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Robinhood CEO Testifies: ‘We Don’t Answer to Hedge Funds’

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Robinhood’s decision on Jan. 28 to restrict buying in GameStop and other so-called meme stocks heavily traded by retail investors was driven by regulatory requirements, and hedge funds Melvin Capital and Citadel Securities played no role in that decision, Vlad Tenev, CEO of Robinhood Markets, told lawmakers Thursday.

“Robinhood Securities put the restrictions in place in an effort to meet increased regulatory deposit requirements, not to help hedge funds,” Tenev told members of the House Financial Services Committee. “We don’t answer to hedge funds.”

Both Kenneth Griffin, CEO of Citadel LLC, and Gabriel Plotkin, CEO of Melvin Capital Management, also testified before the committee that they had no role in Robinhood’s decision to restrict trades.

“I want to be perfectly clear: we had no role in Robinhood’s decision to limit trading in GameStop or any of the other meme stocks,” Griffin said, adding that he “first learned of Robinhood’s trading restrictions only after they were publicly announced.”

Melvin Capital “played absolutely no role in those trading platform decisions,” Plotkin added. “In fact, Melvin closed out all of its positions in GameStop days before the platforms put those limitations in place. Like you, we learned about those limits through news reports.”

Robinhood receives payment from a number of market makers in exchange for order flow; the largest share by far of these payments comes from Citadel. In the fourth quarter of 2020, Robinhood received $196.5 million from Citadel in payment for order flow , according to The Economist.

In her opening remarks, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., said she held the hearing to find out “how each of the witnesses here today, and the companies they represent, contributed to the historic trading events in January.”

The recent market volatility tied to GameStop and other stocks “has put a national spotlight on institutional practices by Wall Street firms, and prompted discussion about the evolving role of technology and social media in our markets,” Waters said.

The trading event has also “illuminated potential conflicts of interest and the predatory ways that certain funds operate, and they have demonstrated the enormous potential power of social media in our markets,” Waters continued, and have “raised issues involving gamification of trading, potential harm to retail investors, and the business models of apps with retail investors as their users.”

‘Completely Unprecedented Event’

While many brokerage firms saw a “massive increase” in trading activity in a handful of stocks in late January, Tenev said, “one specific day, Jan. 28 [there was a] completely unprecedented event — the spike in trading activity and volatility meant that Robinhood Securities, our clearing broker, had to hold the line and post additional firm capital to support our clearinghouse deposit demands.”

To put it in perspective, he continued, “on Jan. 28, our daily deposit requirement was 10 times more than on Jan. 25. As a result, Robinhood Securities, along with many other firms, placed those temporary trading restrictions on certain securities. We began allowing limited buys on these securities the following day and we’ve since lifted the restrictions entirely.”

Steve Huffman, co-founder and CEO of Reddit, told lawmakers that the Reddit forum WallStreetBets — which experienced a surge in traffic — “specializes in higher risk, higher reward investments than what you might find in other financial communities on Reddit.”

Reddit, Huffman said, “will of course, cooperate with valid legal requests from federal and state regulators. That said, we do believe this community was well within the bounds of our own policies.”

‘Roaring Kitty’ Defends His GameStop Push

Keith Gill, the former MassMutual broker who’s set to testify Feb. 26 before the Massachusetts Securities Division over his GameStop activity on YouTube, where he was known as Roaring Kitty, testified at the hearing that “it is true that my investment in that company multiplied in value many times.”

However, Gill continued, “A few things I am not: I am not a cat, I am not an institutional investor, nor am I a hedge fund. I do not have clients and I do not provide personalized investment advice for fees or commissions. I’m just an individual whose investment in GameStop on posts in social media were based on my own research and analysis.”

Gill also told lawmakers that in 2019, he accepted “a marketing and financial education job” at MassMutual.

“My job was to help develop financial education classes that advisors could present to perspective clients. I’m not a stockbroker or financial advisor. I did not talk to clients and I did not recommend stocks for them to buy,” Gill said.

Before and after joining MassMutual, Gill continued, “I studied and followed stocks. One of those was GameStop. Early June of 2019, the price of GameStop declined below what I thought was its fair value. I invested in GameStop in 2019 and 2020 because as I studied the company I became more and more confident in my analysis.”

Gill stated that his conversations about GameStop on social media with other individual investors “were no different from people in a bar or on a golf course or at home talking or arguing about a stock. Hedge funds and other Wall Street firms have teams of analysts working together to compile research and analyze shares of companies. Individual investors do not have those resources. Social media platforms like Reddit, YouTube and Twitter are leveling the playing field.”

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