Robinhood and Reddit in the spotlight during GameStop congressional hearing

By Matt Egan, Brian Fung and Clare Duffy, CNN Business

Updated 5:51 p.m. ET, February 18, 2021
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5:17 p.m. ET, February 18, 2021

Rashida Tlaib: "Our folks are tired of bailing you all out when you screw up"

From CNN Business' Matt Egan

Congresswoman Rashida Tlaib and billionaire Ken Griffin got into a fiery exchange over whether or not to tax financial transactions.

Tlaib noted that such a tax would raise nearly $800 billion over 10 years, an estimate that is backed up by a 2018 report by the nonpartisan CBO. The idea is that revenue could then be invested in infrastructure or other programs aimed at reducing inequality.

Griffin, not surprisingly, is not a fan of a financial transaction tax. His high-speed trading firm, Citadel Securities, would be hurt by the levy.

"We firmly believe a financial transaction tax would injure Americans trying to save for retirement," Griffin said.

Tlaib did not buy that explanation and criticized Wall Street broadly.

"Let's not gaslight the American people. Y'all will be fine with the tax," she said. "Our folks are tired of bailing you all out when you screw up."
4:43 p.m. ET, February 18, 2021

More than half of Robinhood's revenue comes from payment for order flow

From CNN Business' Brian Fung

Under questioning from Rep. Ritchie Torres, Robinhood CEO Vlad Tenev disclosed two important stats that shed light on its underlying business model.

  1. More than half of Robinhood's revenue is derived from payment for order flow, the trade execution practice that's received heavy scrutiny during the hearing. Pressed on how much of Robinhood's business comes from payment for order flow, Tenev said: "I don't recall the exact percentage. It's over 50%."
  2. He also acknowledged that Citadel Securities is Robinhood's "largest counter-party," in that it receives the bulk of Robinhood trading orders.
4:36 p.m. ET, February 18, 2021

The 'enormous catastrophe' that Robinhood only narrowly avoided

From CNN Business' Matt Egan

Robinhood CEO Vlad Tenev admitted that the app did not have the liquidity needed to meet an early-morning demand from its clearinghouse for $3 billion on January 28.

"At that exact moment we would not have been able to post the $3 billion in collateral," Tenev said.

Within a few hours, Robinhood managed to persuade the clearinghouse to lower its request to $1.4 billion, and the app imposed controversial restrictions on GameStop and 12 other stocks.

Congressman Anthony Gonzalez pointed out that if Robinhood did not impose those restrictions, the clearinghouse would have stepped in and liquidated unsettled trades.

"It would not have been a good situation for the firm or the customers," Tenev said, adding that it would have caused a "total lack of access to markets" for users.

Gonzalez said this would have been an "enormous catastrophe for Robinhood."

"I believe a vulnerability was clearly exposed in your business model and perhaps in the regime that governs your capital requirements," he said. "We just can't live in a world where my constituents could have had their shares liquidated without their consent."

4:20 p.m. ET, February 18, 2021

Casten sums it all up in a single line

From CNN Business' Brian Fung

Illinois Rep. Sean Casten took Robinhood to task with a polite but devastating critique, highlighting the suicide of investor Alex Kearns.

"There is an innate tension in your business model between democratizing finance, which is a noble calling, and being a conduit to feed fish to sharks," he said.
4:26 p.m. ET, February 18, 2021

GameStop tumbles more than 11%

From CNN Business' Anneken Tappe

While the hearing is chugging along, the closing bell rung on Wall Street and it wasn't a pretty day for GameStop (GME).

The company's shares tumbled 11.4% and closed at $40.69, near the lowest point of the session. It was a worse performance than the broader market, including the small-cap Russell 2000 index that GameStop is a member of, which also closed in the red.

4:16 p.m. ET, February 18, 2021

Hedge fund blown up by GameStop will monitor message boards. About four weeks too late...

From CNN Business' Matt Egan

Melvin Capital learned a very painful lesson when the hedge fund was blindsided by an army of Reddit traders. GameStop shares went to the moon and Melvin Capital turned to rivals for a lifeline.

"Us at Melvin, we'll adapt. And I think the whole industry will have to adapt," Melvin Capital CIO Gabe Plotkin said.

How? Well, for starters, Plotkin is going to pay more attention to the chatter on WallStreetBets. "There will be closer monitoring of message boards," he said.

Indeed, Wall Street is keeping very close tabs on WallStreetBets. Thinknum Alternative Data recently built and launched a tool that provides hedge funds and investment banks a ranking of the most-mentioned stocks on WallStreetBets.

That kind of intel could have allowed Melvin Capital to unwind its bets against GameStop before that company's shares skyrocketed. Melvin ultimately accepted a $2.75 billion cash infusion (don't call it a bailout, according to Plotkin) led by rival hedge funds Citadel and Point72.

At one point, the short interest on GameStop was an unthinkable 140% -- a scenario that Plotkin said is unlikely to be repeated.

"I don't think investors like myself want to be susceptible to these dynamics," he said.

3:58 p.m. ET, February 18, 2021

Congressman San Nicholas congratulates successful GameStop investors

From CNN Business' Clare Duffy

Congressman Michael San Nicholas, the Democrat from Guam, began his questioning by congratulating retail investors who made money trading GameStop (GME) last month. 

“You guys found a low float, low volume, massively shorted stock and you squeezed it,” San Nicholas said. “I think that investors like Mr. Plotkin, large money managers, probably doubled down on their short positions thinking that they were going to win, and in the end, the massive communication networks that we have these days rallied the small to beat the large.”

San Nicholas called the success of small investors “something to behold” and said, “Robinhood made that possible.”

3:28 p.m. ET, February 18, 2021

Reddit CEO throws shade at CNBC

From CNN Business' David Goldman

Reddit CEO Steve Huffman called out CNBC without saying those four letters.

"People in the United States talk about stocks on Reddit, they talk about it on TV, in magazines -- in fact they do all the time on TV encourage people to make what I would call bad investment decisions," Huffman testified.

You can trust advice you get on Reddit, though, he argued.

"On Reddit, investment advice is probably among the best because it has to be accepted by many thousands of people before getting that visibility," Huffman said. "On Reddit you're seeing retail investors who are giving authentic advice based on their knowledge, and you would not call into question positions they may hold before they talk about it on television."
3:20 p.m. ET, February 18, 2021

'Let me be clear': Citadel had 'absolutely' no contact with Robinhood about banning GameStop purchases

From CNN Business' David Goldman

Fun moment in the hearing: Congressman Juan Vargas wanted to know if Citadel ever told Robinhood to ban orders of GameStop during the trading frenzy.

"Are you asking if we have contact with Robinhood?" Griffin asked.

"With respect to GameStop," Vargas replied. "Did you talk to them about restricting? About buying -- not selling -- GameStop?"

"Let me be perfectly clear: Absolutely not," Griffin said.

"So if we depose everyone in your organization we'll find that?" Vargas asked.

"That is correct," Griffin said.