Why congress says Robinhood culpable, not Reddit

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We didn’t learn anything new at today’s hearing, but the focus was certainly on the gamified trading tool, rather than the R/WallStreetBets traders.

Vlad Tenev, Robinhood’s CEO, was very much in the hot seat at today’s hearing before the House Financial Services Committee on January’s market volatility.

None of the members were especially interested in putting the screws on Reddit CEO Steve Huffman, and all seemed to give Keith Gill the same props as the rest of us.

These aren’t the market manipulators you are looking for

Gill, in all honesty, was the most courteous person involved, presenting his remarks by saying, “Some things I’m not: I’m not a cat and I’m not an accredited investor.” Gill, who really began this chain of events by posting on his investment in GameStop in June 2019, also doubled his view that GME is still a strong buyer today at current rates. This is despite the fact that the trade in wild GME has drawn criminal investigation.

The lack of oversight of Gill and Huffman is a major cause of widespread concern that the events surrounding the explosive trading of GameStop (GME) shares at the end of January will prompt an investigation into the role of social media sites in possible market manipulation.

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This comes only as the House Antitrust Subcommittee reported today that further hearings will be held to scrutinise the major players in social media. Reddit appears to have been flying under the radar for now.

Congressman Warren Davidson, who sits on the committee, noted this unusual area of consensus and said:

“I was hopeful right out of the gate because early on in the news cycle AOC was sticking up for the Reddit users, saying these people should have a right to trade. And then Ted Cruz, on the other end of the political spectrum said, ‘well, we agree.’”

Tenev’s business model

While, generally speaking, Republicans were more lenient than Democrats in discussing Robinhood’s actions, and in particular the contentious shut-off of buying but not selling GME and other high-volatility stocks, everybody needed Tenev’s answers.

The essence of Robinhood’s business model, which is focused on the selling of order flow, while promoting itself as commission-free, came under mass scrutiny, as did its reliance on a $3 billion capital infusion to meet collateral requirements.

“I believe a vulnerability was clearly exposed in your business model,” said Congressman Anthony Gonzales while questioning Tenev. “We just can’t live in a world where my constituents can have their shares liquidated if you can’t make a capital call.”

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Many have called for Robinhood’s claims to be busy democratising finance. Tenev constantly pushed the figure of $35 billion as the total income of Robinhood users, which Rep. Jim Himes said, “You and anyone else schooled in finance know that without a rate of return it is worthless.”

But while today’s hearing showed a lot of animosity to Tenev, it wasn’t all that educational.

Despite President Maxine Waters’ admonition that “This is not political theatre at all,” there seemed to be no concerted sense of solutions to the epic trade that fueled GameStop’s (GME) meteoric rise at the end of January.

Real-time solution?

Some proposals, including from Tenev himself, as well as Davidson, were that the situation would not have arisen if the U.S. had trade that resolved the day, rather than two days later—T-0 rather than T-2. Tenev noted that “the current two-day period for the settlement of trades exposes investors and the system to risk.”

Kenneth Griffin, CEO of Citadel, described as “the world’s largest market maker,

”disputed the likelihood of a real-time system for securities trading in the next several years, saying: “The issue is everything has to work perfectly.” Real-time trading, he said, “requires that every bit of the workflow is perfectly synchronized across the parties.” Davidson disagreed, saying “Clearly in your business the technology exists for trading firms that are engaged in high-frequency trading.”

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Davidson has acknowledged the potential role of blockchain. The ability of protection tokens to settle problems with intermediaries and brokers has been one of the long-promised advantages of blockchain, although this is changing.

The hearing today was just the beginning, said Chairwoman Waters. She said the committee wished to hold two more witnesses.


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