I'd like to follow-up a little bit on payment
+for order flow and best order execution issues. Democratization
+of finances is a good and noble goal, but for democracy to
+work, consumers need transparency and high-quality information.
+And not only about fees, but about order execution quality.
+ Your customers actually don't care directly about who you
+subcontract order execution to or any payment for order flow,
+but they need a simple way to compare the execution quality
+between your app and competing apps or other accounts, while
+institutional investors can afford to run their own tests and
+they do.
+ And I'm sure Mr. Griffin is quite often on the receiving
+end of those tests, and trying to measure up to his competitors
+to compete for market share there. The institutional investors
+have the market power to demand best-execution statistics for
+their prime brokers. And everyday investors do not get the same
+transparency.
+ In fact, I believe there's an SEC rule, Rule 606, that
+requires brokers to disclose at least some order execution data
+to institutional investors, but this requirement does not apply
+to retail investors.
+ So, Mr. Tenev, since Robinhood's mission is to democratize
+finance for all, I ask, what are the mechanisms that you would
+accept and support to provide transparent order execution
+quality statistics so that your customers can engage in a
+clean, apples to apples comparison between other brokers,
+between your app and other peoples' apps in terms of the total
+cost of trading?
+ Mr. Tenev. Thank you, Congressman, for that very important
+question. I'm generally in favor of a greater amount of
+transparency than what we've typically seen in the financial
+industry, and recently, Robinhood, and me personally, have
+engaged publicly on the topic of payment for order flow, short
+selling, and, of course, T plus 2 and real-time settlement.
+ We do publish 606s via Robinhood Securities that detail our
+payment for order flow arrangements with various market makers.
+And just this past year, the industry implemented more detailed
+606 requirements, which we, of course, conform to.
+ Also, back in December of 2020, we released a public page
+on our website that provided detail about the execution
+quality, including price improvement that our customers
+received. And we're proud to announce that in 2020, our
+customers received in aggregate over a billion dollars of price
+improvement on their executions.
+ Mr. Foster. Right, but that's not a comparison to your
+competitors. There are a lot of questions about the accuracy of
+the best execution reference price, and independent of whether
+it should be improved, it seems like, if I was a customer of
+you or one of your competitors, what I'd want to see is, I just
+executed a trade of $2,000, and on average, I got X percent
+better or worse than a reference price.
+ And then over time, and seeing not only the trade that I
+just executed, but perhaps a running average over the last
+month or two that you can compare to the running average of
+whether you're exceeding some benchmark for trade execution
+quality that can really be compared with potential competitors.
+ And is that a workable system? Are there difficulties? Is
+there a reason why industries should move that way in the name
+of transparency to customers?
+ Mr. Tenev. Congressman, this is a very interesting topic to
+me. I'd love to have the conversation. I don't know if this is
+the right forum to necessarily ideate and brainstorm on all of
+the solutions, but I just want to say I'd be happy to engage
+with this in a detailed forum and figure out the right path.
+ Mr. Foster. Okay. We do intend to continue to engage with
+the industry on this subject because it's very easy to make
+payment for order flow sound really creepy. You're basically
+selling a list of rubes to the sharks, okay?
+ On the other hand, you make part of an argument that this
+can net out positive for consumers, but for it to fully net out
+positive, they have to be able to make the apples to apples
+comparison. That's really an important issue.
+ And I think that probably your reaction to that, if you
+found your customers were leaving you because of poor execution
+quality, you would do what large funds do, which is to split
+your order flow between multiple order execution firms and then
+demand of them the best order execution and move your business
+to whomever does the best for your customers.
+ Mr. Tenev. Congressman, we already do that. We have seven--
+ Chairwoman Waters. The gentleman's time has expired. Mr.
+Mooney, you're recognized for 5 minutes.
+ Mr. Mooney. Thank you, Madam Chairwoman.
+ Let me just start by saying that in the last Congress, 30
+of my Democrat colleagues, 4 on this very committee,
+cosponsored a bill that would impose a financial transaction
+tax on the purchase of securities and certain derivatives.
+ And just recently, after the market volatility surrounding
+GameStop in January, many Democrats renewed the call for a
+financial transaction tax. On January 28th, Congresswoman Ilhan
+Omar tweeted, ``How about this financial transaction tax now?''
+Congressman Peter DeFazio is the lead sponsor of the bill. He's
+already put the bill back in for this session of Congress. It's
+now House Resolution 328--it's called the Wall Street Tax Act
+of 2021. I actually have a copy of it from the last session
+here. It's in again now. And Congressman DeFazio says that a
+financial transaction tax would, ``help create a more level
+playing field for Main Street.''
+ So with that background, Mr. Tenev, this question is
+directed at you. The Robinhood platform has more than 13
+million users and most of them are small-dollar retail
+investors. If the Federal Government levied a .1 percent
+transaction tax on the sale of securities--and I know one of my
+colleagues, my good friend mentioned this earlier, and I want
+to expand upon it a little more. How would that .1 percent
+transaction tax on the sale of securities affect your platform
+and the retail investors who are your customers?
+ Mr. Tenev. Thank you, Congressman. And we'd be happy to
+engage in this discussion much more in the future. A 10 basis
+point financial transaction tax would eat into the returns of
+our customers, which, as you pointed out, are largely smaller
+investors. And in that sense, it would be a cost to the retail
+investor.
+ Of course, that would have to be weighed against the
+potential benefits of this tax, and I know it's a more
+complicated issue than meets the eye at first glance.
+ Mr. Mooney. Okay. Thank you for that answer. My next
+question is actually for Jennifer Schulp. I know you spent your
+career specializing in financial regulation. In your expert
+opinion, would a financial transaction tax directly prevent
+fraud or market manipulation?
+ Ms. Schulp. No. I don't think a financial transaction tax
+would have an effect on fraud or manipulation. I also don't
+think that it ultimately--financial transaction taxes often
+fail to raise money, and they distort trading in a way that's
+not necessarily foreseen initially by the tax.
+ And I'd like to just add in there as well that the
+financial transaction taxes, while they initially might seem
+like a small imposition on an individual investor, those taxes
+often hurt individual investors and their long-term retirement
+goals by affecting the institutions that also do the trading in
+mutual funds and with retirement money. I don't think a
+financial transaction tax is a good idea.
+ Mr. Mooney. And a quick follow-up to that, Ms. Schulp, do
+you think that a financial transaction tax would have done
+anything to prevent the market volatility and disruption we saw
+just this past January?
+ Ms. Schulp. No, I don't think it's related here. There's
+been some discussion that it might've decreased the amount of
+trading and thus changed the volatility. It's my opinion that
+that would not have had any effect in this particular
+circumstance.
+ Mr. Mooney. Thank you. I only have a minute left, so let me
+just summarize. The financial transaction tax supported by many
+Democrats would do nothing to prevent market manipulation or
+fraud, would have not prevented the market disruption in
+January, and, most importantly, it would hurt retail investors,
+yet Democrats are claiming that the events surrounding GameStop
+and Robinhood in January make it imperative to implement this
+financial transaction tax. It just doesn't add up.
+ A financial transaction tax would make it more expensive
+for small retail investors to trade, and so much for looking
+out for Main Street. I believe we should be working together to
+find ways to open up markets to retail investors, not close
+them. Instead of making trade more expensive with a burdensome
+tax, let's look for ways to empower retail traders.
+ Thank you, Madam Chairwoman. I yield back.
+ Chairwoman Waters. Thank you very much. Mrs. Beatty, you're
+recognized for 5 minutes.
+ Mrs. Beatty. Thank you, Madam Chairwoman, and thank you to
+the witnesses. My first question is to Ken Griffin. In the
+first 3 quarters of 2020, your company paid online brokerages
+like Robinhood $700 million for their order flow.
+ Do you believe that brokers like Robinhood can serve the
+best interests of their users while selling their order flow to
+companies like yours? And that's a yes or a no.
+ Mr. Griffin. Congresswoman, I believe that Robinhood
+actually goes further in the best interests of their customers
+by, in fact, routing their order flow to Citadel. We give a
+better price, a better execution for American retail investors
+than the alternative of going to exchanges.
+ Mrs. Beatty. I'm going to take that as a yes, since you
+said they go further. Then, can you tell me, why does your
+company urge the SEC to ban the payment for order flow models
+in a filing to the SEC?
+ Mr. Griffin. Congresswoman, that is a terrific question.
+That filing relates to the U.S. options market--it was a filing
+back, I believe, in 2004. And in the U.S. options market at the
+time, trades were committed against listed quotes.
+ We were apprehensive about the direction in which the U.S.
+options market was heading towards the existence of these price
+improvement auctions which diminished the incentives to
+aggressively provide bids and offers in the options market.
+ We felt that legislative or regulatory efforts to encourage
+tight quoting, to discourage the existence of these auctions--
+and this was being, in some sense, fueled by a series of
+payment for order flow programs was in the best interest of
+American institutional and retail investors.
+ Now, regretfully, we did not prevail in our reasoning. The
+rise of price improvement auctions came into, in essence, the
+day-to-day model for options trading in the United States. And
+I do believe that this is a setback for our capital markets.
+ Mrs. Beatty. Because my clock is ticking, let me ask you
+this: Are you saying that you no longer believe that the model
+is anticompetitive and distorts order routing decisions?
+ Mr. Griffin. I think it's important to distinguish between
+a market where you must trade on an exchange. In the options
+market, we must print the trade on the exchange, versus a
+market where you can trade off exchange, which would be the
+U.S. equities market.
+ So just to be very clear, because your question's very
+good, every single options trade must be executed on an
+exchange. Equity trades do not. And because of that, I can save
+Robinhood exchange fees, and offer a tighter bid-ask spread
+than--
+ Mrs. Beatty. Clearly, we're going to have to have a further
+discussion. Let me interrupt you only because my time is
+running out, and I want to follow up with a question for
+Robinhood's CEO.
+ Mr. Tenev, several of the brokers offered their users order
+flow for the sale to the firm, like with the previous CEO at
+Citadel. However, the price that Robinhood gets for the order
+flow is much higher than any other brokers receive. And I could
+go on and tell you we pulled the SEC filings, and that
+Robinhood received 17 percent per 100 shares of stock traded,
+and 58 percent to 100 shares, and I could go on. But the
+question is, why do companies like Citadel pay a premium for
+their order flows of Robinhood's users?
+ Mr. Tenev. Thank you, Congresswoman, for that very
+important question. There are several reasons that may be the
+case. One important one is that our model and formula for
+payment for order flow works a little bit differently. We
+actually receive payment for order flow as a percentage of the
+bid-ask spread rather than on a per-share basis, and we do
+believe that's the most optimal way to structure payment for
+order flow arrangements.
+ Mrs. Beatty. Okay. Is it not because companies like Citadel
+can make more money off of Robinhood users than others? And
+that's a yes or a no, because my clock is going to run out.
+ Mr. Tenev. No.
+ Mrs. Beatty. I'm sorry. I yield back. My time is up.
+ Chairwoman Waters. Thank you very much. Next, we will have
+Mr. Davidson.
+ Mr. Davidson, you are recognized for 5 minutes.
+ Mr. Davidson. Thank you, Madam Chairwoman. And I thank our
+witnesses and I appreciate the work you've done today.
+ I just want to share that in May of 2020, the Depository
+Trust & Clearing Corporation (DTCC) unveiled a working proof of
+concept called Project Ion. In this project, DTCC said they
+would examine the potential use of distributed ledger
+technology in accelerating the clearing and settlement process.
+Now, since Project Ion was publicly announced, we've received
+little information pertaining to its progress.
+ As a long-time advocate for this emerging technology,
+distributed ledger technology and blockchain, today I've sent a
+letter to the DTCC to request that they provide an update on
+the status of Project Ion. And I look forward to hearing back
+from them, and hope to include them in our next hearing.
+ Mr. Griffin, with Project Ion in mind, could you briefly
+state what would be your biggest concern if DTCC implements
+same-day clearing and settlement?
+ Mr. Griffin. Same day clearing and settlement requires that
+every bit of the workflow is perfectly synchronized across all
+parties, and we have no time for recoverability or for the
+error management that you have in the overnight batch process.
+ Mr. Davidson. Right. The technology makes that essential,
+in my assessment, that is inherent for the architecture for
+blockchain to move forward with each proof. And, so, I guess,
+clearly, in your business, just to follow up there, the
+technology exists for trading firms that are engaged in high
+frequency trading, you measure success in the course of the day
+in what, milliseconds for high frequency trading?
+ Mr. Griffin. As you know, we are the largest market maker
+in the world and the largest in the United States in equities.
+We put great emphasis on the performance of our systems. That
+was one of the reasons that on the week of January 24th, we
+were the only major market center for retail order flow that
+was responsive every minute of every trading day.
+ Mr. Davidson. Perfect. I just wanted to make the point that
+I think the technology exists, whether you use blockchain or
+not, and I applaud you for having the ability to execute with
+precision swiftly already, and I don't think it's a barrier.
+I'd love to have more dialogue, but unfortunately, I have to go
+to a few others.
+ Mr. Tenev, do you believe that the root cause of January
+28th, for the problems that you and others experienced, were
+market infrastructure-related, particularly related to T-2
+versus T-0?
+ Mr. Tenev. Thank you, Congressman. I do believe if we had
+real-time settlement capability and the infrastructure was
+modernized, we would not have seen similar problems.
+ Mr. Davidson. Yes. And thanks for that. I think one of the
+related things, and it's related to your mission at Robinhood
+of more democratic access to capital--it's just not the ability
+for more people and a broader portion of America to become
+savers and investors. It's also to engage in corporate
+governance, even. Do you believe that if market infrastructure
+would guarantee--this is really related to the musical shares
+where someone could be left with no share when the music stops,
+mobile claims on a shorted stock. If the market infrastructure
+would guarantee an investor could retain custody of their
+shares so that the shares can't be lent to short sellers, there
+could be a downside. How do you feel that only one claim on the
+shares would resolve this, and that relates to proxy voting as
+well or shareholders voting the shares?
+ Mr. Tenev. Congressman, I believe that's an important
+question. It's one that Robinhood, and me, personally, have
+engaged with. I do believe that the ability for the same share
+to be shorted an indefinite number of times is somewhat of a
+pathology, and that should be fixed. And I think step one of
+that is modernizing the antiquated settlement infrastructure
+that everything is built on. We simply don't have the ability
+to properly track what shares have been shorted, and how many
+times, as they're moving through our settlement system
+currently.
+ Mr. Davidson. Yes. Thank you for that. And I appreciate
+that you see the relationship. Hopefully, broadly we do, and we
+provide the nudge the market needs.
+ I want to commend Vice Chancellor Travis Laster on the
+Court of Chancery of the State of Delaware for his letter and
+paper, ``The Blockchain Plunger,'' which explains how this
+could be done, and I ask unanimous consent to submit that for
+the record.
+ As my time expires, I want to commend you, Mr. Gill, for
+just representing a large segment of the industry, in my view,
+where savvy investors have had an opportunity to engage, and it
+relates to people with diamond hands that hold. You might not
+call yourself a holder, you might use the words, ``diamond
+hands,'' but thanks, and congratulations for your success. I
+yield back.
+ Chairwoman Waters. The gentleman's time has expired, and,
+without objection, your submission is taken. Thank you.
+ Chairwoman Waters. Mr. Vargas, you are recognized for 5
+minutes.
+ Mr. Vargas. Thank you very much, Madam Chairwoman.
+ First of all, I want to apologize to Mr. Plotkin. You spoke
+of the anti-Semitic attacks that you suffered online. As a
+person of color, I always feel the need to confront hate speech
+and speak out, and I don't think there's ever been a more
+hateful, evil, sinful event in human history than the
+Holocaust, so I want to apologize to you and your family for
+those attacks. You brought it up, and I think we owe you an
+apology, so I want to apologize for that.
+ Sometimes, I think some of my colleagues on the other side
+of the aisle are devoid of any contact with real people when
+they say this is just political theater, or they don't want to
+know the rate of return, when that's exactly what people want
+to know. In fact, there's been a great deal of interest in this
+hearing, and I think it speaks to a great distrust in our
+society of government, markets, and institutions.
+ And then, along comes the story of GameStop, and it's a
+story, really, of Robinhood turned on its head. And the reason
+I say that is, and Mr. Luetkemeyer brought it up, Robinhood was
+an English folk hero, in the 13th, 14th Century, and he was
+supposed to steal--Robin of Loxley was supposed to steal from
+the rich and give to the poor, and here, you almost have the
+opposite. You have a situation where you have stealing from the
+small retail investor and giving it to the large institutional
+investor.
+ From an outsider's perspective, you have, at least, the
+hedge funds and their armies of analysts and lawyers and
+regular old suits attacking the trust [inaudible] GameStop by
+shorting its stock. And to the rescue, here comes the retail
+investors, and they're taking stock to these incredible levels.
+And all of a sudden, Robinhood steps in, but not to help the
+little guy. He steps in and says, I'm going to help the big
+guy, and stops the sale, because no one knows how high this is
+going to go. And who is getting it? Who is getting socked in
+this thing? The bullies are, the hedge funds. And that's why
+people were excited about this.
+ But all of a sudden, Robinhood steps in, and they say, No,
+no. We had to do this because of other conditions, and my good
+friends, the Republicans, say it was the government, really. It
+was because the government regulations forced them to do this.
+Well, that's not what the public thinks. The public thinks that
+there was collusion, that the big guys, all of you guys were
+figuring out how to do this, and, ultimately, come out ahead as
+you always do. And it seems that my colleagues on the other
+side want to help people.
+ Now, Mr. Griffin, if I could just ask you the first
+question: How many people are in the room with you? If you
+could just count how many people are in the room with you.
+ Mr. Griffin. There are five people, including myself in
+this room, sir, Congressman.
+ Mr. Vargas. Thank you. So, I don't think my colleagues need
+to help the CEOs or anybody else. They have plenty of help.
+ I have to ask this: You said that you didn't talk to
+anybody at Citadel, Citadel Securities. Did anyone in your
+organization, since January 1st, contact Robinhood?
+ Mr. Griffin. Are you asking if we've had contact with
+Robinhood?
+ Mr. Vargas. With respect to GameStop, and what we're
+obviously talking about.
+ Mr. Griffin. Congressman, we offered to have my colleague
+who manages that relationship be here today instead. He has
+firsthand knowledge. We, of course, are talking to Robinhood
+routinely in the ordinary course of business. We manage a
+substantial portion of their order flow.
+ Mr. Vargas. I understand that, but did you talk to them
+about restricting or doing anything to prevent people from
+buying, not selling, but buying GameStop?
+ Mr. Griffin. Let me--
+ Mr. Vargas. Anybody in your organization?
+ Mr. Griffin. Let me be perfectly clear: Absolutely not.
+ Mr. Vargas. So if we depose everyone in your organization,
+we'll find that.
+ Mr. Griffin. That is correct.
+ Mr. Vargas. Okay. Thank you. I do want to ask you one
+thing, and Mr. Sherman was pursuing this. How do you balance
+the best execution for the order flow for your purchase from
+Robinhood with the need to profit from the purchase order flow?
+How do you do that?
+ Mr. Griffin. As a market maker, we have to provide to the
+customer a better price than they can achieve on an exchange.
+Order flow is routed to us on the merits of the execution
+quality that we provide in contrast to our competitors with
+whom we are competing.
+ Mr. Vargas. Okay. My time's about to expire, but I have to
+say, Mr. Tenev, when you say that Robinhood has made $35
+billion, and you don't say how much your people lost on
+GameStop, people who invested with you, that's like taking the
+Fifth. Thank you.
+ Chairwoman Waters. Thank you. The gentleman's time has
+expired.
+ Mr. Budd is recognized for 5 minutes.
+ Mr. Budd. Thank you, Madam Chairwoman. And I also want to
+thank the panel.
+ Now, I really care about a level playing field for retail
+investors to access the market, and I have long been a
+supporter of financial innovation in fintech, and the shared
+goal of democratizing finance and making access to the
+financial system easier for all.
+ So, Mr. Tenev, your company boasts that it's helping to
+democratize finance and is at the forefront of innovation. Can
+you talk a little bit more about what Robinhood is doing to
+push innovation forward, and create a level playing field for
+all investors, while at the same time, making sure that those
+investors are well-informed?
+ Mr. Tenev. Absolutely, Congressman. Thank you for that very
+important question. The first thing I should note is that many
+of the witnesses and representatives here have stated that it's
+never been a better time to be a retail investor in America
+than it is right now. I think the combination of zero
+commissions, no account minimums, and fractional shares,
+really, things that Robinhood has helped make the industry
+standard, have helped small investors, and helped level the
+playing field for people to participate in the markets.
+ Over the past year, Robinhood has released fractional
+shares, the ability to do dividend--automated dividend
+reinvestments, recurring investments so that you could take $1
+or $5 and create a habitual investment into a particular stock.
+And the theme of this year for Robinhood is, how do we take a
+first-time investor and turn them into a long-term habitual
+investor? How do we make long-term investing accessible for
+people around the country?
+ And we're making huge investments in education and customer
+support, to support that. We recently released a revamped Learn
+Portal, we call it Learn 2.0, with the aim of taking a customer
+from basic concepts such as, what is a share? What is a stock?
+What's an ETF? And taking them all the way through to more
+advanced concepts. And we're continuing to invest more and more
+on Learn as well as on Snacks, which is our popular podcast,
+and all other forms of content that we distribute. Last year,
+more than 3.2 million--
+ Mr. Budd. I want to interrupt you there. I know you have a
+lot more things. These are great, and I know we could probably
+talk for a lot longer than this, but I want to shift gears just
+a bit. But I do want to keep talking about the retail investor,
+and I want to switch to Ms. Schulp.
+ Ms. Schulp, back in December, there was an article that you
+wrote prior to all of these events that we're having the
+hearing on today. And in the article, I think that you said
+that it's inappropriate to refer to these very retail investors
+that we're talking about that are using these platforms like
+Robinhood, that we're talking about, and referring to those
+investors as, ``dumb money.'' I think that is pretty insulting,
+and my colleague from across the aisle from Connecticut used
+that term. I think it's insulting. And instead, retail
+investors are, in fact, revolutionizing the stock market. So
+would you elaborate on those views, Ms. Schulp?
+ Ms. Schulp. Absolutely. Thank you, Congressman. Retail
+investors are often referred to as, ``dumb money,'' by Wall
+Street, and it's because they don't have access to the same
+level of research, or some use the term because they think
+retail investors make dumb decisions. I think it's insulting. I
+think that the term needs to go out the window. Retail
+investors are investors who make their decisions based on the
+information known to them, and we should focus on educating
+people so that they can understand the risks and rewards of
+investing.
+ Here, I think the GameStop situation is proof that the
+retail investors are revolutionizing the market. No one would
+have guessed, when I wrote that article in December, that
+retail investors were going to initiate a sophisticated short
+squeeze. I think the retail investors here are learning,
+learning by doing, which is one of the best ways to learn, and
+we should expend effort making sure that people are equipped
+with the knowledge to understand the risks of being in the
+market.
+ Mr. Budd. I appreciate that, and I would like to ask for
+unanimous consent to insert that letter into the record, Madam
+Chairwoman.
+ Chairwoman Waters. Without objection, it is so ordered.
+ Mr. Budd. Thank you. I just want to look--Robinhood wrote
+about the need for--and this is open to anyone. And I just have
+a few seconds left, but I'd like for someone to talk aboutx, is
+it possible for clearinghouses in real-time settlements on the
+blockchain to exist? And I don't have time for that, but that's
+something we can come back to at a further point. And, Madam
+Chairwoman, I'll go ahead and yield back.
+ Chairwoman Waters. Thank you very much. And, without
+objection, I want to make sure that that's in the record, that
+your insertion was accepted. Thank you. With that, we'll turn
+to Mr. Gottheimer.
+ Mr. Gottheimer, you are recognized for 5 minutes.
+ Mr. Gottheimer. Thank you, Madam Chairwoman, and thank you
+to our witnesses for being here today. Before I begin, Mr.
+Gill, I read your testimony, and I'd like to offer my heartfelt
+condolences for the loss your family suffered last year.
+ It's not just Melvin Capital that lost money as part of the
+frenzy around GameStop. Whether it's a security guard losing
+$20,000, or a dog walker losing a few hundred dollars, everyday
+retail investors were left holding the bag after GameStop's
+stock fell back to earth. Not every investor lost money. Mr.
+Gill, sitting before us here today, remains bullish on the
+stock. Still, Bloomberg reported yesterday that he was served a
+lawsuit accusing him of misrepresenting himself and his
+motivations.
+ I'm not here to take sides in the litigation. However, it
+does raise important questions about the role of social media
+websites, like Reddit, especially in the context of the
+volatility we experienced with GameStop, AMC, and numerous
+other stocks last month.
+ Mr. Huffman, what kind of authentication exists for Reddit
+users to confirm their identities to verify that they're even
+real people?
+ Mr. Huffman. Reddit--and this an important quality of
+Reddit, so thank you for the question--doesn't require people
+to reveal their full identity to use the platform. One of our
+pillars of privacy, and privacy is something that's critically
+important to us, is that users should be masters of their own
+identity, and they can choose to reveal as little or as much as
+they would like.
+ I'll point out that there are two sides to this that are
+really important. On one side, this allows Reddit to work.
+Something like WallStreetBets would not exist if users had to
+reveal their full identity, because in WallStreetBets, people
+are revealing gains and losses. They're effectively revealing
+their financial position in life, and we would not put that
+burden on anybody to force them to do so.
+ I'd like to point out that other platforms have real
+identity, and it doesn't do anything to improve their behavior.
+ Mr. Budd. Is there any way for a regular user of
+WallStreetBets to know what content is genuine, written by
+other users just like themselves, retail investors who are
+looking for honest information to invest on? Is there any way
+for that?
+ Mr. Huffman. There are a couple of aspects to this. The
+first is that we, as a company, invest significant resources in
+enforcing the veracity of our voting system. It's something
+we've been doing for 15 years, long before events like this,
+long before even the election and the politics of the last few
+years where these things have become top of mind for everybody.
+This has been critically important to us.
+ Also, our user base is exceptionally good at sniffing out
+untruths, misinformation, and fake stories both within this
+community and Reddit at large. So, in order for any piece of
+content to be successful on Reddit, it has to be accepted by
+that community and receive the same votes that anything else
+would.
+ Mr. Budd. Okay. Do you have any heightened standards for
+places like WallStreetBets or other investing subreddits where
+people can manipulate content to their own financial gains?
+ Mr. Huffman. We keep a high standard across the entire
+site. And with this particular community, over the past few
+weeks, we've been looking especially closely, anticipating
+these sorts of issues and questions. And, to date, we have not
+found any nefarious behavior.
+ Mr. Budd. Got it. But we could have a situation where
+thousands, possibly millions of dollars of retail investor
+money may be being manipulated. We don't know that for sure.
+ Mr. Huffman. People in the United States talk about stocks
+on Reddit. They talk about it on TV, in magazines. People can
+say--in fact, they do, on television, all the time encourage
+people to make what I would call bad investment decisions. On
+Reddit, I think the investment advice is actually probably
+among the best because it has to be accepted by many thousands
+of people before getting that sort of visibility.
+ Mr. Budd. Do you see any difference between someone on
+Reddit offering advice versus an analyst at a major bank or a
+financial services firm?
+ Mr. Huffman. Absolutely. I think on Reddit, you're seeing
+retail investors who are giving authentic advice based on their
+knowledge, and you would not, I think, call into question what
+their motivations are, or what large positions they may hold
+before going on TV and talking about them.
+ Mr. Budd. Do you plan to do more in this space, and is this
+something that's going to be a major priority of yours? And do
+you think overall, social media companies, like yourself,
+should be held to a different standard? Should you be
+responsible for what happens in your content? If someone
+manipulates something or if it's a bot, should that be on you,
+or do you think that's just buyer beware?
+ Mr. Huffman. We take manipulation of Reddit incredibly
+seriously. That is one of our, I think, first duties in all of
+this is to ensure the authenticity of our communities, yes.
+ Mr. Budd. Yes. But do you think you should be held
+responsible if somebody puts something--if there's some
+collusion or if there is somebody who is a--it's a Russian,
+it's a bot that's online. Do you think you should be on the
+line, or this is just a site you offer for people to exchange
+ideas?
+ Mr. Huffman. Reddit can be held responsible, and we do take
+our responsibilities here incredibly seriously.
+ Chairwoman Waters. Thank you. The gentleman's time has
+expired.
+ Mr. Budd. Thank you. Thank you, Madam Chairwoman.
+ Chairwoman Waters. Mr. Kustoff is now recognized.
+ Mr. Kustoff. Thank you, Madam Chairwoman. And I want to
+thank you and the ranking member for convening today's hearing.
+ If I could, Mr. Tenev, I'd like to echo what many of my
+colleagues have said today. We do appreciate the fact that
+you've created this platform. To a large extent, you've leveled
+the playing field so that small, individual investors can have
+a shot at the American Dream of investing. A lot has been said
+about the situation that occurred in late January. My question
+to you is, how did you misjudge your capital requirements to
+prevent people from being able to trade during that period in
+January?
+ Mr. Tenev. Thank you, Congressman. I wouldn't say we
+misjudged our capital requirements. This was a 1-in-3.5 million
+occurrence event, one that had never been seen before in
+capital markets, and we had to play this by the book. Robinhood
+Securities made the decision that we did so that we could
+remain in compliance with our regulatory capital and deposit
+requirements. Unfortunately, it required us to restrict the
+buying of these securities for Thursday, and limit it to some
+degree on subsequent days until additional capital came in that
+allowed us to relax the restrictions.
+ Mr. Kustoff. It was Robinhood's mistake, though, correct?
+ Mr. Tenev. Robinhood owns what happened, certainly, and we
+need to make sure it doesn't happen again, but Robinhood--
+really, Robinhood Securities had limited options on how to
+address this. And I fully support the team in making the
+decision that they did, and I believe they did the right thing,
+and the only thing.
+ Mr. Kustoff. You said at the beginning that you're
+privately held. With that said, is your primary source of
+revenue from the order flow payments that you receive from some
+of the players we've talked about today?
+ Mr. Tenev. That is correct, Congressman. Payment for order
+flows is one of our largest revenue sources.
+ Mr. Kustoff. Is it the largest?
+ Mr. Tenev. It's the largest, yes.
+ Mr. Kustoff. In both your written and oral testimony, you
+talked about the settlement period, and we're probably capable
+of doing it in real time, or instead of T plus 2, making it T
+plus 1. If we had real-time settlement, would the situation
+that occurred in January have been preventable? In other words,
+that wouldn't have happened if we had real-time settlement?
+ Mr. Tenev. Congressman, if we were to have real-time
+settlement, and of course, there's some implementation details
+that would govern this, there would be less of a need for
+collateral at clearinghouses because the cash and securities
+transactions would be exchanged in real time. Collateral for
+counterparty risk would be less necessary. So, real-time
+settlement would lead to reduction, perhaps, and elimination in
+some of these collateral requirements, a reduction in the money
+that's sort of clogging up the plumbing of the system, and that
+would have avoided some of these problems altogether.
+ Mr. Kustoff. Thank you very much. And just to be clear,
+does the same answer apply if I asked you if settlement was T
+plus 1 instead of same-day settlement, would your answer be the
+same?
+ Mr. Tenev. Congressman, T plus 1 would be better, but it
+doesn't--it reduces the scope of the problem, but it doesn't
+eliminate it from a technology standpoint.
+ Mr. Kustoff. Thank you very much.
+ Mr. Huffman, I'd like to follow up on some of the questions
+that my colleagues, Congressman Hill and Congressman
+Gottheimer, asked. You've done an investigation into Reddit and
+into WallStreetBets. You don't see anything--any bad actors--
+I'm paraphrasing, but you don't see any bad actors that caused
+any role in the GameStop frenzy. Am I characterizing that
+correctly?
+ Mr. Huffman. Congressman, that's right.
+ Mr. Kustoff. You know that Congress is looking at amending
+Section 230. What are your thoughts about that as it relates to
+Reddit?
+ Mr. Huffman. Sure. Section 230, I think, is a critically
+important law to the internet as we know it. And it was
+created, in fact, to protect a forum in the early internet for
+talking about stocks. Section 230, I think it's also important
+to point out, doesn't protect platforms or companies like ours
+from civil litigation, so there are mechanisms for coming after
+companies like ours. What it does protect is our ability to
+evolve the way we moderate our content, which we have done in
+many ways over the last decade.
+ Chairwoman Waters. The gentleman's time has expired.
+ The gentleman from Texas, Mr. Gonzalez, is recognized for 5
+minutes.
+ Mr. Gonzalez of Texas. Thank you, Madam Chairwoman, and
+Ranking Member McHenry, and I want to thank everyone here with
+us today.
+ This is for Citadel. Mr. Griffin, in 2020, Citadel violated
+Regulation SHO, which governs short selling. Citadel is now
+involved in another short-selling problem, and Robinhood routes
+half of its customers' orders to you. Robinhood halts buying on
+a position that you're long on, and you own the hedge fund and
+the clearing broker. What is there to prevent you from taking
+advantage of that situation and making sure you profit off of
+the confusion and retail investors?
+ Mr. Griffin. Congressman, I'm trying to understand the
+question.
+ Mr. Gonzalez of Texas. Let me give it to you again. In
+2020, Citadel violated Regulation SHO, which governs short
+selling. Citadel is now involved in another short-selling
+problem, and Robinhood routes half of its customers to you, its
+orders to you. Robinhood halts buying on a position that you're
+long on, and you own the hedge fund and the clearing broker.
+What is there to prevent you from taking advantage of that
+situation and making sure you profit off of the confusion of
+retail investors?
+ Mr. Griffin. In no particular order, I just do not
+understand the reference to us owning a clearing broker. We do
+not own DTCC. We do not control DTCC. We are not a party to the
+discussion, dialogue, or demands between DTCC and Robinhood.
+So, I do not understand the premise of the question, because we
+have literally nothing to do with DTCC other than being a
+member of DTCC for providing settlement services for us, and
+for doing real-time trade affirmation and clearing.
+ Now, Citadel Securities owes a duty of best execution for
+every order that comes from Robinhood, and I will tell you that
+I'm incredibly proud of how seriously my team takes that duty
+of best execution. Some of the most earnest, hard-working, and
+thoughtful people that I've ever met in my life work on our
+retail execution business here at Citadel, and take great pride
+in the execution quality that we give to each and every trader,
+not only at Robinhood, but at every single one of the--
+ Mr. Gonzalez of Texas. Thank you.
+ Mr. Griffin. --of the retail--
+ Mr. Gonzalez of Texas. Thank you for your response.
+ Mr. Gill, I understand that you made your position known on
+GameStop as far back as 2019, and are lauded as a diamond hands
+hero by the WallStreetsBets community. Have you ever previously
+experienced or observed the type of restrictions Robinhood and
+other applications performed on January 28th?
+ Mr. Gill. Thank you, Congressman. No, I have not.
+ Mr. Gonzalez of Texas. Thank you. That was it for the
+question.
+ And, Mr. Huffman, I'm not a Redditer, but I do understand
+the problems around social media and freedom of speech and the
+tightrope act that goes on where these intersect. In the near
+decade of WallStreetBets and subreddit, have they shown
+themselves to be an exceptionally problematic forum, or just
+one of the many eccentric communities that call Reddit home?
+ Mr. Huffman. Congressman, I think your latter description
+is more accurate. They are an eccentric community, but they're
+well within the bounds of our content policy. And though we do
+have difficult decisions to make here and there regarding
+specific communities, one of the things we look to first is
+whether the community is trying and putting their best efforts
+toward being a good citizen of Reddit. And towards that end,
+we've had consistent communication with the moderators of that
+community, and they've been doing, I think, an excellent job.
+ Mr. Gonzalez of Texas. Thank you. The last financial crisis
+was caused when we turned a blind eye to the bad practices of
+our financial institutions. Perhaps today, we've seen a warning
+about the clearing process, and I hope today can be a jumping-
+off point for us to take a hard look at our markets, and the
+practices of these institutions.
+ In a two-day clearing process, the liability risk and
+potential financial stress limited trading, but in a key time
+in market, and, perhaps, in a way that materially affected
+investors in these recent events. So, I'm hoping that we all
+get to take a closer look at what is happening.
+ And with that, I yield back. Thank you.
+ Chairwoman Waters. Thank you very much.
+ Mr. Hollingsworth is now recognized for 5 minutes.
+ Mr. Hollingsworth. Thank you, Madam Chairwoman.
+ Mr. Griffin, I'm going to direct my questions to you,
+specifically, but I'm hoping to talk a little more
+philosophically about the market writ large, rather than just
+Citadel itself. Certainly, there's been a significant amount of
+evidence supporting the advantages that market makers offer
+retail investors.
+ Through sophisticated infrastructure and high-speed
+technology, bid-ask spreads have decreased from $0.33 to less
+than a penny over the last 5 decades, and according to some
+research, saved retail investors $1.6 billion just in the first
+6 months of last year alone. None of our discussion after this,
+and the questions I'm going to ask, is intended to be
+pejorative to that reality, but I just wanted to pick your
+brain, given your deep experience about some of the
+implications of off-exchange trading, specifically. We've seen
+this year that off-exchange trading has eclipsed nearly 50
+percent of all trading.
+ Can you talk a little bit about what factors have
+contributed to off-exchange trading's growth versus on-exchange
+trading? Certainly, I want to talk about the concerns we may
+have as market participants about that, but first, just the
+factors that you think are driving that?
+ Mr. Griffin. I think one of the most significant drivers of
+off-exchange trading is that exchanges are handcuffed in their
+ability to fulsomely compete.
+ Mr. Hollingsworth. Can you talk a little bit more about
+that? Is this just regulatory arbitrage?
+ Mr. Griffin. I hate the word, because it has a negative
+connotation. I believe that the exchanges should have greater
+latitude in setting their kick sizes in the most liquid
+securities. That will allow order flow that's currently going
+to dark pools to go to exchanges and to receive better
+executions. So, let me just be very clear: It's not that we
+want to inhibit dark pools, or market makers like Citadel, from
+competing.
+ Mr. Hollingsworth. Right.
+ Mr. Griffin. It's that we want to enable and empower
+exchanges to be better competitors. I started my career as a
+retail investor in the day where I used to spend $0.25 in a
+bid-ask spread if I was lucky. I know the days you're referring
+to. We've come a long way. But to continue on this journey, the
+next step is to allow exchanges to be more competitive in the
+market.
+ Mr. Hollingsworth. I think you answered this question, but
+just to put a fine point on it, there is public policy work
+that needs to be done in order to help resolve some of this
+challenge that exists in the movement of volume from on-
+exchange to off-exchange. That's incumbent upon us. It's
+incumbent upon regulators to find a better solution. Is that
+what you're saying?
+ Mr. Griffin. Congressman, I'm saying that yes, it's
+legislators or the SEC. I believe much of this can be done by
+the SEC as a policy matter.
+ Mr. Hollingsworth. Right.
+ Mr. Griffin. Think of it as the next step forward in
+regulation en masse.
+ Mr. Hollingsworth. Love it. Great. Thank you for all of
+those answers. I want to highlight this further. Can you talk
+about some of the challenges or deleterious impacts on the
+market if more and more volume is off-exchange versus more--
+versus [inaudible] trading? Can you talk a little bit about why
+we should be concerned about that, to make sure we all
+understand how important it is to make these changes to
+empower, as you said, exchanges to be better competitors?
+ Mr. Griffin. I think there are three salient points I'd
+like to make. First, price discovery is the most important part
+of our capital market's function, because price discovery
+combined with liquidity fuels our free enterprise system. It's
+how companies raise capital. It drives down the cost of
+capital. The more trading on-exchanges, the better price
+discovery we have. That is good for our capital markets.
+ The second is that dark pools are often willing to engage
+in business practices where they discriminate against one class
+of investors versus another. I find it very unsettling that we,
+in any way, prohibit discrimination against one group of
+investors to the benefit, or at the expense of another in any
+part of our capital markets. We want our capital markets to
+represent the values of our country.
+ The third is that the dark pools themselves create a level
+of concern and apprehension about the integrity and fairness of
+our markets. And I believe that we should always be taking
+steps to advance public confidence and the confidence of retail
+investors and institutional investors that the United States
+capital markets are a fair place in which to transact business.
+ Mr. Hollingsworth. Mr. Griffin, thank you for those
+answers, and I would call upon my colleagues to recognize the
+deep experience Mr. Griffin has in these areas, and how
+important it is that we take the steps, either via agency or
+via legislation, to help empower exchanges to compete on a
+level playing to make sure that we create a public policy.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Lawson, you're recognized for 5 minutes.
+ Mr. Lawson. Thank you, Madam Chairwoman. Thank you to you
+and Ranking Member McHenry for this hearing today, and I want
+to thank the rest of the panel, the panelists too, for this
+great forum.
+ One thing, Madam Chairwoman, I want to clarify for the
+record is that one of my colleagues earlier said that when
+people got their stimulus money, they went out and started
+investing. I want to let them know that my people got their
+stimulus money and were trying to pay the rent, trying to take
+care of their kids, and I don't want the panel to think that we
+worked so hard on the stimulus dollars so that people could run
+out and invest their money. That's not the norm.
+ Mr. Plotkin, Wall Street is supposed to be tied to revenue
+and property fundamentals. We saw these fundamental changes
+when amateur investors gained control. They publicly stated
+that this isn't about investing based on their fundamentals and
+that this is an investment about making a profit in that way.
+It's about making a profit to demonstrate that they can
+manipulate the system, and if not, better than professionals
+such as yourself.
+ The Reddit trade won, and Wall Street was losing billions
+of dollars. Melvin Capital bet against GameStop, and was on the
+verge of bankruptcy. Clearly, there is manipulation and
+distrust within the system, and inequality in American finance.
+ Mr. Plotkin, do you believe that there is manipulation,
+distrust, and overall inequality within American finance? And
+what do you believe are the consequences to a big guy like
+yourself, but, also, little guys in this process?
+ Mr. Plotkin. Thank you for the question. I really can't
+speculate in terms of the broader system. I think Melvin--my
+focus is on running our portfolio and building a great
+organization and a strong team. I think some of the issues you
+speak about are much greater societally, and it's not really my
+area of expertise.
+ Mr. Lawson. Okay. One other thing, you guys have a Series
+67 license and everything, but these amateur investors don't
+have to go through those same standards. And because they do
+not have to go through those same standards, how are they able
+to go in and manipulate the market--maybe someone here can
+answer--over people who have been involved in just research and
+calculation and investors for so many years? Can anybody
+answer, how are they able to go in and manipulate markets like
+this and cause billions of dollars to be lost?
+ Mr. Plotkin. Sure. I think, as we've spoken about today,
+the financial markets are changing. There's a lot of new
+players. I think they saw an opportunity to drive the price of
+the stock higher. And today, with social media and other means,
+there's the ability to kind of collectively do so. That was a
+risk factor that, up until recently, we had never seen.
+ I think sometimes with retail investors, they've been
+really adept at this, investing in the internet or software
+stocks or electric vehicles, ideas with big opportunities, and
+they chase them because they believe in the fundamentals. I
+think this was very different in that a lot of the mean stocks
+were businesses with real challenges. But they exploited an
+opportunity around short interest and the way that was
+approached. And I think Melvin will adapt, and I think the
+whole industry will have to adapt.
+ Mr. Lawson. I understand that. And I guess from our
+standpoint, and I don't have much more time, but what do you
+recommend to us to try to keep this from happening again?
+ Mr. Plotkin. I think to some degree, markets are self-
+correcting, moving forward, stocks--I don't think you're going
+to see stocks with the kind of short interest levels that we
+saw prior to this year. I don't think investors like myself
+want to be susceptible to these type of dynamics. I think there
+will be a lot closer monitoring of message boards. There will
+be software providers. We have a data science team that will be
+looking at that. Whatever regulation that you guys come up
+with, certainly, we'll abide by. And I look forward to helping,
+if you guys want to have future conversations about that.
+ Mr. Lawson. Okay. Thank you.
+ Madam Chairwoman, my time is running out, so I yield back.
+ Chairwoman Waters. Thank you very much.
+ Mr. Gonzalez of Ohio, you're recognized for 5 minutes.
+ Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. I want
+to thank Ranking Member McHenry for his leadership in calling
+for this hearing today, and also you, Madam Chairwoman, for
+bringing us together.
+ Mr. Tenev, I'm going to start my questions with you by
+walking through a series of events from that day in January,
+just to make sure we're all on the same page. In your
+testimony, you mentioned that the automated deposit
+requirements from DTCC came in at 5:11 a.m. Eastern time, and
+it showed a $3 billion deficit, correct?
+ Mr. Tenev. I believe that's correct, yes.
+ Mr. Gonzalez of Ohio. At that point, 5:11 a.m., did you
+have the liquidity to meet the additional $3 billion deposit
+requirement?
+ Mr. Tenev. As I wrote in detail in my written testimony,
+there were a series of steps that the Robinhood securities team
+took to--
+ Mr. Gonzalez of Ohio. Reclaiming my time, sir. At that
+exact moment, did you have the liquidity for $3 billion? At
+5:11 a.m.?
+ Mr. Tenev. At that moment, we would not have been able to
+post the $3 billion in collateral.
+ Mr. Gonzalez of Ohio. Okay. So when you said, and you've
+said this multiple times, that you did, in fact, have the
+liquidity, and you didn't have a liquidity problem, at that
+moment in time, that is not necessarily true, correct? You had
+to take steps to get there?
+ Mr. Tenev. Congressman, we did have to--the Robinhood
+Securities team had to work with our relevant clearinghouses to
+adjust the risk profile of the trading day in order to meet our
+collateral requirements.
+ Mr. Gonzalez of Ohio. Right. And in order to do that, your
+choice was to throttle trading to prevent your clients from
+being able to purchase certain shares, correct?
+ Mr. Tenev. That's correct. Robinhood Securities had to
+restrict buying in about 13 securities.
+ Mr. Gonzalez of Ohio. Okay. And if you had not been able to
+de-risk the portfolio, you wouldn't have been able to raise the
+money and get the bar requirement and the excess capital charge
+waived to de-risk the portfolio, then DTCC would have stepped
+in and liquidated the portfolio, correct?
+ Mr. Tenev. I'm not sure what exact steps that they would
+have taken if we weren't in compliance with the deposit
+requirements, but it would not have been a good situation for
+the firm or the customers.
+ Mr. Gonzalez of Ohio. Reclaiming my time, I would draw
+everyone's attention to the letter that Ranking Member McHenry
+submitted for the record. I'll just read this, ``If a clearing
+member fails to satisfy a margin call, it exposes other
+clearing members to risk and can put NSCC out of compliance. In
+a case of nonpayment, NSCC may cease to act for the clearing
+member and liquidate its unsettled clearing portfolio.''
+ So, that was definitely in the cards. For my constituents
+who are Robinhood clients, what would this have done to their
+portfolios if it would have been forced liquidation as a result
+of missing the capital call?
+ Mr. Tenev. Congressman, if there was forced liquidation, at
+the very least, it would have resulted in a total lack of
+access to the markets for your constituents, not just to the 13
+securities that we restricted buying in.
+ Mr. Gonzalez of Ohio. Right. So, this would have been an
+enormous catastrophe for Robinhood, correct, and the clients?
+ Mr. Tenev. That's correct. And not just Robinhood, but the
+over 13 million customers that we serve.
+ Mr. Gonzalez of Ohio. Yes. And I think that's really sort
+of the crux of the issue. 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 for one reason or another. At the same time,
+though, I believe a vulnerability was clearly exposed in your
+business model, and, perhaps, in the regime that governs your
+capital requirements, and we just can't live in a world where
+my constituents could have their shares liquidated without
+their consent, because you all aren't able to make a capital
+call. I appreciate that you were able to ultimately satisfy it.
+ But the amount of time you had, from 5 a.m. to 10 a.m., to
+figure this out is scary for the company. And, frankly, I care
+more about my constituents than anything, and it was scary for
+them, and, so, I hope we'll continue to look at that.
+ Beyond that, though, I also hope that this hearing
+highlights a very real problem with our financial markets today
+and how they're accessed by everyday investors. Today, the
+Melvins and Citadels of the world, as well as major private
+equity (PE) and venture capital (VC) funds have access to the
+world's greatest investment opportunities on the planet,
+whereas the retail investor world, of which Mr. Gill is a great
+member, doesn't. It has access to an ever-diminishing set of
+investment opportunities. While we're debating these
+vulnerabilities, we're also serious about finding ways to
+expand access for Main Street investors.
+ And with that, I yield back.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. San Nicolas, you're recognized for 5 minutes.
+ Mr. San Nicolas. Good morning from Guam, Madam Chairwoman.
+I've been with the hearing since 3 a.m. The sun is starting to
+come up out here, but it's always a pleasure to be joining you
+in these very, very important hearings that you call for the
+American people. Thank you very much.
+ I wanted to first begin by congratulating everybody who
+made money on the Robinhood trade. You guys found a low-float,
+low-volume, massively-shorted stock, and you guys squeezed it.
+And 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, and that was absolutely something
+to behold, and Robinhood made that possible.
+ Mr. Tenev, you mentioned in your testimony that you've
+secured $3 billion in funding to address the regulatory deposit
+requirement situation that you faced. Where did that $3 billion
+come from?
+ Mr. Tenev. Thank you, Congressman, for that question. To be
+clear, we were in compliance with all regulatory net capital
+and deposit requirements without the additional capital
+infusion. It was simply to provide an extra cushion, allowing
+us to unrestrict trading and be prepared for other black swan
+events that might happen in the future. The capital came from
+mostly existing venture capital investors that Robinhood
+already had.
+ Mr. San Nicolas. So, basically, you had to further dilute
+your position in Robinhood in order to make sure that you
+secured all of the liquidity and customers affected [inaudible]
+that additional $3 billion.
+ Mr. Tenev. That's correct, Congressman.
+ Mr. San Nicolas. That's why I have a serious concern, Mr.
+Tenev, because not only was your business model designed to
+profit off of order flow, which caused you to take
+extraordinary risks in having 13 million customers with access
+to large margin trading that facilitated the GameStop
+situation, but you halted buys on that stock, and you allowed
+sells in order to mitigate the capital requirement situation,
+and you materially benefited from it. You materially benefited
+from it because it reduced the amount that you would have had
+to go out and raise in additional capital in order to prevent
+these kinds of crises from recurring.
+ You took from your customers in order to minimize the $3
+billion from being larger than it probably would have been
+because you wanted to protect your position, and that is very
+troubling. It's very troubling that the order flow model that
+you built and the risk that you took on resulted in that halt,
+and it's very troubling that that halt also materially
+benefited both you and the existing shareholders by minimizing
+the amount of additional capital you had to raise in order to
+prevent that from happening again.
+ You basically took from the shareholders in order to do
+that, and that's just--I don't know what to say about that. But
+I think that this, Madam Chairwoman, presents a very serious
+situation where we need to ensure that companies are not taking
+advantage of customers in this way.
+ Mr. Tenev, you're quoted as saying in this hearing that,
+``buying increases capital requirements; selling does not.''
+So, it was something that you knowingly did. It was beyond just
+trying to protect the existing customers. And at the end of the
+day, while you had to raise an additional $3 billion, it
+minimized that from being a larger sum. We have customers who
+purchased the stock, who are now bag holders after the price
+came down, because they couldn't continue going up with buying,
+additional buying, and that was willful. That was intentional.
+ So I'm glad, Madam Chairwoman, that we've called this
+hearing. I'm glad we're able to put these things on the record,
+and I'm just very, very concerned with the implications of
+this. And I only hope that at the end of the day, those bag
+holders get a lot more than an apology.
+ Thank you, Madam Chairwoman, and I yield back.
+ Chairwoman Waters. Mr. Rose, you're recognized for 5
+minutes.
+ Mr. Rose. Thank you, Madam Chairwoman, and thank you,
+Ranking Member McHenry, for holding this important hearing
+today, and thank you to our witnesses for your testimony and
+your participation today and for the dedication of time that
+you've made to this hearing.
+ There is still so much for us to learn from this market
+event. Obviously, speculation has been rampant, and I believe
+we should not get ahead of our skis, so to speak, and rush to
+policy recommendations before we understand the full scope of
+this situation. The committee investigation is barely underway,
+and I would view a large majority of the policy proposals
+suggested today as half-baked at this point.
+ At the end of the day, we should all want retail investors
+to have access to the market and to ensure that they have the
+information they need to participate in the market in an
+informed way.
+ Mr. Griffin, my colleague, Representative Loudermilk, asked
+you to explain the advantages of cutting down on the settlement
+time, but you were cut off before you could complete your
+answer. Would you like to finish your thought there?
+ Mr. Griffin. Congressman, to be brief, the issue in going
+to real-time settlement is that everything has to work
+perfectly in a world where there are still people involved in
+many of the processes.
+ We'll get there one day as an industry. I just think it's a
+bridge too far in the next couple of years.
+ Mr. Rose. And then, you were also cut off earlier when
+answering my colleague, Mrs. Beatty's, question regarding the
+difference between payment for order flow for the options
+market versus the equities market. Would you like to continue
+that explanation?
+ Mr. Griffin. I think we covered that reasonably well. I
+think the salient difference is that in the options market,
+every trade must take place on an exchange to start with.
+ In the equities market, the current market structure has
+been arrived at with the blessing of the SEC as the best way to
+give retail investors in America price improvement as compared
+to the exchanges.
+ And to be succinct, we should make exchanges more
+competitive, not make internalization or dark pools more
+privileged.
+ Mr. Rose. Thank you.
+ And then finally, Mr. Griffin, earlier, Representative
+Luetkemeyer asked about how we got to where GameStop was short
+sold to 140 percent. Given that naked shorting is an illegal
+practice, how did that happen, given current U.S. law?
+ Mr. Griffin. Clearly, a number of the purchasers of the
+short sales--of the shares sold short--are institutions that
+also lend their securities.
+ And it's very important to remember that institutional
+investors earn substantial returns from participating in the
+securities lending markets.
+ So if you are lending your GameStop stock out, for example,
+over the period of the recent crisis, you may have been earning
+an annualized rate of return of 25 or 30 percent on the shares
+that you lent out. That accrues to the benefit of pension
+plans, of ETFs, and of other pools of institutional lending
+that participate in the securities lending market.
+ And keep in the back of your mind, when a bank lends money
+to a business, that business may turn around and lend money to
+its suppliers. Just because, in some sense, somebody can on-
+lend what they've bought doesn't necessarily mean something has
+gone wrong in the chain itself.
+ Mr. Rose. Would you see that as an area ripe for regulatory
+adjustment or do you think that's not a problem?
+ Mr. Griffin. I think if we were to think about legislative
+priorities to make our capital markets work better, this
+doesn't make the top 100 list.
+ Mr. Rose. Thank you.
+ Despite the intense volume and exposures presented in the
+markets, the broader infrastructure of our financial markets
+has performed very well, I believe. My concern, like those of
+my colleagues, is that forging ahead with new regulations at
+this point would be harmful and have unforeseen consequences.
+ In the few moments that I have left, Ms. Schulp, can you
+speak to what the potential dangers are of increased regulation
+to retail investors?
+ Ms. Schulp. That's going to take me more than 12 seconds.
+ But there's a lot of potential for unintended consequences
+here, and increased regulation can drive retail investors out
+of the market. It can cause them to have less good prices.
+ Mr. Rose. I'm sorry not to give you more time. Maybe one of
+my colleagues will give you a chance to complete that.
+ I yield back.
+ Chairwoman Waters. Thank you very much.
+ Next, we will have Mrs. Axne for 5 minutes.
+ Mrs. Axne. Thank you, Madam Chairwoman.
+ And thank you to the witnesses for being here today.
+ I just want to quickly follow up on a question that my
+colleague, Mr. Foster, asked you earlier, Mr. Tenev.
+ You said that Rule 606 reports detail the arrangements you
+have with firms like Citadel. However, those only detail the
+payments you receive.
+ Are you saying that you're prepared to publicly disclose
+the detailed terms of your payment for order flow with Citadel
+and other market makers?
+ Mr. Tenev. Thank you for the question, Congresswoman.
+ The 606 reports do publicly detail the payment for order
+flow arrangements we have with Citadel Securities and our other
+market makers.
+ Mrs. Axne. Okay. I'll look forward to seeing those details
+then. Will you make sure that you get those over to our
+committee?
+ Mr. Tenev. Certainly. We can have that arranged.
+ Mrs. Axne. Okay. Thank you.
+ Last month, of course, as we saw this volatility with
+GameStop and AMC and the stocks started to rally, everybody
+seemed to get involved. And one survey recently said that 30
+percent of Americans purchased one of those viral stocks. That
+includes people like my nephew and his two friends who stayed
+up until 4 a.m., to see if they could get a piece of this
+action.
+ One of the most concerning pieces, though, of this whole
+episode is how many people really felt like that's what they
+needed to do to get ahead. To me, this just exemplifies the
+income inequality across America and it's one that we need to
+deal with.
+ And I do appreciate the opportunity for retail investing.
+However, I want to make sure that it creates a good outcome for
+the people who are using it. And right now what I'm seeing is
+gambling on the stock market, and it's not a real solution to
+that income inequality, and I don't think we should pretend
+that it is.
+ Just last June, when Hertz declared bankruptcy, and after
+that, Robinhood was actively pushing the stock on its site, it
+was trending on Robinhood, and I don't think the promotion of
+that worthless stock is good for investors. That's a gamble
+that they shouldn't have taken. And that's just one example.
+ People having access to the stock market is nice, but if
+they don't have the money to invest, then really it's not
+democratization. And that's the real reason that 80 percent of
+the stock market is owned by 10 percent of the people.
+ And, of course, those are people who don't have to put all
+their money into healthcare or childcare or a car payment or
+whatever it is that's just keeping them going through their
+day-to-day.
+ Earlier, Mr. Tenev, you said that you couldn't tell us what
+your clients' rate of return is, but generally, 99 percent of
+short-term traders underperform the market.
+ So, Mr. Tenev, you say that Robinhood's mission is to
+democratize finances. Is that correct?
+ Mr. Tenev. That's correct, Congresswoman. Yes.
+ Mrs. Axne. Okay. So I want to ask you then, you've invested
+significantly in behavioral research. And just so you know, I
+own a digital design firm with my husband, so I'm familiar with
+what behavioral research can do for platforms and websites. And
+that behavioral research has really shaped how your app is
+designed. Is that correct?
+ Mr. Tenev. Congresswoman, like many technology companies,
+we employ data scientists, user researchers, and designers to
+provide a better customer experience and to understand our
+customers' needs.
+ Mrs. Axne. So on the specifics, 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,
+and they're encouraged to trade. If a friend signs up, they get
+a free stock, and on and on.
+ Why have you added specific gaming design developments to
+look like gambling to your app? That encourages more frequent
+trading.
+ Mr. Tenev. Congresswoman, as I mentioned earlier, we want
+to get people what they want in a responsible, accessible way.
+We don't believe in gamification. We know investing is serious.
+And that's why most of our customers are buy and hold. A very
+small percentage of our customers utilize margin.
+ Mrs. Axne. I appreciate that. But folks like my nephew
+actually aren't your customers; they're your product. Your
+customer is sitting right next to you, Mr. Griffin with
+Citadel.
+ So when you don't pay as much for index funds or Apple or
+anything like that, your app to me shows me that you're really
+just trying to encourage more trade, which puts more money in
+your pocket, not helping people build equity through smarter
+investing.
+ Mr. Tenev, I'd ask two things. Who exactly do you believe
+you're democratizing finance for? And how do you plan to
+address these conflicts of interest?
+ Mr. Tenev. First of all, I believe in our business model,
+Congresswoman. I believe our business model has become the
+industry standard for a reason. It's because it's good for
+customers, it's led to the democratization of the markets, and
+it works.
+ And we're very proud to route to market makers on uniform
+terms without taking into account any of the payments that we
+generate from them in the routing and based purely on the
+execution and quality we provide to our customers.
+ Chairwoman Waters. The time has expired.
+ Mr. Steil is recognized for 5 minutes. Thank you.
+ Mr. Steil. Thank you, Madam Chairwoman, and thank you for
+holding today's hearing.
+ I'm concerned about investors in the State of Wisconsin and
+across our country, to make sure that they have access to the
+market, access that is fair and equal to the big banks and the
+hedge funds and Wall Street.
+ We've seen great improvements in access, the
+democratization in finance, and I'm concerned that these
+hearings are going to lead us down the path of additional
+regulations before we've fully investigated the facts.
+ It was stated earlier that that may not be the case. And
+I'd like to insert in the record a Bloomberg article dated
+January 28th, entitled, ``GameStop trades show need for more
+regulation, Democrat says.''
+ Chairwoman Waters. Without objection, it is so ordered.
+ Mr. Steil. Thank you.
+ I think it'll be helpful for everyone to review that with
+the concerns being that we're going to drift away from the
+democratization of our finance systems.
+ I'm also a bit disappointed that we don't have
+representation in our first hearing here today from the SEC or
+the DTCC, especially in the early days of the Biden
+Administration. I think that would be helpful. And hopefully,
+we'll be able to have that participation in a future hearing.
+ If I can direct my first question to Mr. Gabe Plotkin at
+Melvin Capital Management, there's obviously a lot of attention
+that came pouring in on a stock, GameStop, that you held a
+short position in. People were tweeting about it, things were
+building.
+ Do you have any information as to why folks on Twitter and
+on Reddit and others uniquely targeted that stock?
+ Mr. Plotkin. First of all, thank you for the question. I
+think it's a really good one.
+ I think ultimately--I'm not sure how the momentum built
+around that. There were certainly some signs, as we kind of
+discovered after the fact. And there were even website names
+bought, like nasty things about our firm, as far back as
+November.
+ So I'm not sure how it started, but I think ultimately,
+they saw an opportunity with a very high short interest stock
+that a lot of people could relate to because it was a retail
+experience, and that's sort of the genesis of it.
+ Mr. Steil. Thank you very much.
+ I'm going to shift gears over to Robinhood and Mr. Tenev,
+if I can.
+ As my colleague, Mr. Gonzalez, was talking about, at some
+point, it became clear that additional collateral would likely
+be needed.
+ How many of your customers owned GameStop stock or options
+on January 27th?
+ Mr. Tenev. I don't have the exact numbers--
+ Mr. Steil. Suffice it to say, had it increased dramatically
+over the days leading up to the 27th?
+ Mr. Tenev. Yes. That's accurate.
+ Mr. Steil. That's fair. And you saw additional order flow
+coming into this.
+ Was it reasonable to believe that there would be additional
+capital requirements, and did you take any steps, either
+internally or working in concert with the National Securities
+Clearing Corporation, to mitigate the risk posed by the
+volatility before the January 28th collateral call?
+ Mr. Tenev. We did. On January 21st, we went to 100 percent
+market requirement for AMC, which requires all purchases for
+those stocks to be fully paid for, so customers would have been
+unable to use margins to buy those. And that was January 21st
+in the case of AMC, and January 26th for GME.
+ Mr. Steil. But this was still insufficient ultimately, as
+related to the collateral call that came in, in the early
+morning hours of the 28th. Is that correct?
+ Mr. Tenev. That's correct. The limiting margin was
+ultimately insufficient.
+ Mr. Steil. And as you look to your peers, do you know any
+other brokerages that were putting in place limitations on
+their buy orders?
+ Mr. Tenev. Yes, I do, Congressman. I think that's an
+important question. Many brokerages put in place similar
+limitations on buy orders for many of these securities.
+ Mr. Steil. For the record, I've heard conflicting reports
+on that. I think that's something that this committee needs to
+further look into, is the differential between what occurred
+under your control at Robinhood, and some of the other
+brokerages. I think it's a question that we should fully
+investigate on this committee, and make sure we have all the
+facts as we're moving forward.
+ Could you detail, Mr. Tenev, your plans going forward as it
+relates to making sure that an event like this doesn't occur
+again, and that you have the foresight to prevent these late
+collateral needs?
+ Mr. Tenev. Absolutely, Congressman. Thank you for that
+important question.
+ Certainly, the additional $3.4 billion helps provide a
+significant cushion. In addition, you could see that between
+Thursday and Friday, Robinhood replaced the PCO, which is a
+position closing only setting, with a much more granular
+position--
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Casten, you're now recognized for 5 minutes.
+ Mr. Casten. Thank you, Madam Chairwoman.
+ And thank you so much to our witnesses.
+ There's a whole bunch of themes in today's hearing, and I
+want to, if I can, just tie a couple of threads together that I
+think are relevant that have been--we've had corners of.
+ In June 2020, Alex Kearns, who was 20-years-old at the
+time, from Naperville, Illinois, killed himself, largely thanks
+to a bug in the Robinhood system. The bug was that he turned on
+the app, and it said that he owed $730,000 that he did not
+have, because of options positions that he thought canceled
+out, but didn't appear to.
+ He called the help line. The help line, of course, was not
+manned, as we've discussed. He sent several panicked emails,
+three to be precise, but did not receive a response.
+Ultimately, there was a response in an email saying that, in
+fact, his positions were covered, but by that point, it was too
+late, because he had taken his own life.
+ This is a gentleman who was 20-years-old. Under Illinois
+law, he was not allowed to buy a beer, but he was allowed to
+take on $730,000 in positions and exposure that he did not have
+the liquidity to cover.
+ Your mission, Mr. Tenev, is to democratize finance, but the
+history of financial regulation is to protect people like Alex
+Kearns from the system.
+ As the old joke goes, if you're playing poker and you can't
+figure out who the fish is at the table, you should leave the
+table because you're probably the fish.
+ And there's an innate tension in your business model
+between democratizing finance, which is a noble calling, and
+being a conduit to feed fish to sharks.
+ I want to cover a little bit of timeline.
+ In December 2019, Robinhood was assessed a $1.25 million
+fine by FINRA for failing to disclose payment for order flow
+agreements to your customers.
+ Six months after that, Alex Kearns committed suicide.
+ Six months after that, on December 20th, Robinhood paid a
+$65 million fine to the SEC for, among other things, failing to
+disclose payment for order flow agreements to your customers.
+ There is a tension in your model.
+ Now, along with that, according to your 606s, as has been
+reported by CNBC, you attract a higher rate for equity trades
+from payment for order flow than any of your competitors, 17
+cents per hundred trades, versus about 11 cents for your
+competitors, and even more, over 50 cents per hundred trades,
+for options.
+ I would ask unanimous consent to enter the CNBC article
+into the record.
+ Chairwoman Waters. Without objection, it is so ordered.
+ Mr. Casten. Mr. Tenev, when did you start offering options
+on your platform?
+ Mr. Tenev. Thank you, Congressman Casten. And first, let me
+say--
+ Mr. Casten. We're tight on time. When did you start
+offering options?
+ Mr. Tenev. Options trading was offered starting in Q1 of
+2018.
+ Mr. Casten. Okay. Thank you.
+ That's relevant because prior to 2018, your revenue grew
+basically linearly with user growth. Your revenue in a year,
+your payment for order flow revenue was about $10 per user, per
+year. In 2020, it got to $50 per user, per year.
+ So, your revenue model went from growing revenue by growing
+users, to growing revenue by growing revenue earned on the back
+of each user consistent with taking on options.
+ How many firms do you route options orders to, Mr. Tenev?
+ Mr. Tenev. Congressman, we have seven market makers. I can
+get back to you with the precise number for options. It's under
+seven.
+ Mr. Casten. According to your 606 disclosures, you only
+list four--Citadel, Susquehanna, Wolverine, and Morgan Stanley.
+Are there any others besides the ones listed in your 606
+disclosures?
+ Mr. Tenev. If that's in the 606s, Congressman, I'm sure
+it's accurate.
+ Mr. Casten. Okay. So, do you route options trades to anyone
+with whom you do not have a payment for order flow agreement?
+ Mr. Tenev. Currently, we have, Congressman, uniform payment
+for order flow arrangements with all of our market makers. So,
+they would all be under the same arrangements.
+ Mr. Casten. Okay. So how do you ensure that you're getting
+best pricing if every single firm you're ruling out anybody who
+is not paying you for the privilege to trade?
+ Mr. Tenev. Congressman, we believe having uniform payment
+for order flow arrangements with all market makers ensures
+structurally that there is no conflict of interest, because it
+prevents payment for order flow from being an input in
+decision-making for where to route orders.
+ Mr. Casten. Okay. I'm almost out of time, but there is an
+innate conflict in your model.
+ Let's imagine right now that we are today's version of Alex
+Kearns. I'm nervous, I have an exposure, and I call your help
+line now. Let's call and let's listen in the time we have
+remaining to what I'm going to hear on the other end of the
+phone.
+ [Audio recording played.]
+ Chairwoman Waters. Mr. Casten, you may wrap up.
+ Mr. Casten. I yield back my time.
+ Chairwoman Waters. You may wrap up. Go ahead, Mr. Casten.
+ Mr. Casten. I have no further questions, Madam Chairwoman.
+ Chairwoman Waters. Thank you very much.
+ I will now recognize Mr. Gooden for 5 minutes.
+ Is Mr. Gooden on the line?
+ Voice. Madam Chairwoman, Mr. Gooden is in Texas, and he's
+unavailable.
+ Chairwoman Waters. Thank you very much.
+ I now recognize Mr. Timmons for 5 minutes.
+ Mr. Timmons. Thank you, Madam Chairwoman.
+ It seems we're here today to try to find culpability in the
+events that transpired last month. I seem to spend a lot of my
+time thinking about capital requirements and the time it takes
+to execute these trades. So, I'm going to focus my questions
+there.
+ Mr. Tenev, you have repeatedly invoked capital requirements
+that both your company and your clearinghouse are required to
+abide by in order to explain the restriction of trading last
+month.
+ My friend and colleague, Mr. Barr, asked you about this
+earlier, but I would like to hone in on this a little bit.
+ Could you explain what specifically about the nature or
+volume of the trades being ordered by your customers caused
+these increased capital requirements to be triggered? And how
+did the level of collateral required compare to what you would
+normally have to abide by?
+ Mr. Tenev. Thank you for that question, Congressman.
+ To give you a sense for the increase, our capital
+requirements--our deposit requirements with NSCC from January
+25th to January 28th, so a span of 3 days, increased tenfold.
+ Mr. Timmons. What is the most your capital requirements had
+been prior to this event?
+ Mr. Tenev. I believe there was a table, Congressman, that I
+provided in my written testimony that had the precise value at
+risk and special charges in the prior days.
+ Mr. Timmons. But, obviously, it had never been close to
+this amount. And now, you have additional capital that you've
+raised, and so this should not happen again. Again, I think you
+referenced one in three and a half million was the likelihood
+of this situation occurring. Is that correct?
+ Mr. Tenev. That's correct. And that's not a Robinhood
+number. That's actually a third-party industry number.
+ Mr. Timmons. Are you aware of the origin of these capital
+requirements?
+ Mr. Tenev. I do believe that these capital requirements,
+and specifically the NSCC deposit, was spelled out in Dodd-
+Frank.
+ Mr. Timmons. So, the Dodd-Frank Wall Street Reform and
+Consumer Protection Act is arguably to blame for what happened?
+You would not have halted trading in this case but for this
+exorbitant capital requirement that you were unable to meet?
+ I think that when we're searching for culpability, we need
+to realize that the well-intentioned legislation from over 10
+years ago is somewhat culpable in this entire conversation.
+ Ms. Schulp, will you elaborate on that? Do you agree that
+Dodd-Frank is somewhat responsible for the situation in which
+Robinhood found themselves?
+ Ms. Schulp. I think the capital requirements in Dodd-Frank
+can be seen as responsible.
+ I think it's incumbent on us to evaluate those capital
+requirements, and whether they are appropriate, given the
+business models at issue. I think that's also a question of
+settlement times and modernizing our system.
+ But I agree that the capital requirements here put into
+place are one of the reasons that we're having these
+conversations today.
+ Mr. Timmons. And you went to the next place I wanted to go,
+which is the time it takes to settle these transactions.
+ So, 12 years ago, 10, 11 years ago, we never really
+considered the whole concept of a Robinhood, of an app-based
+trade platform that democratizes access to purchasing and
+selling publicly traded companies.
+ So, I do think that needs to be revisited, especially
+because it is unfair. There are other companies that have far
+more resources that are not in the situation, and those
+companies have larger investors. So, we really are picking on
+the little guy in this entire conversation.
+ Between reconsidering capital requirements for retail
+investor platforms, number one; and, number two, trying to find
+a way to settle these transactions faster, those two things
+seem to be the best way to achieve our objective of making sure
+this doesn't happen again.
+ I do hope that we can hear from Michael Bodson from the
+DTCC in the next hearing or perhaps someone from the NFC.
+ I'll end with this. One of my colleagues across the aisle
+said the deck is stacked against the little guy, and I couldn't
+agree more. But in this case, the very committee that is
+conducting this hearing has more culpability, I would say, than
+any of the witnesses whom we have brought before us today.
+ We need to make sure this doesn't happen again. I look
+forward to working with my colleagues across the aisle.
+ With that, I yield back.
+ Chairwoman Waters. The gentleman yields back.
+ At the request of one of our witnesses, we will take a
+short recess. The committee stands in recess for 5 minutes.
+ [brief recess]
+ Chairwoman Waters. The committee will come to order.
+ Mr. Torres, you are recognized for 5 minutes.
+ Mr. Torres. Thank you, Madam Chairwoman.
+ One of the concerns about payment for order flow is that it
+creates a perverse incentive for a brokerage firm like
+Robinhood to send detail orders not to the firms that provide
+the best execution to retail investors, but rather to firms
+that provide the highest payment to Robinhood.
+ There's a concern about a conflict between the interests of
+brokers and the interests of retail investors, and that concern
+seems to have been vindicated by the conduct of Robinhood.
+ The SEC previously found that Robinhood misled its
+customers about how it makes its money. Both the SEC and FINRA
+previously found that Robinhood failed to ensure the best
+execution for retail customers, depriving those customers of
+$34 million, resulting in a $65 million civil penalty from the
+SEC.
+ My first question for the CEO of Robinhood, how much of
+your revenue comes from payment for order flow?
+ Mr. Tenev. Thank you, Congressman.
+ Let me first state that regulatory compliance is at the
+center of everything that we do--
+ Mr. Torres. I want to reclaim my time. How much of your
+revenue comes from payment for order flow? Please answer the
+question as asked, given the time constraints.
+ Mr. Tenev. Congressman, I don't recall the exact
+percentage. It's over 50 percent.
+ Mr. Torres. And do you know how much of your order flow
+revenue comes specifically from Citadel?
+ Mr. Tenev. Citadel is indeed an important counterparty.
+It's our largest counterparty in terms of where we route orders
+to, and I want to explain that a little bit, Congressman.
+ Mr. Torres. I want to move on, because I want to cover the
+concerns about gamification.
+ The stated mission of Robinhood is the democratization of
+finance, but I worry that the real world impact of Robinhood is
+the democratization of financial addiction.
+ Robinhood has gaming features that seem to manipulate
+retail traders into making rash and reckless and potentially
+ruinous investments. We all know the tragic story of Alexander
+Kearns.
+ According to a memo from the Financial Services Committee,
+there's one feature in particular that encourages retail
+investors to tap on the Robinhood app up to a thousand times a
+day in order to improve their position on the wait list for
+Robinhood's highly-coveted cash management feature.
+ Do you share my concern that a retail trader tapping on a
+Robinhood app a thousand times a day is a sign of addiction?
+ Mr. Tenev. Congressman, that particular feature that you're
+discussing was to get access to our debit card plus high yield
+savings product, which is one of the many features targeting
+passive investors that we've rolled out over the past--
+ Mr. Torres. Mr. Tenev, a thousand times a day? You are
+encouraging your customers to tap on an app a thousand times a
+day? That to me is a sign of addiction, and it worries me that
+you fail to see it in the same light.
+ Mr. Tenev. Congressman, we didn't encourage anyone to tap
+on anything. To get access to the debit card, people were
+placed on a wait list. And we wanted to give our customers
+delightful features so that they know that we're listening to
+them and that we care about them, and this is just one example
+of how we add great features, that customers love, to our
+products.
+ Mr. Torres. Addictive trading might be bad for your
+customers, but it's good for Robinhood. Addictive trading means
+more trading, and more trading means more money for Robinhood.
+There's a sense in which Robinhood monetizes addiction. You
+make money from the quantity rather than the quality of
+trading.
+ Much has been said about price improvement. One of the
+arguments for payment for order flow is price improvement.
+According to The Wall Street Journal, Citadel Securities claims
+to have saved investors a total of $1.3 billion last year.
+ But I'm wondering, how can Citadel possibly know how much
+it saves retail investors? Citadel does not transact directly
+with retail investors; it transacts directly with brokers.
+ And even if you stipulate that there has been a cost
+savings, it's unclear to me how much of that cost savings is
+being passed on to the retail investors, and how much of that
+cost savings is actually being pocketed by Robinhood as profit.
+ We know that there's no commission, there's no visible fee
+at the front end of the transaction. But what is the hidden
+cost to investors at the back end of the transaction? Can you
+give me clarity about the hidden cost to investors?
+ Mr. Tenev. Congressman, I appreciate the question. I think
+that's a very important question.
+ In 2020, Robinhood provided our customers in excess of $1
+billion in price improvement. That price improvement is
+measured relative to the National Best Bid and Offer (NBBO),
+which is the reference price per security on all major LID
+exchanges.
+ Mr. Torres. I ran out of time, so I will yield back.
+ Thank you, Madam Chairwoman.
+ Chairwoman Waters. Mr. Taylor, you're recognized for 5
+minutes.
+ Mr. Taylor. I will point out that today and this week has
+been very hard for my home State of Texas and for my district
+in Collin County. We have faced a record-breaking freeze across
+the State, which has crushed our power-generation capability.
+And we have had some really heartbreaking stories of need.
+ In fact, during this hearing, I was called away to help a
+mayor try to get power back to their water pumping stations to
+make sure that they have water for their citizens in Anna,
+Texas, today.
+ So, members of the committee, I encourage you to send your
+thoughts and prayers to the people of Texas as they go through
+this really challenging time.
+ On to the topic of this hearing. Mr. Tenev, I just wanted
+to go--and I know there has been a lot of questions about the
+margin call that you got on the morning of the 28th of January.
+But I'm not sure that we really understand how the margin call
+changed from $3 billion to $1.5 billion to $600 million.
+ Can you sort of go through, how did you negotiate the
+margin call down? And these are very sizeable decreases, right,
+50 percent, then 50 percent again, to something that you could
+then in turn manage?
+ How did you decrease the margin call?
+ I'm sorry. You're on mute. You're still on mute. I haven't
+been able to hear a word you said, unfortunately.
+ Mr. Tenev. How about now?
+ Mr. Taylor. I can hear you now.
+ Mr. Tenev. Congressman, I appreciate the question. And,
+first, I want to send my thoughts and prayers to the people of
+the great State of Texas. I appreciate you mentioning that.
+ I'd like to just refer to my written testimony, which gives
+the details of everything that happened on, I believe, pages 9
+to 11--
+ Mr. Taylor. I've read that. But did you go in and say,
+``Hey, you need $3 billion, but I won't sell these stocks if
+you reduce it,'' and that's how you got to the point where
+people could only sell the stock, not buy it? Is that what you
+did?
+ Mr. Tenev. I believe--
+ Mr. Taylor. Because that's not in your written testimony.
+So, I'm just trying to get your answer.
+ Mr. Tenev. I don't believe we have made any decisions on
+PCO'ing the stocks between the initial $3 billion request and
+the subsequent $1.4 billion request.
+ But between the $1.4 billion and the roughly $700 million,
+there was a discussion between our operational team at
+Robinhood Securities and their relevant counterparts at NSCC
+regarding what measures we intend to take to lower the risk of
+our portfolio.
+ Mr. Taylor. Okay. So in other words, if you had $3 billion,
+your customers would have been able to do everything they
+wanted to do, including purchase more GameStop. Is that
+correct?
+ Mr. Tenev. I don't want to speculate on that. If we had
+infinite capital, certainly.
+ But I think it's also important to note, Congressman, that
+this was an evolving situation. We hadn't seen it before. We
+had no idea what Friday would have looked like had we been able
+to allow customers to buy these securities unrestricted on
+Thursday.
+ So, I think it's difficult to speculate exactly how things
+would have been different.
+ Mr. Taylor. But isn't the reason they said you need $3
+billion was because your customers wanted to buy GameStop and
+then by saying, ``Hey, they can't buy it, they can only sell
+it,'' that reduced the capital that you needed?
+ It seems to me that's what happened, but I'm just trying to
+get--
+ Mr. Tenev. They weren't saying specifically that--nobody, I
+believe, didn't want our customers to buy GameStop. These are
+regulatorily-mandated deposit requirements, Congressman, that
+we had to comply with, that were heavily influenced by the
+concentrated activity in GameStop, AMC, and the other
+securities.
+ Mr. Taylor. Wouldn't it be fair to say that your firm was
+undercapitalized to allow your customers to do what it is that
+you wanted them to be able to do?
+ Mr. Tenev. I think, Congressman, that in this case,
+certainly if we had the additional capital, we would have been
+able to ease restrictions, or perhaps, with sufficient capital,
+unrestrict altogether.
+ I think it's important to note that lots of other firms did
+essentially similar things, if not the same thing, in
+restricting the buying. Sox, this was really more of a systemic
+problem rather than a uniquely Robinhood problem.
+ Mr. Taylor. But didn't the fact that you went out and
+raised more capital so that you can actually answer this
+problem in the future--doesn't that also belie that you were
+undercapitalized on the 28th of January?
+ Mr. Tenev. Again, Congressman, we met all of our regulatory
+capital requirements and deposit requirements.
+ Mr. Taylor. Your customers wanted to buy the stock. You
+wouldn't let them do it because you didn't have the capital to
+allow them to do it, right?
+ Mr. Tenev. Yes. We didn't have the deposit requirements.
+ Mr. Taylor. I think that's really a core problem that I
+think this committee hearing has shown me, is that you were,
+unfortunately, undercapitalized to help your customers do what
+they wanted to do.
+ I yield back.
+ Chairwoman Waters. Thank you very much.
+ Mr. Emmer, you're recognized for 5 minutes.
+ Mr. Emmer. Thank you, Madam Chairwoman. I appreciate it.
+ Mr. Gill, as was previously noted at this hearing, one of
+your colleagues at the witness table has as many as five people
+in the room with him.
+ I guess, Mr. Gill, my first question for you is, how many
+people are in the room with you right now?
+ Mr. Gill. Zero, Congressman.
+ Mr. Emmer. That's what I thought, Mr. Gill.
+ And I just want to note for the entire committee that Mr.
+Gill is actually appearing before our panel by himself while
+many others are receiving significant [inaudible].
+ [Inaudible] underestimating the sophistication and the
+independence of these individual investors.
+ Now, we've heard a lot of reasons for concern today, and
+some are legitimate, but there have also been some proposed
+overreactions by Members of Congress that could create even
+more problems.
+ Attention has been given to the positive sides of this
+story [inaudible] temporarily limiting its investors from
+trading, which deserves an investigation.
+ What we saw was a movement of individuals investing to try
+to make money. I don't see what's wrong with that, even if that
+motivation is fueled by a desire to stick it to a hedge fund
+they don't like.
+ Mr. Gill, you're the only retail investor involved in this
+GameStop situation on our panel today--why, I don't know, but
+you are--yet members on the committee have hardly asked you any
+questions. We've heard from a lot of the companies whose funds
+were involved in this event, but we've barely heard from the
+people who made this happen.
+ Is there anything you would like to add to this hearing
+that you haven't been able to add yet, given that we're past
+the 4-hour mark on this hearing?
+ Mr. Gill. I appreciate that, Congressman. I do.
+ I don't have anything to add at this time, just that I
+would be the first to acknowledge that investing in stocks and
+options is incredibly risky and it's so important for people to
+do their own thorough research before investing.
+ But that said, I tend to agree with you that folks should
+be able to freely express their views on a stock and they
+should be able to buy or not buy a stock based on those views
+that they may have.
+ Mr. Emmer. Mr. Gill, on that note, how would you feel if
+these brilliant people who are asking you these questions today
+decided that you should not take the risks that you're making
+these thoughtful decisions on? What do you think about that?
+ Mr. Gill. I would probably ask for an explanation,
+Congressman, and to try to understand their viewpoint as to why
+they might think that, and perhaps we'd be able to talk through
+it.
+ Mr. Emmer. Right. I appreciate it, Mr. Gill. I think we
+need to value the right of the individual to make decisions for
+themselves.
+ And it's fantastic to see so many people getting involved
+and participating in the greatest financial markets in the
+world. We should be encouraging individual participation in the
+market by you and others.
+ And we should want more people--more, not less. We don't
+need the people from the mountaintop deciding who's capable and
+who's incapable. We need more people having the opportunity to
+develop financial literacy, to build their own portfolios, to
+secure a safe and comfortable retirement, to grow their wealth
+so they can send their kids to college.
+ And most importantly, in my opinion, we should strive for
+individuals to have the autonomy to do all that they themselves
+want to do without having to rely on others or, God forbid,
+their government.
+ I also want to thank Mr. Budd for using his time to mention
+blockchain technology applications in the post-trade
+[inaudible] settlement and clearing process.
+ In light of this whole situation, it's important now more
+than ever that we utilize the technology that we have access
+to, and we do have access to technology that is decentralized
+and can provide real-time trade settlements.
+ Mr. Lynch and I have a nonpartisan bill that we introduced
+last [inaudible] reintroduce very soon that concerns this.
+ If we should exercise oversight of anything here, it's to
+ensure that individuals maintain access to our markets,
+individual investors. And discussions about over- and
+undervalued companies only continue to increase.
+ Unfortunately, average investors were locked out of the
+markets at a time of extreme volatility, while institutional
+investors were not. While I understand that a lot of what
+happened during this market frenzy came down to liquidity
+issues, individual investors were in a vulnerable position and
+were at the will of online brokerages.
+ We should be taking this time to discuss how to move
+forward in a way that promotes market access to all investors,
+just like we did last month. [Inaudible] clearly does not
+understand what Reddit is and how you utilize social media and
+catalyze the market's movement.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Emmer. We've significantly underestimated the
+sophistication of America's retail investors and we've not been
+focusing on improving market access.
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Emmer. Thank you, Madam Chairwoman.
+ Chairwoman Waters. Mr. Lynch, you're recognized for 5
+minutes.
+ Mr. Lynch. Thank you, Madam Chairwoman.
+ And speaking for the families of the Eighth Congressional
+District, we just want the gentleman from Texas to know that we
+are, indeed, praying for all of the good people of Texas and
+hope you come out okay and get the power that you need.
+ I do want to follow up on Mr. Perlmutter's questions, Mr.
+Gill. I represent the Eighth Congressional District, which
+includes Brockton, Massachusetts, your home. So I figure I,
+more than anyone, owe you the opportunity to respond.
+ You said earlier that you began your trading in GameStop
+when it was around $5 a share, with the hope that it might go
+to $20 or $25.
+ And I want to say, I accept your analysis, your initial
+analysis that GameStop was undervalued, and I think your belief
+was sincere, and I think it was fact based.
+ And, in your defense, we are talking about GameStop, right?
+It's a shopping mall retailer. We all know it. It's a well-
+known commodity.
+ But at some point the stock really takes off, right? It
+goes from $5 to $100 to $200 to $300. It gains escape velocity,
+as they say, and it ends up at almost $500 a share.
+ But we're still in the midst of a pandemic, right? And you
+can land a jumbo jet in the parking lot of the Westgate Mall in
+Brockton, or any major mall in America, right? No one's going
+to the malls, nobody's feeding this company, and so, it's up
+around $400, $500.
+ Is there a role for someone to play here, for you to play,
+or the SEC, or Robinhood, to, say, okay, the price dislocation
+has become detached from reality and a note of caution might be
+given to other day traders and individuals, retail traders who
+might get jammed if they get into this trade?
+ You have a unique perspective, so what do you think is the
+proper thing that should have happened? At some point, this
+thing got away from you and went totally into the stratosphere.
+And I'm just wondering what your thoughts are on how this
+should have worked?
+ Mr. Gill. Thank you, Congressman Lynch. I do know Westgate
+Mall quite well.
+ I would say that, just to be clear, I had thought that
+maybe roughly $20 or $25 per share, I had thought that at that
+time, but investment theses evolve over time. As the
+fundamental events change over time, it's important to update
+theses accordingly.
+ And I had mentioned that it appeared as though the stock
+price had gotten a little bit ahead of itself last month. But
+there's a lot outstanding. There's a lot that has happened in
+recent months to suggest that GameStop could indeed turn around
+its business significantly.
+ And one big element of that is indeed one of the largest
+investors in GameStop, Ryan Cohen. And he has brought in some
+colleagues who could turn around this company. And their value
+could indeed--
+ Mr. Lynch. I want to reclaim my time.
+ Mr. Gill. Sorry.
+ Mr. Lynch. Okay. I want to reclaim my time.
+ Ms. Schulp, I want to ask you, we have this convergence
+between fintech, social media, and the traditional markets.
+And, if anything, the GameStop incident and the convergence of
+all this has demonstrated a certain vulnerability in our
+markets.
+ And I'm just wondering, if a loosely associated association
+of day traders could cause all of this upset in our markets,
+isn't there a wider national security issue that's out there in
+terms of other people who might be nefarious actors who are
+actually intentionally trying to disrupt our markets?
+ Isn't there a national security dimension to all of this as
+well?
+ Ms. Schulp. Again, I can say that national security is not
+my area of expertise. But to the extent--
+ Mr. Lynch. Well, something more specific then.
+ You said earlier that you were with FINRA, and they're
+under Regulation Systems Compliance and Integrity (Regulation
+SCI.) Is it appropriate to put some of these trading platforms
+under that same regulation, which requires them to develop
+systems and policies that protect the integrity of their
+systems.
+ Ms. Schulp. I think protecting the integrity of systems is
+important for all trading platforms, not simply the Robinhoods
+of the world. We need to look to make sure that there is
+integrity on the platforms.
+ I would agree with that, not necessarily Regulation SCI in
+particular, but having platforms that are strong is important
+here.
+ Mr. Lynch. Okay. Thank you.
+ Madam Chairwoman, I yield back the balance of my time.
+Thank you.
+ Chairwoman Waters. Thank you very much.
+ Ms. Adams, you are recognized for 5 minutes.
+ Ms. Adams. Thank you, Madam Chairwoman. It's been a very
+interesting hearing. I do want to thank you for organizing
+this. I think it has certainly been very helpful.
+ Ms. Schulp, let me ask you, first of all, in the case of
+GameStop and AMC stocks, the prevailing narrative has been that
+a band of Reddit-inspired folks rose up against Wall Street,
+and forced a short squeeze by professional hedge fund managers
+who were forced to cover their negative bets or risk
+catastrophic losses.
+ But, according to a JPMorgan analyst, several signs are
+pointing to institutional investors as big drivers of the wild
+price action on the way up.
+ In your opinion, and based on historical data on retail
+investors' ability to move the markets, what is the likelihood
+that GameStop and AMC's market volatility was largely driven by
+institutional investors looking to ride the wave?
+ Ms. Schulp. I think these are questions that we are going
+to find out the answers to as we get deeper into the data. But
+I think that it's likely that at some point in this increase in
+value for all of these stocks, institutional investors were
+involved. Retail investors traditionally have not been able to
+move markets in the same way.
+ But it's important to note here that these were not large
+stocks to begin with. This was not a massive increase in price
+in Apple or Google. It was GameStop, a much smaller company.
+So, the ability of retail investors to have outsized influence
+here is entirely possible as well.
+ Ms. Adams. Thank you, ma'am.
+ Mr. Griffin, or Mr. Plotkin, do you have any thoughts on
+this likelihood as well?
+ Mr. Griffin. Congresswoman, I believe you are asking one of
+the single most important questions posed today. I believe that
+the decline in the short interest as reported over the 2-week
+period of time--the U.S. updates short interest reporting every
+other week--indicates that roughly--and I apologize for not
+having the exact number--but roughly 35 to 40 million shares
+were bought back by parties that were short the stock.
+ This would be a dramatic degree of short covering that
+could cause a dramatic increase in the price of GameStop.
+ Ms. Adams. Okay. Thank you.
+ Mr. Plotkin?
+ Mr. Plotkin. Yes. Thank you for the question.
+ I don't have the exact answer to your question, but I do
+think it's worth noting that as the stock price moved higher,
+there was a 3-day period where it traded almost 11 times the
+entire float.
+ And so, I think that kind of volume gave anyone who was
+short ample opportunity to cover, and probably suggests
+tremendous either frenzied buying or institutional buying or
+some sort of combination.
+ We did look at some of the options activity in the stock,
+and on Friday, January 22nd, there were options that were
+expiring which would have equated to 35 to 40 million shares of
+stock ownership.
+ So, I actually don't think the short covering was the
+biggest driver of the stock when you kind of look at the
+volume. I really think the biggest driver was the aggressive
+options activity and then whether it was institutional retail
+or just the collective buying.
+ Ms. Adams. Okay.
+ Mr. Griffin, prior to the GameStop volatility in January,
+did Citadel have any investments in Melvin Capital? And, if so,
+how much?
+ Mr. Griffin. We first invested in Melvin Capital on Monday
+of the week in question. I want to say that it was the 24th of
+January. And prior to that, we had had no investment with
+Melvin Capital.
+ Obviously, Gabe Plotkin is, by reputation, one of the best
+money managers of his generation, and is well-known to my
+partners here at Citadel. Gabe actually trained one of my best
+portfolio managers, who worked with me over the course of his
+career. So, he is well-known to my colleagues here at Citadel.
+ Ms. Adams. Okay.
+ Mr. Plotkin, can you confirm that you worked at Citadel LLC
+before--
+ Mr. Griffin. I'm sorry. He trained--my portfolio manager
+worked for Gabe at a different firm and then joined Citadel
+subsequently.
+ Ms. Adams. Okay.
+ Mr. Plotkin, can you confirm that you worked at Citadel LLC
+before eventually starting your own hedge fund, Melvin Capital,
+in 2014?
+ Mr. Plotkin. When I was 23-years-old, I worked at Citadel
+for 1 year.
+ Ms. Adams. Okay. Did you solicit or receive any advice from
+Mr. Griffin during the GameStop volatility that occurred in
+January?
+ Mr. Plotkin. All of my conversations with Mr. Griffin
+really centered around his investment in our firm.
+ Ms. Adams. Okay. And did you reach out to Citadel or
+Point72 for significant investments?
+ Chairwoman Waters. The gentlewoman's time has expired.
+ Ms. Adams. Thank you, Madam Chairwoman. I yield back.
+ Chairwoman Waters. You're welcome.
+ Ms. Tlaib, you're recognized for 5 minutes.
+ Ms. Tlaib. Thank you, Madam Chairwoman.
+ Hello, everyone. I'm so glad that we're having this
+hearing. And I'm super appreciative of the leadership of our
+chairwoman, so that we can at least have some sort of
+transparency in exactly what happened.
+ As we all know, the wealthiest 10 percent own 84 percent of
+all stocks. In fact, 50 percent of American families own no
+stock at all.
+ I say this to emphasize that, to many of my residents, the
+stock market is simply a casino for the rich whose gambling
+hurts pension and retirement funds. And when you all screw up,
+the people end up paying the tab through losses or bailouts.
+ I want to talk about the high frequency trading. We know
+about half of all stock trading in the U.S. is done by
+computers. They analyze market activity and instantly complete
+trades at a profit. This high frequency trading allows Wall
+Street traders to get ahead of transactions done by pension
+accounts and retirement funds.
+ Mr. Griffin, and this truly is a yes-or-no question, is
+Citadel's trading algorithm programmed to identify and trade
+ahead of large trades done by pension and retirement funds? Yes
+or no?
+ Mr. Griffin. Congresswoman, today, virtually all trades
+executed by institutional investors are in the form of program
+trades such as volume-weighted average price (VWAP) and other
+algorithmic trades.
+ Ms. Tlaib. So that's a yes, right, Mr. Griffin? Just so
+it's clear.
+ Mr. Griffin. I'm answering the question. It's a very
+complex question that deserves an appropriate level of answer.
+ Ms. Tlaib. Okay.
+ Mr. Griffin. These VWAP trades are not large trades that
+you can--it's not like there's 10 million shares to be bought.
+It is a trade that is sliced into small slices, 100 or 200
+shares, and executed over the course of a day, a week, or a
+month.
+ Ms. Tlaib. Help me out with this one. Does this increased
+cost, this kind of algorithm or whatever program to identify
+and trade the computers doing the trading, does this increase
+costs for people who have pension and retirement funds? Yes or
+no?
+ Mr. Griffin. Given that we, for example, manage money on
+behalf of pensions--
+ Ms. Tlaib. There's no time. This is not out of disrespect.
+We just have to limit the time.
+ Mr. Griffin. We use VWAP orders to execute on behalf of our
+hedge fund and have generated exceptional returns for pension
+plans and for endowments, so--
+ Ms. Tlaib. Well, I'm going to help you out, Mr. Griffin. In
+effect, some estimates indicate that as a result of the high
+frequency trading, pension and retirement accounts pay nearly
+$5 billion in taxes. This means that Wall Street firms like
+yours engaging in high frequency trades are actually making
+money at the expense of my residents' retirement funds.
+ One way to ensure that this enormous wealth generated on
+Wall Street actually reaches the real economy, what's happening
+right here in our communities, and in my district, is to enact
+and look at proposals like a financial transaction tax.
+ And let me tell you, according to recent polling, the
+majority of Americans--all of you need to hear this--support
+taxing Wall Street transactions. Taxing them at just 0.1
+percent would actually raise $800 billion over 10 years which
+could fund programs like helping my district expand healthcare,
+nutrition, and public education.
+ I heard my friend from Texas--and we are all praying that
+all of the families will be taken care of--talk about access to
+water and electricity, but guess what? Right now, in my
+community, it's so poor that I have families melting snow so
+that they can flush their toilets, because they have no access
+to water. So this tax, to me, would discourage risky and high
+frequency trading, unfair high frequency trading.
+ Mr. Griffin, has Citadel's lobbyist right now been hired to
+oppose Federal proposals of a financial transaction tax because
+it would make high frequency trading less profitable?
+ Mr. Griffin. We firmly believe that a transaction tax will
+injure Americans hoping to save for retirement. I believe that
+Vanguard has publicly come out and said that we'd have to work
+about 2\1/2\ years longer--
+ Ms. Tlaib. I want to make this--
+ Mr. Griffin. Let me finish my answer. I think it's
+important to--
+ Ms. Tlaib. No, no, no. I'm reclaiming my time. The Hong
+Kong stock market, Mr. Griffin, imposes a 0.2 percent tax on
+transactions, and as a result, sees little high frequency
+trading, but this hasn't stopped the Hong Kong stock market
+from thriving or becoming the third-largest in the world, after
+New York and London.
+ So just to be clear, let's not gaslight the American
+people. You will all be fine with the tax. And it's fair,
+because let me tell you, our folks are tired of bailing you all
+out when you screw up and gamble with the retirement funds, and
+that's exactly what happens every single moment. And that's the
+reason why we're having this hearing, is that sometimes you are
+irresponsible, and it's set up in a way that helps only the
+wealthy and leaves people like my community here with this
+large income inequality that I feel like never, ever gets the
+bailout it deserves.
+ Thank you so much. I yield back.
+ Chairwoman Waters. Thank you very much.
+ Ms. Dean, you're recognized for 5 minutes.
+ Ms. Dean. Thank you, Madam Chairwoman, and I appreciate
+this hearing for the opportunity to get detailed information
+and to gather the facts as to what happened over the course of
+these transactions.
+ Let me start by saying, and I saw that Members on both
+sides of the aisle are interested in this question--that the
+core question that I'm going to be asking is, what did the
+customers know? What did the users know, and when did they know
+it? That's the theme of what I want to ask.
+ Because I believe if we understand what happened, and what
+they knew and what they didn't, we're going to be able to
+prevent some of the harm in the future.
+ Let's go to the narrative. Mr. Tenev, I want to take a look
+at your page 9. You said that at approximately 5:11 a.m.,
+Robinhood Securities received the automated notice saying that
+you had a deposit deficit of approximately $3 billion. You then
+said that between 6:30 and 7:30 a.m., Eastern Standard Time,
+Robinhood decided to impose the trading restrictions, meaning
+no more purchases of GameStop. And you said in your testimony
+that in conversations with NSCC staff, early that morning, you
+notified NSCC of your intention.
+ In that time period from 5:11 a.m. to the time you were
+having the conversations, what did you tell your users? What
+notice did they have?
+ Mr. Tenev. Thank you, Congresswoman. I believe during that
+time period, shortly after the restrictions on purchasing of
+these relevant securities were made, we communicated to users,
+to our customers, that these securities would be restricted
+from purchasing. And then subsequently, we issued broad
+communications and communication on social media explaining the
+reason being enhanced deposit requirements due to high
+volatility.
+ Ms. Dean. I'm going to ask you to be much more specific,
+because in your testimony, you wrote that you offered three
+different ways of notification. You said that first, the
+notification to your customers was what they agreed to in their
+customer opening agreement. That was your first backstop,
+which, who knows what that boilerplate said or when customers
+or users agreed to it.
+ Second, you said they were notified 2 days later by an SEC
+alert, and we know what that SEC alert was. It was quite
+general, much more vague.
+ And third, you said that you also list a more ambiguous
+mention of targeted messages to customers.
+ When did you specifically send your customers an alert,
+``This is what we have had to do, because we were short
+capital?'' When did you do that? What time?
+ Mr. Tenev. I believe, Congresswoman, that happened at
+several different points in time. There was a blog post that
+was published in the afternoon, Pacific time. I don't recall
+the specific time. Maybe it's in my written testimony.
+ Ms. Dean. Would it be after the SEC notice? It seems to me
+that you didn't notify your customers for at least 2 days. You
+relied upon the SEC notice 2 days later. Would I be correct?
+ Mr. Tenev. Congresswoman, that's inaccurate. Customers were
+notified several times on that day, and they were notified of
+other restrictions as they happened days prior to January 28th
+as well.
+ Ms. Dean. But you don't say what those notifications were
+in your testimony. What did you notify them? Specifically, what
+would I, as a user, have heard from you immediately upon your
+imposing the restrictions?
+ Mr. Tenev. Congresswoman, immediately upon imposing the
+restrictions, customers would have received communications
+saying that they would be prevented from opening further
+positions in the relevant securities. Later in the day, on
+January 28th, around early afternoon Pacific time, we published
+a blog post which explained that the decision to restrict these
+securities was due to collateral requirements at NSCC and
+clearinghouses, and not at the direction of special interests
+or hedge funds.
+ Ms. Dean. Forgive me. Let me interrupt you there. You
+admitted to making mistakes. Specifically, what mistakes did
+you make?
+ Mr. Tenev. I admit to always improving. And certainly,
+we're not going to be perfect, and we want to improve and make
+sure that we don't make the same mistakes twice.
+ Ms. Dean. But what were those mistakes? That's what we're
+here to learn about.
+ Mr. Tenev. Thank you for the question. It's an important
+question. On Thursday, we did restrict the buying of these
+securities. On Friday, we imposed position limits, which I
+believe was a much better long-term solution, one that we'll
+have in the future if anything like this happens again. We also
+raised $3.4 billion in capital to allow our customers to trade
+what they want.
+ Ms. Dean. Thank you. I yield back. I think my time has
+expired.
+ Thank you very much, Mr. Tenev.
+ Chairwoman Waters. Thank you very much.
+ With that, we'll go to Ms. Ocasio-Cortez for 5 minutes.
+ Ms. Ocasio-Cortez. Thank you so much, Madam Chairwoman.
+ Mr. Tenev, Robinhood has 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.
+You've previously tried to blame clearinghouses for your need
+and scrambled to raise some $3.4 billion in a matter of days.
+But you've also blamed a lack of industry-wide real-time
+settlement, or rather, a lack of that settlement of trades.
+ But Robinhood's requirements for margin have long been far
+more lax than other brokers--in December, just a couple of
+months ago, you bragged about having some of the most
+competitive rates in the industry, and this is evidenced by
+your recent decision to raise those requirements.
+ When Robinhood prohibited its customers from purchasing
+additional shares of several stocks, other brokerages merely
+adjusted the margin requirements on these stocks.
+ So Mr. Tenev, given Robinhood's track record, isn't it
+possible that the issue is not clearinghouses but the fact that
+you simply didn't manage your own book or failed to
+appropriately manage your own margin rules or failed to manage
+your own internal risks?
+ Mr. Tenev. Thank you for the question, Congresswoman. Let
+me address the margin point, because I think this is an
+important one that has been underdiscussed.
+ In December, when we lowered our margin rates to 2.5
+percent, one of the details that I think was missed is that
+most other brokerages have tiered margin rates where the
+wealthier customers pay much lower margin rates than lower-net-
+worth customers.
+ You'll have someone who has $10,000 paying 9 to 10 percent
+for margin, whereas someone with a million dollars pays 2
+percent. So, our approach was to give everyone a uniform rate
+so that wealthier customers are not advantaged with lower rates
+than lower-income customers, and I think that's a unique
+approach in our industry and is representing--
+ Ms. Ocasio-Cortez. Thank you. I apologize. I have to
+reclaim my time for questioning.
+ As many of my colleagues have also pointed out, Robinhood
+generates much of its revenue from the payment for order flow
+arrangements with market makers like Citadel, as well as Two
+Sigma and VIRTU. And in 2016, the SEC highlighted ways that the
+payment for order flow created a, ``potential conflict of
+interest with the broker's duty of best execution.'' And then,
+one of the ideas that the Commission floated in 2016 for
+addressing these conflicts of interest was to require that
+brokers pass on the proceeds of a payment for order flow.
+ Earlier, one of my colleagues, Representative San Nicolas,
+said that Robinhood owes its customers a lot more than an
+apology, and I happen to agree with him. I believe that the
+decisions made by you and this company have harmed your
+customers.
+ Mr. Tenev, would you be willing to commit today to
+voluntarily pass on the proceeds of the payment for order flow
+to Robinhood customers?
+ Mr. Tenev. Congresswoman, I appreciate that question. When
+the statement you refer to was made, I believe in 2015 or 2016,
+it was before Robinhood forced the entire industry to drop
+commissions and replicate our business model which made--
+ Ms. Ocasio-Cortez. So, I should take that as a no, you're
+not willing to pass on the proceeds of payment for order flow
+to your customers?
+ Mr. Tenev. When the other brokers dropped--
+ Ms. Ocasio-Cortez. I'm just talking about today, right now.
+ Mr. Tenev. Payment for order flow, Congresswoman, allows
+for commission-free trading in the context of trading
+commissions. It's a much larger source of revenue in the past
+than payment--
+ Ms. Ocasio-Cortez. Mr. Tenev, I apologize. I don't want to
+be rude. I just have limited time.
+ But 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 to
+begin with, because you're just hiding the cost, the cost in
+terms of potentially poor execution or the cost of lost rebates
+to your customers?
+ Mr. Tenev. Certainly, Congresswoman, Robinhood is a for-
+profit business and needs to generate some revenue to pay for
+the costs of running this business. People were initially
+skeptical that the model, even with payment for order flow,
+would work when you removed the commissions, and I think we've
+proven that otherwise by making this the standard model by
+which brokerages operate now.
+ Ms. Ocasio-Cortez. I see. Okay. Mr. Tenev, I have to move
+on very quickly.
+ I have a timeline question here for Mr. Plotkin. Mr.
+Plotkin, earlier today, you mentioned that Melvin Capital had
+not engaged in a naked short of GameStop, and Melvin closed out
+its position on GME on the--is that correct?
+ Chairwoman Waters. I'm sorry. The gentlelady's time has
+expired. We have to go to Mr. Auchincloss for 5 minutes.
+ Mr. Auchincloss. Thank you, Madam Chairwoman, and I want to
+thank our panel for being with us through a very substantive
+and long afternoon. I think I might be a welcome face for them
+because I, as the most junior member, am the last one to ask
+questions here.
+ And I want to talk with Mr. Tenev about options. I agree
+with what other members of the committee have said in both
+parties about the value of democratizing access to assets, and
+we should give latitude for independent retail investors'
+judgment.
+ But in fields where there is an information asymmetry
+between the user of a product or a service and the provider of
+it, there's always a professional code of ethics around that.
+When you go to a doctor, when you go to a lawyer, there is a
+code of ethics wrapped around that interaction which protects
+someone who doesn't understand as much about the service being
+provided. And in finance, as you're well aware, there's a
+fiduciary responsibility to do what's right.
+ In Massachusetts, where there are 500,000 users of
+Robinhood, we hold broker-dealers to a fiduciary standard, and
+the Secretary of State Securities Division filed a complaint
+against Robinhood for violating that fiduciary standard, and
+some of it was premised on options. Two-thirds of customers
+approved in Massachusetts for options trading identified as
+having limited to no investment experience.
+ The first question I would ask you, Mr. Tenev, and please
+take no more than a minute, is what do you think is the
+appropriate amount of financial literacy that a user should
+have before they should be allowed to trade options?
+ Mr. Tenev. Thank you for the question, Congressman. Let me
+first say that Robinhood really pioneered commission free and
+zero contract fee options trading, and I think our market
+leadership in this space is due to the fact that we not only
+provide that access but have improved upon the safety of our
+product in several ways over the past few years. Number one, we
+don't allow undefined risk options trades so no selling of
+naked calls, no undefined risk.
+ Number two, we made several enhancements to the safety of
+the product over the past year, including the ability to
+perform an instant, in-app exercise of an options position,
+clarifications around the user interface, and live customer
+support by phone for urgent options cases. So, we've actually
+proven and are committed to improving in the future the safety
+of our options offering.
+ Mr. Auchincloss. But to be clear here, options are decaying
+assets. They're binary in outcome, so they are qualitatively
+and quantitatively different than stocks and bonds in the sense
+that you can lose all your money very fast. You can make a lot
+of money very fast as well, but this is getting very close to
+gambling. And especially when you gamify the option-buying
+experience as your app does, it can very quickly turn into a
+casino-like feel.
+ So, I'd ask you just to address the question again. What
+level of investment sophistication do you think a retail trader
+should have before they're buying options?
+ Mr. Tenev. Sure. Congressman, I appreciate the follow-up. I
+should first say there are strict FINRA rules and regulations
+governing who gets access to options that, of course, Robinhood
+complies with. I also should note we're in a competitive
+market. Several others have mentioned Chinese-based brokerages,
+and other brokerages that are essentially offering similar
+products, all having to comply with these regulations.
+ We're certainly willing to engage in a discussion about how
+rules should change, if at all. And as long as they're applied
+uniformly and are fair to small investors and not just
+benefitting high-net-worth individuals and institutions, we'd
+be open to having that conversation.
+ Mr. Auchincloss. The standard for my constituents in
+Massachusetts is not going to be what the Chinese regulators
+think is appropriate. It's going to be a fiduciary standard.
+ I regret that you really haven't addressed the question,
+and so I guess I would ask a separate one, which is, would you
+commit here to offering a higher in-app threshold, including,
+but not limited to, financial education before allowing people
+to purchase options?
+ Mr. Tenev. Again, Congressman, I'd be happy to engage on
+this topic substantively. I think as long as those requirements
+are uniformly applied to all brokerages and not just startup
+brokerages or brokerages catering to small investors, we're
+open to having that conversation.
+ Mr. Auchincloss. The fiduciary standard is applied equally
+to all brokerages, and yours is the one that was singled out by
+the Massachusetts Securities Division as having violated, given
+the way that your users are using the options.
+ I will cede the balance of my time, Madam Chairwoman, and I
+thank you for arranging this hearing.
+ Chairwoman Waters. Thank you very much.
+ And with that, Mr. Garcia, you are recognized for 5
+minutes.
+ Mr. Garcia of Illinois. Thank you Madam Chairwoman, and
+Ranking Member McHenry. It has been a long day. I wanted to ask
+Mr. Griffin some questions. Mr. Griffin, would you consider
+your firm successful? This is an easy yes or no.
+ Mr. Griffin. Yes. I would consider Citadel to be
+successful, and I would consider Citadel Securities to be
+successful.
+ Mr. Garcia of Illinois. And, of course, I'd agree that
+you've done pretty well for yourself. As you mentioned earlier
+in your testimony, your company handles over 40 percent of
+retail trading. Did I get that correct?
+ Mr. Griffin. Citadel Securities is the largest destination
+for retail flow in the United States. It reflects the execution
+quality that we give.
+ Mr. Garcia of Illinois. And Citadel is a leading market
+marker for interest rate drops as well. Is that correct?
+ Mr. Griffin. Due to the great work of the House and Senate
+on the back of Dodd-Frank, where we permitted competition to
+exist in the interest rate swap market, and I am grateful for
+that opportunity to compete in that market, we are now a swap
+dealer at Citadel Securities and a significant participant in
+that market, and I'd like to express my gratitude for Dodd-
+Frank's derivatives reform.
+ Mr. Garcia of Illinois. Good. You're hedge fund managers.
+Do you manage over $30 billion? Is that correct?
+ Mr. Griffin. Congressman, yes, that is correct. We manage
+approximately $35 billion of assets for pension plans, for
+endowments, for colleges, and for charities.
+ Mr. Garcia of Illinois. Very well. That's pretty
+significant. I'd say that's a lot. It seems to me that your
+company is systemically important to our financial system.
+Would you agree with that?
+ Mr. Griffin. I believe that we play an important role in
+the U.S. capital markets. I believe that our hedge fund would
+not be in the category of systemically important. With $30-some
+billion of equity, it is simply not at the scale or magnitude
+of a JPMorgan, a Bank of America, or a Wells Fargo. And in
+particular, having worked on these policy issues with members
+of the Fed in various contexts, we don't have to make payroll
+on Friday.
+ Mr. Garcia of Illinois. Okay. But you're doing pretty well,
+and yes, you're not one of the big guys that we have visit us
+frequently, at least a couple of times a year. Was Citadel
+Securities fined recently by FINRA for trading ahead of
+customer orders in the past? Is that what I heard from a couple
+of questioners earlier today?
+ Mr. Griffin. I believe this was brought up earlier, that we
+paid a fine to FINRA for trading ahead in the OTC market back
+in the, let's say, roughly 2012 through 2014. It was due to a
+systems failure. Now, we have no tolerance internally for
+having made such a mistake. We, of course, have taken actions
+to rectify such a mistake.
+ Mr. Garcia of Illinois. But that did occur.
+ Mr. Griffin. That did occur.
+ Mr. Garcia of Illinois. Okay. I appreciate that. It seems
+to me that the retail investors using their savings are not
+exactly an even match for a complex, deeply connected firm like
+Citadel. Would you agree with that?
+ Mr. Griffin. I don't actually understand the premise of the
+question. Retail investors who do good research, and I--one of
+our fellow panelists said earlier, many retail investors have
+understood the game-changing technologies unfolding before us,
+electric cars, solar energy, and have done extraordinarily well
+investing their assets into these newly emerging parts of the
+economy.
+ Mr. Garcia of Illinois. Okay. And your firm has done and
+you've personally done well during the pandemic, right? There
+hasn't been much of an adverse effect on your firm?
+ Mr. Griffin. Congressman, we've all been adversely impacted
+by the pandemic. I think all of us long for the return back to
+life as it was a year-and-a-half ago.
+ Mr. Garcia of Illinois. But you haven't done badly, right?
+ Mr. Griffin. There are two dimensions to this. There's the
+personal impact on everybody, and we've all had to deal with
+family, with friends--
+ Mr. Garcia of Illinois. But in terms of your bottom line,
+sir?
+ Mr. Griffin. Our bottom line over the course of the last
+year has been successful, Congressman.
+ Mr. Garcia of Illinois. Okay. Good. That's what I thought.
+Is it true that last year in Illinois, you were involved in an
+effort, and you spent close to $50 million to defeat a tax
+increase in Illinois that would have forced the big income
+earners like yourself to pay more in taxes in Illinois, a
+progressive tax?
+ Chairwoman Waters. The gentleman's time has expired.
+ Mr. Garcia of Illinois. Thank you, Madam Chairwoman.
+ Chairwoman Waters. All Members on the platform today have
+been heard and have had an opportunity to raise their
+questions.
+ Before we get to closing statements, I would like to ask
+unanimous consent to enter letters in the record from the
+following entities: Bear Markets; Public Citizen; the
+Depository Trust & Clearing Corporation; and Healthy Markets.
+ Without objection, it is so ordered.
+ I now yield 1 minute to the gentleman from Missouri, Mr.
+Luetkemeyer, for brief closing remarks.
+ Mr. Luetkemeyer. Thank you, Madam Chairwoman, and I thank
+all of the witnesses for being here today. I thought you all
+did a great job, and we really thank you for spending time with
+us and educating us on the market and all of the activities
+surrounding GameStop investing in short selling.
+ I'd like to reiterate the ranking member's commitment that
+the House Financial Services Committee Republicans stand ready
+to work with the Majority to continue to provide oversight on
+and investigation of the GameStop activities. And going
+forward, I hope that we always have an eye towards protecting
+and giving more choice and access to America's everyday
+investors.
+ With that, Madam Chairwoman, I yield back.
+ Chairwoman Waters. I now yield myself 1 minute.
+ Today, the committee has heard firsthand from witnesses
+about their roles in the market volatility in late January.
+This hearing has allowed us to begin to assess what transpired
+and whether our guard rails have not kept up with the rapid
+changes the markets have experienced.
+ For example, I'm more concerned than ever that some
+investors are being fleeced, and massive market makers like
+Citadel may pose a systemic threat to the entire system. The
+committee is going to continue to examine these issues.
+ Our next hearing will include securities market experts and
+investor advocates to discuss the policy issues that are
+involved, and potential solutions to problems with our system
+that these events have illuminated.
+ I will also convene a hearing to hear testimony from the
+regulators, including the Securities and Exchange Commission
+(SEC) and the Financial Industry Regulatory Authority (FINRA).
+ All of these hearings will inform the committee's role and
+help us to determine potential legislative steps to protect
+investors and ensure Wall Street accountability.
+ With that, I'd like to thank our distinguished witnesses
+for their testimony here today.
+ The Chair notes that some Members may have additional
+questions for these witnesses, which they may wish to submit in
+writing. Without objection, the hearing record will remain open
+for 5 legislative days for Members to submit written questions
+to these witnesses and to place their responses in the record.
+Also, without objection, Members will have 5 legislative days
+to submit extraneous materials to the Chair for inclusion in
+the record.
+ And I sincerely thank you, and I want all of us to pay
+attention to what is happening in Texas and to do what is
+necessary to be able to give assistance to all of our people,
+all of the families in Texas who are experiencing this very,
+very difficult time. Thank you so very much. This hearing is
+adjourned.
+ [Whereupon, at 5:25 p.m., the hearing was adjourned.]
+
+ A P P E N D I X
+
+ February 18, 2021
+
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