Congress hits Robinhood over lack of transparency around GameStop stock spikes

GameStop’s stock price soared in late January as traders in the r/WallStreetBets Reddit community took on Wall Street investors who’d bet against the struggling video game retailer’s success. Soon, GameStop’s stock was reaching new all-time highs, jumping more than 2,600% from the beginning of the year, before crashing down. The market volatility caught the attention of Congress, who now says it wants to figure out what happened and whether there was any foul play.

California Rep. Maxine Waters said the House Committee on Financial Services hearing was “an opportunity for this committee to get the facts about the role each of the entities of the witnesses represent played in the events we are examining today.” Its title, Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, emphasized that point. 

The chief executives of Reddit, Robinhood, Citadel and Melvin Capital were in attendance, along with the Reddit poster who spearheaded the GameStop buying frenzy were all there through video conferencing and gave answers under oath. But, many times, committee members complained that some of the CEOs weren’t giving direct enough answers. And by the end of the more than 5 hour hearing, committee members found themselves short on specifics. (Though Keith Gill, the Reddit trader also known as “RoaringKitty” on YouTube, did confirm to congress that he is not, in fact, a cat.)

What Congress learned instead was that the entire market process, from how trades are settled to how Robinhood and other brokerages are able to offer no-fee trading, is maddeningly opaque. Committee members regularly came repeated questions about what market forces led to trading issues at the height of the drama, and how those issues were communicated with users at various points.

Another big theme of the session was whether sophisticated trading mechanisms, like short selling, are appropriate for individual investors. Committee members tried to learn whether Robinhood’s push to “democratize finance” for the public is more harmful than good. The members repeatedly raised concerns like the story of Alex Kearns, a 20-year-old man who committed suicide after the app appeared to tell him he’d racked up roughly $730,000 in trading losses on the app. His family is suing Robinhood.

The line of questioning suggests at least some lawmakers will scrutinize the financial tech industry and even move to introduce legislation that would bring more regulation. Some Republican committee members said that the overall market response was appropriate, though, and dismissed the need for more regulations. 

“We don’t have the facts — we need facts, not just the salacious bits or nasty comments on Reddit,” said North Carolina Rep. Patrick McHenry, who advocated instead for more lax regulations on investing. “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.”

Robinhood in the spotlight

Robinhood in particular drew much of the committee’s attention. Its app was at the center of what had happened, making it easier for new investors to trading accounts by offering no-commission trades and more forgiving loan terms. But it also drew user’s ire when it halted GameStop stock purchasing on Thursday, Jan. 28, accusing the company of market manipulation just as prices began to fall.

Robinhood CEO Vlad Tenev denied the accusations, saying instead that Robinhood made those moves in response to market restrictions requiring the company have more money in its coffers to help cover its user’s trades. Tenev said that since then, Robinhood secured more capital to ensure it wouldn’t happen again. 

When asked whether Robinhood hadn’t been appropriately prepared for the GameStop drama in the first place, Tenev said there was a one in 3.5 million chance of a GameStop situation happening, calling it a “Black Swan event.”

Still, committee members continued to hit him with questions, asking for details about how Robinhood communicates with users and how it educates them about the market. And some lost patience with him and his seeming evasive answers.

“You have admitted to making mistakes,” Rep. Madeline Dean of Pennsylvania said to Tenev at one point. “Specifically, what mistakes did you make?”

“I admit to always improving,” Tenev responded.

Waters, who is chairwoman of the committee, said more hearings about the GameStop stock surge are being planned.