tv Robinhood CEO Reddit Co- Founder Others Testify on Game Stop Stock CSPAN February 18, 2021 12:34pm-5:27pm EST
22 u.s.c. 6913 and order of the house of january 4, 2021 of the following members on the part of the house to the congressional executive commission on the people's republic of china. the clerk: mr. mcgovern of massachusetts as co-chair, and mr. smith of new jersey. the speaker: the chair announces her appointment pursuant to section 4-b of house resolution 8, 117th congress, and the order of the house of january 4, 2021, of the following member to serve as co-chair of the tom lantos human rights commission. the clerk: mr. mcgovern of massachusetts. the speaker: pursuant to section 5-a-1-b of house resolution 8, the house stands adjourned until 11:30 a.m. on monday, february 22. >> the u.s. house returns next
week to return on a covid-19 relief bill. watch the debate live on c-span. take you like to coverage of the house hearing on gamestop, stop trading. >> this team searched high and low for the specific comment in the previous testimony or anything like it. the closest we could find was a single, that received no votes and was deleted in five minutes. such is not tolerated on red and we will investigate further claims of this nature. centralized moderation of, but read it additional uses a structure akin to a federal democracy where the policies in teams represent the federal government and the communities represent states. all communities or sub-residents are created by yeutter -- users we call moderators. they have community rules which may be as strict as they like as long as they are not in conflict . moderators not paid employees but users passionate about employees.
the members of each community contribute both content of self and ranking of it by voting up or down on any post or comment. unlike other platforms where submission has a built-in audience through the authors follower count, every piece of content on reddit no matter how famous the author starts at zero. 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 approach has helped create the most authentic communities online. the specific community we would like to talk about is wall street bet. it is important to understand they are one of many finance and investing related communities on reddit. this particular community specializes in high-risk and high reward investments than what you might find in other conservative financial communities on reddit with such names as personal finance, investing, and financial independence. i will stress wall street bets is first and foremost a real
community, the self-deprecating jokes, memes, the crass at times language all reflects this. if you spend any time on wall street bets, you will find that 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 wall street bets banded together to seize an investment opportunity not usually accessible to retail investors but 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. our first duty in the situations is for communities in our role in this moment was to keep wall street bets online. working around-the-clock, we scaled infrastructure, made technology changes to help the community to withstand the onslaught of traffic and diplomats to resolve conflict within leadership. we analyzed wall street bets to
determine whether bots, foreign agents, or other bad actors play a significant role. they have not. and every metric, the activity was lower than normal parameters and moderation tools were working as expected. we will -- to conclude, i would like to reiterate why it is important to protect online communities like wall street bets. wall street bets may look chaotic from the outside, but the fact we are here today mean they managed to raise important issues about fairness and opportunity in our financial system. i am proud they used reddit to do so. thank you, and i look forward to your questions. >> thank you very much, mr. gill.
now, you are given five minutes to present your own testimony. mr. gill: thank you, chairwoman waters and numbers of the committee. i am happy to discuss with the committee my purchase of the gamestop shares and discussions of their failed bear -- fair value on social media. it is true my investment and i community multiplied in value many times. for that, i feel enormously fortunate. i also believe the current price of the shares demonstrate i have been right about the company. a few things i'm not, not a cap, not an institutional investor, nor a hedge fund. i do not have clients and 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 on my own analysis. i grew up in massachusetts and my family was not wealthy. my father was a truck driver and mother a registered news --
nurse. i was one of three kids and the first of my family to earn a four-year college degree in 2009. that was not a good time to look for a job. from 2010 to 2017, i worked a few startup companies, but there were significant periods where i was unemployed. i took any interest in the stock markets, and even though i had little money, i used those times to educate myself and learn more about investing. in 2019, after nearly two years unemployed, i accepted a marketing and financial education job at massmutual. my wife, caroline, and i were thrilled i had income and benefits. my job was to help develop financial education classes -- classes that advisors could present to perspective clients. 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. early june of 2019, the price of gamestop stopped declining blow what i thought was its fair value. i invested in gamestop in 2019 and 2020 because, as i studied the company, i became more confident in my analysis. two important factors, based entirely on publicly available information, gave me confidence gamestop was undervalued. first, the market was underestimating the prospects of gamestop 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 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 the book about gamestop and social media with other investors, our conversations were no different from people on a golf course, or at home talking, or -- wall street firms have teams of analysts analyzing 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 i use social media to promote gamestop stock to unwitting investors and influence the market is preposterous. my post not because the movement of billions of dollars into gamestop shares.
it is tragic some people lost money and my heart goes out to them, but what happened in january demonstrates again investing in public security 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 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 in june. i'm 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. i'm thankful the committee is examining what happened. i also want to say i support retail investors's right to invest in what they want and when they want.
in the right of individuals to send a message based on how they invest. as for me, i like to the stock. i'm as bullish as i have ever been on a potential turnaround for gamestop and have remained invested in the company. thank you you and cheers, everyone. >> thank you, mr. gill. miss scholl, you are recognized for five minutes to present your testimony. ms. schulp: chairman waters, ranking member, and this -- distinguished members of financial services. i'm general schulte, the director of regulation studies at the cato institution for monetary and financial institutions. thank you for the opportunity to take part in today's hearing. before addressing the gamestop phenomenon specifically, i would like to talk about the participation of retail or individual investors in our public equity markets. retail participation has ebbed and flowed over the years, but the recent upward trend
accelerated sharply during the pandemic. most .2 zero commission trading, but several other factors also likely attracted retail investors. including fractional share trading, low account minimums, and easy app-based platforms. or time at home during the pandemic probably even played a role. retail participation in our equities market is important. the fact retail investors behave differently than institutional ones and differently from each other is particularly valuable in times of market stress. individual investors may have held stabilize the market in march of 2020. importantly, investing in the stock market also provides a path to wealth for individual investors. but stock ownership traditionally has been skewed toward the already wealthy, and it is highly correlated with the race, education, and age.
retail investors making up this new third are different. recent research by the center investor education foundation and nor cap the university of chicago, found investors who opened accounts for the first time in 2020 were younger, had lower income, and were more racially diverse. new investors also held lower account balances. as one of the researchers noted, a shift toward more equitable participation. these new opportunities for individuals to grow their wealth should be welcomed and expanded, not restricted. now, we turn to gamestop. at the outset, i will note it is difficult to analyze the impact of the trading in gamestop and other stocks because many facts are unknown. but something seemed clear, the temporary volatility in the stocks did not present a systemic risk to market function.
as the chair -- as the -- recognized, the core infrastructure was resilient during 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. spillover effects on the wider market were mild and short-lived. the fact gamestop traded temporarily and perhaps still trades above fair estimates is not by itself a reason for concern. stock prices move in and out of alignment all the time, and markets are no strangers to bubbles. it might indicate the analysis is missing relevant information about a company's prospects, or it might indicate the company's stock price is due for a correction. the markets mechanisms, including the short, generally work well to handle these
circumstances. stepping into 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 was conducting a study of the event. the sec has for more information then publicly available, and i think it has the tools necessary to address harmful misconduct that may have occurred. if regulators learn more, there are areas identified for improvement. by no means should eventually to restrictions on investors restriction -- restricted access to the market. i welcome any questions you may have. chair water: thank you.
now, five minutes for questions. [indiscernible] has highlighted how many people feel [indiscernible] and there are market participants [indiscernible] listen to me. you explain robin hood restricted transactions in certain securities to meet demands, yet on january 28, you represented to the media that there was no quiddity problem. isn't it true being concerned about not having enough capital to meet requirements, isn't that a liquidity problem? could you just answer yes or no. >> chairwoman waters, i appreciate the opportunity to address that. chair water: yes or no. >> we always felt comfortable with our liquidity. chair water: please answer yes or no.
i don't have time. i just need a s were no answer -- need a s were no answer. >> i stand by my statement. the additional capital was not to meet capital requirements or deposit requirements. chair water: i'm reclaiming my time. this liquidity problem had consequences for your customers, but i wonder if they were all -- between summer 20 19th and december 2020 robin hood customers experienced losses due to system outages, customer accounts were compromised, the firm repeatedly failed to testify its best execution obligations and misled his customers regarding its revenue sources. it seems retail investors often get a bad deal at robin hood. you testified today robinson's customers benefited greatly, and december 2020, the sec charged
robin hood for not disclosing that it was getting paid to send customer trades to citizen l securities and -- citadel securities and other market makers. [indiscernible] robin hood provided such inferior trading that it cost the customers over $34 million. is it your testimony that's robin hood paid the sec 65 million dollars to settle those charges that this conflict of interest is in your customers best interest. yes or no. >> first let me say, regulatory compliance is at the center of everything we do. we have made mistakes in the past and i'm not claiming. chair water: just answer that question. >> citadel securities is an important counterparty, nobody is the lying -- denying that.
chair water: did not answer yes or no so i'm reclaiming my time. also, it raises difficult questions for policymakers. citadel securities pay robin hood tens of millions of dollars to process trades by robin hood customers. this relationship gives citadel enterprise nonpublic enter -- nonpublic information. your firm makes use of changes is called dark pools, and other training to trade large -- [indiscernible] all trays that occurred in dark pools [indiscernible] your business strategy is designed intentionally to undermine market transparency and scale profit from companies and other investors. one problem is that we don't
really know how simple your form has become to the capital markets. it citadel handle 47% of u.s. retail volumes. please, yes or no. mr. tenev: i'm sorry, what number, i could note here the percentage. chair water: 47%. >> to my knowledge, we handle in excess of 40% of all retail volume. chair water: i'm reclaiming my time. mr. griffin, on january 27, did citadel execute 7.4 billion shares to retail investors, which would be more trades than the volume of the entire united states equities market in 2019? yes or no. mr. griffin: chairman waters, that was my written and oral testimony. chair water: thank you very
much. with that, i recognize the distinguished ranking member for five minutes for questions. >> thank. mr. tenev, i'm going to come to you first. i just want to get you 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 have heard you in interviews say, and based off the conversation with your compliance team, you decided to halt the buying of game stock stocks -- gamestop stocks. we will get into the parts of that today, we will get into 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 robin hood -- first of all, robin hood has always committed to providing access. it is in our name, everything that we do. the decision was driven purely by the positive collateral requirements imposed by our clearinghouses. >> but why -- mr. tenev: selling does not. preventing customers from selling is a 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 customers were upset and disappointed that we had to do this, i imagine it would have
been significantly worse if we prevented customers from selling. >> let me ask this question, is payment for order flow legal? mr. tenev: yes. payment for order flow is legal and regulated. >> and is this disclosed to those users of your app? mr. tenev: yes. payment order flow is disclosed in multiple places. moreover, the flow enables commission-free trading, and that is why it has become the industry standard model, as other brokerages have replicated our model and started offering commission-free trading to their customers as well. >> so to this greater point of what happened that day and the model you are using, let's be crystal clear, that decision you made to restrict the buying but not the selling of gamestop, was it based on pressure from anyone
on the witness panel here today? mr. tenev: not at all. zero pressure from anyone. it was the collateral depository decision made by our robin hood securities president. >> so let me get to this other question. you want to democratize finance. you want to open up wall street to retail investors. you say robin hood's mission is to democratize finance for all. so yes or no, candidate -- kenny robin hood customer invest in robin hood the company? mr. tenev: robert hunt is currently a private company, so that is not possible, no -- robin hood is currently a private company, so that is not possible, no. >> so you're telling me the people that make you a successful company and correctly contribute to your company's growth and success, they don't get the same access to equity shares as a robin hood employee
or your institutional investors. is that correct? mr. tenev: currently, that is correct, yes. miss schulp, -- miss shulp, why is that? ms. schulp: the sec limits a lot of investment in private companies to those folks known as accredited investor. to become a credited investor, you need a wealth test of owning at least $200,000 per year or having a debts worth of over $1 million. the vast majority of people in this country do not meet that standard and are unable to invest in most private companies. >> so let me just clear this, mr. tent hav -- tenev, i don't blame you on the restriction. i would like to have more opportunity to ask mr. gill his thoughts on this, but i do not fault you for the inequitable
regulatory structure that d.c. has created, but i think we need to clear this up. madam chair, for the record, i would like to submit a letter from the atcc, which is the clearing company that was not on the panel today, and your staff has this letter. chair water: [indiscernible] >> thank you all. chair water: [indiscernible] >> chairwoman waters and -- and i hope today's hearing shed light that sheds light on how our markets are not working or are working for our investors in 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 videogame, trading stocks instead of properties in monopoly money. 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 robin hood and other platforms during the gamestop friends because confusion, anger, and undermined investor confidence in the font on mental -- and the fundamental fairness of our capital markets. none of this is healthy for our markets, good for investors. what makes markets work fairly is that everyone knows the rules and the rules remain consistent, predictable, and are enforced. but because of robin hood's actions, too many customers did not get that predictability.
many retail investors woke up on january 28 to find they can no longer buy and sell stock the same way they could the days prior. and they were being treated differently than other market participants who could still buy and sell the same stocks. so i don't blame them for thinking stacked -- thinking they were stacked against the little guy. you stated in this testimony that robin hood restricted trading for certain securities including gamestop in order to meet your financial requirements with your clearinghouse. when i go to robin hood's website and the blog post you initially released on january 28, your financial requirements for your clearinghouse are not mentioned. he only mentioned market volatility. when i review the customer agreement, you don't have specifics on how and when
you may decide to restrict training but you dead. and you did not 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. you seem to reserve the right to make up the rules as you go along. i have two questions for you. first, you think you all your customers more disclosure and transparency then you gave them? 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 question. to answer the second question, i am sorry for what happened.
i apologize, and i'm not going to say that robin hood did everything perfect and we have not made mistakes in the past, but what i commit to is making sure that we improve from this, learn from it, and do not make the same mistakes in the future. robinhood has an organization will learn from this and improved to make sure it does not happen again. i will make sure of that. >> i expect we will experience future events with increased volatility, because robin hood's recent actions appeared arbitrary. which is why i blame customers for feeling treated unfairly. your trading restrictions came out of the blue and your communication was not clear. my next question, looking forward, what operational changes is robin hood making to better respond to future market volatility, to improve transparency with your
customers, and to ensure 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, the $3.4 billion we raised i think goes a long way to cushioning the firm from future market volatility and other similar black swan events. i believe even throughout this process we improved our risk management and strengthen them so that the idea the customers have was much improved from thursday. we continue to learn and improve on this. chair water: miss wagoner, you are recognized. >> thank you, madame chairwoman. i would like to welcome our witnesses for testifying today to mark the volatility that took
place along with what i hope that they broader discussion on market functions and their effect on everyday investors. since our house for selected, i have advocated for america's main street and worked tirelessly to ensure all americans, especially those low and middle income sabers, are giving the investment choice, access, and affordability they deserve. retail investors are the strength of our stock market. i have fought throughout my career for their best interest in the financial markets. this hearing today is no different. the advances in financial technology that we witnessed the last decade have improved the way americans and our businesses perform financial i to vinci's. in the past year, we have seen retail investors, market participation, more than double. i think this is great.
i believe in the wisdom of the retail investor, and i say i will -- and i say i believe in the first amendment as well. this is attributed to robinhood and other trading brokerages lowering account and imams, permitting fractional trading and zero commission trading. it is critical that congress focus on reducing barriers, reducing barriers to market participation, which is what it rarely wants to do, and allowing main street americans access to these financial instruments that can create long-term investment savings. all of these changes have given millions of americans the ability to invest for their families and future. my hope is that the majority does not use this hearing as an excuse to once again added a new federal regulatory burden to any
industry already heavily regulated, that will prevent people from participating in our capital markets, letting existing regulations work is key, not burning everyday investors with new and more costly barriers to entry. mr. tenev, it appears at the time, your company did not meet the level of requirements for training for your customers. your view, or collateral requirements or 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 one in 3.5 million event. to put that in context, there have only been [indiscernible] in the history of the u.s. stock market. so i one in 3.5 million event is
on model a bowl. that said, we could -- on model -- unmodelable. that said, [indiscernible] >> i realize you are doing a full review of your practices in such. i encourage you to do that and certainly communication with more investors will be key to that. because you did not communicate with them are leon. as the ranking member on the inclusion testimony, i'm delighted to be speaking with -- we are smack helen sauers talking about having qualified women in finance. this is a daily collateral command set by a corporation that was the reason robin hood had to temporarily restrict
trading. can you briefly explain the purpose of these capital requirements and overall relationship to ensuring markets function in a prone manner. -- broad manner. >> the sec's collateral serves a function to provide security for stocks [indiscernible] while investors thinks what is happening is the stock on the day of the trade, it really takes two days for the settlement process to clear. during that time, the brokerage firm and the brokerage firm on the others remain at risk for that stuff on clearing. in the collateral [indiscernible] in the brokerage firm will not
be able to make good on its promises to sell or buy. i did not see any broad care -- broad scale [indiscernible] the collateral core requirements -- the collateral requirements were long but understandable. >> my time has expired. thank you for your testimony and i yield back to the chairwoman. >> menem chairman, point of order. -- madame chairman, point of order. when they are not speaking, mute yourself because there's a lot of feedback when the question is asked and the mic stays open and the people answering the question. just remind everybody to mute when you not speaking. chairwoman water: thank you very much. i would hope every member will certainly do that. mr. chairman, you are recognized for five minutes. >> thank you very much.
we have come to expecting's on the internet to be free. when you are not paying for it, it is not free. you are the product, someone else 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 who. so we now have a system where we are telling investors it is free to invest, 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 the -- and they know they are paying a commission. the other way to do it is give them a worse execution.
whenever there is say a stock sold a market maker, perhaps send it out, might be willing to sell the stock for $10.05 but will buy it for only $10. the difference is five cents. the issue is whether robin hood 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 and you pay some brokers for order flow and pay -- don't pay other order -- 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. that is hidden -- the amount of that is hidden from the customer. the fact it exists perhaps has
been recently disclosed. sec rules require people get the best execution, but i recently learned there is best execution and enhanced pricing. if you get an order from fidelity and an order from robin hood, and you are paying for the robin hood order flow, is that customer -- is the robin hood customer getting a good a price as the fidelity customer? mr. griffin: congressman, i believe that is an excellent question. the execution quality we can provide as measured in terms of price improvement is heavily related or correlated to the size of the order we receive. if i were to speculate -- >> don't tell me there are other factors involved and take us down another road. i am asking you a clear question.
assuming the same size of order, one comes in from robin hood, one comes in from fidelity, is it's not true that one is going to be getting an enhanced desk execution and the other one will get general execution. mr. griffin: as i was trying to explain, because the robin hood order comes from a community, a community of traders who tend to trade in smaller size -- >> that is not my question. you are evading up my question by making up other questions. two identify -- identical orders come in, same stock, same quality, one is from robin hood and one of the -- mr. griffin: this is a commonly under hood phenomena in economics. for example, when you get a mortgage, a mortgage to their
clientele has a different rate of interest -- >> 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, size of the order is only one factor. >> 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 talked to in this industry says when you pay for order flow you get -- when your broker is being paid for order flow, you get a worse execution. otherwise, you are in a peculiar circumstance where you are making more money on a fidelity transaction than a robin hood
transaction -- our bank transaction -- robinhood transaction. chairwoman water: [indiscernible] >> thank you, madame chairman for holding this hearing and thank you for the witnesses for agreeing to testify. it has been reported approximately 20% of market volume is not traded to retail customers. which i think is fascinating considering it was 10% in 2019. that's an overwhelmingly positive development. more additional household -- avenues for households to grow their wealth. it is important to increase access for market customers. i don't want to disrupt that if we can possibly -- if we possibly can. i would like to get my first question to mr. tenev. let's talk about the attention paid for order flow received. explain to your testimony robbins hodes -- testimony,
robin hood provides commission free trading. expand if you would on how that process benefits the everyday investor. expand in general on that, if you would. >> congres -- congressman, i would be happy. >> as i mentioned in my written testimony, payment for order flow enables commission free trading. prior to robin hood 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. robin hood routes to market makers including citadel execution services. we have seven in total across equities and options. we routes without consideration for payment overflow, all payment for overflow agreements are uniform, and our system routes orders based on who provides the best execution
quality for our customer. the reason citadel gets a relatively high percentage of our customer order flow is because they provide superior execution quality for our customers. that is first and foremost the most important consideration we look for, how are our customers getting the best execution quality if another market maker were to improve upon the execution quality that citadel provides on any subsidy of orders. our system is set up to automatically route or traffic that market maker. >> continuing down this line because this is clearly one of the things my colleagues and republicans have a strong culligan, and have living through dodd frank before, i see major things can occur. i want to turn to mr. griffin. can you elaborate on how payment for order flow provides, whether it is the best price to the
retail investor from the market makers. can you stand on that as you outlined? mr. griffin: absolutely, congressman. as the ceo robin hood set forth clearly, the orders allocated amongst the marketmakers today are allocated principally on the basis of price improvement. we have fought for 15 years to make that basis by which how orders are allocated, because we strongly believe citadel is able to provide a better execution to orders. in the long run, we make a huge investment our team and technology to do so. how is it we are able to provide better execution quality in exchanges? because exchanges are limited by regulatory mandates. changes by law have a minimum 1/10 wide markets, which means there are less competitive than
they otherwise could be. >> [indiscernible] >> that wasn't either one of us. continue, mr. griffin. mr. griffin: we are able to share with retail investors and are able to give them a better price and are able to make payments or order flow to firms like robin hood that will allow them to have lower, or in most cases no commission, and help robin hood and other brokers help pay exchange fees to the exchanges at the time of execution. this is very important for the democratization of finance. it has allowed the american retail finance or to have the lowest execution cost they have ever had in the history of the u.s. financial market. >> mr. tenev, in the dodd frank process that the chairman and i went through a decade ago, there
was much discussion about margin requirements. give us [indiscernible] when you discovered you had a 3 billion-dollar dollar additional market call. mr. tenev: thank you, congressman. i believe that the [indiscernible] was described in detail in my written testimony. just to clarify, this decision -- >> my time has expired, unfortunately. i yield back. chairwoman water: [indiscernible] >> thank you, madam chair for this hearing and mr. ranking member. let me ask a question to mr. tenev. i have been burnt once or twice in the market, but particularly since i have been a member of congress, one of the things i recall greatly was the financial
crises in 2008. we thought that opening the market up for people who had adjustable-rate mortgages excepted were able to get into the market, but a lot of disclosures had not happened. so there was no documents to look at what the incomes were or anything of that nature. so when their adjustable rates happened, many individuals lost their homes, many people who bought the mortgages, who initially agreed to the mortgages sold it immediately because they did know that people would not be able to afford and would default shortly after. i understand your model of trying to get more people and more democratization, but that means there a greater
responsibility of ensuring your customers have all of the information they need to assess trades. for me, the information that needs to be digestible and sensible. the problems i had, you are allowing up to $1000 to buy stock on market. -- 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 as sophisticated as that and allowing them to buy these risky stocks on margin? mr. tenev: thank you, congressman for the opportunity to address that. let me set the stage by saying about 2% of our customers are on margin. about 13% on a monthly basis performing options transaction and a much smaller number, 3%, for multi-like options
transactions. the vast majority of customers are engaging and investing on our platform. to clarify your point on the $1000 margin, that is actually something we refer to as robinhood instant, provided as a courtesy. any customer initiates the deposit, we allow them access to up to $1000 of that deposit immediately, similar to how if you deposit a check in a bank, as a courtesy they might provide access to that -- those funds or a portion of them before the check clears. as for margins specifically, borrowing money on margins, the rules are very ironclad industrywide. robinhood securities conforms to the applicable rules, and robinhood's product is in many way more restrictive than that of the competitors -- of our competitors because in order to
qualify on margin, you have to be a robin hood gold customer which includes paying five dollars per month for the service. >> you say everything is restrictive, but you're going after the less sophisticated investors, more than that, there is a greater responsibility you have, because they could lose, and when they lose, it could make a determination on whether or not they can pay for mortgage so the rent went up. they can be taken advantage of. often it is those who are taking advantage of so the [indiscernible] which really concerns me. let me get to this request, because with what you said in regards to liquidity, you said you did not borrow the money because you needed it at the
time, but [indiscernible] he raised the additional money for future situations. so you had a problem or anticipated having a liquidity problem are having 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 --robinhood was able to meet our deposit requirements. we confirm with our capital requirements throughout the period, and that $3.4 billion is not to serve as [indiscernible] it was to prepare for a future even greater black swan event and to un-restrict and remove restrictions on the trading and buying of these securities. chairwoman water: the
gentlemen's time has expired. [indiscernible] >> thank you, madam chair. this would have been nicer 10 minutes ago when i was supposed to go, but i will go back to mr. griffin and the capital markets subcommittee. i think ranking was filibustering himself and i want to make sure that mr. griffin that you had that 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 hope it is -- i think it is important to emphasize we have vigorously advocated for execution quality to be one of the dominant decision-making factors for order flow in the united states. this has saved retail investors billions of dollars over the year in contrast to the executions they would receive from other execution strategies. with respect order flow, we
simply play by the rules of the road. payment for order flow has been expressly approved by the sec and is a customary practice within the industry. if they choose to change the rules tomorrow, we need to drive on the left side versus the right side, that is fine with us. i do believe payment for order flow has been an important source for innovation in the industry. as the ceo of robinhood testify, they drove the industry toward zero dollar commissions. this has been a big win for american investors. >> i want to get to ms. schulp. there was a study and others are out there, do you concur this has been can -- good for consumers and the most part? ms. schulp: i think they are still ongoing studies but i think the payment for order flow and price improvements have largely been good for improvements.
-- for customers. i agree with mr. griffin that that has -- this has driven innovation in the industry. i think disclosure could always be better and i think people should understand the broker still needs to make money, even if they are providing zero commission trading services. >> ok. all right. i've got a few minutes left. i was going to start with this and ask each one of you why you thought you are here today, but i will dispense with that because it will take too much time and i will provide the answer. political theater for the most part. that is what this hearing is today. we are on the business channels right now and on c-span. i think if you see a few of my colleague spying for the cameras, but we need to have some fundamental and important questionsfundamental and importt questions answered at the end of the day. one of the assertions you have heard is that investing is casino gambling using monopoly
money. i guess i want to know, is individual retail participation in the marketplace casino gambling or using funny money? let's start with you, very quickly. i don't hear him. so mr. hoffman, let's move to you. mr. hoffman: i believe that investing. i believe -- mr. griffin: i believe the vast majority of retail participation will saving their dreams. mr. plotkin: people who have
made millions in unrealized gains. absolutely it is testing building wealth. mr. gill: i believe it is an opportunity for investors to participate in the market >> the business -- participate in the market. >> the business channels have a question. would you buy their stock at 45? you were talking about being happy when it crossed 20. would you buy that stock today? >> investing is risky as my personal approach is aggressive and may not be suitable for anyone else, but yes. >> so yes or no? mr. gill: personally, i do find it attractive.
>> did you invest in game stock because you were not aware of the payment for order flow? a lot of people bought into this because they don't know that. mr. gill: could you repeat that question? >> did you buy game stock because you were not aware of the investment and order flow? mr. gill: my investment was based on fundamentals. >> i believe that answers it. chairwoman waters: mr. vazquez -- misses vazquez, you are recognized for five minutes. >> thank you. [indiscernible] investing through the robin hood
app, of course, we must understand that investing is not a game and has significant risk. how does robin hood balance disclosures around the potential downside risk of investing, including the risk of substantial loss? >> congresswoman, i appreciate that question. giving people what they want, they don't consider that. they know that investing is furious and investing in all the educational tools.
>> i want to mention again, robin hood customers have realized gains on top of what they have deposited. it shows us that the product is working for customers. thank you. over the course of my time in congress, i have heard of the dangers of shortselling. too often, i have seen abuse and it ends up harming ordinary workers.
large investors have to disclose their shares, are these kinds of disclosures for short decisions something you would support? >> congresswoman, thank you very much for the question. whatever regulation is put forth in the marketplace, we will obviously operate within those rules. >> my question about shortselling. >> i think it is a really good question. it is not for me to decide,
those are the rules, i will certainly abide by it. >> ok. well i'm glad to hear that answer. >> [indiscernible] the stock has fallen from that high in many amateur investors have lost hundreds of thousands of dollars. chairwoman waters: the gentlelady's time has expired. >> thank you. i yelled back. -- i yield back. chairwoman waters: i appreciate all of the members who have contributed today. this is not political theater at all. this has been important and
members are not to criticize the points of other members. >> my first question would go to mr. gill. mr. gill, i guess the question is you are a very serious investor someone who does their homework. do we need more legislation as a result of what happened here or does the system actually work? and from the standpoint that it worked, was it self-correcting? to take advantage of the shortage visions for the hedge fund guys to point out perhaps that we have companies like robin hood.
or maybe there was overaggressive other types of nesting that took ways. -- that took place. the business models did not work because you outsmarted the system, so to speak. mr. gill: thank you for the question, congressman. i would save my expectations were on analyzing the fundamentals of the business not so much the inner workings of the market. i would say increased transparency could help. that someone like me could have a better understanding of how those things work i feel would be quite beneficial to retail investors. >> thank you for that. robin hood is an interstate name. as i recall, the old story is taking from the rich and giving to the poor, and i assume what you are doing is allowing the poor to compete with the rich.
you made the comment about settling this in real time. i think that would probably help the situation that occurred here , but what other problems occur when you do this in real time? what other consequences will you be -- will there be westmark >> thank you for the question. i believe that certain market participants have relied on next-day settlements to be able to take advantage of intraday netting and run up larger one-sided positions or reduce them by the time settlement happened. i understand that would be a limitation to some of the activities of these institutions, so that is one area to consider. one area is about -- is around
securities and lending. we have to make changes. i don't think any of these are insurmountable challenges. >> the question is for both of you here. i understand that gamestop stock was short sold at 140%. you made the comment that you are not trying to manipulate stock, and yet if you are shortselling a stock hundred 40% -- 140%, for me that is exactly what you are doing. explain to me how you are not manipulate stock. mr. griffin: thank you, mr.
congressman. i cannot speak to others who were shorted. we always short stocks in the context of all the rules. >> would you like to comment on that? you guys are marketmakers and hedge fund guys. why is not considered manipulating a stock whenever you can short sell at 140%? do you not think there should be a limit on that? >> i believe the short interest in gamestop was exceptional. i am not sure it is worth us delving into legislative corrections for a unique situation in terms of the extreme size of the short interest. i will say that every hedge fund does have to required with the requirement to borrow shares and short shares in the day to day
[indiscernible] figures moving markets set the figures higher and higher. what does robin hood have in place to monitor what happened and how it drives the use of your trading platforms? >> currently, robin hood does not provide any moderation of social media. we currently do not have any of the data that social platforms have at their disposal to try these quotes to their identities we do conform to all regulatory
terms around monitoring and trade surveillance and all things of that. -- of that nature. >> what do you do to monitor the trades on individual stocks, particularly when in the case of gamestop, they moved on social media. >> i appreciate the question. our priority throughout the exceptional market conditions in january and early february was to maintain the uptime performance of our platform. >> let me try to get to my point here. do you have any policies in place to ensure that investors
are making trades based on legitimate, material financial information and not influence of social media? does the design your platform or any other support this information? mr. tenev: we provide educational resources to our customers, including a portal not just available to robin hood customers, the general public. it had over 3.2 million. -- people visiting in 2020. >> you are at the center of this. don't you see or agree that something very wrong happened?
and that you are at the center of it? that we are looking at this committee upon which we can protect our wonderful financial system. what about you, mr. hoffman? do you have anything? what has your company taken to guard against it? mr. hoffman: we spent a lot of time ensuring the authenticity of our platform. we have a large team dedicated to exactly this task. all of our content is voted on by users and we make sure that is as authentic on manipulate it as possible. >> i want to conclude, this
episode exposes the threat to our financial system. when social media posts do more to move the market than legitimate material information. this is enormous. chairwoman waters: thank you very much. member, you have five and its. >> thank you, madam chair. i appreciate you calling this hearing. the american financial markets are the envy of the world but they are still imperfect. i would like to see this committee have a material discussion about capital requirements and the trading rules that may have contributed to robin hood customers not being able to purchase stocks, including gamestop, for a time. but because the committee did not include the sec or the national securities clearing
corporation testified, we are left with what we have. i believe that for the majority's attempting to use this hearing drive a narrative on the capital markets being rigged. you decided to stop allowing your users to buy gamestop and other stock as a result of capital requirements. is that correct? >> that is correct. deposit requirements with our clearing requirements. >> for a time some of your users only sell and not by. that contributed to the stock not going up as fast because some of your users contributed to by the.
-- to buyers. >> i can't comment. >> if there are more sellers than buyers, does the stock go up? >> robin hood is a minority trading securities. -- in trading securities. >> i understand, but if your sellers can only sell and not by, it prevents you from putting pressure. >> [indiscernible] >> i know some have said earlier i want you to be clear. if your users were harmed as a result of those actions, they can recover through arbitration. is that correct? >> correct. our arbitration has been supervised and overseen and we do believe arbitration gives
customers a fair and speedy resolution to their claims. >> does your user agreement include group arbitration or only individual? >> let me get back. >> if a group was treated similarly or similarly affected, does only affect your group? >> congressman, i am sure you are familiar with the number of class-action lawsuits filed against. >> i am asking about your arbitration system. can a group of people come together? this is not a trick question. i am just trying to understand. >> i appreciate the question. i think the best thing i can do is get back to you and make sure we give you the right answer. >> are you a frequent short
seller, yes or no? mr. plotkin: we run a long short portfolio. we have short investments to head out market risk. >> has melvin capital ever engaged in shortselling of the stock tesla? mr. plotkin: we have been short tesla in the past. >> and this is a longer. did you hear -- see the tweet from tesla ceo elon musk? >> i did on tuesday. >> do you believe his tweet had any significant effect in driving the rise of gamestop stock? >> i don't want to speculate on the actions of his tweet. >> do you believe that tweet was targeting you as you had shorted tesla stock in the past? >> we had a small short position in tesla.
>> thank you. i will go back to mr. tanana -- mr. tenev on the regulatoryrequirements. -- regulatory requirements. do you believe that the fec or others should modify their rules as a result of what happened to your users? >> the gentleman's time has expired. chairwoman waters: the fdc -- the fec is not here today. this is a serious hearing in their mind the members not to ascertain the moment -- not to judge the motives of others.
>> there is a reason for penalizing a market improperly training ahead of its clients accounts. notice i said improperly training i don't want to go through the scenario of there being a time for proper training. i would like you to tell us what that reason is. ms. schlup: to put trading ahead of customer accounts is illegal. >> i understand it is illegal. i don't mean to be rude, but i have to ask this quickly. what happened to the moves that can be monetized that the market maker profits greatly? ms. schlup: if a market maker trades improperly head of the account, he can get a better price and move the market
improper, thus hurting customer. >> and if this trade is huge and see that the trade the client had and will have an impact on the market, how does that benefit the market maker? ms. schlup: the market maker can get a better price for himself before the market changes and also engage in self-dealing that way as well. >> what if a huge market maker has a deal let's say robin hood because of the flood coming through the market maker and take advantage of. >> i don't think they are necessarily when you are trading ahead of a custom order, it is very different from having
knowledge as to the way the market might be moving. >> i want to talk about the success with improper training. but my next point, let me go to it weekly. the market maker citadel traded stocks while simultaneously delaying orders the same shares. citadel has been muddy for some time. citadel face hundred thousand dollars. 2017, 2.6 million. 2018, 2.5 million it seems like
a lot of money it is to me. but over the same time, citadel has revenues generated in the amount of $13.2 billion it seems to me that the punishment for the improper trades, and it wasn't just trading center dot some other things. it seems that the punishment so small given the amount of revenue generated over the same time. it seems citadel has at least an opportunity to build into its cost of doing paying penalties.
and that concerns me. it concerns me that the punishment does not seem to deter citadel. it deters me because i know of circumstances where persons who are not in the market do things that are much less harmful and they can go to jail. so the question i have is this. what kind of systems do we have in place to protect from the very things i have called attention to? ms. schlup: as a former enforcement attorney, i can say that regulators have the same concern with fines or other punishments becoming just a cost of doing business. and it is one of the things that
is considered one of the things that can be punished >> may i ask for the record -- chairwoman waters: as you know, we are going to have a series of. it will include other experts the issues. >> may i say something in the record? chairwoman waters: entered into the record, you. >> thank you, madam chair. and i want to open this issue of payment for order flow. this issue of payment order flow is been around for decades, correct? >> at least one or two. >> and it is a recognized and approved practice by the fec? >> yes it is.
>> and payment for order flow is set by the brokerage firm not the whole seller, right? >> it is a negotiated number, but it is a number that is set by the brokerage firm and us as the market. >> as a market maker you are required to meet best executional arms. is that correct? >> yes it is. >> in other words, marketmakers are required to provide same or better pricing as the exchanges. correct? >> correct. >> how can marketmakers offer better pricing? >> there are a number of drivers that permit us to offer better pricing than what is available on exchange. the first is that exchanges have legally mandated sizes.
she looked at a stock like amc -- she looked at a stock like -- if you looked at a stock like amc, the changes are limited. and we have been clear on the record in prior testimonies that changes should be permitted to have a smaller and more competitive size. number two is that the average retail order is much smaller in totality than the average order that goes onto an exchange. because this order is smaller, and because -- and i will share a number with you, the typical robin hood order is in the ballpark of $2000 in size.
because it is smaller, the amount of risk that we need to assume in managing that order is relatively small compared to an order that we have to manage for our on exchange trading. and i am sure you are aware we are the largest trader of stocks. >> what impact might greater restrictions have on your ability to offer zero mission trades? >> we do believe that is an important payment flow will help cover the cost of running our business and offer commission free training to customers. when we started, they did not think there was enough to even make this business work we have been fortunate to make it work for our customers. >> let's talk about why robin
hood drifted trade the restriction made by the clearinghouse makes sense. is your clearinghouse supervised by the fed and sec? are the margin requirements approved by federal regulators customers? did federal regulars approve the charge imposed on robin hood? >> i believe the value of risk charge is outlined in general terms but i am not sure this improved the implementation. >> congressman, i am not trying to throw anyone under the bus.
all i can say is that robin hood plays this by the books and was basically the only way we can remain in appliance. >> i appreciate your testimony. but melvin lost $6 billion in 20 trading days. let me ask you about your risk management. did your short positions exceed flow? >> no they did not. >> shorting has an important role to play in our market allowing for legitimate hedging price discovery. [indiscernible]
>> i would like to thank you mother people are asked -- asking for their district. let me just ask how did you come up with the name for your company? mr. tenev: robin hood stands for lowering the barrier to entry and democratizing famines for all the access to wealthy institutions that hide network have had individuals regardless of how much money they have. >> i appreciate the answer because it is something i would also embrace.
i have a 23-year-old on the others of the house who i love dearly. but they have no training no income no qualifications. how in the world could he get a million dollars worth of leverage. >> thank you, congressman. >> the leverage that we provide to our customers is less than 3% of what our customers actually use and is regulated strictly by requirements. the only way to get that amount of leverage in an account through borrowing is to deposit a similarly sized amount of capital. >> war by mistake. -- or by mistake. >> congressman, i am not sure what you are referring to.
>> for those looking at the young man getting $1 million worth of leverage, he is currently 20 years old. i'm saying that was an error. >> i appreciate the opportunity to address that. you are referring to the man who unfortunately passed last year. i'm sorry to the family of mr. kern. the passing of mr. kearns's was deeply troubling to me and to the entire company we have that sticky series of aggressive steps to take our options products -- to make our options products safer including changing our interface, having more options education, as well
as strengthening and tightening requirements for people getting options and adding the life support line. -- live support line. it was a tragedy and we made immediate actions to make sure we made safest options for our customers. >> in my real life i am a pastor so your statement of the tragedy , i don't think you recognize. what kind of improvements?
mr. tenev: one is the ability to instantly exercise as well as exercise option positions in the app. we clarified the display of buying power specifically negative buying power in situations where multi-transactions were to be assigned. we also added an option specialist in the phone base board for option cases which is gotten great feedback customers in the something we are expanding to other cases such as cases were customer accounts have had platform hacking incidents. >> that is when i was concentrating on.
they were trying to get into the system. the response time was like hours later. as it became more familiar with this particular case -- chairwoman waters: the gentleman's time has expired. the gentleman is reckless for five minutes. >> thank you for holding this hearing and i want to thank our witnesses for their expertise and patience. i have a letter from the american securities association i would like to insert into the. >> without objection >> thank you very much. -- insert into the record. chairwoman waters: without objection. >> thank you very much.
i had the pleasure of working with president bush to bring capitalism to bulgaria. i am proud to see american citizens innovating here in our country. you have done a good job talking about the lessons you learned in terms of the deposits in the risk management issue. so i would like to turn to a follow-up on some of the discussion on retail service that you have also touched on today. do you have a call center for robin hood investors customer >> thank you for that. i want to start by saying customer service is fundamental for everything we do and one of the areas where we are in testing the most. -- investing the most.
we have centers in a number of states -- >> do you have a call center i can call if i am having trouble? >> we do offer life support -- live support. as i mentioned earlier, advanced options cases as well as account takeovers which typically happen through a customers personal email. the feedback has been great and we are looking to expand the live channel as well as make improvements. >> thank you, that is helpful. on the subject of margin and options you talk about that today. i spent 40 years on the general security principal and this issue of granting merchants and option approval for retail clients is an important issue.
i want to turn to a different topic has not been raised. as i understand it your policy and procedure manual says you will now stocks if they are on an exchange, but many firms are reticent to allow investors to invest in stocks that are under five dollars. can you address that? >> i would be happy to. >> robin hood allows customers exchange in trade with securities so that is the objective. we, and it actually excludes several types of securities customers request to trade in. in robin hood you cannot trade except in limited cases of stocks over-the-counter. you cannot trade pink sheets and you cannot enter undefined risk options trades.
the criteria involves exchanges with securities. >> thank you and am sure you will reevaluate that >> -- reevaluate that. when you think about the obligation of this ftc pending best asian, based on your federal background do you think the fec should look at the bulletin board participants of potentially inducing trading in a certain direction customer is that worthy of their review? >> thank you for the question. there has been little evidence that there has been very little fault or deceptive conduct taking place. that does not mean that the fec should not take a deeper look.
because of the anonymity in the form, there could have been people that were engaging in deceptive hater that is not readily apparent to the public. i do think the fec should look, and to this point i have seen very little that would meet the test for manipulation, which generally involves false or deceptive behavior. >> i thought of another question for you. would a security transaction tax be beneficial to retail investors in the united states? >> thank you, congressman. i don't believe it would. chairwoman waters: the committee stands in recess for five minutes. thank you.
>> washington journal continues. student next on washington journal, we are joined by arthur brooks, professor at -- author of the book "love your enemies. -- "love your enemies." thank you for being with us this morning. guest: thank you. host: we are hope to be joined by steven dinkin from the national conflict resolution center. can you hear at this morning? guest: yes. host: we solved our technological divide. let us talk about the political divide. we will start with arthur brooks
in terms of political polarization. if you look at our current state of polarization, how far back do you trace this and what are some of the social factors that have driven us to the point where we are now? guest: everybody knows it is bad and the truth is that most people dislike it. any 3% of americans say they hate how divided we have become as a country. that does not mean that they are doing what they need to do to make it go away. they do not like it. the reason why is because it is not historically something that
>> there are also economic roots to it. the good news is it generally does not persist, but it is going to take leadership to bring our back. >> we just finished up the segment talking about the civil war you looked back civil war with fear and horror. i guess the same question to you in terms of how we got where we are now. >> there is a long history of polarization in our society. currently, there are issues both political, economic, and other issues driving this. politically, what is happening
in our society is that there has been redistricting that has occurred across our communities so that political leaders and congress, individuals that are representing various districts because of gerrymandering, and sometimes 80% of a district as either democrats or republicans, so that representative does not need to really cater to the middle, they have to focus on either the political side of the democrats or the republicans. and then economically, what has happened over time is that the extreme of wealth, the shrinking of the middle class, so you have a very wealthy community and the poor. it is very divided. and most importantly, is the lack of civil society that we find currently. robert putman, a sociologist, talk about it in his book. what happened in our society today is that people are not
engaging, we are not going to our churches, our synagogues, we are not engaging in our civic clubs, like the rotary club and because of that, there is not an opportunity for us to engage with one another and that is the critical element of what a democracy is about. host: arthur brooks, coronavirus has exacerbated those things that stephen talked about, not being able to be together in those social situations, but -- >> you began analyzing gamestop in the summer of 2019? >> congressman, i have been following gamestop for a number of years. i started to bite into it in june was recently. >> back then, what was the price of the stock? >> in the ballpark of five dollars per share. chairwoman waters: in your
analysis, what did you think the proper price of the share was? >> at the time i thought the value of the business could be worth up to roughly $2 billion. >> how much is that her share -- worth per share? mr. gill: in the range of 20-20 five dollars per share. >> and you continued to invest on and off. is that true? >> yes. >> and the also bought long and bought some shares but you also did some options trade. and options trading is not really for the modest esther. mr. gill: it is a riskier investment, yes.
>> on january 27, the stock price hit $483 or something that -- something like that. in your analysis back at the start of stock, did you ever see it being valued at $483 per share? >> i thought it was possible mr. gill:, -- mr. gill: i thought it was possible, but a very low probability? . >> in terms of the platforms where you visited and discussed this stock with others, it was on the reddit wallstreetbets platform, correct?
at any given time, have any people were you talking to? mr. gill: i was not talking to anybody individually, but rather making public posts. >> that gamestop was attractive? mr. gill: early on, i felt it was an attractive investing opportunity and shared my thoughts as to why i thought that was. >> did you discuss this on other platforms? mr. gill: yes, i have talked about the stocks on other platforms. >> did you talk about the short-sellers that bet against the company? mr. gill: the topic did come up. >> when did that occur? mr. gill: since the time i had begun someone else thought it was an exceptional level of short interest. .
>> let me turn my attention to you, mr. plotkin. when did melvin take a short position in gamestop? mr. plotkin: that was at that in 2014, at the inception of the fund. >> and when you did that, you continued to maintain a short position? >> that is correct. you thought that by taking the short position, mr. gill thought was overpriced, you thought it was underpriced. in your analysis, when you went into the stock position, what did you think the stock was worth? mr. plotkin: when we launched, it was a $40 stock.
we believe the company had a lot of chevy -- had a lot of challenges, fundamentally. >> if you were in a naked position or short position. was oversold -- were you in a naked position or short position because of the stock was oversold? >> our system is not even allow that. >> i yield back. chairwoman waters: thank you very much. you are recognized for five minutes. >> thank you. thank you madam chair, ranking member henry for holding this hearing. thank you to the witnesses for being your today. -- being here today. 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. securities trading by the private sector has increased access. the situation is a perfect example. one of our witnesses turned $53,000 into almost $50 million and that is what you would call some deep value. we know that not all those invested in the stocks share the same success story, but i want to highlight a potential vulnerability in these innovations.
i have been concerned with sharing of individual user data. i sent a letter to the treasury department expressing concerns with 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 mumu are two examples. funds affiliated on a 14% of weibel. jamming is a chinese company --
mumu is owned by a company that received a significant investment from tencent, a company with known test of the ccp. on december 8 of 2020, bloomberg businessweek ran an article on webull saying the company increased its roster by about 10 fold this year to more than 2 million by offering free stock trades, with a flick online interface. on january 20 9, 2020, the day after trading activity for long trades on certain stocks discussed on reddit threats were limited, bloomberg ran an article with the headline "robin hood rival we-- webull sees increase in trading accounts."
do you think we should be concerned about the potential for chinese entities with ties to the ccp perceiving personally identifiable information or other user data from their subsidiary broker-dealers that are licensed and registered in the u.s.? >> i think it is 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 comply with regarding identifiable information and other material data should be applied equally to companies that are based off shore and companies that are based on shore. i hope that is the case with respect to webull or any competitors that are not to mystically owned. >> having a diversity of choice or different trading apps
is generally good for competition, but is 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. >> again, i think joyce is key here -- choice is key here. as well as understanding from a consumer perspective what companies you're choosing to do business with. national security concern is outside my area of expertise. >> 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. we want these retell investors to have the most amount of information as possible to be set up for success. i yelled back. -- yield back. >> thank you very much. you are recognized for five minutes. >> a big thank you to our panel today for a very interesting conversation.
one of the chairwoman's ways of characterizing this hearing is who winds are who loses -- or who loses. looking at the players here, i am convinced that citadel is one of the winners. they make a lot of money. there's a casino in the story. the casino tends to win over time. robin hood has evaluation of $5.6 billion. it makes a lot of money from the casino. so who loses? i want to spend time talking about the person who usually looses, the retail investor. while i have supported for many years the democratization of finances, we say it is not just in washington, d.c., put on wall street. the retail investor is known as a dumb money. there are any number of structure set up to take a vantage of the retail investor. i think it is worth looking at
that. because as much as we are celebrating here, we are not talking about mr. salvador, who was featured in a wall street journal story, who took out a $20,000 personal loan through robinhood, invested in gamestop, only to see his value go down 80%. as much as i support the democratization of finance, we need to be thoughtful about this. my question is for you, if you just look at your customers, who traded in gamestop over the period of its increase and subsequent decrease, how did your customers react? did they win or lose? >> thank you for that question. i don't have that data top of
mind. maybe we can get back to you on that one. >> you don't have that. you do have a $35 billion figure. it is just a dollar number. how do we convert that? is that $35 billion gross or net? is that actual profit or doesn't include margin shares, other forms of leverage may actually not belong to the account holder? >> it does include congressmen, unrealized gains -- congressman, unrealized gains, including positions insecurities and cryptocurrencies. >> i get that. but again, $35 billion doesn't mean anything to me unless you can convert that into a rate of return. do that for me. on what asset management number, is that $35 billion, unrealized against? >> the acid under management number is -- the asset under management number is not one that robinhood
has publicly shared. >> i just don't have a lot of time. $35 million is a meaningless number. i need to know what that is in terms of returns. convert that for me into rate of return. so i can compare it to treasuries, comparative the s&p 500. >> congressman, with respect, i think the proper comparison is, the customer is not investing at all, much of our customers are investing for the first time and are taking money that they otherwise would have spent or consumed and put it into -- >> i don't want to be rude. but it is my time. you offered the $35 billion number. which anyone in finance knows is meaningless unless you converted to a rate of return. please convert that $35 billion number, for those at home, at times like a lot of money, what does that translate to in terms of rate of return, which is what matters? >> $35 billion is indeed a large
amount of money, especially for customers, who were mostly small investors -- who are mostly small investors. >> don't make me be rude here. you and i both know $35 million of unrealized gains, -- billion dollars of unrealized gains, it is $1 million rate of return. i actually thing the right comparison is, what if your clients had simply invested in the long run, in an s&p index fund? what that number be more than $35 billion or less? >> with respect, i don't believe the right comparison is comparing it to an s&p 500 index fund. the wreck comparison is not having invested at all. and having -- the right comparison is not having invested at all. >> it is most certainly not.
i am out of time. you put out the $35 billion number. i think it is only -- i think you and i both know that number is meaningless. i am going to ask you to convert that. august the i'm -- obviously i'm out of time. >> you are now recognized for five minutes. >> thank you, madam chair. i appreciate all the members of the panel being here. seeing that if you are not giving the answer they want, they are going to continue to push on you. i just encourage you to continue speaking the truth, and you will 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 regulations to be enough. it 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 for knowing what even happen -- before knowing what even happen. i can even testify to what was just being said as, i know numbers of people, personal friends who have never invested, before, but because of robinhood and other retail platforms, many of them took the stimulus money they received during the cares act, which they were still working, they didn't need, and actually started an account and started investing, so yes, more and more people who had never invested before are now investing using these platforms. this hearing as a reminder that with complex situations, we should take time to understand what actually did or did not happen, especially with this gamestop situation.
the sec is the proper authority to determine if any rules or blow -- any rules were broken. congress has already given the sec broad authority to oversee the capital markets. we do not need to rush to enact even more big government regulation, that could ultimately harm the investors. question, can you remind us, again, why robinhood d temporarily post trading of gamestop? of gamestop and other stocks? >> of course, thank you, congressman. robinhood paused buying of about 13 secured he sums thursday so that we could meet our regulatory deposit and collateral requirements. >> what you are saying is, you were positive because you had to comply with regulations. is that true? >> correct. >> it is ironic that the people
who were criticizing brokers firms, because they paused trading, which they sometimes have to do to comply with regulations, the same folks are now saying, we need to respond to those with more regulations. i would say, if people don't like brokers occasionally pause trading, at some point, we need to recognize counting on more regulations only increases complexity and does not help investors. despite the volatility in the frenzy of social media activity, it seems to me like the markets functioned as a were supposed to in that situation and that markets are not broken. in fact, they are working well. do you agree with that? >> i agree with that. >> thank you. i appreciate that. i think most reasonable people listening to this would agree that there are regulations in place, the sec has those. it could be harmful not owing to
the markets, but to the individual investors. it did work in the way it was supposed to is what i'm hearing you say. >> with the fact that i know now, it does appear to have worked the way it is supposed to. this is not assigned to me that the market is broken. >> thank you. mr. griffin, what are some of the issues that policymakers should consider? requirements exist to make sure firms have enough capital to settle transactions. what it can be positive for the retail investors. we need those needs. can you address what some of the issues are in the debate? >> i am not an expert on these issues, but i will give you my perspective. we started the t5. we will one day be at real-time. the question is how long that
journey takes. from t2 to t1 reduces the amount of capital required by broker-dealers to meet the needs of their customers. that reduction capital will be meaningful. it would've been helpful to robinhood during this time. it reduces party risk callista glee. good for everybody in the market. we should push more t1. as we go to same-day settlements, you know bring into question the complexity and e bring into play the -- and you bring into play the systems functioning every moment of every day with no room for error. >> [indiscernible] >> let me remind members that we are going to have a series of hearings. there will be probably tomorrow.
[indiscernible] >> thank you, madam chair and to our witnesses. i would like to follow up a little bit on best order executions. for democracy to work, consumers need transparency and high-quality information. about order execution quality. your customers don't care directly about who you subcontract, for any payment -- or any payment. they need to compare the execution policy between your app and competing apps. institutional investors can afford to run their own tests. and they do. i'm sure mr. griffin is quite often on the receiving end of those, trying to measure up to his competitors, to compete for market share there.
yes additional investors have the market power to demand executions statistics for prime brokers. everyday, investors have the same conspiracy. there is an sec rule that requires brokers to disclose at least some execution data to institutional investors. but this requirement does not apply to retail investors. since robin hood'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 qualities to citizens, so your customers can engage in a clean comparison between other brokers, your application, and other people's application, in terms of the total cost of treating? >> thank you for that very important question. i am generally in favor of a greater amount of transparency
than what we have typically seen in the financial industry. andy -- and recently, robinhood has engaged in shortselling, of course, real-time settlement. we do publish 606's via robin hood securities. with various marketmakers. and just this past year, the industry and lamented -- implemented more details, because the requirements we have conformed to come also back in december of 2020 -- conformed to. also in december of 2020, a page on our website provide a detail about the executive quality, including price of group meant that our customers received and were proud to announce in 2020, our customers received an aggregate over a billion dollars of pricing group meant on the execution. >> that is not a comparison to
your competitors. there are a lot of questions about the accuracy of the best execution price. independent of whether it should be improved, it seems like about was a customer of you or one of your competitors, what i would want to see is i just executed a trade of $2000, and on average, i got x percent better or worse. over time, you can compare to running average weather you are exceeding some benchmark or try to excuse and quality. that can really be compared with potential competitors. is not a workable system? are there difficulties? is there a reason my industry should move that way? then name of transparency to customers. >> this is a very interesting topic for me.
i would love to have the conversation. i don't know if this is the right forum to necessarily 88 and brainstorming and all the solutions. but -- ideate and brainstorm all the solutions. but i would love to figure out the right path. >> we do intend to continue to engage with the industry on the subject. because it is very easy to make it sound really creepy. you are basically selling a list of groups to the sharks. you make part of an argument that this is positive for consumers. but they have to be able to make the apples to apples comparison. a really important issue. i think probably your reaction to that, if you thought your customers were leaving you because of poor execution quality, you would do what large funds to, to split your order flow between multiple execution firms, then demand the best
order of execution and move your business to whoever does the best for your customers. >> congressman, we already do that. we have seven. >> [indiscernible] you are recognized for five minutes. >> thank you, madame chairwoman. the last congress, 30 of my democratic colleagues cosponsored a bill that would impose a financial transaction packed on the purchase of securities and certain derivatives. after the market volatility surrounding gamestop in january, democrats renewed the call, many democrats renewed the call for financial transaction tacts. ilhan omar tweeted, how about this, financial transaction tax now. the lead sponsor of the bill, he's already put the bill back
in for this session of congress. it is now house resolution 328. it is called the wall street tax act of 2020 one. actually have a copy of it from the last session here. it is in again now. he said, the congressman, set a financial transaction tax would "help create a more level playing field for main street." with that background, mr. tena t, the robin hood platform has more than 13 million users and most of them are small dollar retail investors. if the federal when he put a tax on the sale of securities, i want to expand a little more, how would that tax on the sale securities affect your platform and the retail
investors that are your customers? >> think you, congressman -- thank you, congressman. we would be happy to engage in this discussion much more in the future. a tax would eat into the returns of our customers, which as you pointed out, are largely smaller investors. in that sense, it would be a cost to the retail investor. of course, that would have to be weighed against the potential benefit of this tax. i know it is a more complicated issue. than meets the eye at first glance. >>'s question is for jennifer. i know use make your career specializing in financial regulation. in your expert opinion, woody
financial transaction tax directly prevent fraud or market manipulation? >> no i don't think, it would have an effect on fraud or manipulation. i also do not think that -- the financial transaction taxes often failed to raise money and distort trading in a way that is not necessarily foreseen initially by the tax. i would like to just add as well that financial transaction taxes might seem like a small imposition on an individual investor, but those taxes often hurt individual investors by affecting the institutions and trading in mutual funds, with retirement money. i don't think the financial transaction tax is a good idea. >> do you think it would have done anything to prevent the
market volatility and disruption we such as this past january? >> no, i don't think it is related here. there's been some discussion that it might have and thus changed the volatility. it's not my opinion that would have had any effect on this particular circumstance. >> i only have a minute left. 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, would hurt retail investors. yet democrats are claiming the event surrounding gamestop and robinhood make it imperative to implement the financial transaction tax. it just does not add up woody financial transaction tax would make it more expensive for retail investors to trade. we should be working together to find a way to open up markets to
reach investors, not close them. instead of making trade more expensive with the burden syntax, look for a way to empower retail traders. -- burdensome tax, look for a way to empower retail traders. >> you are recognized for five minutes. >> thank you, madam chairperson. thank you to the witnesses. my first question is to the ceo, president griffin. in the first three quarters of 2020, your company paid online brokerages, like robinhood, $700 million for their order flow. do you believe brokers like robinhood that can serve their best interest of their use as well so linger orders look to companies like your? -- cell orders to companies like yours? >> i believe that robin hood
actually goes further in the interest of customers by in fact robbing the order flow to citadel. we give a better price, a better execution for american retail investors than the alternative of going through the changes. >> so, i'm going to take that as a yes. since you said to go further. can you tell me, why did your company urge the sec to ban the payment for order flow models in a filing to the sec? >> terrific question. that filing relates to the u.s. options market. it was a filing back into thousand four. -- in 2004. 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. market was heading towards the
existence of these, which diminished the incentives to aggressively provide offers in the options market. we felt that legislative or regulatory efforts to encourage tech quoting, to discourage the existence of these auctions, and this was being fueled by a series of programs, was in the best interest of american institutional and retail investors. we did not prevail in our reasoning. i do believe this is a setback for the capital markets. >> so because my clock is ticking, are you saying you no longer believe that the model is in fact competitive, and distorts order routing decisions? >> i think it is important to
this and wish between a market where you must trade on an exchange, in the options market, we must print a trade on the exchange versus a market where you can trade off exchange, which would be the u.s. equities market. just to be very clear, because your question is very good, every single options trade must be executed on an exchange. equity trades do not. and because of that, i can save robinhood -- >> we are going to have tavi further discussion. i want to follow up with a question for robin hood's ceo. several of the brokers
-- however robinhood's price is higher than any other brokers we see. i could go on and tell you we pulled the sec filing, that robinhood received 17% per 100 shares stopped -- stock traded. 50% to 100 shares. i could go on. but the question is. why do companies like citadel pay a premium for their order flow of robinhood's users? >> there are several reasons that may be the case. one important one is that our model in formula for payment for order flow works a little bit differently. we actually receive payment for order flow as a percentage of the spread, rather than on a per share basis.
and we do believe that is the most optimal way to structure payment arrangements. >> okay. is it not because companies, like citadel, can make more money off of robinood than others? that is a yes or no, because the clock is going to run out. >> no. >> i yield back. my time is up. >> thank you very much. you are recognized for five minutes. >> thank you, madame chairwoman. i appreciate the work you have done today. i just want to share in may of 2020, it was unveiled a working proof of conflict
named project ion. since project ion was publicly announced, we have received little information pertaining to its progress. as a longtime advocate for this emerging technology, in block chain. today, i've sent a letter to the dtcc to request a provide an update on the status of project ion. i look forward to hearing back from them 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? >> same-day clearing and that requires every bit of the workflow is perfectly synchronized across all parties, and we have no time to recover
or for error management that you have an overnight -- in overnight processes. >> debt is inherent in block chain -- i guess clearly in your business, just a follow-up, the technology exists, where firms engaged in high-frequency trading, you measure success in the course of a day and what, milli-seconds -- in milliseconds for high-frequency trading? >> we put great emphasis on the performance of our systems. that was one of the reasons that january tony for, we were the only major market center for retail order flow. -- 24, we were the only major market center for retail order flow. >> i just wanted to make the
point that the technology exists whether you use block chain or not. i applaud you for having the ability to execute with precision swiftly. i don't think it is a barrier. i would love to have more dialogue. but unfortunately i have to go to a few others. do you believe the root cause of generate 28 -- january 28th, the problems you and others experienced were market infrastructure related, particularly related to d2 ver sus d0? >> thank you, congressman. i do believe if we had real-time settlement give abilities and the infrastructure was modernized, we would not have seen similar problems. -- capabilities and to the infra-structure was modernized, we would not have seen similar problems. >> related to your mission and robin hood, it is not just the ability for more people in a broader portion of america to become investors, it is also to engage in
agencies. do you believe market infrastructure, if it would guarantee -- this is really related to the over musical shares, where someone could be looked with no share when the music stops. mobile claims on a shorted stock. if the market structure would guarantee an investor to retain custody of their shares, so the shares can't be lent, how do you feel that only one claim on the shares would result? that relates to proxy voting as well. >> congressman, i believe that is an important question. it is one that robinood and me personally have engaged with. -- robinhood and me personally have engaged with. it is somewhat of a pathology. that should be fixed. i think step one of that is
modernizing the antiquated settlement infrastructure that everything is built on. we simply do not have the ability to properly track what shares have been shorted and how many times they are moving through our settlement system currently. >> thank you for that. i appreciate that you see the relationship. i want to commend the vice chancellor the delaware tensely -- delaware court. i ask him consent to submit it into the record. as my time expires, i want to commend you for representing a large segment of the industry, in my view, where savvy investors have had an opportunity to engage in. you might not call yourself a holder, but congratulations for the success. >> time has expired.
the submission is taken. thank you. you are recognized for five minutes. >> thank you very much. 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. i don't think there's ever been a more sinful act in human history than the pollock cost. i want to apologize for you and your family for those attacks. you brought it up. i think we'll you one apology. i want to apologize for that. -- we owe you an apology. i want to apologize for that. i think my colleagues on the other set 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, one that is exact with people want to know. the fact that there's been a great deal of interest in this hearing, i think there is great
distrust and our society, and government, markets, institutions. then along comes a story of gamestop. and it is a story really of robinhood turned on its head. the reason i say that is, robinhood is an english full hero the 13th, 14th century. he was supposed to steal from the rich and give to the poor. here, you almost have the opposite. you have a situation where you have to steal from the small retail investors and give it to large institutional investors. from an outsider's perspective, you have the hedge funds, and their armies of analysts, lawyers, shorting gamestop's stock. here comes the retail investor. all of a sudden robinhood
, steps in. not to help the real -- all of a sudden, robinhood steps in. not to help the little guy. who was getting socked? the bullies by the hedge funds. that is what people were not excited about this. it was because the government regulations forced them to do this. that is not with the public things. the public thinks there was collusion. that all of you guys were figuring out how to do this and alternately come out ahead, as you always do. mr. griffin, if i could just as get 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 the. >> there are five people, including myself in this room,
sir. >> i don't think my colleagues need the help of ceos or anybody. they've got plenty of help. i have to ask this. you said you have not talked to anybody at citadel, citadel securities, did anybody from your organization contact robin hood? >> are you asking if we have had contact with robinhood? >> with respect to gamestop. and what we are all beasley talking about. -- obviously talking about. >> we offered to have my colleague to be here today instead. he has firsthand knowledge. we of course are talking to -- talking to robinhood. we manage a substantial portion of their order flow. >> i understand that. but did you talk to them about restricting? anything to prevent people from buying in gamestop.
anybody in the organization. >> let me be perfectly clear, absolutely not. >> so, if we depose everyone in your organization, we will find that. >> that is correct. >> ok, thank you. i do want to ask you one thing. how do you balance the best execution for the order flow from your purchase from robinhood with the need to profit from the purchase order flow? how do you do that? >> so, as a market maker, we have to provide to the customer a better price that they can receive an exchange. order flow -- to us on the merits of the execution policy that we provide in contrast to our competitors, we are competing with. -- who we are competing with.
>> my time is about to expire. i have to say, when you say that the valuation is $35 billion, and you don't say a lot more, [indiscernible] thank you. >> thank you. the gentleman's time has expired. >> thank you, chair. >> you are recognized for five minutes. >> thank you. i want to also thank the panel. i care about a level plainfield for retail investors, to access the market. i've been a long supporter of financial innovation and the shared goal of democratizing finance and making access to the financial system easier for all. your company boasts that it is helping to democratize finance. can you talk a little bit more about what robin hood 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? >> absolutely. thank you for that very important question. the first thing i should note is, many of the witnesses and representatives here have stated that there's never been a better time to be a retelling best or in america than right now. i think the combination of zero commissions, no account minimums, fractional shares, really things that robinhood has helped make the industry standard, has helped small investors and help to level the playing field for people to participate in the markets. but over the past year, robinhood has released fractional chairs, dividend reinvestment, recurring investments, so you could take one dollar for five dollars, and
create a habitual investment into a particular spot. the theme of this year for robinhood is, how do we take a first time investor and turn them into a long-term control investor? how do we make long-term investing accessible for people around the country? we are making huge investments in education and customer support to support that. we recently released learn 2.0, with the aim of taking a customer from basic concepts, such as what is a share, what is a stock, what is this, all the way to more advanced concepts. we are continuing to advance more and more on learn as well as our popular podcast, and all other forms of content that we distribute. last year, more than 3.2 million -- >> i know you have a lot more to
say. we could probably talk for a lot longer than this. but i want to shift gears just a bit. i want to continue talking about the retail investors. i want to switch to, back in december, there's article written, prior to these events we are hearing today. in the article, i think you said it was inappropriate to refer to these retail investors we were talking about using these platforms like robinhood that we are talking about. referring to those investors as dumb money. i think that is pretty insulting. instead, retail investors are revolutionizing the stock market. would you elaborate? >> absolutely. thank you, congressman. retail investors are often referred to as dumb money by wall street. it is because they don't have access to the same level of research. some use the term because they
think retail investors make dumb decisions. i think it is insulting. i think the term needs to go out the window. retail investors are investors, to make their decisions based on the information known to them. and we should focus on educating people, so they can understand the risks and rewards of investing. here, i think the gamestop situation is proof 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 short squeeze. i think the retell investors here -- retail investors here are learning, learning by doing, one of the best ways to learn, and we should spend effort making sure that people are equipped with the knowledge to understand the risks about being in the market. >> i appreciate that. i would like to ask for in ms consent to insert that letter
into the record, madam chair. -- unanimous consent to insert that letter into the record, madam chair. thank you. robinhood, and this is open to anyone, wrote about the need -- i would let someone to talk about, is it possible for clearinghouses on blocking settlements to exist? that is something we can come back to it a further point. madam chair, i will go ahead and yield to back. >> thank you very much. well that objection, want to make sure that is in the record -- without objection, i want to make sure that is in the record. thank you. with that, you are recognized for five minutes. >> thank you, madame chairwoman and our witnesses for being here today. i would like to offer my heartfelt condolences to you.
[indiscernible] -- mr. gill remains bullish on the stock. i'm not here to take sides. however, social media sites like reddit, in the context of volatility, like gamestop, and numerous other stocks, last month, -- what kind of indication exists for reddit users to verify they are even real people? >> this is an important quality of reddit. think you for the question. it doesn't require people to revealed their full identity to use the platform. privacy is prickly important to us. users should be masters of their own identity. they can choose to reveal as
little or as much as they would like. i will point out, there are two sets that are really important. this allows reddit to work. some wall street bets would not exist if users had to reveal their full identity, because they are revealing gains and losses, effectively revealing financial position it in life -- position in life. i would like to point out other platforms have a real identity. >> is there any way for a regular user of sub reddit to know what content is genuine, written by other users like themselves, retail investors, with honest information to invest on, etc.? >> there are a couple of aspects to this. we as a company invest significant resources in enforcing the veracity of our voting system. it is something we have been doing for 15 years. long before events like this. long before even the election
and the politics of the last few years, where the stings have become top of mind for everybody. this has been critically important to us. also, our user base is exceptionally good. in order for any piece of content to be successful on reddit, it has to be accepted by the community and receive the same votes that anything else does. >> are there heightened standards for places like wall street bets and other investing sub reddits? >> we keep the high standard across the entire site. with this particular community over the past few weeks, we have been looking especially closely, anticipating these sorts of issues and questions. to date, we have not found any nefarious behavior. >> got it. but we could have a situation where thousands may be manipulated. we don't know that.
>> they talk about stocks in the u.s. on reddit, on tv. people can say, in fact, they do come on television all the time, encourage people to make what i would call bad investment decisions. on reddit, i think the advice is among the best, because it is accepted by many senses of people before getting that sort of his ability. -- many thousands of people before getting that sort of visibility. >> -- >> absolutely. i'm -- on reddit, they are giving authentic advise based on their knowledge. you would not question what their motivations are or what larger positions they may hold before going on to be in talking about them. >> do you plan to do more on this space? do you think overall social media companies like yourself should be held to different
standards? should you be responsible for what happened, someone manipulated something, or a bot? do you think that should be on you? >> we take minute religion of reddit incredibly seriously -- manipulation of reddit incredibly seriously. that is one of our first duties, to ensure the authenticity of our community. >> do you think you should be held responsible if somebody wrote something, if a bot is online, do you think you should be on the line, or is this a site for people to exchange ideas? >> reddit can be held responsible. we do take our response -- response a billy -- responsibilities here incredibly seriously. >> [indiscernible] >> thank you, madam chair.
i would like to echo what my colleagues have said today. we do appreciate the fact that you have created this platform, to a large extent, you have leveled the playing field so that small individual investors can have a shot at the american dream. i do want to ask you, a lot has been said about the situation in january. my question to you is, how did you misjudge your capital requirements to prevent people from being able to trade during that period of january? >> thank you, congressman. i want to say we misjudged our capital requirements. this was a one in 3.5 million occurrence event. one that had never been seen before in capital markets.
we had to play this by the book. robinhood made this -- made the decisions we did, and that restricted us from buying the securities for thursday. it limited to some degree subsequent days, until additional capital came in, that allowed us to relax restrictions. >> it was robinhood's mistake though, correct? >> robinhood owns what happened. we have to make sure it doesn't happen again. but robinhood securities has limit options with how to address this. i fully support the team in making the decision that they did. i believe they did the right thing, and the only thing. >> you said at the beginning that you are privately held.
with that said, is your primary source of revenue from the order flow payments you receive, from some of the players we talked about today? >> that is correct, congressman. payment order flows is one of our largest revenue sources. >> is it the largest? >> it is the largest, yes. >> in your written testimony, oral testimony, you talked about the settlement period. if we had real-time settlements, with the situation that occurred in january, what that have been preventable -- would that have been preventable? >> congressman, if we were to have real-time settlements, and of course, there is some implementation details that would govern this, there
would be less need for collateral clearinghouses. because the cash and securities transactions would be exchanged in real-time. so collateral for a county party risks would be less necessary. it would lead to a reduction, perhaps in elimination and some of these collateral requirements. -- in some of these collateral requirements. in the money that is clogging up the system. that would have avoided some of these problems altogether. >> thank you very much. just to be clear, was the settlement -- if the settlement was t+1, would it be the same settlement? >> t+1 would be better, but it reduces the scope of the problem. from a technology standpoint. >> thank you very much. i would like to follow-up on
some of the questioning that my colleagues asked. you have done an investigation into wall street bets. you don't see any bad actors that caused any role in the frenzy. is that -- i'm i characterizing that correctly? >> that's right. dashcam i characterizing that correctly -- am i characterizing that correctly? >> yes. section 230 is an incredibly important love to the internet as we know it. it was created in fact to create a forum in the early internet for talking about socks. section 230 think is also important to point out doesn't protect platforms, companies like ours, from civil
litigation. what it does protect is our ability moderate our content, which we have done in many ways over the last decade. >> the time has expired. you are recognized for five minutes. >> thank you. i want to thank everyone in the committee here with us today. mr. griffin, in 2020, sho, which governs short selling, citadel is now involved in another shortselling problem. robin hood halts buying on a position that you are long on, and you on the hedge fund, and to the clearing broker, what is there to prevent you from taking advantage of the situation and making sure you profit of the confusion -- off the confusion and retail investors? >> congressman, i am trying to understand the question.
>> let me give it to you again. in 2020, citadel violated regulations, sho, which governs short selling. citadel is now involved in another shortselling problem. robinhood halts buying on a position that you are long on. you on the hedge fund and the clearing broker. -- you own the hedge fund and the clearing broker. what is there to prevent you from taking a vantage of the situation? > we do not own -- >> do not own dtcc. we are not party to the discussion dialogue or demands between dtcc and robinhood.
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. citadel securities owes a duty of best execution for every order that comes from robinhood. and i will tell you, i am incredibly proud of how seriously my team takes that duty of best execution. some of the most earnest, hard-working, and thoughtful people i have ever met in my life work on retail execution business here at said adele -- here at said adele and take great pride in the execution quality that -- here at citadel, and we take great pride in the
some of the implications. can you talk about what factors have contributed to growth versus on exchange trading? i want to talk about the concerns we may have about that. but first, the factors you think are driving that. >> one of the most significant drivers is that exchanges our -- have the ability to wholesome the complete.
>> we want to enable and empower exchanges to be better competitors. i started my career as a retelling buster in the day where i used to spend -- retail investor. i know the days you are referring to. we have come along way. but to continue on this journey, the next market. >> there is public policy work that needs to be done in order to help resolve some of the challenge and the movement of volume from on exchange two off exchange. that is incumbent upon us and regulators to find a better
solution. is that what you are saying? >> this can be done by the sec as a policy matter. this >> can you talk about why we should be concerned about that, why it is important to make these changes to empower exchange to be better competitors? >> i think there are three points i would like to make. first, price discovery is the most important part of our capital markets function. because prices got recombined. it is how companies drive down
the cost of capital. that is good for our capital market. they're willing to engage in business practices where they discriminate one class of investors versus another. i find it unsettling we have this commission against one group of investors but. not another. we want capital markets to represent the valleys of our country. -- the values of our country. the third is that the fools himself create a level of concern and apprehension about the integrity and fairness of our markets. 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.
>> thank you for those answers. i call on my colleagues to recognize the experiences and how important it is that we take the steps either via agency or legislation to help empower exchanges. compete on a level playing field and [indiscernible] >> the gentleman's time has expired. you are recognized for five minutes. >> thank you, madam chair. i want to thank the panelists of this great form. one of my colleagues earlier said [indiscernible]
and inequality in american finances. do you believe that there is manipulation, distrust, and overall inequality with americans -- with an american finances? do you believe the consequences of big guys like yourself, but also little guys in this process? >> thank you for the question. i really cannot speculate in terms of the system. i think my focus is on building a greater organization. i think some of the issues you speak about are much greater societally. it is not really my area of expertise. >> one other thing, you guys now
, these amateur investors don't have the same standards. how are you able to go in and manipulate the market? people who have been involved in this research and calculation, and have invested for so many years. because millions of dollars will be lost. >> sure, the financial markets are changing, and i think there is opportunity to drive the place and the stock higher, and today with social media and other memes, that was a risk factor that up until recently, we had never seen. retail investors, they are adapted in investing in the internets or software stocks, or
electric vehicles, ideas with big opportunities and they change the -- they chase them because they believe in the opportunities. they exploited an opportunity around short interest and the approach, and us and melvin will adapt and the whole industry will adapt. >> from our standpoint, and i do not have much more time, but what do you recommend to us to keep this from happening again? >> to some degrees, markets are self-correcting. in moving forward, i do not think you will see stocks with the kind of short interest levels that we saw prior to this year. i do not think that investors like myself want to be susceptible to these types of dynamics. there will be closer monitoring of message boards with the
software providers. whatever regulation that you can offer, and i look forward to helping, so you guys will not have future conversations about that. >> i yield back. >> thank you. i want to thank mchenry for his leadership for calling this hearing today. i will start my questions by walking through a series of events from that day in january, just to make sure we are all on the same page. in your testimony, you estimate that the automated requirements came at five: 11:00 a.m. eastern -- 5:11:00 a.m. eastern and it showed a $5 million estimate. >> correct. >> at that point, did you have the ability to meet the 3
billion-dollar liquidity deposit requirement? >> as we wrote in detail in my written testimony, there were steps that the robin hood securities team took -- >> at that exact moment, did you have the liquidity for $3 billion, 5:11 a.m.? >> at that moment, we would not have been able to post a $3 billion in collateral. and you said, you did have the liquidity and not a liquidity problem, at that point in time, that is not true, correct? you had to take steps to get there? >> congressman, we did -- the robin hood securities team had to work with a relevant clearinghouse to address the risk profile of the trading day in order to meet our collateral requirements. >> and in order to do that, your
choice was to throttle trading, to prevent your clients from being able to purchase in certain shares, correct? >> correct. robin hood securities has risk defined in 13 securities. rep. gonzalez: if you had not been able to derisk the portfolio, the excess capital to derisk the portfolio, dtcc would have stepped in and liquidated the portfolio, correct? >> i am not sure what the exact steps that they would take if we were not in compliance with the deposit requirements, but it would not have been a good situation for the firm or the customers. >> reclaim my time. the letter that the ranking member mchenry submitted, i will
just read this. if a clearing member fails to satisfy market calls and exposes other members to risk, it can put it out of compliance. they may seek to act and liquidate its unsettled clearing portfolio. that was definitely in the cards. for my constituents who are robin hood clients, what would this have done to their portfolio if it had been forced liquidation as a result of missing the capital call? >> 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. >> this would have been a catastrophe for robin hood, correct? >> right.
and not just robin hood about the over 13 million customers that we serve. >> yeah. i think that is the crux of the issue, so in a sense, i love your company because it does provide investment opportunities for individuals who are frozen out of the markets. at the same time, i believe a vulnerability was exposed in your business model. and perhaps, in the regime that governs your capital requirements. we cannot live in a world where my constituents that have their shares liquidated without their consent because you all are not able to make a capital call. i appreciate that you were able to satisfy it, but the amount time from 5:00 a.m. to 10:00 a.m. to figure this out is scary for the company and frankly, i care more about my constituents, and scary for them. and so we will continue to look at that. beyond that, i hope this hearing highlights a very real problem
with our financial markets and how they are accessed. the melvin and said adele -- citadel's of the world have access to the greatest investments on the planets, where as the retail investors does not. it has access to an ever diminishing set of investment opportunities. also serious about finding ways to have access for retail investors. >> good morning. it is a pleasure to be joining you in these very important hearings you call for the american people. thank you. i want to first to begin by congratulating everyone who made money on robin hood. you found a low float, low
volume, massively shorted stock, and you guys squeezed it. and investors probably doubled down on their short positions thinking they were going to win, and in the end, the massive communication networks that we have these days rallied the small to beep the large, at -- to beat the large, and robin hood made that possible. you mentioned in your testimony that you secured $3 billion in funding to address the regulatory deposit requirement situation. where did that come from? >> thank you, for the question. we were in compliance with all regulatory net capital and deposit requirements without the additional capital infusion. it was to provide extra cushion, allowing us to be prepared for
other events that might happen in the future. the capital came from mostly existing venture capital investors that robin hood already had. >> you had to further dilute your position in robin hood in order to make sure you secured all of the additional $3 billion? >> that is correct. >> that is a serious concern because not only was your business model designed to profit off of overflow, which caused you to take extraordinary risks and having 13 million customers with access to large margin trading that instigated the gamestop situation, but halted buys on that stock, and that was in order to mitigate the capital requirement situation, and divested from it
-- and you benefited from it, because it reduced the amount you would have to go out and raise an additional capital in order to prevent these kinds of prices reoccurring. you took from your customers in order to minimize the 3 billion-dollar being larger than it probably would have been, because you wanted to protect your position. that is very troubling. that is very troubling. it is troubling that the model you built and the rescue took on resulted in that, and it is troubling that the halt benefited the existing shareholders by minimizing the amount of additional capital that you had to raise in order to prevent that from happening again. you basically took from the shareholders in order to do that, and i don't know what to say about that. i think that this presents some
very serious situation where we need to ensure that companies are not taking advantage of customers in this way. you are quoted as saying buy increases capital requirements, selling does not. it was something that you knowingly did something that you knowingly did and went beyond just trying to protect the existing customers. at the end of the day, why you had to raise the additional $3 billion, it minimized the larger sum. we have customers who purchase a stock who are now bag holders after the price came down because they could not continue going up with additional buying. that was willful, that was intentional.
i'm glad that we have called this hearing, i am glad we are able to put these things on the record, and i am very concerned with the implications of this. i can only hope that at the end of the day, those buy orders get a lot more than an apology. thank you madam chair. i yield back. >> you are recognized for five minutes. >> thank you, madam chair. thank you ranking member mchenry for holding this important hearing, and thank you to our witnesses for your testimony and the precipitation -- participation today. there is so much for us to learn from this market event. speculation has been rampant and i believe we should not get ahead of our skis and rush the policy recommendation before we understand the full scope of the situation.
the committee investigation is barely underway, and i would give a large portion of the policy proposals as half-baked. we should all want to retail investors to have access to the market and to ensure they have the information they need to participate in the market in an informed way. my colleague, representative loudermilk asked you to explain advantages of cutting down on the settlement time, but you were cut off before you could complete your answer. would you like to finish her thoughts? -- your thoughts? >> the issue of going to real-time settlement is everything has to work perfectly and a world where there is still people involved in many of the processes. we will get there one day as an industry, but i think it is a bridge too far in the next
couple of years. >> you were also cut off earlier when answering my colleague's question regarding the difference between payment for order flow or the options markets, versus the equities market. would you like to continue that explanation? >> i think we covered that reasonably well. the difference is that the options markets, 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 blocking of the sec as the best way to give retail investors in america price in comparison. we should make exchanges more competitive, not make internalization or dark rolls more privileged. >> thank you.
early, representative meyer asked about how we got to where gamestop was short sold the two 140%. given that naked shorting is a legal, how did that happen -- is illegal, how did that happen? >> a number of the purchasers of the short sales, of the shares sold short are institutions that also lend their securities. it is very important to remember that institutional investors burn substantial returns from participating in the securities lending market. if you are lending your gamestop stock out for example, you may have been earning an annualized rate of return of 25 or 32%. that accrues to the benefit of pension plans. etf's of other institutional
lending that participate in the securities lending market. 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 supplier. this because, in some sense, does not necessarily mean there something wrong in the chain itself. >> would you see that as an area ripe for regulatory adjustment, or do you think that is not a problem? >> i think if we were to think about legislative priorities to make our capital markets work better, this does not make the top 100 list. >> thank you. the spite the intense volume and exposures presented in the markets, the broader infrastructure has performed.
new regulations would have and be harmful and have unforeseen consequences. can you speak to what the potential dangers are of increased regulation for retail investors? >> that will take me more than 12 seconds. there is potential for unintended consequences here and increased regulation can drive retail investors out of the market, it can have them have -- >> may be one of my colleagues will give you a chance to complete. >> thank you. next, up for five minutes. >> thank you, and thank you to the witnesses for being here today. i just want to follow up with a question my colleague mr. foster asked earlier. you said that rule 606 reports detail of the arrangements you
have with firms like said adele hot -- citadel, and are you saying that you are prepared to publicly this close the detailed terms of flows with citadel and other firms? >> thank you for the question. the 606 do publicly detail the flow arrangements we have with other marketmakers. >> i look forward to seeing those details, will you make sure you get those to our committee? >> certainly, we can have that arranged. >> thank you. last month, as we saw the volatility with gamestop and amc and the stock started to rally, everyone seems to get involved in one. that includes people like my nephew and his two friends who
stayed up until 4:00 in the morning to see if they could get a piece of this action. one of the most concerning pieces is how may people really felt like, that's what they needed to do to get ahead. to me, this exemplifies the income inequality across america and one that we need to deal with, and i do appreciate the opportunity for retail investing. i want to make sure it produces a great outcome for the people using it. right now, what i am seeing is gambling on the stock market, and it is not a real solution to the income inequality, and i do not think we should pretend that it is. just last june, when hertz eclair to bankruptcy, after that, robin hood was actively pushing the stock on its site and it was trending on robin hood and the promotional of that was the stock, i do not think it is good for investors. that is a gamble that they should not have taken, that is
one example. people having access is nice, but if they do not have the money to invest, it is not democratization. that is the real reason that 80% of the stock market is owned. and of course, those are people do not have to put all their money into health care or childcare or a car payment or whatever it is that is keeping them going through their day-to-day. earlier, you said you could not tell us what your clients' rate of return is. 99% of short-term traders underperformed the market. you say robin hood's mission is to democratize finance. is that correct? mr. tenev: that is correct. >> i want to ask you, you have invested significantly in behavioral research. i own a digital design firm with my husband, so i am familiar with what behavioral research
can do for platforms and websites. that behavioral research has shaped how your app is designed to. is that correct? mr. tenev: like many technology companies, we employ data's entire -- data scientist, user researchers and designers to provide a better customer experience. >> so on the specifics, when people sign up, they get a scratch off ticket, confetti falls when they place an order, they are encouraged to trade. if a friend signs up, they get a free stock. why have you added specific game design elements to look like gambling? that encourages more frequent trading. mr. tenev: as i mentioned earlier, we want to give people what they want in a responsible, acceptable way. we do not believe in gamei fication.
most of our customers are buy and hold. a small percentage utilize margin. >> i appreciate that, but folks like my nephew are not your customers. your customer is sitting right next you, mr. griffin with citadel. when you do not pay as much for index funds or apple or anything like that, you're apt to me shows you are trying to encourage more trades, which puts more money in your pocket, not helping people build equity through smarter investing. i would ask two things. who exactly do you believe you are democratizing finance for and how do you plan to address these conflicts of interest? mr. tenev: i believe our business model has become the industry standard for a reason. it is because it is good for customers. it has led to the democratiz
ation of the market. we are proud to market on uniform terms without taking into account any of the payments we generate from them in the routing. >> recognized for five minutes. thank you. >> thank you for holding today's hearing. i am concerned about investors in the state of wisconsin and across our country. to make sure they have access to the market, excess that is fair and equal to the big banks and hedge funds in wall street. we have seen improvements in wall street. i am concerned these hearings are going to lead us down the path of additional regulations before we fully investigate the facts. it was stated earlier that may not be the case. i would like to have inserted a bloomberg article daniel waited -- dated january 28 titled
gamestop aids show more need for regulations. i think it will be helpful for everyone with the concerns we will be drifting away from the democratization of the finance system. i am a bit disappointed we do not have representation from the sec, especially in the early days of the biden administration. i think that would be helpful and hopefully we will have their per dissipation in future hearing. if i can direct my first question to gabe plotkin, there is a lot of information that came pouring in on gamestop that you held a short position in. people were tweeting about it. do you have any information as to uniquely why folks on twitter and on reddit and others uniquely targeted that stock? mr. plotkin: first of all,
thanks for the question. i think it is a really good one. i think ultimately -- i'm not sure how the momentum built around that. there were certainly some signs. there were even website names bought as far back as november. i am not sure how it started, but i think they saw an opportunity with a high short interest stock a lot of people could relate to because it was a retail experience. that is sort of the genesis of it. >> thank you very much. i'm going to robin hood if i can. it is -- as my colleague was talking about, at some point, it became clear additional collateral would be needed. how many of your customers owned gamestop stock or options on january 27? mr. tenev: i don't have the exact numbers. >> suffice it to say at
increased dramatically over the days leading up to the 27th? mr. tenev: that is accurate. >> and you saw additional order flow coming into this. did you take any steps and was it reasonable to believe it 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 january 28 collateral call? mr. tenev: we did. so on january 21, we went through a 100% market requirement for amc. that requires purchases for those stocks to be fully paid for. customers would have been unable to use margin to buy those. that was january 21 in the case of amc and january 26 for gme. >> but this was still
insufficient as related to the collateral call that came in on the 28th. is that correct? mr. tenev: that is correct. limiting margin was ultimately insufficient. >> 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 is an important question. many brokerages put in place similar limitations on buy orders for securities. >> i have heard conflicting reports. i think it is something this committee needs to further look into as to the differential between what occurred under your control at robinhood and some of the other brokerages. i think it is a question we should fully investigate and make sure we have all the facts as we are moving forward. can you detail your plans going forward as it relates to making sure any event like this does
not occur and you have the foresight to prevent these late collateral needs? mr. tenev: absolutely. thank you for that important question. certainly the additional $3.4 billion helped provide a significant cushion. in addition, you concede that between thursday and friday, robinhood replaced the pco. i'm sorry? >> gentlemen's time has expired. nothing to do with what you were saying. we will move on. you are recognized for five minutes. >> thank you so much to our witnesses. there are a whole bunch of themes in today's hearing.
i went to tie a whole bunch of threads together. june 2020, alex kearns was 20 years old at the time from illinois. killed himself largely thanks to robinhood a bug in the robinhood system. he turned on the app and said he owed $730,000 he did not have because of options positions he thought canceled up. he called the helpline. the helpline was not manned as we discussed. he sent several panicked emails. did not receive a response. there was a response saying his positions were covered. 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 able to take on $730,000 that he did not have the liquidity to cover. the history of financial regulation is to protect people
like alex kearns from the system. field joke goes if you are playing -- and you can't figure out who the fish is a table leave the table because you're probably the fish. i want to cover a little bit of timeline. december 2019, robinhood was assessed two point $9 million for failing to disclose agreements to your customers. six month after that, alex karen's committed suicide. six month after that, robinhood paid a $65 million fine to the sec for failing to divide order flow for customers. along with that, according to your 606's you attract a higher rate for equity trade.
$.17 per hundred trades versus $.11 for your competitors. i would ask unanimous consent to enter the cnbc article into the record. >> without objection. >> a question for you mr. tenev. when did you start offering options on your platform? mr. tenev: thank you, congressman. first, let me say -- >> we are tight on time. when it do start offering options? mr. tenev: options trading was offered starting in q1 of 2018. >> thank you. that is relevant because prior to 20, your revenue grow with user growth. 2020, it got to $50. your revenue model went from growing revenue by growing users to growing revenue by growing
revenue. burned on the back of each user can -- earned on the back of each user. how many firms do you route options? mr. tenev: congressman, we have seven market makers. i can get back to you with the precise number. >> according to your disclosures, you only list four. citadel, susquehanna, wolverine and morgan stanley. are there any other ones? mr. tenev: if that is in the 606, i am sure it is accurate. >> do you route options to anyone you not have a payment through order flow agreement with? mr. tenev: currently, we have uniform payment through order flow arrangements with all of our marketmakers so they would all be under the same arrangements. >> how do you ensure that you are getting best pricing if every single firm you are
willing out everybody who is not paying you for the privilege to trade? mr. tenev: we believe having uniform payment through order flow arrangements with all market flow ensures there is no conflict of interest because it prevents payment through order flow from being an input in decision-making from where to read orders. >> there is an innate conflict in your model. let's imagine we are today's version of alex kearns. i am nervous. i call your helpline loud. -- helpline now. let's call and listen to the other end of the function that other it -- other end of the phone. >> [indiscernible] thanks and have a great day. >> you can wrap up. you may wrap up. go ahead.
>> i have no further questions. >> thank you very much. is he on the line? >> he is in texas and is unavailable. >> thank you very much. let us hear from mr. timmons. for five minutes. >> thank you, madam chair. it seems we are here today to define culpability in the events that transpired last month. i seem to spend a lot of my time thinking about capital requirements. in the time it takes to execute
these trades. i'm going to focus my questions there. mr. tenev, you have repeatedly invoked capital requirements. my friend and colleague mr. barr asked you about this earlier, but i would like to hone in on this. can you explain what specifically about the nature or volume of the trades being ordered by your customers because these requirements to be triggered and how did the level of collateral required compared to what you would normally have to abide by? mr. tenev: thank you for that question. to give you a sense for the increase, our capital requirements, our deposit requirements from january 25 to january 28 increased tenfold. >> what is the most your capital
requirements have been prior to this event? mr. tenev: i believe there was a table that i provided my written -- in my written testimony that had the precise value at risk and special charges in the prior days. >> never been close to this amount. now you have additional capital you have raised and so this should not happen again. you referenced one in 3.5 million was the likelihood of the situation occurring. mr. tenev: that is not a robinhood number. that is a third-party industry number. >> are you aware of the origin of these capital requirements? mr. tenev: i do believe that these capital requirements and specifically the nsc see deposit was spelled out in dodd frank. >> so the don 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 you were unable to meet. i think when we are searching for culpability, we need to realize the well-intentioned legislation from over 10 years ago is somewhat culpable in this entire conversation. will you elaborate on that? do you agree that dodd frank as somewhat responsible for the situation robinhood has found themselves in? >> i think it is incumbent on us to evaluate those capital requirements and whether they are appropriate given the business model has an issue. i think it is a question of settlement times and modernizing our system.
i agree the capital requirements here put into place are one of the reasons we are having the conversation today. >> you went to the next place i wanted to go, which is the time it takes to subtleties transactions. 12 years ago, 10, 11 years ago, we never considered the concept. a trade based platform that democratize his access to purchasing and selling. i think that needs to be revisited because it is unfair. there are other companies that have far more resources that are not in the situation. those companies have larger investors. we 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 subtleties transactions faster,
those two things seem to be the best way to achieve our objective and make sure this does not happen again. i do hope we can hear from the d tcc in the next hearing. i am hearing something strange in my computer. one second. thank you. i will end with this. one of my colleagues across the aisle said the deck is stacked against the little guy. the very committee that is conducting this hearing has more culpability i would say that any of the witnesses we have brought before us. we need to make sure this does not happen again. >> at the request of one of our witnesses, we will take a short recess. the committee stands and a recess for five minutes. -- stands in recess for five
>> thank you. hoping to be joined by the national conflict resolution center. can you hear us this morning? >> yes, i can. good morning. >> we solved our technological divide. let's talk about the political divide. arthur brooks, we will start with you in terms of political polarization. if you look at our current state of polarization, how far back do
you trace this and what are some of the social factors that have driven it to the point where we are now? guest: everybody knows it is bad. the truth is most people dislike it. any 3% of americans say how they hate how we have become divided as a country. the reason they do not like it is because it is not historically something in the united states is our equilibrium. it is not where we like to be. you have to go back to the 19th century to find this kind of political polarization we see in congress and the dissimilarity we see and the ideology we see in the parties. we see it socially in all sorts of ways. one in six of americans have stopped talking to a close family member because of politics. many of them because of politics. when you see numbers like that, you see a big and growing crisis
in american society. it has lots of roots. there are economic roots. the good news is we have gone through periods like this and they generally do not persist. it is going to take a and citizen action. >> we just finished up the segment talking about the civil war. you look back at the civil war with fear and hard. the same question to you in terms of how we got to where we are now. guest: there is a long history of polarization in our society and currently, there are issues both political and economic and other issues that are driving this. politically, what is happening in our society is there has been redistricting that has occurred across our communities so political leaders and congress,
individuals representing various districts because of gerrymandering and sometimes 80% of the district is either democrat or republican. that representative does not need to cater to the middle. they just have to focus on either the political side of the democrat or the republican. economically, what has happened over time is the extreme wealth. it is this ranking of the middle class so you have a very wealthy community and the poor. it is very divided. most importantly is the lack of civil society we find currently. robert putnam in his book bowling alone talks about in society today, we are not engaging. we are not going to our churches, our synagogues. we are not engaging in our civic
clubs like the rotary club and the kiwanis club. because of that, there is not an opportunity for us to engage with one another. that is the critical element of what a democracy is about. host: the coronavirus has exacerbated those things. not being able to be together in those social situations. pre-pandemic, there certainly was a lot of common experience across america in the types of activities, the types of things we purchased and places we went. what has happened to that absent outside the pandemic? why are those common experiences no longer seemingly with us? guest: american society has segregated itself in all sorts of ways. what people are doing is you find neighborhoods that are less
mixed socioeconomically. people who either went to college or did not go to college. there are a lot of communities where people don't know anybody who did not go to graduate school. you're going to see consequences of that. people are not going to understand each other. there is interesting polling that shows people from different socioeconomic groups have wildly inaccurate understandings of people who are not in their groups. you find conservatives tend to think something like 40% of democrats and liberals are lgbtq for example. or you see democrats who think 40% of republicans and conservatives earn more than $250,000 a year. these are wildly inaccurate. >> thank you, madam chair. creates an incentive for a brokerage firm like robinhood to
send a retail order not to the firm that provides the best -- but rather to firms that provide the highest payment to robinhood . there is a contender but i conflict between the interest of brokers and investors. that concern seems to have indicated by the conduct of robin hood kid the sec found robinhood misleads its customers. they found robin hood failed to ensure the best execution for retail customers, depriving their customers have $34 million, resulting in $65 million penalty from the sec. my first question for the ceo of robin hood, how much of your revenue comes from payment through order flow? mr. tenev: regulatory compliance is at the center of everything we do. >> i want to reclaim my time to how much of your revenue comes from payment through order flow
w? mr. tenev: i do not recall the exact percentage. it is over 50%. >> do you know how much of your order flow revenue comes from citadel? mr. tenev: citadel is indeed an important counterparty. it is our largest counterparty in terms of where we route orders two. i want to explain that a little bit. >> i want to move on because i want to cover concerns. the stated admission of robinhood is the democratization of finance. i worry that the real world impact of robin hood is the democratization of financial addiction. robinhood has gaming features that seem to manipulate retail traders. we know the case of alexander kearns. according to a memo from the financial services committee, there is one feature that
encourages people to tap on the robin hood app in order to improve their position on the waitlist. do you share my concern that a retail trader passing on and maybe a thousand times a day as a sign of addiction? mr. tenev: that particular feature you are discussing was to get access to our debit card high-yield savings product, which is one of the many features targeting passive investors. >> 1000 times a day? you are encouraging your customers to tap on and maybe 1000 -- on an app 1000 times a day? that to me as a sign of addiction and it worries me you fail to see it in the same light. mr. tenev: we did not encourage anyone to tap on anything to get
access to the debit card people. they were on a waitlist. we want to give our customers delightful features so they know we are listening to them and we care about them and this is one example of how we add great features that customers love to our products. >> addictive trading might be bad for your customers, but it is good for robinhood. addictive trading means more trading. more trading means more money for robinhood. there is a sense in which robinhood monetizes addiction. you make money from the quantity rather than the quality of trading. one of the arguments for payment through order flow is price improvement. according to the wall street journal, citadel and city -- citadel securities claims to have saved investors $1.3 billion last year.
how can citadel possibly know how much it saves retail investors? citadel does not transact directly with retail investors. it transacts directly with brokers. it is unclear to me how much is being tapped onto the retail investors and how much of the cross savings is being pocketed by robinhood as profit. we know there is no commission. but what is the hidden cost to investors at the back end of the transaction? can you give me clarity on the hidden cost of investors? mr. tenev: i think that is a very important question. in 2020, robinhood provided our customers in excess of $1 billion. that price improvement is measured relative to the national bit bid offer, which is the reference price for security on all major exchanges.
>> ok. we were having a technical problem here but i think it has been corrected. mr. taylor, you are recognized for five minutes. >> today and this week has been very hard for my home state of texas and my district. we have faced a record-breaking freeze across the state, which has crushed our power ability and we have had some heartbreaking stories of need. during this hearing, i was called away to help the mayor try to get power back to the water company stations to make
sure they had water. to those members of the committee, i encourage you to send your thoughts and prayers to the people of texas as they go through this challenging time. onto the topic of this hearing, mr. tenev, i know there have been a lot of questions about the margin call you got on the 28th of january. i'm not sure we understand how the market called changed from 3 billion to 600 million. can you go through, how did you negotiate the margin call down? these are very sizable decreases. 50%, then 50% again. how did you decrease the margin call? i'm sorry. you are on mute.
you are still on mute. i have not been able to hear a word you said unfortunately. mr. tenev: how about now? >> i can hear you now. mr. tenev: congressman, i appreciate the question. first, i want to send my thoughts and prayers to the people of the great state of texas. i appreciate you mentioning that. i would like to refer to my written testimony that details everything that happened. >> i have read that. did you go in and say i need 3 billion but i will not sell the stocks until you reduce it and that is how you got to the point where people could only sell a stock and not buy it? that is not in your written
testimony so i'm trying to get your answer. mr. tenev: i do not believe we made any decisions on peace pcoing the stocks. between the 1.4 billion and the roughly 700 million, there was a discussion between our operational team at robinhood securities and the relevant counterparts regarding what measures we intend to take to lower the risk of our portfolio. >> 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. i think it is also important to note that this is any balding situation. we had not seen it before. we had no idea what friday would
have looked like had we been able to allow customers to buy the securities unrestricted on thursday. it is difficult to speculate how things would have been different. >> is the reason they said we need 10 billion because your customers wanted gamestop and not reduce the capital you needed? mr. tenev: they were not saying specifically -- nobody i believe did not want our customers to buy gamestop. these were regulatory mandated deposit requirements we had to comply with that were heavily influenced by the concentrated activity in gamestop, amc and the other securities. >> wouldn't it be fair to say your firm was undercapitalized to allow your customers to do what it is you wanted them to be able to do? mr. tenev: i think in this case
if we had the additional capital, we would have been able to ease restrictions or with sufficient capital unrestricted altogether. it is important to note lots of other firms did similar things if not the same thing in restricting the buying. this is more of a systemic problem rather than a uniquely robinhood problem. >> the fact that you went out and raise more capital, does that imply you were undercapitalized? mr. tenev: we met all of our regulatory requirements. >> your customers wanted to buy the stock. you would not let them do it because you did not have the capital to allow them to do it, right? mr. tenev: yes. >> i think that is 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. >> thank you very much. thank you, madam chair. 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 my first question for you is how many people are in the room with you right now? mr. gill? mr. gill: zero, congressman. >> that is what i thought, mr. gill. i wanted to note for the entire committee that mr. gill is
appearing before our panel by himself while many others are receiving -- underestimating the sophistication and independence of these individual investors. we have heard a lot of reasons for concern. some are legitimate. also some proposed overreactions by members of congress that can create even more problems. attention has been given to the positive side of the story. limiting investors from trading, which deserves an investigation. so -- i don't what is -- i don't see what is wrong with that. even if that motivation is a desire to stick it to a hedge fund. you are the only retail investor involved in the gamestop situation on our panel today. if members -- yet, members on
the committee have hardly asked you any questions. we have heard from a lot of the companies involved in this event. we have barely heard from the people who made this happen. is there anything you would like to add to this hearing you would have not been able to add yet? mr. gill: i appreciate that, congressman. just that i would be the first to acknowledge investing in stocks and options is incredibly risky and it is so important for people to do their own thorough research before investing. i tend to agree with you that folks should be able to freely express their views on stock and they should be able to buy or not buy a stock based on the views they have. >> on that note, how would you feel if these brilliant people asking you these questions today decided you should not take the risk?
what do you think about that? mr. gill: i would probably ask for an explanation. and to try to understand their viewpoint as to why they might think that and perhaps we would be able to talk through it. >> right. i appreciate it, mr. gill. i think we need to value the right of individuals to make the decision for themselves. it is fantastic to see some many people getting involved and the greatest financial markets in the world. we should be encouraging participation by you and others. we should want more people, not less. we don't need people from the mountaintop describing -- deciding who is capable and incapable. to secure a safe and comfortable retirement. to grow their wealth so they can send their kids to college. most importantly, we should strive for individuals to have
the autonomy to do all that they themselves would want to do without having to rely on others or god forbid their government. i also want to thank mr. bud for using his time to mention block chain. it is important now more than ever that we utilize technology we have access to and we do not have access to technology -- and we do have access to technology that is decentralized and can provide real-time trade. we have a nonpartisan bill we introduced that secures this. if we should exercise oversight on anything, it is to ensure individuals maintain access to our markets. individual investors. in discussions about over and undervalued companies, -- average investors were left out
of the markets at a time of extreme volatility while institutional investors were not. while i understand a lot of what happened during this frenzy came down to liquidity issues, individual investors were in boehner position -- were in a vulnerable position. take time to discuss how to move forward. how utilize social media. [indiscernible] had we not been focusing on improving -- >> gentlemen's time has expired. >> thank you, madam chair. speaking to the families of the eighth congressional district, we want the gentleman from texas to know we are praying for all the good people of texas and
hope you come out ok and get the power you need. i do want to follow up on the questions, mr. gill. i represent the eighth congressional district, which includes brockton, massachusetts, your home. i'm more than anyone oh you the opportunity to respond, you earlier said you began your trading at gamestop around five dollars a share with the hope it might go to 20 or 25. i want to say i accept your analysis. your initial analysis that gamestop was undervalued. i think your belief was sincere and i think it was fact-based. in your defense, we are talking about gamestop. it is a shopping mall retailer. we all know it. it is a well-known commodity.
at some point, the stock really takes off. it goes from five dollars to $100 to $300. it gains escape velocity as they say. it ends up almost $500 a share. but we are still in the midst of a pandemic. you can land a jumbo jet in the parking lot of the westgate mall in brockton. no one is going to the malls. no one is saving this company. it is up around 400, $500. is there a rule for someone to play here, for you to play or the sec or robinhood to say, ok, 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. at some point, this thing got away from you and went totally into the stratosphere. i am just wondering what your thoughts are on how the should have worked. mr. gill: thank you. i do know westgate mall quite well. i would say just to be clear, i had thought roughly 20, 20 five dollars per share, i thought at that time. investments evolve over time. as the fundamental events change over time, it is important to update them accordingly. i had mentioned the stock prices got a little ahead of itself last month. there is a lot outstanding.
there is a lot that has happened in recent months to suggest gamestop could turn around its business significantly and one element of that is the largest investors, brian cohen, and he has brought in some colleagues to turn around this company. sorry. >> i want to reclaim my time. ms. schulp, i want to ask upa we get this convergence between thin tech, social media and traditional markets. if anything, the gamestop incident and the convergence of all this has demonstrated a vulnerability in our markets. i am just wondering if the loose association of day traders could cause all of this upset in our markets even if there were wider national security issues out
there. in terms of other people who might be nefarious actors who are intentionally trying to disrupt our markets. isn't there a national security dimension to all of this as well? ms. schulp: i can say national security is not my area of expertise. >> so, you said earlier you are with finra. they are under 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 ensure there is integrity on the platforms.
i would agree with that. not necessarily sci in particular, but having platforms that are strong is important here. >> ok. i yield back the balance of my time. >> thank you very much. having technical difficulties. we are back. you are recognized for five minutes. >> thank you, madam chair. it has been a very interesting meeting. i have been wanting to thank you for organizing this. i think it has been very helpful. ms. schulp, let me ask you first of all, in the case of gamestop and amc stocks, the prevailing narrative is a band of folks
roosevelt against wall street, -- of folks rose up against wall street. according to a j.p. morgan analyst, institutional investors have been drivers of the price action on the way appeared in your opinion, based on historical data, what is the likelihood that gamestop and amc's market volatility was driven by institutional investors looking to ride the wave? ms. schulp: i think these are questions we are going to find out the answers to as we get deeper into the data. i think it is likely at some point in this increase in value for all of these stocks, institutional investors were involved. retail investors have not been able to move markets the same way. it is important to note 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. the ability of retail investors to have outside influence is entirely possible. >> mr. griffin, mr. plotkin, you have any thoughts on this likelihood as well? >> congresswoman, i believe you're asking one of the single most important questions today. and i believe the decline in the short interest as reported over the two weeks that the u.s. updates short interest reporting every other week indicates -- and i apologize for not having the exact number but roughly 35 to 40 million shares were bought back by parties short to stop. this would be a genetic degree
of short covering they could cause a dramatic increase in the price of gamestop. >> thank you. mr. plotkin. mr. plotkin: nikki for the question. i do not have the -- thank you for the question. i do not have the exact answer. as the stock price moved higher, there was a three day period where it traded almost 11 times the flow. that kind of volume gave anyone an ample opportunity to cover . we did look at some of the options activity under the stock. on january 22, there were options that were expiring that would have equated to 35 to 40 million shares of stock ownership. i do not think the short covering was the biggest driver of the stock trade when you look at the volume, i think the biggest driver buzz the -- biggest driver was the
aggressions -- the aggressive activity. >> 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 the monday of the week in question. i want to say that with the 24th of january. prior to that, we had no investing with melvin capital. gabe plotkin by reputation, one of the best money managers of his generation pilled well-known to my partners at citadel. gabe trained one of my best portfolio managers over the course of his career. well-known to the -- to my colleagues of citadel. >> can you confirm your worked at citadel llc? mr. griffin: my portfolio manager worked for gave at a
different term and then joined citadel subsequently. >> all right. mr. plotkin, can you confirm 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 one year. >> did you receive any advice from mr. griffin during the gamestop volatility that occurred in january? mr. griffin: all my conversations with mr. griffin centered around his investment in our firm. >> did you reach out to citadel? >> gentlewoman's time has expired. >> i yield back. >> thank you, madam chair. hello, everyone.
i am so glad we are having this hearing. i am super appreciative of the leadership of our chairwoman. having transparency exactly on what happened. the wealthiest 10% own 84% of all stocks. 54% 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. when you all screwup, the people end up paying the 10 through losses or bailouts. i want to talk about the high-frequency trading. we know half of all stock trading in the u.s. is done by computers that 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 the tensioning accounts. mr. griffin, and this is a yes
or no question, is citadel's trading programmed to identify and trade ahead of large trades done ahead of pension and retirement funds? yes or no. mr. griffin: today, virtually all trades executed by virtual investors are in the form of program trades. >> so that is a yes, right, mr. griffin? mr. griffin: it is a complex question that deserves an appropriate level of answer. it is not -- trading is sliced into small slices. 100 or 200 shares. and executed over the course of the day, a week or a month. >> help me out with this one. does this increase -- aggravate programs to identify in trade. does this increase cost for
people with pension and retirement funds? mr. griffin: given that we example money -- >> because -- this is not a disrespect. we have limited time. mr. griffin: we use orders to execute on behalf of our hedge fund. we have generated exceptional returns for pension funds and for endowments. >> i'm going to help you out. in fact, some estimates indicate as a result of the high-frequency trading, pension and retirement accounts pay nearly $5 billion. this means wall street firms like yours engaging in high-frequency trade are making money at the expense of my residents' retirement fund. one way to ensure this reaches the real economy, what is happening in our communities and my district, is to enact and look at proposals. let me tell you, according to recent polling, the majority of
americans -- and it is going to grow -- the majority of americans support taxing wall street transactions. taxing them at 0.1% would raise $800 billion over 10 years, which could fund programs like helping my district expand health care, nutrition, public education. i heard my friend from texas talk about access to water and electricity. guess what. right now in my community, they are so poor that i have families melting snow so they can flush their toilets because they have no access to water. this tax would discourage high-frequency and risky trading. mr. griffin, does citadel's lobbyists been hired to oppose financial transaction tax because it would make high-frequency trading less profitable? mr. griffin: we firmly believe a transaction tax will injure
americans hoping to save retirement. i believe vanguard has publicly come out and said we have to work two and a half said we havt two and a half years. >> no. i'm reclaiming my time. the stock market, mr. griffin, imposes 0.2% tax on transactions and sees little frequency trading, but that has not stopped the market from becoming the third largest in the world after new york and london. so just to be clear, you all will be fine with the tax. and it is fair. because let me tell you, our folks are tired of bailing you all out when you screw up and gamble with a retirement fund and that is exactly what happens. the reason we are having this hearing is because you are irresponsible and set up in a way to help only the wealthy. it leaves people like my community here with this large income inequality that i feel like never gets the bailout it
deserves. thank you very much. i yield. chair waters: thank you very much. you are recognized for five minutes. >> thank you, chairwoman. i appreciate this opportunity for this hearing to get detailed information and gather the facts as to what happened over the course of these transactions. so let me start by saying -- and i saw members on both sides of the aisle are interested in this question. the question i am going to be asking is, what did the customers know? what did the users know? and when did they know it? that is the theme. i believe if we understand what happened and what they knew and what they didn't, we will be able to prevent some of the harm in the future. so let's go to the narrative. mr. tenev, i want to look at
your page nine. you said at a proximally 5:11 a.m., we received an automated notice that you had a deficit of approximately $3 billion. you then said between 6:30 and 7:30 eastern time, robinhood decided to impose their trading restrictions, which means no more purchases of gamestop, and you said in your testimony in conversation with staff early that morning you notified nscc of your intention. in that time period from 5:11 to the time you are having the conversation, what did you tell your users? what information did they have? mr. tenev: thank you, congresswoman. during that time period, shortly after the restrictions were made, we communicated to users and customers the
securities would be restricted from purchasing. subsequently, we issued communications on social media with the reason we enhanced deposit requirements due to high volatility. rep. dean: i have to ask you to be more specific. you said that first, the notification to your customers was what they agreed to in their customer agreement. that was your first back step. who knows when users or customers agreed to it. then you said they were notified two days later by sec alerts. and we know what the sec alert was. it was quite general, much more vague. and number three, you said you also list a more and become his mention of targeted customers.
when did you send customers specific information? when did you do that? what time? what is the clock? mr. tenev: i believe, congresswoman, that happened at several different points in time. that was a block in the afternoon, pacific time. i don't recall the specific time. rep. dean: would it be after the sec notice? it seems to me you did not let them know for two days. mr. tenev: congresswoman, that is inaccurate. they were notified several times on that date and were notified whether restrictions as they happened prior to january 28 as well. rep. dean: but you don't say what the notifications were in your testimony. specifically, what did the users hear from you immediately upon
imposing the restrictions? mr. tenev: immediately upon imposing the receptions, customers would have received a message saying they would be prevented from opening further submissions in the wealth and securities. later in the day on january 28, around early afternoon pacific time, we published a blog post that explained that the decision to restrict these securities were due to collateral requirements and clearing houses and not upon the direction of hedge funds. rep. 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 will not be public. we will not be perfect. we want to improve and make sure we don't make the same mistakes
twice. rep. dean: but what were those mistakes?that is what we are here to learn about. mr. tenev: i think that -- thank you for the question. it is an important question. on thursday, we did restrict the buying of the securities. on friday, we imposed position limits, which i believe was a much better long-term solution, one that we will have in the future if anything like this happens again. we also had $3.4 billion in capital. rep. dean: thank you. i yield back. thank you very much, mr. tenev. chair waters: thank you very much. we are back. five minutes. >> thank you so much, madame chairwoman. robinhood has engaged in a track record of outages, design failures, and most recently it appears to be a failure to
properly account their own internal risk. you tried to blame clearing houses for your need and scramble to raise billions of dollars in a matter of days, but you also blamed a lack of industrywide real-time settlement, the lack of that. robinhood's requirements per margin have long been far more lax than other brokers for a long time. in december, just a couple months ago, you brag about having some of the most competitive rates in the industry. this is evidenced by your recent decision to raise this requirement. when robinhood prohibited its customers from purchasing a in several stocks, other brokerages merely adjusted the margin requirement on the stocks. so, mr. tenev, given robinhood's track record, isn't it possible that the issue is not clearing houses but the fact that you simply did not manage your own
brokers, failed to properly manage your own margins, or failed to manage her own risks? mr. tenev: thank you for this question, congresswoman. let me address the margin point because i think this is an important point that has been under discussed. so in december, when we lowered our rates to 2.5%, one of the details that i think was messed is that most other brokerages have tiered margin rates where the wealthier customers pay much lower margin rates than lower net worth customers, so you don't have someone that has $10,000 paying 9% to 10% per margin with someone worth $1 million paying 2%. we wanted to give everyone a uniform rate so wealthier customers are not advantaged with lower rates than lower income customers. and i think that is a unique approach in our industry. rep. ocasio-cortez: thank you. i have to 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 arrangements with market makers like citadel as well as two sigma and virtue. the sec highlighted ways that the overflow created a potential conflict of interest. and then one of the ideas the commission floated in 2016 for addressing these conflicts of interest, which requires brokers pass on the proceeds. earlier, one of my colleagues, representative nicholas, said robinhood owes its customers more than an apology. i believe you have harmed your customers. mr. tenev, would you be willing to commit today to voluntarily pass on the proceeds of the flow
to robinhood customers? mr. tenev: congresswoman, i appreciate that question. when the statement you referred 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. rep. ocasio-cortez: i should take that as a no, you are not willing to pass on the proceeds to your customers? mr. tenev: when the other brokers dropped -- rep. ocasio-cortez: i'm just talking about today, now. mr. tenev: it allows for commission free trading in the context of trading commissions. a much larger source of revenue in the past. rep. ocasio-cortez: mr. tenev, i apologize. i don't want to be rude. i just have limited time. the revenues that you make firm a payment for order flow would cause the removal of free commissions.
doesn't that mean trading on robinhood is not actually free to begin with because you are just hiding the cost, the cost of potentially poor execution or the cost of lost rebates to your customers? mr. tenev: so certainly, congressman, robinhood is a for-profit business and needs to generate some revenue to pay for the cost of running this business. people were initially skeptical that the model even with payment for order flow would work. i think we have proven that otherwise by making this a standard model by which brokerages operate now. rep. ocasio-cortez: i see. i have to move on very quickly. i have a timeline question here for mr. plotkin. i see that earlier your testimony today was that -- hello? earlier, your testimony today was that melvin capital has not
engaged in -- sorry. madame chairwoman, i'm sorry. i think you are not muted. sorry about that. mr. plotkin, earlier today, you mentioned that melvin capital had -- short of gamestop. the position, correct? mr. plotkin: i'm sorry. chair waters: we have to go for five minutes. >> thank you, madam chair. i want to thank our panel for being with us through a very substantive and long afternoon. i am the last one to ask questions here. i want to talk with mr. tenev about options. i agree with what other members said in both parties about the
value of democratizing access and that we should give latitude for investor sentiment, but in fields where there is information asymmetry between the user of a product or service and the provider, there is a professional code of ethics around that. when you go to the doctor, a lawyer, there is a code of ethics wrapped around that that protects someone who does not understand as much about the service being provided. in finance, it is the fiduciary's responsibility to do what is right. in massachusetts, where there is 500,000 users of robinhood, we hold broker-dealers to a fiduciary standard. secretary of state securities division filed a complaint against robinhood for violating that fiduciary standard. so some of it is premised on options. two thirds of customers approved in massachusetts for options trading identified as having limited to no investment
experience. so the first question i would ask you, mr. tenev, if you take no more than a minute, what do you think is the appropriate amount of financial literacy that the user should have before they are 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 two years. number one, we don't allow undefined risk options trades. so
no selling of naked calls. no undefined risks. number two, we made several enhancements to the safety of the product over the past year, including the ability to perform an instant inapt exercise of an
options position, clarifications or other user interface, live customer support by phone for urgent cases, so we have actually proven and are committed to improving in the future the safety of our options offerings. but to be clear here, options are binary in outcome. so they are qualitatively and quantitatively different than stocks and bonds. you can lose all your money very fast. you can make a lot of money fast as well. but this is getting very close to gaming, especially the options buying experience. i would ask you to address the question again. what level of
investment sophistication do you think a detailed trader should have before buying options? mr. tenev: sure. mr. congressman, thank you for the follow-up. there are things that robinhood complies with.
we are in a competitive market. several others have mentioned chinese based brokerages, other brokerages that are essentially offering similar products, not having to comply with these regulations. we are certainly willing to engage in the discussion about how rules should change, if at all, and if markets are applied uniformly and are fair to small investors and not just benefiting high net worth individuals and institutions. we would be open to having that conversation. rep. auchincloss: in massachusetts it will not be what the chinese think is appropriate. it will be a fiduciary standard. i regret that you have not addressed the question. 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
would be happy to engage substantively. as long as those requirements are uniformly aligned to all brokerages and not just start a brokerages or brokerages catering to small, we are open to having that conversation. rep. auchincloss: the fiduciary standard is equally applied to all brokerages. given the way that your users are using this. i will yield the balance of my time, madame chairwoman. and i thank you for arranging this. chair waters: thank you very much. mr. garcia, you are recognized for five minutes. >> thank you, madam chair. [indiscernible] a long day. -- i know it is a long day. i wanted to ask questions to mr.
griffin. mr. griffin, would you consider yourself successful? yes or no? mr. griffin: yes, i would consider cito to be successful and held securities to be successful. rep. garcia: i would agree you have done pretty well for yourself. as you mentioned earlier in your testimony, your company handles over 40% of retail trading. did i get that correct? mr. griffin: it represents the execution quality that we give. rep. garcia: citadel is a leading market marker for interest rates 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 insurance stock market, and i am grateful for the opportunity to compete in the market, we are now a swot dealer
of securities and a significant participant in that market, and i would like to express my gratitude for dodd frank's derivatives. rep. garcia: good. your hedge fund managers -- you are hedge fund managers. do you manage over $30 billion? is that correct? mr. goodman: congressman, yes, that is correct. proximately 35 billion dollars for pension plans, colleges, charities. rep. garcia: that is pretty significant. i would say that is a lot. it seems to be your company is systemically important to our financial system. would you agree with that? mr. griffin: i believe we play an important role in the u.s. capital markets forget i believe our hedge fund would not be in the category of systemically
important. with 30 something billion dollars equity, it is simply not the skill or magnitude of a j.p. morgan bank of america, wells fargo, and in particular having worked on these policy issues with members of the fed in various contacts, we don't have to make payroll. rep. garcia: you are doing pretty well, and yet you are not one of the big guys that we have visit us frequently, meet a couple times a year. is citadel securities -- you were fined recently 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 for trading ahead in a market back in the roughly 2012,
2014. it was due to a systems failure we have no tolerance internally for having made such a mistake. we of course have taken actions to rectify those mistakes. rep. garcia: it did occur. ok. 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 permanence of the question. retail investors who do good research, and one of our fellow panelists said earlier, investors have understood the game changing technologies unfolding before us. cars, solar energy, and have been extraordinarily well putting assets in the newly
emerging part of the economy. rep. garcia: ok. your firm has done and you have personally done well during the pandemic, right? there has not been much of an adverse effect on your firm? mr. griffin: congressman, we have all been adversely impacted by the pandemic. i think all of us long to return to life as it was a year and a half ago. rep. garcia: but you have not done badly, right? mr. griffin: there are two dimensions to this. there is the personal impact to everybody. we all had to deal with family. rep. garcia: but your bottom line? our bottom line over the past year has been successful, sir. rep. garcia: that is what i thought. is it true that last year in illinois, you were involved in an effort and he spent like close to $50 million to beat a tax increase in illinois that would have forced the big income
earners like yourself to pay more in taxes in illinois? chair waters: the time has expired. all members today had an opportunity to ask their questions. i would like to ask unanimous consent to enter that into the record under the following entities, fair market, public citizens, and health markets. so without objection, it is so argued. i now yield one minute for brief closing remarks. >> thank you, madam chair, and thank all of you for being here today. i think you all did a great job, and thank you for spending time
with us and educating us on the markets and the activities surrounding gamestop and shortselling. i would like to reiterate the ranking member's commitment that the committee republicans stand ready to work with the majority to provide oversight on an investigation of all the gamestop activities and hoping we have an eye two protecting and giving more choice and access to america's everyday investors. with that, madam chair, i yield back. chair waters: i now yield myself one minute. about their roles in the market volatility in january. this allowed us to begin to assess what transpired and what has not kept up with the rapid changes. for example, i am more concerned
-- it may pose a systemic threat to the entire system. we are going to continue to examine these issues. this will conclude. security market experts, advocates to discuss the issues that are involved, and looking for solutions to problems that these events have originated. also included testimony including from the securities and exchange commission and authorities. all of these fall under the committee's role. we will take steps to protect investors and insure wall street accountability. with that, i would like to think them for their testimony here today. all members will have
opportunity to submit to the chair to the witnesses for response. so i will ask all witnesses to respond as promptly as you are able. so without objection, all members will have five minutes to submit these materials. thank you. for what is happening in texas, to do what is necessary to provide assistance to all of our people, all of the families in texas that are experiencing this very, very difficult time. thank you so very much. this hearing is adjourned. [captions copyright national cable satellite corp. 2021] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] >> the house financial services committee here just wrapping up its hearing on the recent volatility in the stock price of gamestop and decisions by some companies to restrict trading of th