Last Friday, the House Committee of Financial Services called upon Robinhood and Citadel CEOs Vlad Tenev and Ken Griffin to testify before Congress for restricting trading of GameStop stock on the Robinhood app.
Following the immense stock price surge of GameStop stock fueled by “amateur” traders on an infamous Reddit subforum, WallStreetBets, the zero-fee trading firm was criticized for its action to halt further purchases of GameStop on its platform. Branded by their mission to “democratize finance for all” and believing that “everyone should have access to the financial markets,” the company faced major backlash on their attempt for market regulation and hypocrisy. Not only that, over 90 investors have filed federal lawsuits claiming that the app’s actions were “unlawful and unfair,” according to CNBC news. In response to the alleged accusations, Tenev apologized for his firm’s actions stating, “To our customers, I’m sorry, and I apologize. Please know that we are doing everything we can to make sure this won’t happen again.”
Despite apologizing for the firm’s restriction of trading volatile “meme stocks,” Tenev continued to defend Robinhood’s business model of payment for order flow (PFOF). PFOF is a type of algorithmic flow in which, instead of sending one’s market order into the exchange, the broker sends the customer’s trading data (order flow) to a high-frequency trading firm (in this case, Citadel). The high-frequency firm then purchases the shares right before the customer and then sells them back to the customer for a fractional difference. In perspective, every time that Robinhood sells customer data to Citadel, they profit off of the difference, allowing for the ability of no-commission trades. According to CNBC, both Tenev and Griffin have stated that this also allows for “innovation in the industry.”
During the hearing, lawmakers also took it as an opportunity to dig deeper into Citadel controversies about whether to allow taxation for financial transactions. Griffin and Congresswoman Rashida Tlaib battled it out for a right answer in this fiery argument. According to CNN, Griffin states, “We firmly believe a financial transaction tax would injure Americans trying to save for retirement.” In response, Tlaib attacked with, “Let’s not gaslight the American people. Y’all will be fine with the tax … our folks are tired of bailing you all out when you screw up.”
After the hearing, Tenev admitted to “always improving,” following with “We’re not going to be perfect. And we want to improve and make sure we don’t make the same mistakes twice.” As controversial as a firm that Robinhood is, Robinhood is continuing to democratize the trading area, despite all of the holdbacks.
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