The Committee on Monetary Companies of america Home of Representatives has scheduled a listening to on “current market volatility involving GameStop [Corporation (GME)] inventory and different shares.” The listening to will likely be held nearly, beginning at 12 midday Japanese Time on Thursday, Feb. 18, 2021. Amongst these known as to testify are Vladimir Tenev, CEO of on-line buying and selling agency Robinhood Markets, Inc., and Steve Huffman, CEO and co-founder of social media neighborhood and on-line discussion board website Reddit.
The committee is chaired by Consultant Maxine Waters, D-Calif. The press launch saying this listening to states: “Since changing into Chairwoman of the Home Monetary Companies Committee, Congresswoman Waters has remodeled the Committee to focus its agenda on equity, defending shoppers and buyers, and accountability for big monetary establishments. She has made it a apply to name Committee hearings with CEOs of huge monetary establishments and firms to carry them accountable.”
- The U.S. Home will maintain a digital listening to on the GameStop buying and selling controversy on Feb. 18, 2021.
- The CEOs of Robinhood and Reddit are amongst these known as to testify.
- Robinhood is more likely to face criticism for its enterprise practices.
Earlier Assertion by Consultant Waters
Consultant Waters launched the next assertion on Jan. 28, 2021, within the wake of the GameStop inventory buying and selling controversy. In it, she casts hedge funds as an enemy of atypical American savers and buyers:
“Hedge funds have a protracted historical past of predatory conduct and that conduct is solely indefensible. Personal funds preying on the pension funds of laborious working Individuals should be stopped. Personal funds partaking in predatory short selling to the detriment of different buyers should be stopped. Personal funds partaking in vulture strategies that harm staff should be stopped.
“Addressing that predatory and manipulative conduct is the accountability of lawmakers and securities regulators who’re charged with defending buyers and guaranteeing that our capital markets are truthful, orderly, and environment friendly. As a primary step in reining in these abusive practices, I’ll convene a listening to to look at the current exercise round GameStop (GME) inventory and different impacted shares with a deal with brief promoting, on-line buying and selling platforms, gamification and their systemic influence on our capital markets and retail buyers.
“We should take care of the hedge funds whose unethical conduct straight led to the current market volatility and we should look at the market generally and the way it has been manipulated by hedge funds and their monetary companions to learn themselves whereas others pay the value.”
Robinhood and Fee for Order Movement
Along with singling out hedge funds for criticism, it’s probably that Robinhood CEO Vladimir Tenev will face hostile questioning about his firm’s actions within the GameStop affair. Specifically, the committee memorandum notes that payment for order flow (PFOF) has been Robinhood’s chief income since its inception and that its resolution to limit buying and selling in GameStop and different shares might have been influenced by its enterprise ties to funding companies that have been caught in short squeezes on these shares.
The committee memorandum additionally notes: “In December 2020, the SEC charged Robinhood with making misstatements concerning the agency’s receipt of fee for order move and for failing to adjust to its obligation to make sure that buyer trades have been executed on the absolute best phrases. Robinhood’s failure to fulfill its best execution obligations resulted in additional than $34 million in combination buyer losses. Robinhood was censured and agreed to pay $65 million to settle the motion.”
Robinhood and Playing Addictions
Along with considerations concerning the impacts of fee for order move, the committee memorandum additionally notes that “some attribute the present controversy itself to ‘gamification’ of investing and to the growing function that social media and know-how play in capital markets.”
The memorandum provides: “Gamification entails techniques used to have interaction clients to transact, corresponding to growing use of notifications, prizes, and different psychological instruments and design components to extend fast buying and selling and short-termism, as a substitute of a extra cautious strategy. Robinhood particularly has been accused of utilizing gamification to extend utilization of its app, probably to the monetary detriment of its purchasers. Examples embody designs to enchantment to youthful customers, together with digital confetti to have a good time transactions, colourful illustrations, and its allowance for customers to faucet as much as 1,000 occasions every day to enhance their waitlist place for Robinhood’s money administration function. This has led to criticism that gamified on-line buying and selling platforms corresponding to Robinhood encourage habits just like a playing dependancy.”
The memorandum concludes: “Regulators have expressed concern about Robinhood’s funding platform. On Dec. 16, 2020, Massachusetts regulators filed a grievance towards Robinhood for its ‘aggressive techniques to draw inexperienced buyers, its use of gamification methods to govern clients, and its failure to forestall frequent outages and disruptions on its buying and selling platform.'”
Significance for Traders
It’s potential that the hearings might result in extra laws and regulation regarding the securities markets, however that is not at all sure. One factor that’s sure: prolonged questioning about fee for order move, the incentives that it creates, and the diploma to which Robinhood engages in gamification are all issues which are certain to tarnish that firm’s picture, however not essentially to dissuade a major variety of Robinhood’s purchasers or potential purchasers from utilizing its platform.