Robinhood, CEO of Reddit to testify at GameStop before the congress

The Financial Services Committee of the US House of Representatives has scheduled a hearing on ‘recent volatility in the market in which GameStop is involved’ [Corporation (GME)] shares and other shares. ‘The trial will be held virtually at 12 o’clock Eastern Time on Thursday, February 18, 2021. Among those called to testify are Vladimir Tenev, CEO of online trading company Robinhood Markets, Inc., and Steve Huffman, CEO and co-founder of the social media community and online forum site Reddit.

The chair of the committee is Representative Maxine Waters, D-Calif. The press release announcing this hearing reads: “Since becoming chairman of the House Financial Services Committee, Congresswoman Waters has transformed the committee to focus its agenda on equity, consumer and investor protection, and “liability for large financial institutions. She made it a practice. to convene committee hearings with CEOs of large financial institutions and companies to hold them accountable.”

Previous statement by Representative Waters

Representative Waters announced the following statement on January 28, 2021 following the GameStop stock trading. In it, he hedges funds as an enemy of ordinary American savers and investors:

“Hedge funds have a long history of predatory behavior and the behavior is completely indefensible. Private funds that prey on the pension funds of hard-working Americans must be discontinued. Private funds that do predatory sales to the detriment of other investors must be discontinued. Private funds involved is at vulture strategies that hurt workers should be stopped.

“The pursuit of predatory and manipulative actions is the responsibility of legislators and security regulators charged with protecting investors and ensuring that our capital markets are fair, orderly and efficient. As a first step in exploiting these abusive practices, i a trial to examine the recent activities around GameStop (GME) stocks and other hit stocks, focusing on short selling, online trading platforms, gamification and its systemic impact on our capital markets and retail investors.

“We need to deal with hedge funds whose unethical behavior has directly led to the recent volatility in the market, and we need to examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price. . ”

Robinhood and payment for order flow

In addition to hedging hedge funds for criticism, it is likely that Vladimir Tenev, CEO of Robinhood, will get hostile interrogation about his company’s actions in the GameStop case. The committee’s memorandum notes that order flow payment (PFOF) has been the main source of revenue since the inception of Robinhood, and that its decision to restrict trading in GameStop and other stocks may have been influenced by its business ties. with investment firms trapped in short pressures on these stocks.

The committee’s memorandum also notes: “In December 2020, the SEC charged Robinhood with making misrepresentations about the firm’s receipt of payment for order flows and for failing to fulfill its duty to ensure that customer trade is in the best possible position. “Conditions were executed. In order to meet its best execution obligations, the total losses of more than $ 34 million led to customers. Robinhood was censored and agreed to pay $ 65 million to complete the action.”

Robinhood and gambling addiction

In addition to concerns about the consequences of payment for order flows, the committee also notes that “some attribute the current controversy to ‘gamification’ of investments and the increasing role that social media and technology play in capital markets.”

The memorandum adds: “Gamification involves tactics used to engage customers to make transactions, such as the increasing use of notices, pricing and other psychological tools and design elements to increase fast trading and short-term, instead of a more prudent Robinhood in particular is accused of using gamification to increase the use of its app, possibly to the detriment of its customers, examples of which are designed to appeal to younger users, including digital confetti to celebrate transactions, colorful illustrations and the allowance for users to improve their waiting list position for Robinhood’s cash management feature 1000 times a day. This has led to criticism that online trading platforms such as Robinhood encourage behavior similar to gambling addiction. ‘

The memorandum concludes: “Regulators have expressed concern about Robinhood’s investment platform. On December 16, 2020, regulators in Massachusetts filed a lawsuit against Robinhood for the aggressive tactics to attract inexperienced investors, the use of gamification strategies to manipulate clients, and its failure to prevent frequent outages and interruptions on its trading platform. “

Importance for investors

It is possible that the hearings could lead to additional legislation and regulations regarding the security markets, but this is by no means certain. One thing is for sure: extensive questioning about payment flow order, the incentives it creates and the extent to which Robinhood is engaged in gamification are all issues that will damage the company’s image, but not necessarily to a significant number of Robinhood’s customers or potential customers use their platform.