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tv   Fast Money Halftime Report  CNBC  February 18, 2021 12:00pm-1:00pm EST

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famous for earnings, kellogg, hormel, smuckers, campbell's kraft-heinz and they're leading the s&p at the moment and you can build two cases, one is inflation could be an assist on pricing and the defensive play that we saw when covid first hit. a busy afternoon let's get to the judge ♪ all right, carl. thanks so much breaking news continues now. welcome to "the halftime report." i'm scott wapner we are, as you know, just moments away now from the gamestop hearing on capitol hill as the leaders of robinhood, citadel, along with melvin capital answer questions before the house financial services committee. they're getting set, as you can see. here's who you will see in today's virtual hearing. we'll show you the wall of the major participants there there is vlad and melvin capital
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and steve huffman is the reddit ceo and then keith gil will be there, as well, roaring kitty, otherwise known as, of course. our investment committee here with me to walk you through the event. jim lebenthal, steve wiss, jenny harington and portfolio manager and courtney gibson, think, is with us today and the president of loop capital markets. we do have our team of all-star reporters with me, as well today. bob pisani is here along with kate rooney, julia boorstin and leslie picker. leslie, i'm going to begin with you. we're going to learn a lot today about short selling. we will learn about short squeezes and we're also going to learn how the powerful firm citadel executes its trades among other things >> it's rare to hear from some
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of these voices, namely ken griffin of citadel and dave plotkin, both of whom have been surrounding this controversy is the idea that gamestop and other names have been able to be shorted at over 100% of their float size a lot of people are wondering how that's possible and the short squeezes and short selling can contribute to some of the volatility that we've seen you can probably expect questioning on that front as well as around the transparency involved in disclosing certain short positions whether there needs to be more transparency in order to properly assess the risk both from the company side and the market side. interestingly, keith gill will point to this and say they need to start the discussion on this issue of short selling, but dave plotkin in his prepared remarks plan as it defend the practice of short selling saying that
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absolutely none of the ability to depress or downgrade the stock. you mentioned citadel and ken griffin. interesting in his prepared remarks he makes a passing comment on citadel, instead focusing on citadel securities which is a separate company that he also runs, but had more of a direct relationship with robinhood as it pays for their order flow so he'll focus on citadel securities and their roles in market maker and how that plays into the retail trading environment right now. >> his seat, leslie, may end up being one of the hottest today as that firm has faced criticism about what, if any, role they played in what robinhood ended up doing with curbing some of the trading to which mr. griffin has said in an interview, he called that completely absurd, a completely absurd theory
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he'll face a lot today from these lawmakers in washington. >> there were a lot of conspiracy theories floating around there, but it certainly raises the question about conflicts of interest that are embedded in this market structure that we see today. now with regard to citadel -- >> forgive me for interrupting you, leslie. i'll go to the hearing maxine water, the chair of the committee has now begun. >> 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 role of technology and social media in our markets these have eliminated potential
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conflicts of interests and the ways that certain funds operate and they have demonstrated the enormous, potential power of social media in our markets and they've raised issues involving gameification of trading, harm to retail investors and the business models with 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 and one of the retail investors involved. we will hear from regulators including why dodd frank will be with short selling disclosures, many americans feel that the system is stacked against them and no matter what, wall street always wins. in this instance, many retail
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investors appear motivated at beating wall street at its own game and given the losses that what retail investors have sustained as a result of the volatility in the system there are many whose beliefs that the system is rigged and that there are winners and there are losers in every trade in our financial markets. our role as a financial services committee is to ensure fairness in our financial markets and system, robust protections for investors and accountability for wall street. today we will hear firsthand from the witnesses and this will be an opportunity to get the facts about the role each of the witnesses represent played in the events we are examining today. now i recognize the ranking member of the committee, the gentleman from north carolina, mr. mchenry for five minutes
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>> thank you, madam chair, and let me begin by saying i believe americans are far more sophisticated, informed and capable than they're given credit for i wanted this to be a fact-finding mission and we have speculation, 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. some of the left are already floating new restrictions or things to protect these so-called uninformed retail investors who in their eyes don't know the difference between the point and the dow jones without congress telling them i think if we've learned anything from the past few weeks is that these average, everyday investors are pretty darn sophisticated. there is wisdom. so let's zoom out on that idea
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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 we're collectively to move markets all in real time technology is fueling this revolution congress cannot put technology back in the box. 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 someone who lost money, there were stories who said they were investing in protest. in from test they would gladly risk losing money just to prove a point.
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while no one should invest money that they cannot afford to lose. the sad truth is the k-shaped economy is nothing new in our capital markets because the structural core of our regulations literally enshrined in equity. policies like the credit investor definition, plate apart blatantly pick winners and losers if you're wealthy, you're good to go and if not you're deemed too dumb to be trusted with your own money. so a privileged few get to invest alongside ivy league endowments and to the greatest returns of the last two generations. but not so fast for the average, everyday investor. in the eyes of the government you need to be protected from your own decisions, protected from your own money and protected from your own
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opportunity. so you're left with a savings account which pays more interest and if you need more money than that and although we created a world where you want to invest in the next opportunity. is it any wonder why the 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 and robinhood himself as the white collar employees who work there. same goes for reddit and reddit users, by the way. both contributed to its success, why can't both share in its future success so i'll conclude with a reminder for some of my colleagues who want to regulate more and more in 1980 wall wstreet, regulators
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had high technology companies that occurred that year. were the ipos 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 so i'll begin with 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 >> thank you so much i am so pleased that you are cooperating today and eager to work with us when called to this committee. i'd like to welcome these witnesses to the committee mr. vlad tenev is chief
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investment officer of robinhood, 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 mr. kenneth c. griffin is a chief executive officer of citadel llc, who is one of robinhood's main customers and sources of revenue which also provided financial support to melvin capital management lp when melvin faced significant losses over gamestop and other trades chief executive officer of melvin l.p. which held a significant short position with gamestop and other stocks and experienced significant losses due to its positions steve huffman is a chief executive officer, co-founder of reddit, a social media platform
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which is home to the sub-reddit wall street bets where retail investors discuss trading and where a large members discuss the purchase of gamestop and other stocks which experienced volatility mr. keith gill is a retail investor who posted for reddit and youtube regarding investing in gamestop and other stocks jennifer gall is a director of financial regulation studies at the cato institute without objection, your written statements will be made part of the record each of you will have five minutes to summarize -- >> chairman here >> it was my -- i believe that there are only three 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
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>> well, 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. >> thank you so much back in the day the law school professor would create an exam that would weave together a story that would xexemplify each of the issues in the law and never did the professor did as good a job as the gamestop saga which identifies most of the issues facing our capital markets. sh shortselling should there be limits or acquire additional disclosures? what do we do with market participants whether they be on reddit or on wall street who are shorting the stock or buying a stock for the purpose of influencing its price. what is this payment for order
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flow model and what does it mean when some participants get best execution and some get enhanced execution? price enhanced best execution and are all traders being traded, and we need to take a look at the plumbing where it takes two days to settle a transaction and also why is it the broker's capital rather than the customer's capital that is posted during the two-day period and finally, we need to look at the gameification and glorification of high frequency trading. i thank the chairwoman for the time, and i hope that in the months to come we 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. >> thank you the chair now recognizes the chairman of the subcommittee of
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oversight and investigations the gentleman from texas, mr. green, for one minute. >> thank you very much, madam chair. 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 profits 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
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>> thank you very much i will go back to the introduction of our witnesses. i left off with jennifer scott, director of the financial regulation studies at the cato institute. without objection, your written statements will be made part of the record andeach of you will have five 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 time 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 time 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 before this committee in the
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matters now under consideration will be the truth, the whole truth, and nothing but the truth so help you god. mr. tenev? >> i do. >> mr. griffin >> i do. >> mr. plotkin mr. plotkin? >> i was muted i apologize. i do >> thank you mr. huffman? >> i do. >> mr. gill? >> i do. >> ms. goff? >> i do. >> thank you very much let the record show that all of the witnesses answered in the affirmative. we will now begin with their oral testimonies mr. tenev, you are recognized for five minutes to present your oral testimony >> chairwoman waters, ranking member mchenry, members of the committee. my name is vlad tenev and i'm
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the chief executive officer and co-founder of robinhood and thank you for the invitation to speak about robinhood and the millions of people we serve. almost eight years ago beju bot found robinhood and we believed then as we do now, that the system should be for everyone and 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, but half of -- >> i would like you to use your limited time to talk to what happened january 28th and your involvement in it. >> certainly >> madam chair madam chair, the witness has the opportunity to give their own testimony. >> excuse me, you are not -- >> you are not recognized,
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mister -- >> please directly to the question mr. mchenry. yes, of course >> we created robinhood to economically empower all americans by opening financial facts 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 emigrated with my family to america in search of a better life i have benefited from all 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 platforms 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 and dividend reinvestment and recurring investments and our customers can start with small amounts and grow their investments in blue chip stocks and etfs over time we've always recognized the
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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 this tells me our business model is working for everyday americans 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 -- this tells me 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, save for the future and we are proud to serve them you've invited me today to discuss the events of last month and i welcome this opportunity
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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, was a completely unprecedented event. the spike in trading volatility meant that robinhood security, our clearing broker, had to hold the line and post additional firm capital as collateral to support our clearing house deposit demands. to put it in perspective, on january 28th, our daily deposit requirement was ten times more than on january 25th as a result, robinhood securities, along with many other firms post temporary trading restrictions on securities we began allowing limited buys on 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
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effort to meet increased regulatory deposit requirements and not to help hedge funds. we don't answer to hedge funds we serve the millions of small investors use our platform every day to invest. second, robinhood immediately secured additional funds all together through capital raising and other measures and 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 two-day period to settle trades exposes investors and the industry to unnecessary risk there is no reason that the greatest financial system in the world cannot settle trades in real time.
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i believe we can and should act now to deploy our intellectual capital and our engineering resources to move to realtime 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. >>. >> mr. griffin, you are now recognized for five minutes to present your oral testimony. >> chairwoman waters, ranking member mchenry and distinguished members of the committee, thank you for the opportunity to testify today in the recent events the u.s. markets are the envy of the world, it puts capital to the best and highest use, creates jobs and america's retail investors play an important role in our capital
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markets. according to gallup, about 55% of americans own stock right now. citadel securities has the largest market maker in the u.s. equity 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 stocks i first learned of robinhood's trading restrictions only after they were publicly announced all of us at sales 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 for my dorm
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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 and capital partners include pension plans, colleges, hospital, 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 and we've used 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 retailed equities trading, citadel securities was able to provide continuous liquidity every minute of every trading
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day. when others were unable or unwilling, citadel was there on 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 orders with sales securities reflects the confidence of the retail brokerage community in our firm's ability to deliver in all market conditions and the critical importance of our resilient and stable systems >> i could not be more proud of our team at citadel securities
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my colleagues who were committed to ensuring of the interest of america's retail investors were served during this extraordinary period >> once again, i appreciate the opportunity to be here today and i look forward to answering your questions. >> thank you, mr. griffin. mr. plotkin, you are now recognized for five minutes to present your oral testimony. >> chairwoman waters, ranking member mchenry and members of the committee, i would like to thank you for this opportunity to share melvin capital's, and i am the founding and chief investment officer of melvin capital. i am humbled by these unprecedented events many investors of all sides have experienced losses and 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
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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 the positions in gamestop days before the platforms put those limitations in place. like you, we learned about it in news reports contrary to many reports, melvin report was not bailed out in the midst of these events. citadel reached out to become a new investor, similar to others make in our funds. it was an opportunity for citadel to buy and earn return for its investors if and when the fund's value went up to be sure, melvin was managing through a difficult time, but we always had margin excess and we were not seeking a cash infusion i am here testifying today far removed from my background i grew up in a middle class family, and i studied hard and went to college. upon graduation, i did not have a job. today i'm married with four children and my time is spent at
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melvin capital i named melvin after my grandfather who ran a convenience store and i wanted it to reflect value and hard work investors such as academic institutions, medical research and other charitable foundations, pension funds, retirees and others invest in us we have 36 employees and hundreds of investors and i feel a personal duty to all of them melvin special sizes in the consumer and technology sector including companies like gamestop, autozone, and expedia. most of our investors 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 and 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 that the
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company will not live up to expectations and the stock price is overvalued, you might short a stock. like with our long positions our practice is to short the stock for the long term after extensive research we short stocks because when the markets go down we have the duty to protect our investors' capital. thin of course, we always follow them in addition, none of melvin's short positions are to artificially depress or manipulate the stock nothing of the short position prevents the company from achieving its objectives and it is 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 short gamestop since melvin's inception six years earlier because we believe and still believe that our business model selling new and used video games and physical stores is being overtaken by digital downloads through the internet and that accelerated in 2020 when because of the pandemic people were downloading video
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games at home. as a result, the gaming industry had its best year ever and gamestop had significant losses. in january 2021, a group on reddit began to make posts about melvin's specific investments. it took information contained in our sec filings and encouraged others to trade in the opposite direction. many of these posts had anti-semitic slurs directed at me and others that posted things like it's very clear we need a second holocaust the jews can't keep getting away with this, others sent profane text messages to me. in the frenzy in january gamestop's stock rose to a peak of $483. i did not think that expect would claim the intrinsic value of the business. ordinary investors who were convinced by a misleading frenzy to buy gamestop at 100, $200, or $483 had now lost. not because our investment
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thesis had changed, but because something unprecedented was happening. we also reduced many other melvin positions with significant losses both long and short were the subject of similar posts. i am personally humbled it would happen in january. it is now our job to earn it back while i do not think that anyone could have anticipated these events i've learned much from them and i've taken steps to protect investors from having anything like this happen in the future and i look forward to answering your questions >> thank you, mr. plotkin. mr. huffman, you have five minutes to present your oral testimony. >> madam chairwoman, mr. ranking member and honorable members of the committee. my name is steve huffman and i'm co-founder and ceo of reddit and i am pleased to talk about how
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reddit works and what we have seen on our site in the past few weeks. reddit's community is to bring 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, politics to internet culture to support. for example, our unemployment community has become a source for hundreds of thousands of community who have turned to reddit after losing a job during the pandemic it is used and run by our users. we describe reddit as the most human place on the internet though we are small compared to the larger platforms it provides an online home for millions of people every day i would like to share how content works. the platform-wide rules which all communities must follow. among other thing, these rules prohibit hate, harassment, bullying and illegal activity on reddit and they're enforced by
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the anti-evil team composed by engineers, data scientists and other specialists. this team also ensures the integrity of the site and we have continuously honed our message to protect from bad actors, manipulation, spam and other threats. this team searched high and low for the specific comment 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 in five minutes. such speech was not tolerated on reddit and we will investigate further claims of this nature. centralized moderation is common and reddit uses a government struck irakin to a federal democracy where the aforementioned teams represent the federal governments and the teams represent states all communities or sub-reddits are created by users called moderators and they set the community rules which are as strict as they'd like as long as they're not in conflict with the policies and they have the right to enforce these rules independently. they're not paid employees, but
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rather people who are passionate about their communities. they have the context and judgment to know how to cut. the members of each community contribute to the content itself and the ranking of it by voting up or down on any post or comment. unlike other platforms where the submission has the built-in audience, every piece of content on reddit no famous how famous the author starts at zero and that's to earn its visibility. >> through their votes it has the explicit votes of their community and the unwritten rules that define the culture. its helped the user create the most authentic communities online >> the specific community we'd like to talk about today is wall street bets. it's important to understand that wall street bets is one of finance and investing communities on reddit. this particular community specializes in higher risk, higher reward investments than what you would find in other more conservative financial communities on reddit such as investing and financial independence i will stress that wall street
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bets is first and foremost a real community, the self-deprecating jokes, memes and the crass, at times, language all reflect this. you'll find a siggive in kanth depth in the community xebted by the affection members show one another and they're just as quick to support a member after a loss, as they are to celebrate a big gain a few weeks ago i saw the power of the community when the traders of wall street bets banded together at first to seize an investment opportunity not usually accessible to retail investors and more broadly to defend all retail investors against the criticism of the financial establishment. with the increase in attention, wall street bets faced a surge in traffic in new users. at reddit, our first duty in the situations is to the communities and the role in the moment is to keep wall street bets online working around the clock, we scaled our infrastructure and made technology changes to help the community withstand the onslaught of traffic and we acted as democrats, and we have
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since analyzed activity in wall street bets to determine whether bots, foreign agents or other bad actors played a significant role they have not. in every metric we checked it was within the normal parameters and the moderation tools were working as expected. we will, of course, cooperate with federal and state regulators and that said we do believe that this community was well within the balance of our own policies to conclude, i would like to reiterate why it is important to protect online communities like wall street bets wall street bets 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 about the financial system i am proud to use reddit to do so thank you, and i look forward to your questions.
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>> thank you very much, mr. huffman. mr. gail you are now recognized for five minutes to present your oral testimony. >> thank you, chairman waters and the committee. i am happy to discuss my gamestop shares and my discussion of fair value on social media it is true that my investment in that company multiplied in value many times and for that i feel enormously fortunate i also believe the current price of the shares demonstrates that i've been right about the company. a few things i am not. i'm 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 am 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.
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my father was a truck driver and my mom a registered nurse. i was one of three kids and the first in my family to earn a full year of college degree when i graduated from stonehill college in 2009. that was wanot a good time to b looking for a job. from 2010 until 2017 i worked at a few start-up companies and there was a few periods when i was unemployed i took an interest in the stock market and even though i had very little money i took the time to learn more about investing. in 2019, after nearly two years unemployed, i accepted a marketing and financial education job at mass mutual 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 nor a financial adviser. i did not talk to clients and i did not recommend stocks for
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them to buy. before and after i joined mass mutual i studied and followed stocks one of those was gamestop. early june of 2019 the price of gamestop's stock climbed 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 sors still provide real value to consumers any 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
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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 use social media to promote gamestock to unwitting investors to influence the market is prepoft routs. my post did not cause the
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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 will go such a long way for us we had an incredibly difficult 2020 most difficult was the tragic and unexpected loss of my sister sarah 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 only want to say that i support retail investors' right to invest in what they want,
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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 for gamestop and i remain invested in the company. thank you. ch cheers, everyone >> thank you, mr. gill >> ms. shop you are now recognized for five minutes to present your oral testimony. >> chairwoman waters, ranking member mchenry and distinguished members of the committee my name is jennifer schulp from the cato institute thank you for the opportunity for today's hearings i would like to talk about individuals in the public
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equities market and the recent upward trend accelerated sharply during the pandemic. most point to zero-commission trading, and several other factors also likely attracted retail investors including fractional share trading, low account minimums and easy at-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 provides a path to wealth for individual investors and stock ownership traditionally has been skewed toward the already wealthy and it is highly correlated with race, education and age.
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retail investors making up this new surge are different. recent research by the investor education foundation and 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, quote, 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 of 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
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market function. as the treasury department recognized, the markets, quote, 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 wild and short lived the fact that gamestop traded temporarily and perhaps still trades above fair estimates of the company's value is not, by itself, a reason for concern stock prices move in and out of alignment all of the time and markets are no strangers to bubbles. if the company is valued by the market differently, then 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 include
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short telselling generally work well where the 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 were warranted on this 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. >> thank you, ms. schulp
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i now recognize myself five 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 clearing house 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 the requirements, isn't that a liquidity problem? could you just answer yes or no? >> chairwoman water, i appreciate the opportunity to address that. >> yes or no >> we always felt comfortable with our liquidity and the additional capital that robinhood raised --
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>> please answer yes or no >> i don't have time i just need a yes or no answer >> i stand by my statement the additional capital we raised wasn't to meet capital requirements or deposits -- >> the gentleman -- >> excuse me i'm reclaiming deposits. >> 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 2020 customer accounts were reportedly compromised due to system outages. the firm repeatedly failed to testify its best effort and misled customers regarding revenue sources. it seems retail investors often get a bad deal at robin hood also while you testified today that quote robin hood's customers benefit greatly for
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payment for auto flow in december 2020 the sec charged robin hood for not disclosing that it was getting paid to send customer trades to citadel securities and other market makers and not seeking the best terms for its customers' orders. robin hood provided such inferior trade causes it cost share customers over 34 million. is your testimony after robin hood paid the sec $65 million to settle those charges that this conflict of interest is in your customers' best interest yes or no >> 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 -- >> please answer yes or no to that question. >> so citadel securities is an important counterparty
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nobody is denying that the reason that. >> the jep didn't answer yes or no i'm reclaiming my time. meanwhile citadel's role in this event also raises significant questions for policy makers. citadel securities pays robin hood tens of millions of dollars to process trades by robin hood'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 largely without moving the market against you at some point last month 50% of all trades occurred in dark pools or via otc, off exchange trades your business strategy is designed intentionally to undermine market transparency and scale profits from companies and other investors.
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one problem, though, mr. griffin, is that we don't really know how central your forum has become to the capital markets. does citadel handle 47% of the u.s. listed retail volume? please yes or no >> excuse me, chairman waters, what percentage? i couldn't hear that number. >> 47% >> so, chairman waters, to the best of my knowledge -- >> yes or no. >> so the odd, the best of my knowledge we handle in excess of roughly 40% of all retail volume >> thank you very much reclaiming my time mr. griffin, on january 27th did citadel execute 7.4 billion shares for retail investors to be more trades than the average daily volume of the entire united states equities market in 2019 yes or no >> chairman waters, that was my written and oral testimony
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>> thank you very much with that, i now recognize the distinguished ranking member mr. henry for five minutes of questions. >> thank you mr. tanev, i'm going to come to you first. i just want to get to what happened on that day in january. let's take a step back here. you get a call in the middle of the night. according to what i've heard you in interviews say. and based off 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 settlement part of that today. we will get to that. but this is i think what needs to be answered about your decision why did robin hood restrict the buying but not the selling of gamestop and why did folks get locked out on the buy side only
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>> ranking member mchenry i appreciate the opportunity to address that the reason that robin hood, first of all, let me say robin hood 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 in collateral requirements imposed by our clearing houses so buying -- >> but why -- >> buying securities -- >> but why -- >> selling does not, moreover, preventing customers from selling is a very difficult and painful experience where customers are unable to access their money. we don't want to impose that type of experience on our customers unless we have no other choice even though i recognize
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customers were very upset and disappointed that we had to do this i imagine it would have been significantly worse if we prevented customers from selling. >> so let me ask this question is payment for order flow legal? >> yes payment for order flow is legal and regulated -- >> and disclosed it is disclosed to those users of your app? >> yes, payment for order flow is disclosed in multiple places and, moreover, payment for order flow enables commission free trading. that's why it's become the industry standard model as other broke r brokerages have replicated our model and started off free commission trading to their customers as well. >> okay. so this greater point of what happened that day, and the model that you're using, let's be crystal clear. that decision you maed made to restrict the buying but not the
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selling of gamestop, was it based on pressure from anyone on the witness panel here today >> not at all. zero pressure from anyone. it was a collateral depository requirement decision made by a robin hood securities president. we stand by -- >> all right let me get into this question. you want to democratize finance. you want to open up wall street to retail investors. you say that robin hood's mission is to democratize finance for all. so let's talk about that so yes or no, can a robin hood customer invest in robin hood the company? >> robin ood's currently a private company, so that's not possible no >> and so you mean to tell me that the people that use your platform that make you a successful company and i would say directly contribute to your company's exponential growth and success, they don't get the same access to equity shares as a
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robin hood employee or your institutional investors, is that correct? >> currently that is correct, yes. >> all right miss schult, let me pivot to you. why is that? why is it that every day investors on the robin hood app, people i would argue contribute to its success, can't invest in robin hood, itself >> the sec limits a lot of investment in private companies to those folks that are known as accredit investors and to become an accredit 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. >> okay. so let me just clear this. mr. tenev i don't blame you for the restriction you put on your customers not being able to invest in equity i'd like to have more opportunity to ask mr. gil his
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thoughts on this but 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, madame chair, for the record i'd like to submit a letter from the ddcc which is the clearing company that was not on the panel today and your staff has this letter. thank you all. look forward to getting to the facts of the matter. >> other members ms. maloney? >> chairwoman waters and ranking member mchenry, thank you for convening this hearing i hope today's hearing sheds light on how our markets are working or in many cases 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
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fundamentals the whole enterprise was viewed by some as a giant video game, trading stocks instead of properties and monopoly money. but it's not all fun and games because people can lose their life savings, hard earned cash and, tragically, we know of at least one suicide linked to potential trading losses beyond those possible losses the actions of robin hood and other trading platforms during the gamestop frenzy caused confusion, 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 but it makes markets work fairly is when everyone knows the rules and that the rules remain consistent and predictable and are enforced but because of robin hood's actions too many customers


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