Robinhood CEO to Testify in Front of Congress After GameStop Stock Frenzy
Last week, volatility in the stock market involving securities such as GameStop and AMC made national headlines. Soon after, popular investment app Robinhood found itself under public scrutiny because of the role it played in the controversial GameStop scandal. The market volatility has caught the attention of lawmakers so much so that Robinhood CEO Vlad Tenev is set to testify before Congress' Financial Services Committee on February 18th.
The scrutiny of the company comes after Robinhood limited its customers’ buying capacity on certain stocks. Robinhood blocked retail investors from trading volatile stocks including GameStop, Blackberry, American Airlines, Nokia, and other trending companies that have slowly been on the decline. The sudden interest and continual purchase of the stocks were being pushed by Reddit forum r/Wallstreetbets which in turn led to the volatility the stocks saw last month.
Robinhood Under Mounting Lawsuits
Immediately following the company’s decision to pause trading on these securities, a class-action lawsuit was filed in New York against the company by Robinhood user Brendon Nelson. Since that filing, at least 30 civil lawsuits have been filed against Robinhood. Retail investors claim that the platform was manipulating the market by keeping retail investors from purchasing more stock while Wall Street investors were still able to both buy and sell.
In a rare display of unity, Republican and Democratic lawmakers came together to criticize the app's decision to restrict trading on retail investors but not on Wall Street traders. Along with politicians, many popular figures across all industries have come out in defense of retail investors.
The most notable has been Barstool Sports founder David Portnoy, who has called for app executives to face jail time. In an interview with Fox Business, Portnoy explained the hypocrisy of the company’s actions in relation to their mission of making access to the markets easier for everyday investors. “They basically stole money from their own client,” Portnoy said. He explains that by restricting trading, the platform allowed the stock to crater, costing retail investors opportunities that would have otherwise been there. Portnoy goes on to add that Robinhood's actions were “flat out criminal.”
Portnoy does not shy away from the reality that Reddit had a major influence in the market. The surge in the stock prices did not reflect the fundamental status of the companies traded, rather it reflected the collective efforts of Reddit users who drove the price up intentionally. Portnoy also highlights that the manipulation of the stock displayed by Reddit users is the same type of market manipulation that Wall Street professionals have been utilizing for years. Like many critics of Robinhood's decision, Portnoy argues that it's unfair for retail investors to have the rules of investing changed on them solely because Wall Street hedge funds were on the losing end of the deal.
Conflicts of Interest Brought into Question
Robinhood defended its position of limiting the trade of certain securities by saying that they had to “operate within a regulatory environment.” The company says they had to put limits on these securities so that they could have capital in order to meet the margin requirement at the depository Trust & Clearing Corporation DTCC. They explain that the capital needed did not exist because users were buying options in droves.
Not all players in the game, especially retail investors, are buying this explanation. Many have questioned whether or not Robinhood stopped trades because of relationships that existed among hedge fund Citadel, Citadel Securities, and Robinhood.
Maxine Waters, (D- Calif), who is chair of the House Financial Services, shared the following, "I am concerned about whether or not Robinhood restricted the trading because there was collusion between Robinhood and some of the hedge funds that were involved with this.”
The questions that will likely be asked in the hearing will regard the apparent conflict of interest that may have prompted Robinhood to stop the trade. Hedge fund Citadel and the trading firm Citadel Security have both denied any responsibility in Robinhood’s decision to stop trading.
The chair of the Financial Services Oversight Committee, Rep. Al Green (D-Texas), has also raised questions about the conflict of interest between Citadel Security and Robin Hood. Representative Green has shared that he wants to know "whether or not there was something about this relationship that caused Robinhood to act, or did Robinhood act because of reasons associated with its liquidity."
Questions of SEC Regulations Arise
The volatility of Gamestop and other securities has prompted the question of whether or not the SEC should look at regulations in regards to retail investors. Former SEC trial counsel, Howard Fischer shared with investment news, “The less likely there is fraudulent intent behind , the less likely the SEC is to intervene, unless they really think this damages the integrity of the market.”
Fisher brings up a point that is on the minds of many. Wall Street investors have always interacted with the markets in ways that continuously benefit them; added regulation, however, is seldom proposed. When retail investors have a profound impact on certain stocks, it appears that calling for regulation is unfair at face value just because small-time investors are winning with the same rules that hedge funds have always won with.
Then there is the question of whether or not these Reddit users actually manipulated the market. While their actions were intentionally rooted in their loyalty to the company GameStop, the intent quickly became to keep the hedge funds who bet against GameStop from profiting off the company's decline. By regulating investment strategies like that of Reddit users, some have argued that similar regulations should be in place against the hedge funds that use similar tactics.
It is not yet clear if other institutions have been asked to testify in front of Congress. While Robinhood made national headlines for its decision to stop trading these securities, it wasn’t the only brokerage to do so. Interactive Brokers along with TD Ameritrade also restricted trading on these volatile stocks. It is unclear whether executives from these brokerages will also be asked to testify in front of Congress. It is unlikely that they will, however.
