Robinhood CEO Vlad Tenev appeared before Congress on Thursday to defend the company against accusations that Robinhood hurt retail investors by preventing them from selling shares and encouraging risky behavior as part of the GameStop stock trading drama.
Tenev appeared along with others, including Reddit CEO Steve Huffman, Citadel's Ken Griffin, Melvin Capital's Gabe Plotkin, and Keith Gill, who uses the handle "Roaring Kitty" on YouTube. While Tenev didn't answer all the questions that lawmakers posed, he had one big accomplishment: He didn't have any of the major gaffes that have plagued him in previous interviews.
"I'm sorry and I apologize," he said. "We are doing everything we can to make sure this doesn't happen again … Robinhood owns what happened, certainly, and we need to make sure it doesn't happen again. Robinhood Securities had limited options with how to address this."
Legislators pushed Tenev about the liquidity that Robinhood had on hand during the crisis when it stopped the buying of GameStop and other stocks. Tenev said that the company did not have a liquidity problem and raised $3.4 billion as a "cushion" and to ensure against another "black swan" event. "We met all of our regulatory capital requirements," he said.
But when pressed by Rep. Anthony Gonzalez as to whether Robinhood had $3 billion required by its clearinghouse early on the morning of Jan. 28, Tenev said, "At that moment we would not be able to post $3 billion in collateral."
Legislators also argued that Robinhood did not adequately prepare for the collateral problem. Tenev said the GameStop crisis had a probability of happening once in 3.5 million times.
One of the main areas of interest for lawmakers was payment for order flow, the system that Robinhood uses to generate revenue. Tenev acknowledged that more than half of Robinhood's revenue comes from payment for order flow.
Citadel Securities' Ken Griffin was pressed by Rep. Brad Sherman on whether it gives worse prices for Robinhood compared to other brokerages — so that, for example, paying for order flow gets worse price execution.
When asked by Sherman whether the same sized order for a stock coming from two different brokerages, such as Robinhood versus Fidelity, would get the same price, Griffin didn't directly answer the question. "The quality of the execution varies by the channel of the order," Griffin said.
"If you're going to filibuster, you should run for the Senate," Sherman replied.
Some legislators called for more transparency with short selling. Rep. Nydia Velázquez asked about the lack of requirements for hedge funds to disclose short positions, as they must do for long positions. Some legislators also criticized Robinhood for not providing more disclosure about why it restricts trading in certain stocks.
Lawmakers raised the issues with settlement of trades, and some called for steps to move towards real-time settlement of trades. Tenev said that real-time settlement would have prevented many of the problems that Robinhood faced, since it wouldn't have required as much collateral.
Retail investors also need more protections, lawmakers argued. Some pointed to what they called gamification, such as confetti design features, within Robinhood's app that encourages risky bets. Tenev said that Robinhood doesn't engage in gamification.
"Giving people what they want in a responsible way is what Robinhood is about," Tenev said. "We don't consider that gamification. We know that investing is serious."
Republicans on the committee argued in the hearing for fewer regulations or against more regulation in financial markets. They said that more regulation would not have prevented the problems that happened with GameStop. "Piling on more regulation only increases complexity," said Barry Loudermilk, a Republican from Georgia..
The ranking Republican on the committee, Patrick McHenry from North Carolina, argued for reducing regulation: advocating for lowering requirements for retail investors to invest in private startup companies, which are currently restricted to accredited investors. "Policies like the accredited investor definition blatantly pick winners and losers," he said.
Some lawmakers called for a financial transaction tax on stock trades. Rep. Rashida Talib argued that a majority of Americans support such a tax and that such a tax on the Hong Kong Exchange did not hurt that exchange.
