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Robinhood’s move to temporarily restrict the purchases of GameStop and other very volatile shares at the end of January was the overwhelming focus of the hearing of today’s House Committee on Financial Services.
Robin Ten CEO Vlad Tenev said during the trial that extreme volatility in shares that led to Robinhood’s restriction was a “five sigma” event with a chance of ‘1 to 3.5 million’. This made the situation virtually impossible for the company to plan ahead, Tenev said. “In the context of tens of thousands of days in the history of the US stock market, an event of 1 to 3.5 million is basically unmodelable.”
As we discussed earlier, the huge volatility of GameStop and other so-called ‘meme stocks’ last month means that Robinhood was suddenly forced to deliver much more collateral to the stock clearing houses that process the operations. Tenev said Thursday that these collateral obligations increased tenfold between Jan. 25 and Jan. 28 as GameStop rose from $ 76 a share to more than $ 347, and then back to $ 193.
“Despite unprecedented circumstances, this is what is unacceptable to us,” Tenev said. “I’m sorry for our customers, and I apologize. We are doing everything in our power to ensure that this does not happen again. “
Where’s the money?
Tenev has repeatedly stated that Robinhood has never had a liquidity issue regarding the coverage of the actual positions of its users. But the company did not have immediate capital to cover the collateral requirements, which meant that the only alternative was to temporarily restrict the sale of these shares until it could raise more funds (or until the shares became less volatile).
Some members of the House Financial Services Committee were not impressed with the dispute over what “liquidity” means for Robinhood. “Your customers wanted to buy the stock,” said Rep. Said of Taylor (R-TX) at one point. “You would not allow them to do that because you do not have the capital to allow it.”
Tenev was also scrutinized for not clearly and unequivocally communicating the reasons for these restrictions to customers. Rep. Carolyn Maloney (D-NY) noted that Robinhood’s initial blog post on January 28 announcing the restrictions contained ‘no disclosure on capital requirements’ and only ‘vague language on the restriction of trade’. The first impression, she implied, was that Robinhood ‘[making] keep up the rules as you go along. ‘
As Robin was forced to stop trading, he attracted more than $ 3.4 billion in extra investment, which, according to Tenev, “hinders the company from market volatility and further black swings”. And while apologizing, Tenev also said that ‘other businesses have done similar things to restrict sales. [of these volatile stocks]indicating that this is a systemic problem rather than a unique Robinhood problem. ‘
But Representative Alexandria Ocasio-Cortez (D-NY) pointed out that “when Robinhood banned customers from buying additional shares of certain shares, other brokers simply adjusted margin requirements for those shares.” According to her, this could mean that ‘the issue is not a clearinghouse, but that you simply did not manage your own margin rules or did not manage your own internal risks.’
Some in the committee also focused on Robinhood’s business model, which generates a majority of its revenue by selling its “order flow” to market makers such as Citadel (which then scraps some profit from the price improvement they can offer over the exchange. ). “If you do not pay for it, it is not free,” Representative Brad Sherman (D-CA) said of Robinhood’s commission-free trade. ‘You are the product, someone else [i.e., Citadel] is the customer. ‘
“If removing revenue from order flow payments would remove the commission-free trade, does that not mean that trading on Robinhood is not actually free to begin with, because you are just hiding the cost?” Ocasio-Cortez asked in a few pointed questions.
Regulate or re-regulate?
While Tenev apologized for the mistakes Robinhood made, he also blamed a bit on what he calls outdated and morbid trade arrangements, which put a lot of pressure on the system. According to the current T + 2 timeline for stock settlement, market makers actually have two full days to officially complete a trade (ie transfer the shares / cash) after it has been done. If the price of a stock is particularly volatile, the clearing house needs more certainty to cover the potential price changes that may occur on either side of the trade in that two-day interval.
“The existing two-day trading period exposes investors and the industry to unnecessary risks,” Tenev said. “There’s no reason why the largest financial system in the world can not handle real-time transactions … If we had real-time settlement capability and infrastructure was modernized, we would not have seen similar problems.”
Citadel CEO Ken Griffin, in his testimony to the committee, no longer asked for real trade settlement. But he said loosening the rules to a one-day turnaround “would holistically reduce the risk to counterparties.” While it would be good to clean immediately or the same day, Griffin said it essentially “must do all systems … to function every day at all times with no room for error.”
Rep. Andy Barr (R-KY) pointed out through his interrogation that the current capital requirements were introduced in 2010 in the Dodd-Frank Wall Street Reform Bill. “If anyone has a problem with [Robinhood]According to William Timmons (R-SC), Dodd-Frank has to blame this excessive capital requirement that you could not meet. Well-informed legislation is somewhat responsible. “
Other members of the House, such as Rep. Rashida Tlaib (D-MI), strongly advocated for a 0.1 percent tax on financial transactions, which would discourage speculative betting on equity stocks and restrict algorithm-driven high-frequency trading. She noted that Hong Kong has implemented a tax on financial transactions that is twice as large, restricting high-frequency trading without compromising significant market growth.
But Jennifer Schulp, director of financial regulation studies at the Cato Institute, which focuses on the free market, told the committee that such taxes “often do not raise money and distort trade in an unforeseen manner. A tax on financial transactions may seem like a small imposition, but it often harms individual investors ‘long-term goals by influencing trading institutions.’
While Schulp allowed a tax on financial transactions to lower the overall volatility in the market, she added that she did not think it would have the effect in the specific case of GameStop’s recent stock movements, which are mainly driven by heavy buying driven.
Diamond hands
To represent the retailers who helped drive the GameStop bubble, the committee heard from Keith Gill, aka DeepFuckingValue on Reddit. He first invested in GameStop in 2019 (when the stock was valued at less than $ 10) and shook off the value of the stock on the WallStreetBets subreddit. “The market has underestimated the prospects of GameStop’s legacy business and overestimated the risks of bankruptcy,” he said. “I grew up playing video games and shopping at GameStop, and I plan to keep shopping there. GameStop stores offer gamers real value and real revenue to GameStop.”
Gill, who has now earned an initial investment of about $ 50 billion billion, said he still thinks GameStop is an attractive investment at the current price of about $ 40 per share. Its optimism is largely due to GameStop’s potential to pursue a more focused e-commerce strategy. “As for me, I like the stock,” he said. “I’m just as strong as I’ve ever had a possible turnaround, and I’m staying invested in the company.”
The numerous other investors who were less represented during the trial bought at or near the peak of it at the end of January, only to see their investments crumble within days. Rep. Jim Himes (D-CT) brought up the case of Salvador Vergara, who took out a $ 20,000 personal loan to invest in GameStop, only to see its stock fall by 80 percent in days. “We need to be considerate about this,” Himes said of how to handle access to retail investors to the market.
The committee also heard from Steve Huffman, co-founder and CEO of Reddit, who said that Reddit found no evidence that bots or foreign agents play a significant role in trying to inflate any shares improperly through the WallStreetBets sub-edit. not. “We will comply with the requests of regulators, but we believe the community was very much within the bounds of our own policies,” he said.
“It’s a real community,” Huffman continued on WallStreetBets. “The self-deprecating jokes, memes and scathing language sometimes reflect this. There is a significant depth in the community based on the affinity that users show for each other.”