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tv   Robinhood CEO Reddit Co- Founder Others Testify on Game Stop Stock - Part 1  CSPAN  February 21, 2021 5:41pm-8:00pm EST

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ambassador to the u.n., and tom vilsack to be agriculture secretary. looking ahead, the senate would take up the covid relief package after house passage under reconciliation, which requires a simple majority to pass and does not allow filibusters. watch the house live on c-span, the senate live on c-span 2. announcer: next, a house hearing investigating the recent incident where the stock trading app robin hood halted purchases of gamestop after stock prices soared. witnesses included the ceo's of robin hood and reddit, joined by executives from investment firms and a market analyst. this portion is two hours and 15 minutes.
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>> the staff have been instructed not to meet members except when a member is not being recognized and there is inadvertent background noise. members are also reminded may only participate in one remote proceeding at a time. if you are participating today, please keep your cameras on and if you choose to attend a different remote proceeding, please turn your camera off. today we will make an exception and allow members from texas to put dissipate without their video function if they are experiencing power outages that prevent them from having their videos working. if members wish to be recognized , please identify yourself by
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name. i would also ask members -- -- members to be patient. so, this hearing is entitled gamestop, who wins and loses with short sellers, social media, and retail investors collide. i now recognize myself for three minutes to get an opening statement. good afternoon, everyone. this is a first in a series of hearings for the committeele to look at the recent market volatility involving gamestop and other stock. i want to know how each of the witnesses here today and the companies they represent contributed to the historic trading events in january.
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this recent market volatility has sent a market stop drop of practices by wall street firms. it's not the discussion about the evolving roll of technology and social media in our markets. these events have potential conflicts of interest and the predatory range that certain funds operate and they have demonstrated the enormous tolerance of social media in our markets. it's also raised issues involving indemnification of trading, and the business models of retail investors as their users. all this is why we have witnesses from many of the key players. we are to testify today including witnesses representing wall street firms melvin capital and citadel. social media companies reddit, trading app robinhood, and
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retailers investors. in subsequent hearings we'll hear from regulators and other experts recording these events. including disclosures whenever implemented. many americans feel that the system of staff against them no matter what wall street always wins. in this instance many retail investors appear motivated. given the losses that many retailers had as a result of -- there are many whose beliefs that the system is rigged against them has been reinforced. others have noted there are winners and losers in every trade in our financial markets. i know as a financial services committee is to ensure equity in our financial markets. and protections for investors.
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today we -- we'll talk to the witnesses regarding these events. it will be an opportunity for this committee to get the facts about the role emof the entities of the witnesses represent. now, i recognize the ranking member of the committee, the gentleman from north carolina, mr. mchenry, for five minutes. mr. mchenry: thank you, madam chair. let me just begin by saying i believe americans are far more sophisticated and informed and capable than people in d.c. give them credit for. but i called for this hearing last month i wanted this to be a fact-finding mission. we have speculation, we have headlines and finger pointing, but we don't have the facts. we need facts not just a lishes bits or nasty comments or reddit. there is plenty of that. we need the facts today. now, some of the floating new restrictions.
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without selling them. i think if we are -- we have learned anything from the past few weeks, it's that these average everyday investors are pretty darn sophisticated. there is wisdom for the crowd. so let's zoom out on that idea just for a moment. the gamestop story represents a larger truth. a fundamental change has happened. like never before, everyday investors can communicate. access more information. and more collectively to move markets. all in real time. technology is fueling this revolution. congress cannot put technology back in the box. gamestop is the culmination of years of pent-up frustration. that frustration's paired with faster, cheaper technology. consider for a moment that for every story of someone being
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able to pay off their student debt for the gamestop trade, or conversely somebody who lost money, there were stories of those who said they were investing in protest. in protest. they would gladly risk losing money just to prove a point. now -- while no one should ever risk investing money that they cannot afford to lose, not to tell truth of why someone would do something like that. the sad truth is the k shaped economy is nothing new in our capital markets because of structural core of regulations, literally, enshrined in equity. policies like the credit investor deaf nation -- definition, picks winners and losers, if you're wealthy you are good to go. if you are not you are deemed too dumb to be trusted with your money. so a privileged few gets to
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invest alongside endowments to the greatest returns of the last two generations. but not so fast for average everyday investor. as we are government, you need tobacco protected from your decision, money, protected from more opportunities. so you're left with a saving account which pays no interest. you need more money than that. we created a world where it's easier to buy lottery tickets than invest. is it any wonder why the unhealthy dynamics of gamestop happens? it's time we get serious about equity and ownership in the american economy. we should live in a world where the construction worker or uber driver strayed trading on robinhood has the same access to equity shares and robinhood itself as the white collar
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employees who work there. same goes for reddit users, by the way. both contributed to its success, why can't both share in its future success? i'll be clear with a reminder for some my colleagues who want to regulate more and more. state regulators barred citizens for investing what the "wall street journal" called the latest cascade of stocks companies. is an i.p.o. too risky? apple. instead of shutting the american public out through new regular lailings, new forms of taxation or so-called protections, let's use this opportunity instead to side with them. i'll begin where i started. americans are far more sophisticated and informed and capable than folks in d.c. give them credit for. it's time our securities laws treat them that way.
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i look forward to the hearing. i yield back. chair waters: thank you so very much. i agree we are cooperating today and you were able to join with us. i want to welcome to the committee mr. tenney is the chief executive officeer. a company with a trading app that -- [indiscernible] restricted trading of gamestop. griffith is the chief financial officer of citadel. [indiscernible] the chief
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executive officer of melvin capital management l.l.c. plotkin is the chief executive officer, co-founder of reddit and social media platform which -- where retail investors members discuss the purchase of gamestop. mr. gill is a retail investor. we have the director of financial regulation at the cato institute. without objection, your written statements will be made part of
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the record. each of you will have five minutes. >> chairman, here. it was my, i believe there are only three minutes of democratic opening statements with the idea that the subcommittee chair on the democratic side would be called as well. that's what i was told by your staff. chair waters: thank you very much. that is the order. i will call on mr. sherman. please go ahead. make an opening statement. thank you. mr. sherman: thank you so much. back in the day the law school professor would create an exam where he would weave together a story that would he exemplify each of the issues in that area of the law. but never did the professor do it as good a job as the gamestop saga which identifies most of the issues facing our capital
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markets. could there be limits that require disclose sure? what do we do with market participants whether they be on reddit or on wall street who are shorting the stock or buying a stock for the purpose of influencing its price? what is this payment for order flow model? and what does it mean when some participants get best execution, and some get enhanced best execution? price enhanced best execution? and all traders being treated fairly and is payment for order flow free to the consumer? we need to look at the plumbing where it takes two days to settle a transaction, but also why is it the broker's capital rather than the customer's capital that is toasted -- post the during the two day period? finally, we need to look at the
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gameification and glorification of high frequency trading. i thank the chairwoman for the time and i hope that in the months to come we have several hearings to explore these issues and they were able to pass legislation this year to deal with each of them. i yield back. chair waters:00 the chair now recognizes the chairman of the subcommittee of oversight investigation, the gentleman from texas, mr. green, for one minute. mr. green: thank you very much, madam chair. i grately appreciate the opportunity to express some concerns that i have. it is a fact that citadel securities has over $100 million in penalty, and my concern is this. whether we can allow a market maker's profit from misleading clients and improbably trading ahead of clients to become something as simple as the cost of doing business.
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the risk of punishment for violations always exceed the rewards to deterritory risk. i'm concerned and my hope is we'll get some additional intelligence on how these punishments have impacted the rewards that have been received. i yield back. chair waters: thank you very much. back to the introduction of our witnesses. we'll start with the director of financial regulation studies at the cato institutes. without objection, your written statements will be made part of the record. each of you will have five minutes to summarize your testimony. you should be able to see a timer on your screen that will indicate how much time you have left. a timer will go off at the end of your time and i ask you to be mind of the timer. and quickly wrap up your testimony. before we begin, your oral
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testimonies, i would like to swear in the witnesses. i will call each of your names individually to respond. would you please raise your hands. do you solemnly swear to affirm that the testimony you give before this committee in the matter now under consideration will be the truth, the whole truth, and nothing but the truth so help you god. mr. tenney. mr. tenney: i do. chair waters: mr. griffin. mr. griffin: i do. ms. waters: mr. plotkin. mr. plotkin. mr. plotkin: i apologize. i do. chair waters: mr. huffman. mr. huffman: i do. ms. waters: mr. gill. gloip i do.
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chair waters: miss shupe. ms. schulp: i do. chair waters: all witnesses answered in the affirmative. we'll begin with testimony. you are recognized for five minutes toer for your tim. >> chairwoman waters, ranking member, my name is vlade tenney chief executive officer and co-founder of robinhood. thank you for the invitation to speak about robinhood and the millions of people we serve. almost eight years ago i founded robinhood i believed then and now that the financial system should be built to work for ever not just the select few. we dreamed of making investing more accessible, especially for people without a lot of money. it's a powerful wealth creator but the -- chair waters: [indiscernible].
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mr. tenney: mr. mchen cri: the witness has the tune to give her own testimony. chair waters: you are not recognized, please go right ahead. [indiscernible] mr. tenney: we created robinhood to economically empower all americans by opening financial markets to them. i was born in bulgaria, a country with a financial system that was on the verge of collapse. at the age of 5 i immigrated with my family to america in search of a better life. i invested all of america has to offer and robinhood's mission to demock doctor advertise as financial for all has a special significance for me. it allows people from all backgrounds to invest with no
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account minimums and zero commissions. contrary to some very misleading and highly uninformed reports, we see evidence most of our customers are investing for the long term with futures like fractional chairs, dividend reinvestment, recurring investments, our customers can start with small amounts and grow their investment in blue chip stocks. we recognize the responsibility that comes with helping people. we'll continue to enhance our educational platform to help customers no matter where they are in their financial journey. hundreds of free educational resources are available to everyone on our learn website right now. while markets, this helps means our business model is working for everyday americans. the total value of our customer's assets on robinhood could be the amount of money they deposited with us has over $35 billion.
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this tells 3450e our business model is working for everyday americans. the robinhood community, many people save to pay car loans, reduce student loan debt, meet their bills, save for the future. and we are proud to serve them. you invited me today to discuss the events of last month and i welcome the opportunity. in late january many brokerage firms saw massive increase in trading activity in a handful of stocks. prices were moving dramatically day-to-day and hour-to-hour. one specific day, january 28, there was an unprecedented event. despite the trading activity and volatility meant that robin's security securities had to hold the line and post additional firm capital as collateral to support our clearing-house deposits. to put it in sperspective, on january 28, our daily deposit requirement was 10 times more than on january 25. as a result, robinhood
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securities along with many other firms are temporary trading restrictions on certain security. we began allowing limited bias of these securities the following day and since lifted the restrictions entirely. there are two points i want to make clear about these temporary restrictions. first, robinhood securities put the restrictions in place in an effort to meet increased regulatory deposit requirements. not to help hedge funds. we don't answer to hedge funds. we serve the millions of small investors who use our platform every day to invest. second, robinhood immediately secured additional funds all together through capital raising and other measures, we increased our lick bidity by more than $3 billion to cushion ourselves against clarl requirements and market stress in the future. despite the unprecedent market conditions in january, at the end of the day what happened is unacceptable to us, to our customers, i'm sorry and i
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apologize. please know that we are doing everything we can to make sure this won't happen again. and i want to highlight one more thing, the existing two-day period to settle a trade exposes investors and industry to unnecessary risk. there is no reason why the greatest financial system in the world cannot settle trades in real time. i believe we can and should act now to deploy our intellectual capital and our engineering resources to move to real time settlement. together we can solve this. before i close i want to sincerely thank the millions of customers who continue to use robinhood to access the markets every day. we are grateful and committed to you. members of the committee, i appreciate the opportunity to answer your questions. chair waters: mr. griffin, are you now recognized for five minutes to present your oral
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testimony. mr. griffin: chairwoman waters, ranking member mchenry, distinguished members of the committee, thank you for the opportunity to testify today on the recent market events. u.s. capital markets are the envy of the world. our nation's ability to allocate capital to the highest use creates jobs, drives innovation, and fuels our economy. retail investors play an important role in the capital markets. about 55% of americans own stock right now. the largest market maker in the u.s. equities market executes more trade on behalf of retail investors than any other firm. as i will discuss shortly, citadel securities played an important role in meeting the needs of retail investors during the week of january 24. before doing so, i want to be federal clear, we had no role in robinhood's decision to limit trading in gamestop or any of
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the other stocks. i first learned of robinhood's trading instructions only after they were publicly announced. all of us at citadel securities are committed to the healthy functioning of the u.s. equities markets. i first participated in the financial markets as a retail investor. in the late 1980's while in college, i traded stocks and options for my dorm room. today citadel's one of the world's leading alternative investment managers, capital partners include pension complans, colleges, hospitals, research institutions, and others. in 2002 my partners and i had securities. today sit why dell securities is one of the premiere market makers. we have been a leader in using technology to transform our markets. particularly for retail investors. sit why dell securities invest
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hundreds of millions of dollars each year to serve the needs of our customers. in the last week of january, the importance of this investment was on full display. during the period of frenzied retailed equities trading, sit why dell securities was able to provide continuous liquidity every minute of every trading day. when others were unable or unwilling to handle the heavy volumes, citadel securities was there. on wednesday, january 27, we executed 7.4 billion shares on behalf of retail investors. to put this into perspective, on that day citadel securities executed more shares for retail investors than the entire average daily volume of the entire u.s. equities market. in 2019.
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it reflects the confidence of the retail brokerage community and our firm's ability to deliver in all market conditions . and the critical importance of resilient and stable systems. i could not be more proud of other team at citadel securities. my colleagues who are committed to ensuring the interest of america's retail eninvestors were served during this extraordinary period. once again i appreciate the opportunity to appear today. and i look forward to answering your questions. chair waters: thank you, mr. griffin. mr. plotkin, you are now recognized for five minutes. mr. plotkin: chairwoman waters, ranking member mchenry, members of the committee. i would like to thank you for this opportunity to share melvin
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capital's perspective on gamestop. during these unprecedented events, many of investors have experienced losses. i'm here today to share my own personal experience. the decision to trading gamestop. melvin capital played no role no those trading platform decisions. in fact, melvin close the out all of its positions in gamestop the day before the limitations were put in place. contrary to many reports, melvin capital did not bail out on these events. citadel reached out to become a new investor. similar to investments others make in our funds, it was an opportunity for citadel to buy low and earn returns for its investors in and when the funds value went up.
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to be sure, melvin was managing, but we always had margin access and not seeking a cash infusion. i'm here to testify today i grew up
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started closing out the situation at a loss. we also reduced many other positions as significant losses, both long and short, that were similar. i personally thought that would happen in january. it is now our job to earn it back. no one could anticipate these events. i have taken steps to protect our investors from this happening in the future. i look forward to answering your questions.
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chair waters: thank you. the chair now recognizes -- for five minutes. representative: thank you, madam chairwoman, mr. ranking member, honorable members of the committee. i am the cofounder and ceo of reddit. i am pleased to tell you about it. we bring community and belonging to everyone in the world.
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our community is large. we start with the platform. rules prohibit hate, harassment, bullying, and illegal activity on reddit, and they are enforced by our team of engineers, data scientists, and other specialists. this team also assures the integrity of the site to hone efforts to stay head of that actors, span, and other issues. there is the specific comment mentioned in the previous testimony. the closest we could find was a single comment. it is not tolerated on reddit. we will come of course, investigate any further claims of hate speech. reddit initially uses a
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governance structure. for the aforementioned policies and teams, they represent the governance. all communities are created by users that we call moderators. they are subject to the rules to be as strict as they like as long as they are not in conflict with platform-wide policies. we enforce them. moderators are not paid employees. although users are passionate about their communities, they have decisions. the members of each community contribute to the content and the ranking of it, up and down. unlike other platforms where submission has an audience, know how famous the author, it starts at zero. there are explicit rules of their community but also the rules that define their culture. this approach has helped create
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authentic communities online. the specific community we would like to talk about today, to understand wall street bets is one of the many finance communities on reddit. this features higher risk and higher reward than in other financial communities on reddit, such as personal finance, investing, and financial independence. they have self-deprecating jokes and memes, at times crass language, all reflected. if you find any time there, you will find depth to the community. they are just as quick to support a fellow member after a big loss as they are to celebrate after a big gain. the community, in general, and this community holstered bets and banded together to seize an investment opportunity not normally accessible.
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defending all retail investors against the criticism of the establishment. they faced a surge in traffic in a new users. our role in this moment was to keep wall street bets online. working around-the-clock the clock, we scaled our infrastructure, and we acted as diplomats to help resolve conflicts in the wall street bets leadership. to determine whether bots or agents or foreign actors played a role. checking the activity on wall street bets, its moderation tools were working as expected. federal and state regulators, we believe the community was bound by our own policies. to conclude, i would like to reiterate our communities like wall street bets. it may look chaotic from the
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outside, but the fact that we are here today raises important issues about opportunity in our financial system. i am proud of reddit. thank you. 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,
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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
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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
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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 --
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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.
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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.
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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
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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 --
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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
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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
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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
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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]
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>> 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
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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
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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?
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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
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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
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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
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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
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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,
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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.
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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]
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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.
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-- 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 certainldo 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
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. 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
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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:
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[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
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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
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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
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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
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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
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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
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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.
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>> 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
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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
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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
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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
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-- 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.
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giving people what they want, they don't consider that. they know that investing is furious and investing in all the educational tools. less than 3% aro on margin. -- less than 3% on margin. >> my question is how you balance disclosures. >> we make lots of disclosures.
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we don't provide advice on what customers should or should not invest in. >> [indiscernible] >> 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
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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?
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>> 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
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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
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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.
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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
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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
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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
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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 business. chairwoman waters: mr. scott is recognized for five-minute. >> -- five minutes. >> let me just say, chair lady, that the people of this country appreciate you. this is a threat to the future of our financial system and we
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have got to get to the bottom of it. let's go through this. [indiscernible] figures moving markets set the figures higher and higher. what does robin hood have in place to monitor what happened
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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.
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>> 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
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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
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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.
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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.
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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.
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>> [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
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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.
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>> 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
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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
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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.
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>> 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.
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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
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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
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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.
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>> 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
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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
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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
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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?
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>> 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
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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
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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
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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.
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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
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, 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
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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
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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
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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
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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 inveors 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
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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
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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
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be beneficial to retail investors in the united states? >> thank you, congressman. i don't believe it would. chairwoman waters: t >> you can watch this hearing on gamestop in its entirety, and other events related to robinhood in the stock market, anytime online at attorney general anomaly merrick garland testifies monday at a confirmation hearing before the senate judiciary committee. live coverage begins at 9:30 a.m. on c-span. >> the covid-19 relief package was a topic on the sunday news programs. the house may vote on the legislation later this week. there is what representatives had to say about the bill. >> there's over $1 trillion in
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relief package money that is still available across the board without this bill. this almost $2 trillion bill, that even larry summers said, would wreck our economy. this idea that washington should be giving out 100 plus million dollars of new money to schools and not require them to reopen, what does that say to the children who are demanding to go back to school? >> that bill that looks like it will pass, without republican support, it seems to have overwhelming support across the country. 68% support the bill, 24% opposed. biden may not have any republicans in congress on board, but according to the polling, he must have a lot of republicans across the country in favor of what he's trying to do. >> you don't have to be a good pollster in washington and asked, would you like the government to send you a $3500 check.
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of course the answer will be yes. if it's at, do you want us to borrow the money from your children, because that's what this is, the answer might be different. especially if you told them there was over $1 trillion of money unspent from previous relief bills that were bipartisan. the money is still sitting in a bank account and we will pass one point $9 trillion of additional spending to bailout failed states to raise the minimum wage. what does that have to do with covid? it should be focused on helping families who are struggling, not bankrupting our children. >> the president came out strong early on saying he wanted a $15 minimum wage in this bill. he has been fairly consistent on that. i know there are questions about whether or not the senate can get it through, but this $15 minimum wage increase would mean 30 million americans would get a raise, one million americans would come out of poverty, and 30% of those minimum wage
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workers are black, 25% are latin at, it is essential that we do it. i believe the senate will do it. >> you said he was consistent, but he also said he does not think it will end up in this bill. >> lets see. he is speaking as he is thinking about whether or not it's going to make it through, according to the parliamentarians rule. but i have been speaking with senator sanders regularly, with speaker pelosi, with the white house. and if republicans could give to trillion dollars tax break to the wealthiest people and stop arctic -- and can tilling drilling -- and continue drilling in the arctic, democrats can ensure 30 million americans get a raise. >> congress is back. major business in the house is 1.9 trillion dollar covid relief package that includes an extension of unemployment
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benefits, a minimum wage hike, additional funding for individual stimulus checks, and help with state and local governments. floor action could begin as early as thursday. final vote on friday or over the weekend. democratic leaders aim to have the bill on the president's desk before march 14, which is when current unemployment benefits expire. the senate ends the early part of the week on cabinet nominations. monday and tuesday they will on the nomination of lyndon thomas greenville to be the nomination. looking ahead, the senate would take up the covid relief package after house passage under reconciliation, which requires a simple majority to pass, and does not allow filibusters. watch the house live on c-span, the senate live on c-span2. >> q&a is next on c-span. author and history professor pineal joseph talks about his


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