Robinhood, Citadel Spar With Lawmakers Over Retail Trading

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

At a closely watched Financial Services Committee hearing sparked by the frenzied trading in GameStop stock, Robinhood’s Vlad Tenev and Citadel’s Ken Griffin took fire on issues ranging from trading halts provoked by capital shortfalls to whether “free trades” are really free. While both were adamant that their businesses have helped small-time investors gain access to markets that have long been the domain of Wall Street, lawmakers were frequently dubious of the chief executives’ often complex arguments.

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

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

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

Wild Period

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

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

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

After the proceedings wrapped up Thursday, she said in a press briefing that Congress would determine whether the GameStop debacle requires a legislative response once the panel hears from more witnesses.

During the hearing, Waters took particular issue with Citadel, saying that its business that executes trades gets “key, non-public information” that can benefit the firm, which also runs a $34 billion hedge fund. Citadel has long said it keeps the two operations completely separate.

“Your business strategy is designed intentionally to undermine market transparency and skim profits from companies and other investors,” Waters told Griffin, adding that “we don’t really know how central your firm has become to the capital markets.”

Representative Jim Himes, a Connecticut Democrat, also noted Citadel’s reach, which he said was to the detriment of small investors. “They’re the casino in this story, and the casino tends to win over time,” Himes said.

Griffin, sitting in a mostly bare room with houseplants in the background, kept his cool amid the pointed questions. He avoided pushing back and emphasized that Citadel has saved retail investors large amounts of money by improving the prices they get for trades.

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

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

Republicans generally warned against solving the GameStop problem with new regulations. And, there is unlikely to be a major policy response coming from the committee’s review since getting legislation through the closely divided Congress will be near impossible.

New Rules?

Still, some issues are certain to gain attention at the Securities and Exchange Commission, which oversees markets. They include a look at why so many stocks trade off public exchanges, whether apps like Robinhood’s that seem like a video game should be more tightly regulated and if short sellers should boost disclosure of their bearish wagers. The SEC and the Justice Department are also investigating whether any traders illegally manipulated the prices of GameStop and other stocks.

Many of the committee members made clear that they’re siding with the small investors who pushed GameStop to record highs, despite concerns raised by ex-regulators and some finance executives that the price swings exposed those fueling the surge to potentially crippling losses. Experts noted that GameStop’s jump to as high as $483 last month was not grounded in financial analysis. Shares in the unprofitable video-game retailer closed at $40.69 in New York trading Thursday.

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

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

Swirling Conspiracies

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

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

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

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