“So who is losing?” Asked Himes. “The private investor.”
The hearing before the House Financial Services Committee underscored how the GameStop episode sounded the alarm to legislators and regulators about whether the complex structure of the market serves average investors or is fraught with conflicts of interest and prone to manipulation.
The video game retailer’s share price rose more than 400 percent in late January. This was one of several companies whose stocks had soared in a bizarre buying frenzy apparently tied to a group of small investors on the Reddit social media website. The turmoil caught the attention of policymakers, especially after Robinhood suddenly restricted trading in GameStop and certain other stocks and asked the app to spit $ 3 billion to keep its customers’ deals.
Lawmakers focused on what is known as “paying for the flow of orders,” the practice of selling customer orders to large trading companies that has caught attention thanks to the Reddit-fueled surge in the stocks of troubled companies, a stock buying frenzy took about a week.
But both Robinhood and Citadel have vigorously defended their business deal aimed at cutting costs for retailers. The profit Robinhood makes from selling customer information enables the broker to make enough money not to charge commissions for its services, Tenev said.
“When we started, people didn’t even think there was enough wiggle room to get this business up and running, but we were lucky that it worked and that it worked for our customers,” he said.
Citadel founder Kenneth Griffin, who also operates a separate hedge fund, described the purchase order flow information as “a long-standing, transparent and regulated practice” and the main reason why private investor fees have fallen.
Brokerage fees weren’t the only problem legislating on. Other topics of discussion included collateral requirements for brokers, whether the speed with which business is done is causing problems, and even whether the retail buying boom in the US is a national security risk as China tries to attract similar investors with its own apps .
This was a primary concern from Rep. Lee Zeldin (R-N.Y.), Who pointed out how Webull of China infiltrated Robinhood’s user base during the stock frenzy.
Zeldin said it is possible for Chinese financial firms with ties to the ruling Communist Party to obtain “personally identifiable information or other user data” from US-licensed subsidiaries. He said he asked the Treasury Department about the potential national’s security concerns.
Much of the hearing, however, focused on potential conflicts of interest emanating from brokers who sell order information to “market makers” like Citadel, who, according to Griffin, handle more than 40 percent of total retail volume.
Committee chairman Maxine Waters pointed out a $ 65 million settlement Paid by Robinhood in December to settle SEC fees that failed to disclose millions in profits from sales of client orders to trading companies.
The SEC concluded that Robinhood’s entitlement to “commission-free” trades hides the higher cost of selling client trades for high fees to other brokers. “In large part because of the unusually high payment for order flow rates, Robinhood customers ‘orders were fulfilled at prices below other brokers’ prices,” the SEC said.
According to the SEC’s ruling, the inferior trading prices deprived customers of $ 34.1 million, even after accounting for the savings from not paying a commission.
“Is it your testimony … that this conflict of interest is in the best interests of your customers?” Waters asked Tenev. She also said Citadel’s business strategy “was deliberately designed to undermine transparency and skim the profits of corporations and other investors”.
“Compliance with legal regulations is the focus of our actions. We made mistakes in the past, “Tenev countered before Waters switched him off because he didn’t give a yes or no answer.
Tenev argued that by executing their clients’ orders through companies like Citadel Securities with more sophisticated technology that can trade faster, these clients are getting more than $ 1 billion in improved prices compared to what they would normally have received would have.
But Rep. Bill Foster (D-Ill.) Said that number did not measure whether customers could have gotten better prices from other brokers who also use high frequency traders.
“It’s very easy to make paying for the order flow really scary,” said Foster. “They’re basically selling a list of groups to the sharks.”
“On the other hand, you are making part of an argument that this can be positive for consumers,” he added. “However, in order for a positive result to be achieved, they must be able to compare apples to apples.”
After hours of witness, the legislature had not drawn any political conclusions on the matter. But Republicans argued all day that the trade fiasco shouldn’t lead to a push for more regulation until lawmakers and the SEC do more investigation.
“My general view here is that no matter how you try to regulate it, you are not going to put technology back in the box. You won’t hold back investor interest no matter how curious you want it to be, ”said Rep. Patrick McHenry (R-N.C.), The committee’s chief Republican. “The population is there, and no matter how stupid the Washington politicians think the average investor is, they are much sharper than they appear.”