Written by Isaac Rudich
Edited by Paige Rudich
On 02/18/2021, the U.S. Committee on Financial Service held an investigative hearing about Gamestop. The typical purpose of investigative congressional hearings is to publicly obtain information or opinions from people close to the issue, to help develop legislation. So who spoke about what, what legislation was floated, and what does it all mean? My goal is to answer those questions.
We don’t live in an apolitical vacuum. For transparency, my bias is left-leaning, but I don’t think my political views will affect my summary of this hearing.
The U.S. Financial Services Committee oversees the entire financial services industry, the Federal Reserve, the Department of the Treasury, and the Securities Exchange Commission (SEC). There are currently 30 Democrats, and 24 Republicans on the committee. During the hearing committee members fell (broadly) into three different groups: those floating actionable legislative ideas, those making general arguments (without any obvious associated plan), and those advancing clearly unrelated agendas. I will specifically discuss each group, and conclude with a highlight reel of my favorite moments. I sincerely suggest that if you get bored before the end, you scroll to the end for a list of the hearing’s most absurd moments.
Interpretation Disclaimer: In a couple cases I have marked a committee member as supporting an idea or legislation they did not explicitly name, but made clear they supported. For example, many committee members complain of problematic capital requirements regulation without specifically naming Dodd-Frank. I still include these members on my list of committee members who want to undo Dodd-Frank.
Dodd-Frank was targeted by several committee members during the hearing: Patrick McHenry (NC, R), Ann Wagner (MO, R), Frank Lucas (OK, R), Bill Huizenga (MI, R), Steve Stivers (OH, R), Andy Barr (KY, R), French Hill (AR, R), Barry Loudermilk (GA, R), Anthony Gonzalez (OH, R), John Rose (TN, R), Bryan Steil (WI, R), William Timmons (SC, R), Van Taylor (TX, R). “R” stands for “Republican”. If you are unfamiliar with Dodd-Frank, this Wikipedia article gives a clear explanation, but I will provide a quick summary.
Dodd-Frank was a piece of Obama-era legislation passed after the 2008 financial crisis to limit risky behavior from banks that were deemed “too big to fail”. It is particularly controversial, and its pros and cons have been robustly debated (a mostly un-biased article here). The gist is that almost everyone agrees the legislation works as intended by making the risk of another financial crisis significantly lower, but many others argue that it unfairly hinders economic profitability and reduces liquidity in the markets.
Dodd-Frank is relevant to this hearing because Robinhood had to stop trading due to their inability to meet their capital requirements, requirements that are a direct result of Dodd-Frank. If Dodd-Frank did not exist and Robinhood did not need to meet those requirements, there would not have been a regulatory reason that Robinhood had to suspend the buying of certain assets. However, the counter-argument is that if Robinhood had not been engaged in such risky behavior, Robinhood would have had zero problems meeting their capital requirements. Vlad Tenev (Robinhood CEO) insisted it was an unforeseeable situation, but as it is his company, he’s the most biased person you could ask. All that being said, the Republicans have consistently fought against Dodd-Frank since before it even became law. The Republican attitude towards Dodd-Frank is not new, but it is unlikely to be overturned with the Democrats in control of the government.
Regulating Payment for Order Flow
Payment for order flow was the second most “hot” topic. It is unclear if this topic is actionable or not, but enough committee members brought it up that there is likely legislation being prepared behind the scenes. The committee members who attacked order flow were: Brad Sherman (CA, D), Joyce Beatty (OH, D), Ritchie Torres (NY, D), Alexandria Ocasio-Cortez (NY, D), Bill Foster (IL, D). The committee members who defended order flow were: Ann Wagner (MO, R), Bill Huizenga (MI, R).
In this situation, order flow refers to the real-time list of orders that Robinhood receives from its users. Most brokerages charge a commission on trades; it is their main source of income. Robinhood offers commission-free trading, and instead sells their order flow to firms like Citadel. This article provides a more detailed explanation.
Committee members attacking the sale of order flow focused on the inherent conflict of interest. Robinhood has little motivation to ensure good prices for their users, and Citadel has incentives to abuse order flow data. For example, Citadel learns that a large number of Robinhood users have put in orders to buy a certain stock (which will drive up the price of said stock), so Citadel “front-runs” the large orders by buying shares of the stock, filling the orders from Robinhood users, and then selling Citadel’s shares at a slightly higher price. This leads to Robinhood users being treated as products instead of customers. Citadel has been fined multiple times for abusing this relationship. Unfortunately, as Al Green (TX, D) pointed out, the fines paid by Citadel pale in comparison to the money they made abusing this relationship, and may just be treated as another cost of doing business.
Committee members who argued in favor of the payment for order flow model concentrated on the very real fact that it forced commissions down across the financial industry. It was an innovation that produced a better outcome for the consumer. At the hearing, these two viewpoints were generally presented as being mutually exclusive, but they are not. It is possible for an innovation to be broadly good for consumers, while certain parties are abusing it for illicit profit. Bill Foster (IL, D) focused on this when he asked Vlad Tenev (Robinhood CEO) if Robinhood would be open to helping create an indicator for order fill comparison. Such an indicator would allow customers to see if they are receiving poor fills, incentivizing all parties to act in good faith, while still allowing the payment for order flows model. Vlad Tenev appeared delighted by the idea, and it is possible that this may actually be implemented.
Less Actionable Ideas
Robinhood’s gamification and target market were another talking point at the hearing. This is not a new topic, and the hearing added little of value to the conversation. The gist is that Robinhood doesn’t simply provide a platform for trading, they intentionally market the platform to novices, and the app encourages active trading. Many committee members took the opportunity to express to Vlad Tenev (Robinhood CEO) their concern over Robinhood’s platform and/or behavior. Those members were: Brad Sherman (CA, D), Carolyn Maloney (NY, D), Gregory Meeks (NY, D), Nydia Velázquez (NY, D), Ritchie Torres (NY, D), Madeleine Dean (PA, D), Jake Auchincloss (MA, D), Michael San Nicolas (Guam, D), Cindy Axne (IA, D), Sean Casten (IL, D). These committee members raised many questions over whether Robinhood is acting in an ethical or responsible manner. I have no desire to protect Robinhood from such attacks, but I can’t help but feel that these committee members missed the point. Robinhood is being scapegoated, and targeted for previous illicit behavior, but in terms of the Gamestop fiasco, they did their best to meet legal requirements in a horrible situation that they helped create. The public outcry for an investigation wasn’t asking for a takedown of Robinhood, it was a cry for transparency into the firms with large short positions. I imagine these committee members are hoping to punish Robinhood financially for their role in the Gamestop fiasco, but if the result of these hearings is just a brokerage paying some fines, I don’t think anyone will be satisfied.
A related topic of discussion was the general idea that Citadel and Melvin can’t be trusted to tell the truth. Committee members who pointed this out include: Brad Sherman (CA, D), Al Green (TX, D), Nydia Velázquez (NY, D), Juan Vargas (CA, D), Vincente Gonzalez (TX, D), Alma Adams (NC, D), Jesus “Chuy” Garcia (IL, D). Many of these committee members focused on the fines imposed on these firms in the past, and the vanishingly small effect they have had. It is outrageously generous to believe Ken Griffin (Citadel CEO) and Gabriel Plotkin (Melvin CEO) weren’t colluding even though they are openly friends, Citadel invested in Melvin, and both firms have a history of breaking the law.
Only Nydia Velázquez (NY, D) got to the heart of the issue. She proposed requiring firms to report short positions in the same manner they report long positions. This was the closest the committee members came to discussing transparency laws around position disclosures. If the Gamestop fiasco results in meaningful change that actually benefits retail investors, it would be by creating transparency laws. As Jim Cramer has acknowledged, hedge fund managers commonly throw around claims about securities to manipulate the market, without ever disclosing their positions. One of the strongest advantages these firms have is their ability to promote lies and cloud the truth. Taking away that power would help level the playing field.
There is a partially bi-partisan feeling from some committee members that we should be using real-time transaction settlement instead of T+2. In plain English, when you sell a share of a company through your brokerage, on the back end the brokerage has 2 days before that transaction fully settles and they have to give you the cash. Here is the SEC statement explaining the shift to T+2 from T+3 back in 2017. The committee members who discussed this were: Brad Sherman (CA, D), Blaine Luetkemeyer (MO, R), Steve Stivers (OH, R), Warren Davidson (OH, R), Ted Budd (NC, R), William Timmons (SC, R), Tom Emmer (MN, R). Ken Griffin (Citadel CEO) said a few times that he does not believe real-time transaction is technologically feasible yet, and it will take a few more years for us to get to that point. However, Vlad Tenev (Robinhood CEO) said he believes the technological challenges are surmountable, but hinted that several firms take advantage of the settlement time and will not want to lose that ability.
A little weirdness here came from a subset of the relevant committee members: Warren Davidson (OH, R), Ted Budd (NC, R), William Timmons (SC, R), Tom Emmer (MN, R). These committee members seemed to have little interest in the actual challenges associated with changing settlement times, and a lot of interest in anything containing the word “blockchain”. In May 2020, DTCC (the corporation that settles the majority of stock transactions) published a paper (press release) outlining the potential application of blockchain to real-time transaction settlement. DTCC has not followed up on the paper since, and the listed committee members were all enthusiastic about having DTCC pursue that possibility due to their interest in blockchain. I am not sure exactly why these committee members are so interested (although if I had to guess it involves blockchain investments), but DTCC is a private corporation working on the problem. If DTCC wants to implement real-time transaction settlement, I’m sure they will. The only thing preventing the SEC from moving to real-time settlement is the availability of the technology. It seems unlikely that Congress is going to fix that problem.
Financial Transaction Tax
A financial transaction tax was one of the most significant legislative ideas (even though it has no bearing on Gamestop). It was mentioned positively by: Rashida Tlaib (MI, D), and negatively by: French Hill (AR, R), Alexander Mooney (WV, R). Clearly such a tax would have a huge effect on the market, but it is unclear if the net effect would be positive or negative. All of the reports I found about financial transaction taxes were extremely partisan, and therefore basically useless. My opinion is that we need to tax Wall Street more than we currently do, but I don’t think a financial transaction tax is the best way to do it.
Lower Barriers to Entry
There were several concerns of low to middle income investors being treated differently. I do not have a complete list, but the most explicit statement came from Patrick McHenry (NC, R). He referenced the regulation that deems anyone making at least $200,000/year an accredited investor, and thus allows them to invest in non-public assets. This regulation is viewed by many as unfair due to how it prevents the lower classes from investing in private companies (which often have high rates of return). A common counter argument was put forth by Sean Casten (IL, D); financial firms have a long history of selling bad investments to novice investors, and the described regulation prevents some of those scams. To my ears, it is a weak counter argument, and with all the talk from both sides of the aisle about the “democratization of investing”, this regulation may not stand the test of time. Instead of preventing people with less wealth from investing in an entire asset class, these scams could be prevented by meaningfully punishing the scammers, instead of letting them get away with a slap on the wrist (as is currently done).
Alma Adams (NC, D) asked the obvious question that no-one else seemed interested in. She wanted to know if it was really just retail traders, or if institutions participated in the Gamestop fiasco. Ken Griffin (Citadel CEO) said that shorts covering their positions is likely what drove the squeeze, and not retail traders.
Trey Hollingsworth (IN, R) wants to allow exchanges to use wider tick sizes. See this article for an explanation of what that means.
Stephen Lynch (MA, D) pointed out that if retail traders are really capable of moving the market, there is nothing stopping a hostile entity with a lot of cash from intentionally causing unwarranted market volatility.
Lee Zeldin (NY, R) thinks that sharing trading data with the Chinese Communist Party is a national security threat, and that the government should stop it somehow.
Josh Gottheimer (NJ, D) seemed to think Reddit was responsible and wanted them to take responsibility. He specifically asked Steve Huffman (Reddit CEO) if the financial advice on Reddit was good or bad. Steve Huffman responded by saying that the nature of moderation on Reddit means that the financial advice on Reddit is probably better than what you’d get on Wall Street (a point I made myself here).
David Kustoff (TN, R) also believes that Reddit holds the blame and specifically wants to reform Section 230 which gives immunity to tech companies for content posted on their platform. (This is somewhat horrifying).
The Highlights (and Bloopers)
The Well Delivered
While Brad Sherman (CA, D) was trying to get Ken Griffin (Citadel CEO) to stop dodging questions and give a straight answer he said that if Griffin was going to filibuster he should run for senate.
When Keith Gill aka RoaringKitty aka DeepFuckingValue was asked by Bill Huizenga (MI, R) if he would still buy the stock at the current price, he said yes like the legend that he is. Not to mention that Keith Gill concluded his opening statements by saying “I Like the Stock”, a clear shoutout to WallStreetBets.
In a sea of easily distracted congresspeople with unclear agendas, Gregory Meeks (NY, D) was a ray of sunshine. He knew exactly what he wanted, he delivered his questions like a competent adult, and he stayed on point. Agree with him or disagree with him, it was just nice to see someone who knew what they were doing.
At the beginning of the hearing, Gabriel Plotkin (Melvin CEO) accused WallStreetBets of anti-semitic remarks against him. I have seen articles about that floating around, and as a Jew who has spent some time on WallStreetBets (for the memes) and has never seen any anti-semitism, I was pleased when Steve Huffman (Reddit CEO) said that they found the comment Plotkin was referring to, it received no upvotes, and was removed by the moderators after 5 minutes. So we established right from the beginning that Plotkin is as unreliable as you would expect a hedge fund manager accused of market manipulation to be.
After Vlad Tenev (Robinhood CEO) mentioned several times that Robinhood has made its users $35 billion, Jim Himes (CT, D) pointed out that he was clearly being intentionally misleading, since without knowing what the rate of return was, that number is extremely meaningless. Vlad Tenev would not, or could not, give the rate of return.
Not long after Vlad Tenev gave a spiel about how proud he was of Robinhood’s upgraded live customer support, Sean Casten (IL, D) contacted support during the hearing and was hung up on.
When Patrick McHenry (NC, R) was defending retail investors he said that people accuse them of not understanding the difference between a DOGE coin and other assets. That would be fine on its own except that he pronounced it “Do-ji”, and the irony of that had me chuckling.
Bill Huizenga (MI, R) said that the whole thing was political theater and that no-one was interested in the hearing, when a quick glance at the numbers would have told him that more people were watching that hearing live than have watched any other hearing from the Financial Service Committee. A nice moment followed soon after when Maxine Waters (MI, D) essentially reminded him that this is their job.
At one point Ken Griffin said that the level of short interest on Gamestop was probably inappropriate, but they shouldn’t actually make it illegal because it is unlikely to occur again. That’s some outstandingly terrible logic right there.
French Hill (AR, R) asked the SEC to investigate Reddit users for deceptive behavior. Most of the Republicans thought that the government was the guilty party, and most Democrats thought it was the financial firms. Hill was the only one who blamed retail investors, which is frankly an absurd take on the whole affair.
My Personal Favorite
The most outrageous moment of the entire event was brought to you by David Scott (GA, D). He wants Robinhood to monitor social media outlets to make sure that investors on their platform are not being misled. His heart is in the right place, but that is an opinion so out of touch with reality I’m still reeling.