The Reddit Rally saga made its way to Capitol Hill on Thursday with key players like billionaire Ken Griffin getting reamed out by lawmakers probing whether small investors are given a fair shake in investing.
“You are doing a great job of wasting my time,” Rep. Brad Sherman, a California Democrat, blared at Griffin amid questioning over whether online brokers like Robinhood get the best deals for their clients by sending customer trades through Citadel.
Griffin — worth an estimated $15 billion, according to Forbes — looked startled by the outburst before defending his company’s relationships with the no-fee trading apps like Robinhood.
“We simply play by the rules of the road,” said Griffin. “Payment for order flow had been expressly approved by the SEC, it is a customary practice within the industry.”
Citadel executes the trades and pays for the order flow, which has contributed to the rise of no-fee trading. But critics say the model creates a perverse incentive for Robinhood to encourage users to trade frequently rather than buying and holding, which financial advisors tend to recommend for amateur investors.
The closely watched hearing before the Financial Services Committee also pitted angry lawmakers against Vlad Tenev, CEO of no-fee trading app Robinhood, as well as retail trader Keith Gill and Reddit cofounder Steve Huffman.
All four men were key players in an unprecedented market rally that led to shares of GameStop rising more than 1,600 percent last month. They took heat on a dizzying array of issues, including Robinhood’s controversial halt on trading and whether whether “free trades” via Citadel are actually free.
Tenev of Robinhood found himself grilled over the company’s controversial move to suspend buying in popular stocks like GameStop as shares in small cap stocks popular with traders using Reddit’s WallStreetBets forum spiraled to dizzying heights.
“I’m sorry for what happened. I apologize. I’m not going to say that Robinhood did everything perfect,” he said, adding that no hedge fund influenced its decision-making.
Griffin also sought to discredit theories that Citadel pressured Robinhood to cap buying in stocks that hedge funds were betting would decline in value. One such fund was Melvin Capital, which received a $2.75 billion capital infusion from Citadel and hedge fund Point72 Capital as it’s short positions were being squeezed by Reddit buyers.
“I want to be perfectly clear: we had no role in Robinhood’s decision to limit trading in GameStop or any other of the ‘meme’ stocks.”
Playing a less prominent role in the hearing was the colorful Gill, wo used his online personas “Roaring Kitty” on YouTube and DeepF***ingValue on Reddit to tout GameStop. He prompted some chuckles on social media by trading in his trademark kitty cat t-shirts and the red bandana he often wraps around his head for a suit and tie.
Gill also drew attention on social media for sticking a “Hang in there” cat poster on the whiteboard behind him, which some observers took as a sign of his confidence in GameStop.
The video retailer’s shares closed down 11.43 percent to $40.69 on Thursday, down from a high of $483 a share in late January.
Despite being a fact-finding mission, little new information emerged from the hearing. One of the more salient moments came during questions over whether Robinhood had the cash on hand to meet its capital requirements when trading on GameStop reached a fever pitch on Jan 28.
Tenev and his team were informed by their clearinghouse that morning that it was facing a shortfall of around $3 billion to settle the trades on its account, a huge increase in just a matter of days.
When asked by Ohio Republican Anthony Gonzalez whether Robinhood had the collateral on hand at the time, Tenev responded “At that moment, we would not have been able to post the $3 billion of collateral.”
He said Robinhood managed to raise $1 billion in an emergency funding round and calmed its clearinghouse by limiting the volume of meme stocks being bought on the platform, eventually paying about $700 million to settle the matter.