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House panel spars over GameStop frenzy, trading apps

House panel spars over GameStop frenzy, trading apps
© Getty/Screenshot

Democrats and Republicans on a House panel sparred Thursday over what, if anything, Congress should do in response to the GameStop trading frenzy and the technology platforms that fueled the rapid rise — and sudden spiral — in more than a dozen stocks.

Members of the House Financial Services Committee were deeply divided along party lines over whether stock trading applications like Robinhood need to be reigned in after a Reddit-orchestrated short squeeze on struggling companies roiled the market in January.

Democrats argued during Thursday's virtual hearing that the GameStop episode exposed the traps and dangers amateur traders face in the stock market, on popular online forums and in the opaque world of risky investment products.

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“Many Americans feel that the system is stacked against them, and no matter what, Wall Street always wins,” said Rep. Maxine WatersMaxine Moore WatersHillicon Valley: Biden signs order on chips | Hearing on media misinformation | Facebook's deal with Australia | CIA nominee on SolarWinds Megan Thee Stallion, Maxine Waters discuss building community, education in new interview The Hill's Morning Report - Presented by The AIDS Institute - Finger-pointing on Capitol riot; GOP balks at Biden relief plan MORE (D-Calif.), chairwoman of the Financial Services panel. “Given the losses that many retail investors have sustained as a result of volatility in the system, there are many whose belief that the system is rigged against them has been reinforced.”

Republicans, however, said Democrats were underrating the savviness of retail investors and rushing to impose rules that would limit the average American’s access to financial markets.

“Instead of shutting the American public out through new regulations, new forms of taxation, or so-called protections, let’s use this opportunity instead to side with them,” said Rep. Patrick McHenryPatrick Timothy McHenryOn The Money: House panel spars over GameStop, Robinhood | Manchin meets with advocates for wage | Yellen says go big, GOP says hold off House panel spars over GameStop frenzy, trading apps Robinhood CEO, regulators to testify at House hearing on GameStop frenzy MORE (N.C.), the panel’s top Republican.

“Americans are far more sophisticated, informed and capable than folks in D.C. give them credit for. It’s time our securities laws treat them that way," he added.

Lawmakers found common ground in peppering Robinhood CEO Vlad Tenev with questions and concerns about how his popular stock trading platform responded to the surge of GameStop purchases in late January.

As GameStop shares were near the peak of their 1,800-percent rally, Robinhood halted the purchase of that stock and 12 others targeted by users of the Reddit subforum r/WallStreetBets, prompting a furious response from many users who viewed it as a move to force the stocks to drop.

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Tenev reiterated Thursday that his company restricted purchases of certain stocks to protect customers from losses and allow the company to raise enough money to cover higher collateral requirements set by clearing houses and internal market regulators.

Both Democrats and Republicans ripped Tenev for lapses in communication amid the GameStop frenzy and failing to have enough capital on hand to ensure customers could keep buying stocks as they pleased.

“Your trading restrictions came out of the blue and your communication was not clear,” said Rep. Carolyn MaloneyCarolyn MaloneyDeJoy apologizes for mail delays while defending Postal Service changes House panel spars over GameStop frenzy, trading apps Carolyn Maloney unveils gun safety legislation package MORE (D-N.Y.), adding that Robinhood customers had “the rug pulled out from them at the last minute.”

“Communication with your investors is going to be key to that because you didn't communicate with them early on,” echoed Rep. Ann WagnerAnn Louise WagnerSix ways to visualize a divided America House panel spars over GameStop frenzy, trading apps Republicans rally to keep Cheney in power MORE (R-Mo.).

Tenev admitted that Robinhood did not adequately explain the situation to its customers, but had no choice but to clamp down on their activity.

“I’m not going to say that Robinhood did everything perfect and that we didn’t make mistakes in the past,” he said, “but what I commit to is that we learn from this ... and improve and make sure it doesn’t happen again.”

The bipartisan agreement stopped there.

Democrats pointed to a wide range of changes — some of which they’ve touted for years — as necessary to prevent another GameStop-like rally. 

Several took issue with Robinhood’s usage of payment for order flow (PFOF), a system where stock brokers like Robinhood are paid by market makers for the right to process trades for customers. Tenev said Robinhood makes roughly 50 percent of its revenue through PFOF.

Democrats on the Financial Services panel expressed fears about Robinhood’s role in drawing millions of young, inexperienced users into trading stocks and riskier financial products through a platform akin to a smartphone game.

“It's not just in Washington, D.C., but on Wall Street, the retail investor is known as dumb money. And there are any number of structures that are set up to take advantage of the retail investor,” said Rep. Jim HimesJames (Jim) Andres HimesHouse panel spars over GameStop frenzy, trading apps COVID-19 could complicate Pelosi's path to Speaker next year Democrats debate fate of Trump probes if Biden wins MORE (D-Conn.), a former Goldman Sachs banker.

While Republicans shared their concern about Robinhood’s actions amid the GameStop frenzy, they panned Democrats who saw the episode as a reason to put up new safeguards for investors.

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“We’ve heard a lot of reasons for concern, some of them legitimate,” said Rep. Tom EmmerThomas (Tom) Earl EmmerHouse panel spars over GameStop frenzy, trading apps The Hill's Morning Report - Biden on COVID-19: Next year Americans will be 'better off' NRCC finance chair: Republicans who voted for Trump impeachment will not be penalized MORE (R-Minn.), agreeing that Robinhood’s response warranted an investigation.

“What we saw was a movement of individuals investing and trying to make money," he added. "I don’t see anything wrong with that, even if that motivation is fueled by a desire to stick it to a hedge fund they don’t like.”

Several Republicans even argued that regulations were the reason why Robinhood failed its customers, blaming capital requirements for stock brokers imposed by the 2010 Dodd-Frank Wall Street reform law.

“If anyone has a problem with your decision to halt trades, it's fair to say that their frustration should be directed toward federal regulation,” Rep. Steve StiversSteven (Steve) Ernst StiversHouse panel spars over GameStop frenzy, trading apps Former Ohio GOP chairwoman Jane Timken launches Senate bid Ohio businessman Mike Gibbons steps down from super PAC as he weighs Senate bid MORE (R-Ohio) told Tenev.

Rep. William TimmonsWilliam Evan TimmonsHouse panel spars over GameStop frenzy, trading apps House Republicans ask for briefing on threats keeping National Guard in DC READ: The Republicans who voted to challenge election results MORE (R-S.C.) added, “[Dodd-Frank] is arguably to blame for what happened. You would not have halted trading, in this case, but for this exorbitant capital requirements that you were unable to meet.”

The hearing revealed little new information about the forces behind the GameStop rally, the rationale behind Robinhood’s response, or whether it complied with regulations at each turning point of the frenzy. Representatives from Citadel Securities, Reddit and Melvin Capital also faced few questions about their specific conduct and took few hard stances on the future of regulations.

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Robinhood, however, is far from out of the woods.

Waters said there will be further hearings on the GameStop frenzy featuring the Securities and Exchange Commission and other regulators that may shed light on Robinhood’s compliance. 

Lawmakers also said they would keep a close eye on how Robinhood responds to customers who may have lost money because of the stock purchase shutdown.

Rep. Sean CastenSean CastenDemocratic fury with GOP explodes in House Six ways to visualize a divided America Lawmaker calls Robinhood helpline to make point about customer service MORE (D-Ill.) invoked the story of Alex Kearns, a 20-year-old who died by suicide last year after believing he had accrued roughly $730,000 in losses on Robinhood he had not actually taken. Kearns tried unsuccessfully to contact a Robinhood representative before he passed. He allegedly emailed Robinhood’s support team three times and couldn’t find a phone number for the company.

After Tenev expressed his condolences to Kearns’s family, which sued Robinhood, and explained steps the company took to improve customer service, Casten called Robinhood’s helpline on speakerphone as if he were a customer in dire need of guidance.

A brief pre-recorded message encouraged Robinhood customers to reach out to the company with concerns via email before hanging up on Casten.