    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                        GAME STOPPED? WHO WINS AND LOSES
                       WHEN SHORT SELLERS, SOCIAL MEDIA,
                          AND RETAIL INVESTORS COLLIDE
    =======================================================================

                                 VIRTUAL HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 18, 2021

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 117-3

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    43-966 PDF                 WASHINGTON : 2022

    -----------------------------------------------------------------------------------

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
    GREGORY W. MEEKS, New York           BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            STEVE STIVERS, Ohio
    ED PERLMUTTER, Colorado              ANN WAGNER, Missouri
    JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
    BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
    JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
    JUAN VARGAS, California              TOM EMMER, Minnesota
    JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
    VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
    AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
    MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
    CINDY AXNE, Iowa                     TED BUDD, North Carolina
    SEAN CASTEN, Illinois                DAVID KUSTOFF, Tennessee
    AYANNA PRESSLEY, Massachusetts       TREY HOLLINGSWORTH, Indiana
    RITCHIE TORRES, New York             ANTHONY GONZALEZ, Ohio
    STEPHEN F. LYNCH, Massachusetts      JOHN ROSE, Tennessee
    ALMA ADAMS, North Carolina           BRYAN STEIL, Wisconsin
    RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas
    MADELEINE DEAN, Pennsylvania         WILLIAM TIMMONS, South Carolina
    ALEXANDRIA OCASIO-CORTEZ, New York   VAN TAYLOR, Texas
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    NIKEMA WILLIAMS, Georgia
    JAKE AUCHINCLOSS, Massachusetts

                       Charla Ouertatani, Staff Director

                               C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 18, 2021............................................     1
    Appendix:
        February 18, 2021............................................    93

                                   WITNESSES
                          Thursday, February 18, 2021

    Gill, Keith Patrick, GameStop Investor...........................    13
    Griffin, Kenneth C., Chief Executive Officer, Citadel LLC........     8
    Huffman, Steve, Chief Executive Officer and Co-Founder, Reddit,
      Inc............................................................    11
    Plotkin, Gabriel, Chief Executive Officer, Melvin Capital
      Management LP..................................................     9
    Schulp, Jennifer J., Director, Financial Regulation Studies, Cato
      Institute......................................................    14
    Tenev, Vladimir, Chief Executive Officer, Robinhood Markets, Inc.     6

                                    APPENDIX

    Prepared statements:
        Gill, Keith Patrick..........................................    94
        Griffin, Kenneth C...........................................    99
        Huffman, Steve...............................................   102
        Plotkin, Gabriel.............................................   105
        Schulp, Jennifer J...........................................   108
        Tenev, Vladimir..............................................   114

                  Additional Material Submitted for the Record

    Budd, Hon. Ted:
        Business Insider article by Jennifer J. Schulp entitled,
          ``Retail Investors are Revolutionizing the Stock Market. So
          Stop Calling Them `Dumb Money.''', dated December 19, 2020.   127
    Casten, Hon. Sean:
        CNBC article entitled, ``Here's how Robinhood is raking in
          record cash on customer trades despite making it free'',
          dated August 13, 2020......................................   130
    Davidson, Hon. Warren:
        Keynote speech of Vice Chancellor J. Travis Laster before the
          Council of Institutional Investors, dated September 29,
          2016.......................................................   138
    Hill, Hon. French:
        Written statement of the American Securities Association
          (ASA)......................................................   162
    McHenry, Hon. Patrick:
        Written statement of the Depository Trust & Clearing
          Corporation (DTCC).........................................   167
        Written statement of the Security Traders Association (STA)..   173
    Griffin, Kenneth C.:
        Written responses to questions for the record from Chairwoman
          Waters.....................................................   186
        Written responses to questions for the record from
          Representative Beatty......................................   179
        Written responses to questions for the record from
          Representative Green.......................................   180
        Written responses to questions for the record from
          Representative Lynch.......................................   184
        Written responses to questions for the record from
          Representative Sherman.....................................   185
    Plotkin, Gabriel:
        Written responses to questions for the record from
          Representative Beatty......................................   193
        Written responses to questions for the record from
          Representative Sherman.....................................   193
    Schulp, Jennifer J.:
        Written responses to questions for the record from
          Representative Roger Williams..............................   194
    *Tenev, Vladimir:
        Written responses to questions for the record from Chairwoman
          Waters.....................................................   196
        Written responses to questions for the record from
          Representative Beatty......................................   213
        Written responses to questions for the record from
          Representative Sherman.....................................   217
        Written responses to questions for the record from
          Representative Steil.......................................   221
        Written responses to questions for the record from
          Representative Roger Williams..............................   223
    *Additional information provided by Robinhood is contained in
      Committee files.

                        GAME STOPPED? WHO WINS AND LOSES
                       WHEN SHORT SELLERS, SOCIAL MEDIA,
                          AND RETAIL INVESTORS COLLIDE

                                  ----------

                          Thursday, February 18, 2021

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 12:01 p.m., via
    Webex, Hon. Maxine Waters [chairwoman of the committee]
    presiding.
        Members present: Representatives Waters, Maloney,
    Velazquez, Sherman, Meeks, Scott, Green, Cleaver, Perlmutter,
    Himes, Foster, Beatty, Vargas, Gottheimer, Gonzalez of Texas,
    Lawson, San Nicolas, Axne, Casten, Torres, Lynch, Adams, Tlaib,
    Dean, Ocasio-Cortez, Garcia of Illinois, Garcia of Texas,
    Auchincloss; McHenry, Lucas, Luetkemeyer, Wagner, Huizenga,
    Stivers, Barr, Hill, Emmer, Zeldin, Loudermilk, Mooney,
    Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose,
    Steil, Timmons, and Taylor.
        Chairwoman Waters. The Financial Services Committee will
    come to order. Without objection, the Chair is authorized to
    declare a recess of the committee at any time.
        As a reminder, I ask all Members to keep themselves muted
    when they are not being recognized by the Chair. This will
    minimize disturbances while Members are asking questions of our
    witnesses. The staff has been instructed not to mute Members,
    except when a Member is not being recognized by the Chair and
    there is inadvertent background noise.
        Members are also reminded that they may only participate in
    one remote proceeding at a time. If you are participating
    today, please keep your camera on. And if you choose to attend
    a different remote proceeding, please turn your camera off.
        Today, we will make an exception and allow Members from
    Texas to participate without their video function if they are
    experiencing power outages which prevent them from having a
    working video.
        If Members wish to be recognized during the hearing, please
    identify yourself by name to facilitate recognition by the
    Chair. I would also ask that Members be patient as the Chair
    proceeds, given the nature of conducting committee business
    virtually.
        Today's hearing is entitled, ``Game Stopped? Who Wins and
    Loses When Short Sellers, Social Media, and Retail Investors
    Collide.''
        I now recognize myself for 3 minutes to give an opening
    statement.
        Good afternoon, everyone. This hearing is the first in a
    series of hearings for the committee to examine the recent
    market volatility involving GameStop and other stocks. I want
    to know how each of the witnesses here today and the companies
    they represent contributed to the historic trading events in
    January.
        This recent market volatility has put a national spotlight
    on institutional practices by Wall Street firms and prompted
    discussion about the evolving roles of technology and social
    media in our markets. These events have illuminated potential
    conflicts of interest and the predatory ways that certain funds
    operate, and they have demonstrated the enormous potential
    power of social media in our markets.
        They've also raised issues involving gamification of
    trading, potential harm to retail investors, and the business
    models of apps with retail investors as their users.
        All of this is why we have witnesses from many of the key
    players here to testify today, including witnesses representing
    Wall Street firms, Melvin Capital and Citadel; social media
    company, Reddit; and trading app, Robinhood; as well as one of
    the retail investors involved.
        In subsequent hearings, we will hear from regulators and
    other experts regarding these events, including why Dodd-Frank
    Act rulemakings related to short selling disclosures were never
    implemented.
        Many Americans feel that the system is stacked against
    them, and that no matter what, Wall Street always wins. In this
    instance, many retail investors appeared motivated by a desire
    to beat Wall Street at its own game.
        And 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.
        Others have noted that there are winners and there are
    losers in every trade in our financial markets.
        Our role, as the Financial Services Committee, is to ensure
    fairness in our financial markets and systems, robust
    protections for investors, and accountability for Wall Street.
        Today, we will hear firsthand from the witnesses regarding
    these events. The hearing will be an opportunity for this
    committee to get the facts about the role each of the entities
    the witnesses represent played in the events we are examining
    today.
        I now recognize the ranking member of the committee, the
    gentleman from North Carolina, Mr. McHenry, for 5 minutes.
        Mr. McHenry. Thank you, Madam Chairwoman.
        And let me just begin by saying, I believe Americans are
    far more sophisticated, informed, and capable than people in
    D.C. give them credit for.
        When I called for this hearing last month, I wanted this to
    be a fact-finding mission. We have speculation, we have
    headlines and finger pointing, but we don't have the facts. We
    need facts, not just the salacious bits or nasty comments on
    Reddit. And, look, there's plenty of that. We need the facts
    today.
        Now, some on the left are already floating new restrictions
    or things to, ``protect,'' these so-called uninformed retail
    investors whom, in their eyes, don't know the difference
    between a dogecoin and a Dow Jones without Congress telling
    them.
        I think if we've learned anything from the past few weeks,
    it's that these average, everyday investors are pretty darn
    sophisticated. There is wisdom in the crowd.
        So, let's zoom out on that idea just for a moment. The
    GameStop story represents a larger truth: A fundamental change
    is happening. Like never before, everyday investors can
    communicate, access more information, and work collectively to
    move markets--all in real time.
        Technology is fueling this revolution. Congress cannot put
    technology back in the box. GameStop is a culmination of years
    of pent-up frustration. That frustration is now paired with
    faster, cheaper, and better technology.
        Consider for a moment that for every story of someone being
    able to pay off their student debt from the GameStop trade, or
    conversely, every story of somebody who lost money, there were
    stories of those who said they were investing in protest. They
    would gladly risk losing money just to prove a point.
        And while no one should ever risk investing money that they
    cannot afford to lose, let's tell the truth of why someone
    would do something like that. The sad truth is the K-shaped
    economy is nothing new in our capital markets because the
    structural core of our regulations literally enshrined
    inequity.
        Policies, like the, ``accredited investor,'' definition,
    blatantly pick winners and losers. If you're wealthy, you're
    good to go. And if you're not, you're deemed too dumb to be
    trusted with your own money. So, a privileged few get to invest
    alongside Ivy League endowments, getting early access in
    private markets to the greatest returns of the last 2
    generations.
        But not so fast for the average, everyday investor. In the
    eyes of our government, you need to be protected, protected
    from your own decisions, protected from your own money, and
    protected from more opportunities.
        So, you're left with a savings account which pays no
    interest. And if you need more money than that, well, we
    created a world where it's easier to go buy a lottery ticket
    than it is to invest in the next Google.
        Is it any wonder why the unhealthy dynamics of GameStop
    happened?
        It's time we get serious about equity and ownership in the
    American economy. We should live in a world where the
    construction worker or Uber driver trading on Robinhood has the
    same access to equity shares in Robinhood itself as the white-
    collar employees who work there. The same goes for Reddit and
    Reddit users, by the way. Both contributed to its success. Why
    can't both share in its future success?
        I'll conclude with a reminder for some of my colleagues who
    want to regulate more and more. In the 1980s, Massachusetts
    State regulators barred citizens from investing in what The
    Wall Street Journal called, ``the latest in a cascade of stocks
    of high-technology companies,'' that occurred that year. What
    IPO was too risky in the eyes of the government? Apple.
        So 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.
        I'll begin where I started: Americans are far more
    sophisticated, informed, and capable than folks in D.C. give
    them credit for, and it's time our securities laws treat them
    that way.
        I look forward to the hearing, and I yield back.
        Chairwoman Waters. Thank you so very much.
        I'm so pleased that you're cooperating today, and you were
    able to join with us when we called for this hearing.
        I want to welcome today's witnesses to the committee.
        Vladimir Tenev is the chief executive officer of Robinhood
    Markets, Inc., a company with a trading app that after
    increased trading activity in GameStop and certain other
    stocks, restricted trading of those stocks for a period of
    time.
        Kenneth C. Griffin is the chief executive officer of
    Citadel LLC, a firm which is one of Robinhood's main customers
    and sources of revenue, and which also provided financial
    support to Melvin Capital Management LP, when Melvin faced
    significant losses over GameStop and other trades.
        Gabriel Plotkin is the chief executive officer of Melvin
    Capital Management LP, which held a significant short position
    in GameStop and other stocks and experienced significant losses
    due to its positions.
        Steve Huffman is the chief executive officer and co-founder
    of Reddit, Inc., a social media platform which is home to the
    subreddit WallStreetBets, where retail investors discuss
    trading and where a large number of members discussed the
    purchase of GameStop and other stocks which experienced
    volatility.
        Keith Gill is a retail investor who posted on Reddit and
    YouTube regarding investing in GameStop and other stocks.
        Jennifer Schulp is the director of financial regulation
    studies at the Cato Institute.
        Each of you will have 5 minutes to summarize your
    testimony.
        And without objection, your written statements will be made
    a part of the record.
        Mr. Sherman. Madam Chairwoman? Brad Sherman here. I believe
    that there were only 3 minutes of Democratic opening statements
    with the idea that the subcommittee chair on the Democratic
    side would be called as well. That's what I was told by your
    staff.
        Chairwoman Waters. Thank you very much. If that is the
    order that has been organized, I will cease my introductions,
    and I will call on you, Mr. Sherman, to please go ahead and
    make an opening statement. Thank you.
        Mr. Sherman. Thank you so much.
        Back in the day, the law school professor would create an
    exam where he weaved together a story that would exemplify each
    of the issues in that area of the law. But never did the
    professor do as good a job as the GameStop saga, which
    identifies most of the issues facing our capital markets.
        Short selling: should there be limits or required
    additional disclosures?
        What do we do with market participants, whether they be on
    Reddit or on Wall Street, who are shorting a stock or buying a
    stock for the purpose of influencing its price?
        What is this payment for order flow model?
        And what does it mean when some participants get best
    execution and some get enhanced best executions and price-
    enhanced best execution?
        And are all traders being treated fairly and is payment for
    order flow free to the consumer?
        We need to look at the plumbing where it takes 2 days to
    settle a transaction, but also why is it the broker's capital
    rather than the customer's capital that is posted during the 2-
    day period?
        And finally, we need to look at the gamification and
    glorification of high-frequency trading.
        I thank the chairwoman for the time. And I hope that in the
    months to come, we will have several hearings to explore these
    issues and that we're able to pass legislation this year to
    deal with each of them.
        And I yield back.
        Chairwoman Waters. Thank you.
        The Chair now recognizes the gentleman from Texas, Mr.
    Green, who is also the Chair of our Subcommittee on Oversight
    and Investigations, for 1 minute.
        Mr. Green. Thank you very much, Madam Chairwoman. I greatly
    appreciate the opportunity to express some concerns that I
    have.
        It is a fact that Citadel Securities has paid over $100
    million in penalties. And my concern is this: It deals with
    whether we can allow a market maker's profit from misleading
    clients and improperly trading ahead of clients to become
    something as simple as the cost of doing business. The risk of
    punishment for violations must always exceed the rewards to
    deter the risk.
        I'm concerned, and my hope is that we'll get some
    additional intelligence on how these punishments have impacted
    the rewards that have been received.
        I yield back.
        Chairwoman Waters. Thank you very much.
        And I will go back to the introduction of our witnesses. I
    left off with Jennifer Schulp, the director of financial
    regulation studies at the Cato Institute.
        Each of the witnesses will have 5 minutes to summarize your
    testimony. You should be able to see a timer on your screen
    that will indicate how much time you have left, and a chime
    will go off at the end of your time. I would ask you to be
    mindful of the timer and quickly wrap up your testimony if you
    hear the chime.
        And without objection, your written statements will be made
    a part of the record.
        Now, before we begin with your oral testimonies, I would
    like to swear in the witnesses. I will call each of your names
    individually to respond.
        Would you please raise your hands?
        Do you solemnly swear to affirm that the testimony you will
    give for this committee in the matters now under consideration
    will be the truth, the whole truth, and nothing but the truth,
    so help you God?
        Mr. Tenev?
        Mr. Tenev. I do.
        Chairwoman Waters. Mr. Griffin?
        Mr. Griffin. I do.
        Chairwoman Waters. Mr. Plotkin?
        Mr. Plotkin. I do.
        Chairwoman Waters. Mr. Huffman?
        Mr. Huffman. I do.
        Chairwoman Waters. Mr. Gill?
        Mr. Gill. I do.
        Chairwoman Waters. Ms. Schulp?
        Ms. Schulp. I do.
        Chairwoman Waters. Thank you very much.
        Let the record show that all of the witnesses have answered
    in the affirmative. We will now begin with their oral
    testimony.
        Mr. Tenev, you are now recognized for 5 minutes to present
    your oral testimony.

    TESTIMONY OF VLADIMIR TENEV, CHIEF EXECUTIVE OFFICER, ROBINHOOD
                             MARKETS, INC.

        Mr. Tenev. Chairwoman Waters, Ranking Member McHenry,
    members of the committee, my name is Vlad Tenev and I'm the
    chief executive officer and co-founder of Robinhood. Thank you
    for the invitation to speak about Robinhood and the millions of
    people we serve.
        Almost 8 years ago, Baiju Bhatt and I founded Robinhood. We
    believed then, as we do now, that the financial system should
    be built to work for everyone, not just a select few. We
    dreamed of making investing more accessible, especially for
    people without a lot of money. The stock market is a powerful
    wealth creator in which more than half of U.S. households
    participate.
        Chairwoman Waters. Mr. Tenev, I would like you to use your
    limited time to talk directly to what happened on January 28th
    and your involvement in it.
        Mr. Tenev. Certainly.
        Mr. McHenry. Madam Chairwoman, the witness has the
    opportunity to give their own testimony.
        Chairwoman Waters. Excuse me. You are not recognized.
        Mr. McHenry. [inaudible]--time for your questioning.
        Chairwoman Waters. You are not recognized.
        Mr. Tenev, please go right ahead and speak directly to the
    question.
        Mr. Tenev. We created Robinhood to economically empower all
    Americans by opening financial markets to them.
        I was born in Bulgaria, a country with a financial system
    that was on the verge of collapse. At the age of 5, I
    immigrated with my family to America in search of a better
    life. I have benefited from all that America has to offer, and
    Robinhood's mission to democratize finance for all has a very
    special significance for me.
        Robinhood's platform allows people from all backgrounds to
    invest with no account minimums and zero commissions. Contrary
    to some very misleading and highly uninformed reports, we see
    evidence that most of our customers are investing for the long
    term. With features like fractional shares, dividend
    reinvestment, and recurring investments, our customers can
    start with small amounts and grow their investments in blue
    chip stocks and exchange-traded funds (ETFs) over time.
        We've always recognized the responsibility that comes with
    helping people invest. We'll continue to enhance our
    educational platform to help customers no matter where they are
    in their financial journey. Hundreds of free educational
    resources are available to everyone on our Learn website right
    now.
        While markets fluctuate, the total value of our customers'
    assets on Robinhood exceeds the net amount of money they have
    deposited with us by over $35 billion. This tells me that our
    business model is working for everyday Americans, the Robinhood
    community. Many people say that Robinhood has helped them to
    pay car loans, reduce student loan debt, meet daily bills, and
    save for the future, and we're proud to serve them.
        You've invited me today to discuss the events of last
    month, and I welcome this opportunity.
        In late January, many brokerage firms saw a massive
    increase in trading activity in a handful of stocks. Prices
    were moving dramatically day to day, even hour to hour.
        One specific day, January 28th, proved to be a completely
    unprecedented event. The spike in trading activity and
    volatility meant that Robinhood Securities, our clearing
    broker, had to hold the line and post additional firm capital
    as collateral to support our clearinghouse deposit demands.
        To put it in perspective, on January 28th, our daily
    deposit requirement was 10 times more than on January 25th.
        As a result, Robinhood Securities, along with many other
    firms, imposed temporary trading restrictions on certain
    securities. We began allowing limited buys of these securities
    the following day, and we have since lifted the restrictions
    entirely.
        There are two points I want to make clear about these
    temporary restrictions.
        First, Robinhood Securities put the restrictions in place
    in an effort to meet increased regulatory deposit requirements,
    not to help hedge funds. We don't answer to hedge funds. We
    serve the millions of small investors who use our platform
    every day to invest.
        Second, Robinhood immediately secured additional funds.
    Altogether, through capital raising and other measures, we've
    increased our liquidity by more than $3 billion to cushion
    ourselves against increased collateral requirements and related
    market stress in the future.
        Despite the unprecedented market conditions in January, at
    the end of the day, what happened is unacceptable to us. To our
    customers, I'm sorry, and I apologize. Please know that we are
    doing everything we can to make sure this won't happen again.
        And I want to highlight one more thing. The existing 2-day
    period to settle trades exposes investors and the industry to
    unnecessary risk. There is no reason why the greatest financial
    system in the world cannot settle trades in real time.
        I believe we can and should act now to deploy our
    intellectual capital and our engineering resources to move to
    real-time settlement. Together, we can solve this.
        Before I close, I want to sincerely thank the millions of
    customers who continue to use Robinhood to access the markets
    every day. We are grateful and committed to you.
        Members of the committee, I appreciate the opportunity to
    answer your questions.
        [The prepared statement of Mr. Tenev can be found on page
    114 of the appendix.]
        Chairwoman Waters. Mr. Griffin, you are now recognized for
    5 minutes to present your oral testimony.

       TESTIMONY OF KENNETH C. GRIFFIN, CHIEF EXECUTIVE OFFICER,
                              CITADEL LLC

        Mr. Griffin. Chairwoman Waters, Ranking Member McHenry, and
    distinguished members of the committee, thank you for the
    opportunity to testify today on the recent market events.
        The U.S. capital markets are the envy of the world. Our
    nation's ability to allocate capital to its best and highest
    use creates jobs, drives innovation, and fuels our economy.
    America's retail investors play an important role in our
    capital markets.
        According to Gallup, about 55 percent of Americans own
    stock right now. Citadel Securities, as the largest market
    maker in the U.S. equities market, executes more trades on
    behalf of retail investors than any other firm.
        As I will discuss shortly, Citadel Securities played an
    important role in meeting the needs of retail investors during
    the week of January 24th.
        Before doing so, I want to be perfectly clear: We had no
    role in Robinhood's decision to limit trading in GameStop or
    any of the other, ``meme,'' stocks. I first learned of
    Robinhood's trading restrictions only after they were publicly
    announced. All of us at Citadel Securities are committed to the
    healthy functioning of the U.S. equities markets.
        I first participated in the financial markets as a retail
    investor. In the late 1980s, while attending college, I traded
    stocks and options from my dorm room.
        My passion for investing led to my founding of Citadel in
    1990. Today, Citadel is one of the world's leading alternative
    investment managers. Our capital partners include pension
    plans, colleges, hospitals, foundations, and research
    institutions.
        In 2002, my partners and I founded Citadel Securities.
    Today, Citadel Securities is one of the world's preeminent
    market makers. We've been a leader in using technology to
    transform our markets, particularly for retail investors.
    Citadel Securities invests hundreds of millions of dollars each
    year to serve the needs of our customers.
        In the last week of January, the importance of this
    investment was on full display. During the period of frenzied
    retail equities trading, Citadel Securities was able to provide
    continuous liquidity every minute of every trading day.
        When others were unable or unwilling to handle the heavy
    volumes, Citadel Securities was there. On Wednesday, January
    27th, we executed 7.4 billion shares on behalf of retail
    investors.
        To put this into perspective, on that day, Citadel
    Securities executed more shares for retail investors than the
    entire average daily volume of the entire U.S. equities market
    in 2019. The magnitude of the orders routed to Citadel
    Securities reflects the confidence of the retail brokerage
    community in our firm's ability to deliver in all market
    conditions and underscores the critical importance of our
    resilient and stable systems.
        I could not be more proud of our team at Citadel
    Securities--my colleagues who were committed to ensuring that
    the interests of America's retail investors were preserved
    during this extraordinary period.
        Once again, I appreciate the opportunity to appear today,
    and I look forward to answering your questions.
        [The prepared statement of Mr. Griffin can be found on page
    99 of the appendix.]
        Chairwoman Waters. Thank you, Mr. Griffin.
        Mr. Plotkin, you are now recognized for 5 minutes to
    present your oral testimony.

     TESTIMONY OF GABRIEL PLOTKIN, CHIEF EXECUTIVE OFFICER, MELVIN
                         CAPITAL MANAGEMENT LP

        Mr. Plotkin. Chairwoman Waters, Ranking Member McHenry,
    members of the committee, I would like to thank you for this
    opportunity to share Melvin Capital's perspective on the recent
    trading activities in GameStop.
        As the founder and chief investment officer of Melvin
    Capital, I'm humbled by these unprecedented events. Many
    investors on all sides have experienced losses. I am here today
    to share my own personal experience and to be helpful in this
    conversation.
        I understand that part of the focus of this hearing is the
    decision of stock trading platforms to limit trading in
    GameStop. I want to make clear at the outset that Melvin
    Capital played absolutely no role in those trading platform
    decisions. In fact, Melvin closed out all of its positions in
    GameStop days before the platforms put those limitations in
    place. Like you, we learned about those limits from news
    reports.
        I also want to make clear at the outset that, contrary to
    many reports, Melvin Capital was not, ``bailed out,'' in the
    midst of these events. Citadel proactively reached out to
    become a new investor, similar to the investments that others
    make in our fund. It was an opportunity for Citadel to buy low
    and earn returns for its investors if and when our fund's value
    went up.
        To be sure, Melvin was managing through a difficult time,
    but we always had margin access and we were not seeking a cash
    infusion.
        I'm here testifying today far removed from my background. I
    grew up in a middle-class family in Portland, Maine. I went to
    a public high school. I studied hard and got into a good
    college. Upon graduation, I did not have a job.
        Today, I'm married with four children, and my time is spent
    with my family, and on Melvin Capital, which I founded 6 years
    ago. I named Melvin after my grandfather who ran a convenience
    store. I wanted the firm to represent his values: integrity;
    hard work; taking care of customers and employees; and
    commitment to excellence.
        Melvin Capital manages a hedge fund. Investors such as
    academic institutions, medical research and other charitable
    foundations, pension funds, retirees, and others, invest with
    us. We have 36 employees and hundreds of investors, and I feel
    a personal duty to all of them.
        Melvin specializes in the consumer and technology sector,
    including companies like GameStop, AutoZone, and Expedia.
        Most of our investments are long. In other words, we buy
    stock in companies that create jobs, grow the economy, and
    develop new products for consumers. We do this after extensive
    fundamental research, sometimes literally for years.
        When our research convinces us that a company will grow
    relative to expectations, we make a long-term investment. When
    our research suggests a company will not live up to
    expectations, and its stock price is overvalued, we might short
    a stock.
        Like with our long positions, our practice is to short a
    stock for the long term after extensive research. We also short
    stocks because when the markets go down, we have a duty to
    protect our investors' capital. There are laws governing
    shorting stock, and, of course, we always follow them.
        In addition, it's very important to understand that
    absolutely none of Melvin's short positions are part of any
    effort to artificially depress or manipulate downward the price
    of a stock. Nothing about our short position prevents a company
    from achieving its objectives. It is just Melvin's view about
    whether it will.
        Specific to GameStop, we had a research-supported view well
    before the recent events. In fact, we've been shorting GameStop
    since Melvin's inception 6 years earlier, because we believed
    and still believe that its business model--selling new and used
    video games in physical stores--is being overtaken by digital
    downloads through the internet.
        And that trend only accelerated in 2020 when, because of
    the pandemic, people were downloading video games at home. As a
    result, the gaming industry had its best year ever, but
    GameStop had significant losses.
        In January 2021, a group on Reddit began to make posts
    about Melvin's specific investments. They took information
    contained in our SEC filings and encouraged others to trade in
    the opposite direction. Many of these posts were laced with
    anti-Semitic slurs directed at me and others. The posts said
    things like, ``It's very clear that we need a second Holocaust;
    the Jews can't keep getting away with this.'' Others sent
    similarly profane and racist text messages to me.
        In the frenzy during January, GameStop stock rose from $17
    to a peak of $483. I do not think anyone would claim that the
    price had any relationship to the intrinsic value of the
    business.
        The unfortunate part of this episode is that ordinary
    investors who were convinced by a misleading frenzy to buy
    GameStop at $100, $200, or even $483 have now lost significant
    amounts.
        When this frenzy began, Melvin started closing out its
    position in GameStop at a loss, not because our investment
    thesis had changed, but because something unprecedented was
    happening. We also reduced many other Melvin positions at
    significant losses, both long and short, that were the subject
    of similar posts.
        I'm personally humbled by what happened in January.
    Investors in Melvin suffered significant losses. It is now our
    job to earn it back. And while I do not think that anyone could
    have anticipated these events, I've learned much from them and
    I'm taking steps to protect our investors from anything like
    this happening in the future.
        I look forward to answering your questions.
        [The prepared statement of Mr. Plotkin can be found on page
    105 of the appendix.]
        Chairwoman Waters. Thank you, Mr. Plotkin.
        Mr. Huffman, you are now recognized for 5 minutes to
    present your oral testimony.

      TESTIMONY OF STEVE HUFFMAN, CHIEF EXECUTIVE OFFICER AND CO-
                         FOUNDER, REDDIT, INC.

        Mr. Huffman. Thank you. Madam Chairwoman, Mr. Ranking
    Member, honorable members of the committee, my name is Steve
    Huffman. I am the co-founder and CEO of Reddit, and I am
    pleased to talk with you today about how Reddit works and what
    we have seen on our site in the past few weeks.
        Reddit's mission is to bring community and belonging to
    everyone in the world. What started in 2005 as a single
    community has since evolved into a vast network of many
    thousands of communities. They range from standard topics like
    news, sports, and politics, to internet culture, and support.
    For example, our unemployment community has become a source of
    support for hundreds of thousands of Americans who have turned
    to Reddit after losing their jobs during the pandemic.
        Our communities are created and run by our users. Because
    of this, we describe Reddit as the most human place on the
    internet. Although we are small compared to the largest
    platforms, our communities provide an online home for millions
    of people every day.
        I'd like to share a bit about how content moderation on
    Reddit works. Reddit's moderation system starts with our
    content policy, the platform-wide rules which all communities
    must follow. Among other things, these rules prohibit hate,
    harassment, bullying, and illegal activity on Reddit, and
    they're enforced by Reddit's Anti-Evil team, which is composed
    of engineers, data scientists, and other specialists.
        This team also ensures the integrity of the site, and we
    have continuously honed our methods to stay ahead of bad actors
    to protect Reddit from manipulation, spam, and other threats.
        This team searched high and low for the specific comments
    mentioned in the previous testimony or anything like it. The
    closest we could find was a single comment that received no
    votes and was deleted within 5 minutes. Such speech is not
    tolerated on Reddit, and we will, of course, investigate any
    further claims of this nature.
        Centralized moderation is common, but Reddit additionally
    uses a governance structure akin to a Federal democracy, where
    the aforementioned policies and teams represent the Federal
    Government, and the communities themselves represent States.
        All communities, or subreddits, are created by users that
    we call moderators. They set the community's rules, which may
    be as strict as they like as long as they are not in conflict
    with the platform-wide policies, and they have a variety of
    tools to enforce these rules independently.
        Moderators are not paid employees, but rather users who are
    passionate about their communities. They have the context and
    judgement to make decisions no algorithm could.
        The members of each community contribute both the content
    itself and the ranking of it by voting up or down on any post
    or comment. Unlike other platforms where a submission has a
    built-in audience through the author's follower count, every
    piece of content on Reddit, no matter how famous the author,
    starts at zero and has to earn its visibility.
        Through their votes, the community itself enforces not just
    the explicit rules of their community, but also the unwritten
    rules that define their culture. This layered approach has
    helped our users create the most authentic communities online.
        The specific community we'd like to talk about today is
    WallStreetBets. It's important to understand that
    WallStreetBets is one of many finance- and investing-related
    communities on Reddit. This particular community specializes in
    higher-risk, higher-reward investments than what you might find
    in other, more conservative financial communities on Reddit,
    with such names as personal finance, investing, and financial
    independence.
        I will stress that WallStreetBets is, first and foremost, a
    real community. The self-deprecating jokes, the memes, the
    crass-at-times language all reflect this. If you spend any time
    on WallStreetBets, you'll find a significant depth to this
    community exhibited by the affection its members show one
    another. They are just as quick to support a fellow member
    after a big loss as they are to celebrate after a big gain.
        A few weeks ago, we saw the power of community in general,
    and of this community in particular, when the traders of
    WallStreetBets banded together at first to seize an investment
    opportunity not usually accessible to retail investors, but
    later, more broadly, to defend all retail investors against the
    criticism of the financial establishment.
        With the increase in attention, WallStreetBets
    unsurprisingly faced a surge in traffic and new users. At
    Reddit, our first duty in these situations is to our
    communities, and our role in this moment was to keep
    WallStreetBets online.
        Working around the clock, we scaled our infrastructure,
    made technology changes to help this community withstand the
    onslaught of traffic, and we acted as diplomats to help resolve
    conflicts within WallStreetBets' leadership.
        We have since analyzed activity in WallStreetBets to
    determine whether bots, foreign agents, or other bad actors
    played a significant role. They have not.
        In every metric we checked, the activity in WallStreetBets
    was well within normal parameters, and its moderation tools are
    working as expected. We will, of course, cooperate with valid
    legal requests from Federal and State regulators. That said, we
    do believe that this community was well within the bounds of
    our own policies.
        To conclude, I would like to reiterate why it is important
    to protect online communities like WallStreetBets.
    WallStreetBets may look sophomoric or chaotic from the outside,
    but the fact that we're here today means they've managed to
    raise important issues about fairness and opportunity in our
    financial system. I am proud they use Reddit to do so.
        Thank you, and I look forward to your questions.
        [The prepared statement of Mr. Huffman can be found on page
    102 of the appendix.]
        Chairwoman Waters. Thank you very much, Mr. Huffman.
        Mr. Gill, you are now recognized for 5 minutes to present
    your oral testimony.

           TESTIMONY OF KEITH PATRICK GILL, GAMESTOP INVESTOR

        Mr. Gill. Thank you, Chairwoman Waters, Ranking Member
    McHenry, and members of the committee. I'm happy to discuss
    with the committee my purchases of GameStop shares and my
    discussions of their fair value on social media.
        It is true that my investment in that company multiplied in
    value many times. For that, I feel enormously fortunate. I also
    believe the current price of the shares demonstrates that I've
    been right about the company.
        There are a few things I am not. I am not a cat. I am not
    an institutional investor. Nor am I a hedge fund. I do not have
    clients and I do not provide personalized investment advice for
    fees or commissions. I'm just an individual whose investment in
    GameStop and posts on social media were based upon my own
    research and analysis.
        I grew up in Brockton, Massachusetts. My family was not
    wealthy. My father was a truck driver and my mom was a
    registered nurse. I was one of 3 kids, and the first in my
    family to earn a 4-year college degree when I graduated from
    Stonehill College in 2009. That was not a good time to be
    looking for a job.
        From 2010 to 2017, I worked for a few start-up companies,
    but there were significant periods when I was unemployed. I
    took an interest in the stock market, and even though I had
    very little money, I used those times to educate myself and
    learn more about investing.
        In 2019, after nearly 2 years unemployed, I accepted a
    marketing and financial education job at MassMutual. My wife
    Caroline and I were thrilled that I had an income and benefits.
    My job was to help develop financial education classes that
    advisers could present to prospective clients. I was not a
    stockbroker or a financial adviser. I did not talk to clients,
    and I did not recommend stocks for them to buy.
        Before and after I joined MassMutual, I studied and
    followed stocks. One of those was GameStop. In early June of
    2019, the price of GameStop stock declined below what I thought
    was its fair value. I invested in GameStop in 2019 and 2020
    because, as I studied the company, I became more and more
    confident in my analysis.
        Two important factors, based entirely on publicly available
    information, gave me confidence that GameStop was undervalued.
    First, the market was underestimating the prospects of
    GameStop's legacy business and overestimating the likelihood of
    bankruptcy. I grew up playing video games and shopping at
    GameStop, and I plan to continue shopping there. GameStop
    stores still provide real value to consumers and reliable
    revenue for GameStop.
        Second, I believe that GameStop has the potential to
    reinvent itself as the ultimate destination for gamers within
    the rapidly-growing $200 billion gaming industry. GameStop has
    a unique opportunity to pivot toward a technology-driven
    business. By embracing the digital economy, GameStop may be
    able to find new revenue streams that vastly exceed the value
    of its business. I am hardly the only person who has advocated
    these points.
        When I wrote and spoke about GameStop in social media with
    other individual investors, our conversations were no different
    from people in a bar or on a golf course or at home talking or
    arguing about a stock.
        Hedge funds and other Wall Street firms have teams of
    analysts working together to compile research and analyze
    shares of companies. Individual investors do not have those
    resources.
        Social media platforms like Reddit, YouTube, and Twitter
    are leveling the playing field. The idea that I used social
    media to promote GameStop stock to unwitting investors and
    influence the market is preposterous. My posts did not cause
    the movement of billions of dollars into GameStop shares.
        It is tragic that some people lost money, and my heart goes
    out to them. But what happened in January just demonstrates,
    again, that investing in public securities is extremely risky.
        As I said earlier, I consider myself and my family
    fortunate with our investment. When the stock price broke $20
    in December, I knew my investment was a success. I was so happy
    to visit my family in Brockton for the holidays. The money
    would go such a long way for us.
        We had an incredibly difficult 2020. Most difficult was the
    tragic and unexpected loss of my sister, Sara, in June. I am
    grateful to be in a position to give back to and support my
    family.
        As for what happened in January, others will have to
    explain it. It's alarming how little we know about the inner
    workings of the market. And I am thankful that this committee
    is examining what happened.
        I also want to say that I support retail investors' right
    to invest in what they want, when they want. I support the
    right of individuals to send a message based on how they
    invest.
        As for me, I like the stock. I'm as bullish as I've ever
    been on a potential turnaround for GameStop, and I remain
    invested in the company.
        Thank you. Cheers, everyone.
        [The prepared statement of Mr. Gill can be found on page 94
    of the appendix.]
        Chairwoman Waters. Thank you, Mr. Gill.
        Ms. Schulp, you are now recognized for 5 minutes to present
    your oral testimony.

    TESTIMONY OF JENNIFER J. SCHULP, DIRECTOR, FINANCIAL REGULATION
                        STUDIES, CATO INSTITUTE

        Ms. Schulp. Chairwoman Waters, Ranking Member McHenry, and
    distinguished members of the Committee on Financial Services,
    my name is Jennifer Schulp, and I'm the director of financial
    regulation studies at the Cato Institute's Center for Monetary
    and Financial Alternatives. Thank you for the opportunity to
    take part in today's hearing.
        Before addressing the GameStop phenomenon specifically, I'd
    like to talk about the participation of retail or individual
    investors in our public equities markets. Retail participation
    has ebbed and flowed over the years, but the recent upward
    trend accelerated sharply during the pandemic. Most point to
    zero-commission trading, but several other factors also likely
    attracted retail investors, including fractional share trading,
    low account minimums, and easy app-based platforms. More time
    at home during the pandemic probably even played a role.
        Retail participation in our equities markets is important.
    The fact that retail investors behave differently from
    institutional ones, and differently from each other, can be
    particularly valuable in times of market stress. In fact,
    individual investors may have helped stabilize the market in
    March 2020.
        Importantly, investing in the stock market also provides a
    path to wealth for individual investors. But stock ownership
    traditionally has been skewed towards the already-wealthy and
    it is highly correlated with race, education, and age.
        Retail investors making up this new surge are different.
    Recent research by the Financial Industry Regulatory Authority
    's (FINRA's) Investor Education Foundation, and the National
    Opinion Research Center (NORC) at the University of Chicago
    found that investors who opened accounts for the first time in
    2020 were younger, had lower incomes, and were more racially
    diverse. These new investors also held lower account balances.
    This may portend, as one of the researchers noted, ``a shift
    towards more equitable investment participation.''
        These new opportunities for individuals to grow their
    wealth should be welcomed and expanded, not restricted.
        Now, I'll turn to GameStop. At the outset, I will note that
    it is difficult to analyze the impact of the trading in
    GameStop and other stocks because many facts are unknown.
        But some things seem clear. Importantly, the temporary
    volatility in these stocks did not present a systemic risk to
    market function. As the Treasury Department recognized, the
    market's, ``core infrastructure was resilient during high
    volatility and heavy trading volume.''
        This is not surprising. Despite the huge trading volume and
    rapid increase in value, only a small part of the market was
    affected, and spillover effects on the wider market were mild
    and short-lived.
        The fact that GameStop traded temporarily and perhaps still
    trades above fair estimates of the company's value is not in
    itself a reason for concern. Stock prices move in and out of
    alignment all the time and markets are no strangers to bubbles.
    If a company is valued by the market differently than a review
    of its fundamentals suggests, it might indicate that the
    analysis is missing relevant information about a company's
    prospects, or it might indicate that the company's stock price
    is due for a correction.
        The market's mechanisms, including the tool of short
    selling, generally work well to handle these circumstances.
    Stepping in to prevent trading where a stock price moves
    contrary to conventional wisdom could deprive the market of
    important information.
        The SEC, among a host of others, is reviewing the relevant
    trading and conducting a study of the events. The SEC will have
    access to far more information than has been made publicly
    available, and I believe it has the tools necessary to address
    any harmful misconduct that may have occurred.
        I cannot opine on whether any regulatory changes are
    warranted on this incomplete record. I tend to believe the
    answer will be no, in light of the minimal impact on the
    market's function, but if regulators learn more, there may be
    areas identified for improvement.
        By no means, though, should these events lead to
    restrictions on retail investors' access to the markets.
        Thank you, and I welcome any questions that you may have.
        [The prepared statement of Ms. Schulp can be found on page
    108 of the appendix.]
        Chairwoman Waters. Thank you, Ms. Schulp.
        I now recognize myself for 5 minutes for questions.
        The market volatility surrounding GameStop and other
    securities has highlighted how many people feel that the cards
    are stacked against them, and that market participants, like
    our witnesses, hide the ball.
        Mr. Tenev, you explained that Robinhood restricted
    transactions in certain securities to meet demands coming from
    your clearinghouse, and yet, on January 28th, you represented
    to the media that there was no liquidity problem.
        Isn't it true that being concerned about having enough
    capital to meet deposit requirements--isn't that a liquidity
    problem? Could you just answer yes or no?
        Mr. Tenev. Chairwoman Waters, I appreciate the opportunity
    to address that.
        Chairwoman Waters. Just yes or no.
        Mr. Tenev. We always felt comfortable with our liquidity
    and the additional capital that Robinhood raised--
        Chairwoman Waters. Please answer yes or no.
        Mr. Tenev. We always felt--
        Chairwoman Waters. Reclaiming my time, I don't have time, I
    just need a yes-or-no answer.
        Mr. Tenev. I stand by my statement. The additional capital
    we raised wasn't to meet capital requirements or deposit
    requirements--
        Chairwoman Waters. Does the gentleman--
        Mr. Tenev. Excuse me?
        Chairwoman Waters. I'm reclaiming my time.
        This liquidity problem had real consequences for your
    customers, but I wonder if they were all that surprised.
    Between December 2019 and December 2020, Robinhood customers
    experienced monetary losses due to system outages. Customer
    accounts were reportedly compromised. The firm repeatedly
    failed at its best execution obligations, and it misled its
    customers regarding its revenue sources. It seems that retail
    investors often get a bad deal at Robinhood.
        Mr. Tenev, while you testified today that, ``Robinhood's
    customers benefit greatly from payment for order flow,'' in
    December 2020, the SEC charged Robinhood for not disclosing
    that it was getting paid to send customer trades to Citadel
    Securities and other market makers and for not seeking the best
    terms for its customers' orders. Robinhood provided such
    inferior trade prices that it cost your customers over $34
    million.
        Is it your testimony that after Robinhood paid the SEC $65
    million to settle those charges, this conflict of interest is
    in your customers' best interest, yes or no?
        Mr. Tenev. Chairwoman Waters, first, let me say, regulatory
    compliance is at the center of everything that we do. We've
    made mistakes in the past. I'm not claiming that I'm perfect--
        Chairwoman Waters. But could you answer yes or no to that
    question?
        Mr. Tenev. Citadel Securities is an important counterparty.
    Nobody's denying that. The reason that--
        Chairwoman Waters. The gentleman cannot answer yes or no.
    I'm reclaiming my time.
        Meanwhile, Mr. Griffin, Citadel's role in this event also
    raises significant questions for policymakers. Citadel
    Securities pays Robinhood tens of millions of dollars to
    process trades by Robinhood's customers. This relationship
    gives Citadel Enterprise key nonpublic information as to
    direction and volume of trades by retail investors. Your firm
    makes use of private exchanges called dark pools and other off-
    exchange trading to trade large sizes without moving the market
    against you.
        In fact, at some point last month, 50 percent of all trades
    occurred in dark pools or via over-the-counter (OTC) off-
    exchange trades. Your business strategy is designed
    intentionally to undermine market transparency and skim profits
    from companies and other investors. One problem, though, Mr.
    Griffin, is that we don't really know how central your forum
    has become to the capital markets,
        Mr. Griffin, does Citadel handle 47 percent of the U.S.-
    listed retail volume? Please, yes or no?
        Mr. Griffin. Excuse me, Chairwoman Waters. What percentage?
    I couldn't hear that number.
        Chairwoman Waters. 47 percent.
        Mr. Griffin. Chairwoman Waters, to the best--
        Chairwoman Waters. Yes or no?
        Mr. Griffin. To the best of my knowledge, we handle in
    excess of roughly 40 percent of all retail volumes.
        Chairwoman Waters. Thank you very much. Reclaiming my time,
    Mr. Griffin, on January 27th, Citadel executed 7.4 billion
    shares for retail investors, which would be more trades than
    the average daily volume of the entire United States equities
    market in 2019, yes or no?
        Mr. Griffin. Chairwoman Waters, that was in my written and
    oral testimony.
        Chairwoman Waters. Thank you very much.
        And with that, I now recognize the distinguished ranking
    member, Mr. McHenry, for 5 minutes for questions.
        Mr. McHenry. Thank you.
        Mr. Tenev, I'm going to come to you first. I just want to
    get to what happened on that day in January.
        So, let's take a step back here. You get a call in the
    middle of the night, according to what I've heard you say in
    interviews, and based on that conversation with your compliance
    team, you decided to halt the buying of GameStop stock.
        People were furious. We'll get into the regulations and the
    settlement parts of that today. We will get to that. But this
    is what I think needs to be answered about your decision. Why
    did Robinhood restrict the buying but not the selling of
    GameStop? And why did folks get locked out on the buy side
    only?
        Mr. Tenev. Ranking Member McHenry, I appreciate the
    opportunity to address that.
        The reason that Robinhood--first of all, let me say,
    Robinhood is always committed to providing access. It's in our
    name. It's in everything that we do.
        The decision to restrict GameStop and other securities was
    driven purely by deposit and collateral requirements imposed by
    our clearinghouses. So, buying--
        Mr. McHenry. But why--
        Mr. Tenev. --securities--
        Mr. McHenry. But why--
        Mr. Tenev. --in pieces are [inaudible] requirements.
    Selling does not.
        Moreover, preventing customers from selling is a very
    difficult and painful experience, where customers are unable to
    access their money. So, we don't want to impose that type of
    experience on our customers unless we have no other choice.
        And even though I recognize that customers were very upset
    and disappointed that we had to do this, I imagine it would
    have been significantly worse if we had prevented customers
    from selling.
        Mr. McHenry. Okay. Let me ask this question: Is payment for
    order flow legal?
        Mr. Tenev. Yes. Payment for order flow is legal and
    regulated and is a common industry practice.
        Mr. McHenry. And is this disclosed to users of your app?
        Mr. Tenev. Yes. Payment for order flow is disclosed in
    multiple places.
        Mr. McHenry. Okay.
        Mr. Tenev. Moreover, payment for order flow enables
    commission-free trading. And that's why it's become the
    industry standard model as other brokerages have replicated our
    model and started offering commission-free trading to their
    customers as well.
        Mr. McHenry. Okay. So to that, to this greater point of
    what happened that day and the model that you're using, let's
    be crystal clear. That decision you made to restrict the buying
    but not the selling of GameStop was based--was it based on
    pressure from anyone on the witness panel here today?
        Mr. Tenev. Not at all. Zero pressure from anyone. It was a
    collateral depository requirement decision made by our
    Robinhood Securities president, and we stand by it.
        Mr. McHenry. Let me get in this question. You want to
    democratize finance. You want to open up Wall Street to retail
    investors. You say that Robinhood's mission is to democratize
    finance for all. So, let's talk about that.
        Yes or no, can a Robinhood customer invest in Robinhood,
    the company?
        Mr. Tenev. Robinhood is currently a private company, so
    that's not possible, no.
        Mr. McHenry. Do you mean to tell me that the people who use
    your platform, who make you a successful company, and I would
    say directly contribute to your company's exponential growth
    and success, don't get the same access to equity shares as a
    Robinhood employee or your institutional investors. Is that
    correct?
        Mr. Tenev. Currently, that is correct, yes.
        Mr. McHenry. Okay.
        Ms. Schulp, let me pivot to you. Why is that? Why is it
    that everyday investors on the Robinhood app, people that I
    would argue contributed to its success, can't invest in
    Robinhood itself?
        Ms. Schulp. The SEC limits a lot of investment in private
    companies to those folks who are known as accredited investors.
    And to become an accredited investor, you have to meet a wealth
    test of earning at least $200,000 a year or having a net worth
    of over a million dollars. The vast majority of people in this
    country don't meet that standard and are unable to invest in
    most private companies.
        Mr. McHenry. Okay. So, let me just be clear on this.
        Mr. Tenev, I don't blame you for the restriction you've put
    on your customers not being able to invest in equity. I'd like
    to have more opportunity to ask Mr. Gill his thoughts on this.
    But let me just say this: I don't fault you for the inequitable
    regulatory structure that D.C. has created, but I think we need
    to clear this up.
        Final thing, Madam Chairwoman. For the record, I'd like to
    submit a letter from the DTCC, which is the clearing company
    that was not on the panel today, and your staff has this
    letter.
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. McHenry. Thank you all, and I look forward to getting
    to the facts of the matter--
        Chairwoman Waters. The gentleman's time has expired.
        Mrs. Maloney is now recognized for 5 minutes.
        Mrs. Maloney. Thank you, Chairwoman Waters and Ranking
    Member McHenry, for convening this hearing. I hope today's
    hearing sheds light on how our markets are working, or in many
    cases, are not working for smaller investors and ways we can
    fix that.
        The events of late January saw tremendous volatility and
    stock prices that were totally divorced from market
    fundamentals. The whole enterprise was viewed by some as a
    giant video game, trading stocks instead of properties in
    monopoly money. But it is not all fun and games because people
    can lose their life savings, their hard-earned cash, and
    tragically, last summer, we know of at least one suicide linked
    to potential trading losses.
        Beyond those possible losses, the actions of Robinhood and
    other trading platforms during the GameStop frenzy caused
    confusion and anger, and undermined investor confidence in the
    fundamental fairness of our capital markets. None of this is
    healthy for our markets or good for investors. What makes
    markets work fairly is when everyone knows the rules and that
    the rules remain consistent and predictable and are enforced.
        But because of Robinhood's actions, too many customers did
    not get that predictability. Many retail investors woke up on
    January 28th to find that they could no longer buy and sell
    stocks the same way they could in the days prior, and they were
    being treated differently than other market participants who
    could still buy and sell those same stocks. So, I don't blame
    them for thinking that things were stacked against the little
    guy.
        Mr. Tenev, you stated in your testimony that Robinhood
    restricted trading for certain securities, including GameStop,
    in order to meet your financial requirements with your
    clearinghouse. But when I go to Robinhood's website and the
    blog post you initially released on January 28th, your
    financial requirements with your clearinghouse are not
    mentioned. You only mention market volatility.
        And when I review the Robinhood customer agreement, you
    don't include specifics on how and when you may decide to
    restrict trading which you did. And you don't include any
    language or disclosures regarding your capital requirements. It
    only includes vague language that at any time, and in its sole
    discretion, Robinhood can restrict trading. In other words, you
    seem to reserve the right to make up the rules as you go along.
        I have two questions for you. First, do you think you owe
    your customers more disclosure and transparency than you gave
    them?
        And, second, do you believe your lack of candor with your
    customers might have contributed to the wild speculation and
    confusion that resulted in the aftermath of your trading
    restrictions?
        Mr. Tenev. Congresswoman, I appreciate the questions.
        To answer the second question, look. I am sorry for what
    happened. I apologize. And I am not going to say that Robinhood
    did everything perfect and that we haven't made mistakes in the
    past, but what I commit to is making sure that we improve from
    this, we learn from it, and we don't make the same mistakes in
    the future. And Robinhood as an organization will learn from
    this and improve to make sure it doesn't happen again, and I
    will make sure of that.
        Mrs. Maloney. I expect we will experience future events
    with increased volatility, and Robinhood's recent actions
    appeared arbitrary, which is why I don't blame customers for
    feeling as though they were treated unfairly. Your trading
    restrictions came out of the blue, and your communication was
    not clear.
        Mr. Tenev, looking forward, what operational changes is
    Robinhood making to better respond to future market volatility,
    to improve transparency with your customers, and to ensure that
    retail customers don't get the rug pulled out from under them
    at the last minute?
        Mr. Tenev. Thank you for that question, Congresswoman. We
    will be committing to reviewing absolutely everything about
    this, but the $3.4 billion that we raised I think goes a long
    way to cushioning the firm from future market volatility and
    other similar black swan events.
        And I believe that even throughout this process, we
    improved our risk management processes and strengthened them so
    that the experience customers had that week was much improved
    from Thursday.
        Chairwoman Waters. Thank you very much.
        Mr. Tenev. We continue to learn and improve upon this.
        Chairwoman Waters. Mrs. Wagner, you are recognized for 5
    minutes.
        Mrs. Wagner. Thank you, Madam Chairwoman. I would like to
    thank our witnesses for testifying today to discuss the late
    January market volatility that took place, along with what I
    hope is a broader discussion on market functions and their
    effect on everyday investors.
        Since I was very first elected, I have advocated for
    America's Main Street investors and worked tirelessly to ensure
    that all Americans, especially those low- and middle-income
    savers, are given the investment choice, access, and
    affordability that they deserve. Retail investors are the
    strength of our stock market, and I have fought throughout my
    career for their best interests in the financial markets, and
    this hearing today is no different.
        The advances in financial technology that we have witnessed
    in the last decade have improved the way that Americans and our
    businesses perform financial activities.
        In just the past year, we have seen retail investors'
    market participation more than double, and I think this is
    great. I believe in the wisdom of the retail investor, and I
    will say that I believe in the First Amendment, too.
        This increase is attributed to Robinhood and other trading
    brokerages who are lowering account minimums, permitting
    fractional share trading, and implementing zero-commission
    trading. It is critical that Congress focus on reducing
    barriers to market participation, they rarely want to do, let
    me sadly say, and allowing Main Street Americans access to the
    financial instruments that can create long-term investment
    savings.
        All of these changes have given millions of Americans the
    ability to invest better for their families and their future.
    My hope is that the Majority does not use this hearing as an
    excuse to once again add new Federal regulatory burdens to an
    industry that is already heavily regulated, which would prevent
    people from participating in our capital markets. Letting
    existing regulations work is key, not burdening everyday
    investors with new and more costly barriers to entry.
        Mr. Tenev, it appears that at the time, your company did
    not have money to meet the collateral requirements for that
    level of trading by your customers. In your view, were the
    collateral requirements from the DTCC unreasonably high, was
    the amount of trading on your platform unforeseeable, or was
    your company undercapitalized, given its risk profile?
        Mr. Tenev. Thank you for the question, Congresswoman.
        This event was a Phi Sigma event, which is a 1-in-3.5-
    million event. To put that in context, there have only been
    tens of thousands of stock market days in the history of the
    U.S. stock market, so, a 1-in-3.5-million event is basically
    unmodelable.
        That said, we can learn from it, and in this particular
    case, our risk management processes worked appropriately to
    keep us in compliance with all of our deposit requirements and
    collateral requirements.
        Mrs. Wagner. Mr. Tenev, I realize that you are doing a full
    review of your practices and such. I encourage you to do that.
    And certainly, communication with your investors is going to be
    key to that because you didn't communicate with them early on.
        Let me just say, as the ranking member on our Diversity and
    Inclusion Subcommittee, I am delighted to be speaking with our
    witness, Ms. Jennifer Schulp. Ranking Member McHenry and I have
    spent countless hours stressing the importance of having
    qualified women in finance, so I am pleased to have you here
    today to lend your expertise.
        Ms. Schulp, we now know that it was the daily collateral
    demands set by the National Securities Clearing Corporation
    (NSCC) that were the reason Robinhood had to temporarily
    restrict trading. Can you briefly explain the purpose of these
    capital requirements and their overall relationship to ensuring
    that our markets function in an orderly manner? And did you see
    any broad failures of market function during these events,
    ma'am?
        Ms. Schulp. Sure. Thank you. And thank you for the
    compliment.
        The NSCC's collateral requirements serve the function to
    provide security for the stock-selling process. So while an
    investor thinks that what has happened is they bought a stock
    on the day that they make a trade, it really takes 2 days for
    the settlement process to clear. During that time, the
    brokerage firm, the Depository Trust & Clearing Corporation
    (DTCC), and the investor on the upper side can remain at risk
    of that stock not actually clearing. And the collateral report
    is in place to mitigate the risk that the brokerage firm will
    not be able to make good on its promises to sell or buy.
        I didn't see any broad-scale failures. The DTCC's
    collateral requirement was long, but understandable, and I
    think it functioned correctly, for the most part.
        Mrs. Wagner. My time has expired. I thank you all for your
    testimony, and I yield back, Madam Chairwoman.
        Chairwoman Waters. I thank the gentlewoman.
        Mr. Perlmutter. Madam Chairwoman, point of order.
        Chairwoman Waters. Point of order
        Mr. Perlmutter. Just to remind people that when they are
    not speaking, to mute themselves, because there's a lot of
    feedback when a question is asked and the microphone stays
    open, and the people are answering the question. Just remind
    everybody to mute when you're not speaking. That is all.
        Chairwoman Waters. Thank you very much. You heard Mr.
    Perlmutter. I would hope that every Member would certainly do
    that.
        Mr. Sherman, you are recognized for 5 minutes.
        Mr. Sherman. Thank you very much.
        We have come to expect things on the internet to be free.
    Just because you are not paying for it, it is not free. You are
    the product. Someone else is the customer. When you go onto
    Facebook and it is free, you are the product being sold to the
    advertiser, and your information is sold to God-knows-whom.
        So, we now have a system where we are telling investors
    that it is free to buy and sell stock. There are two ways to
    pay the folks involved in Wall Street for buying and selling
    stock.
        One is a commission, and you know what it is. So, we
    discourage investors a little bit from buying and selling stock
    because they have to pay a commission, and they know they are
    paying a commission.
        The other way to do it is to give them a worse execution.
    Whenever there is, say, a stock being purchased and sold, the
    market maker, perhaps Citadel, might be willing to sell the
    stock for $10.05, but will buy it for only $10. The difference
    is $0.05. And so, the issue is whether Robinhood and other
    people who are being told you get it for free are really
    getting it for free.
        Mr. Griffin, you are a market maker. You pay some brokers
    for order flow. You don't pay others for order flow. So when
    you pay for order flow, you are not making as much on the
    transaction. You have to pay some of that back to the broker.
    The amount of that is hidden from the customer. The fact that
    it exists has perhaps recently been disclosed.
        SEC rules require that people get the best execution, but I
    have recently learned that there is best execution and enhanced
    pricing. So if you get an order from Fidelity, and you get an
    order from Robinhood, and you are paying for the Robinhood
    order flow, is the Robinhood customer getting as good a price
    as the Fidelity customer?
        Mr. Griffin?
        Mr. Griffin. Congressman, I believe that is an excellent
    question. The execution quality that we can provide as measured
    in terms of price improvement is heavily related or correlated
    to the size of the order that we receive. So if I were to
    speculate--
        Mr. Sherman. Don't tell me that there are other factors
    involved and take us down another road. I am asking you a clear
    question.
        Assuming same size of order, one comes in from Robinhood,
    and one comes in from Fidelity, isn't it true that one is going
    to be getting enhanced best execution, and the other one is
    just going to get best execution?
        Mr. Griffin. As I was trying to explain, because the
    Robinhood order comes from a community of traders who tend to
    trade in smaller size--
        Mr. Sherman. That isn't my question, sir. You are evading
    my question by making up other questions. Let me repeat: Two
    identical orders come in; same stock, same quantity. One is
    from Robinhood, one is from Fidelity. What happens?
        Mr. Griffin. The quality of the execution varies by the
    channel of the order. This is a commonly-understood phenomena
    in economics, that channels matter. For example, when you go
    get a mortgage, a mortgage from JPMorgan to their clientele has
    a different rate of interest than a mortgage--
        Mr. Sherman. Okay. Reclaiming my time, sir, who gets the
    better deal, the one that comes from a broker who is being paid
    for order flow, and one not? Can you testify that on balance,
    there is no difference, assuming the same size of the order?
        Mr. Griffin. As I said earlier, the size of the order is
    only one factor.
        Mr. Sherman. You are doing a great job of wasting my time.
    If you are going to filibuster, you should run for the Senate.
        Everyone else I have talked to in this industry says that
    when your broker is being paid for order flow, you get a worse
    execution. And otherwise, you are in a peculiar circumstance
    where you are making more money on a Fidelity transaction than
    a Robinhood transaction which would be an absurd business
    practice.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Lucas, you are recognized for 5 minutes.
        Mr. Lucas. Thank you, Madam Chairwoman, for holding this
    hearing, and thank you to the witnesses for agreeing to
    testify.
        It has been reported that approximately 20 percent of
    market volume is now attributable to retail customers, which I
    think is just fascinating, considering that is up from 10
    percent in 2019, and that is an overwhelmingly positive
    development, allowing for more market liquidity, more
    stability, and additional avenues for households to grow their
    wealth. It is important to increase market access for retail
    customers, and I don't want to disrupt that, so I would like to
    turn with my first question to Mr. Tenev.
        Let's talk about the attention that this payment for order
    flow has received. You explained in your testimony that
    Robinhood's relationship with market makers is important for
    Robinhood's ability to offer commission-free trading. So
    expand, if you would, on how that process benefits the everyday
    investor. Just expand in general on that, if you would?
        Mr. Tenev. Congressman, I'd be happy to. Thanks for giving
    me an opportunity.
        As I mentioned in my written testimony, payment for order
    flow enables commission-free trading. Prior to Robinhood
    changing the industry standard model to be commission-free,
    most brokers collected a commission on top of the payment for
    order flow on every transaction.
        Now, Robinhood routes to market makers. Including Citadel
    Execution Services, we have seven in total across equities and
    options, and we route without consideration of payment for
    order flow. All payment for order flow arrangements are uniform
    across the market makers, and our system routes orders based on
    who provides the best execution quality for our customers.
        So, the reason Citadel gets a relatively high percentage of
    our customer order flow is because they provide superior
    execution quality for our customers, and that is first and
    foremost, the most important consideration that we look for:
    How are customers getting the best execution quality?
        If another market maker were to improve upon the execution
    quality that Citadel Execution Services provides on any subset
    of orders, our system is set up to automatically route more
    traffic to that market maker.
        Mr. Lucas. Continuing down this line, because clearly, this
    is one of the things that my colleagues and the public has a
    very strong interest in, and having lived through Dodd-Frank
    before, I have seen worse times. Major things can occur. I want
    to turn to Mr. Griffin.
        Could you also elaborate on how payment for order flow
    provides, whether it is the best price to the retail investor
    from the market maker's perspective? Could you expand on that--
        Mr. Griffin. Congressman--
        Mr. Lucas. --as you outlined in--
        Mr. Griffin. Absolutely, Congressman. As the CEO of
    Robinhood just set forth clearly, the orders that are allocated
    amongst the market makers today are allocated principally on
    the basis of price improvement. We have fought for 15 years to
    make that the basis by which orders are allocated because we
    strongly believe that Citadel is able to provide a better
    execution for retail orders in the long run. We make a huge
    investment in our team and our technology to do so.
        How is it that we are able to provide better execution
    quality than exchanges? Because exchanges are limited in their
    ability to do business by regulatory mandate. Exchanges, by
    law, have a minimum $0.01 wide market, which for low-price
    securities means that they are less competitive than they
    otherwise could be. We're able to share our trading acumen with
    retail investors, and we are able to give them a better price,
    and we are able to make payments for order flow to firms like
    Robinhood that allow them to have lower, or today, in most
    cases, no commission. And of particular note, we are able to
    help Robinhood and other brokers pay exchange fees to the
    exchanges at the time of execution. This has been very
    important to the democratization of finance. It has allowed the
    American retail investor to have the lowest execution costs
    they have ever had in the history of the U.S. financial market.
        Mr. Lucas. Mr. Tenev, in the Dodd-Frank process that the
    chairwoman and I went through a decade ago plus, there was much
    discussion about margin requirements. Give us just a discussion
    for an instant about when you discovered you had a $3 billion
    additional margin call?
        Mr. Tenev. Thank you, Congressman. I believe the full play
    by play of that situation was described in detail in my written
    testimony. Just to clarify, though, this decision had--
        Mr. Lucas. My time has expired, unfortunately.
        Thank you, Madam Chairwoman. I yield back.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Meeks, you are recognized for 5 minutes.
        Mr. Meeks. Thank you, Madam Chairwoman, and Mr. Ranking
    Member, for this hearing,
        Let me ask a question to Mr. Tenev. I have been burned once
    or twice in the market, but particularly since I have been a
    Member of Congress, one of the things that I recall greatly was
    the financial crises in 2008.
        And we thought that opening the market up to where people
    had adjustable rate mortgages, et cetera, they were able to get
    into the market, people who may not have been before, but a lot
    of disclosure had not happened. So we didn't look, nor were
    there any documents to look at what their incomes were or
    anything of that nature.
        So when those adjustable rates happened, many individuals
    lost their homes. Many people who bought those mortgages or who
    initially agreed to those mortgages sold them immediately
    because they did know that the people would not be able to
    afford them, and they would default shortly thereafter.
        I understand your model of trying to get more people, more
    democratization, but that means that there is now a greater
    responsibility for ensuring that your customers have all of the
    information they need to access riskier trades. For me, the
    information has to be digestible and accessible.
        One of the problems I have, for example, is you are
    allowing up to $1,000 to buy stocks on margin, and buying on
    margin is risky. So, how do you disclose this? How do you make
    the determination of individuals who are not the most
    sophisticated investor and allow them to buy these risky stocks
    that are on margin?
        Mr. Tenev. Thank you, Congressman, for the opportunity to
    address that. Let me set the stage a little bit by saying that
    about 2 percent of our customers borrow on margin, about 13
    percent on a monthly basis perform an options transaction, and
    a much smaller number, around 3 percent, perform a multi-leg
    options transaction. So, the vast majority of our customers are
    engaging in buy and hold activities and long-term investing on
    our platform.
        To clarify your point on the $1,000 margin, that is
    actually something that we refer to as Robinhood Instant, and
    it is provided as a courtesy. When a customer initiates a
    deposit, we allow them access to up to $1,000 of that deposit
    immediately. Similar to how, if you deposit a check at a bank,
    as a courtesy, they might provide access to those funds or a
    portion of them before that check clears.
        As for margins specifically, borrowing money on margin, the
    rules are very ironclad industry-wide. Obviously, Robinhood
    Securities conforms to all of the applicable rules. And
    Robinhood's product is in many ways more restrictive than that
    of our competitors, because in order to even qualify for
    borrowing on margin, you have to be a Robinhood Gold Customer,
    which involves paying $5 a month for the service.
        Mr. Meeks. You say that everything is restrictive, but when
    you are going after the less sophisticated investor, it is more
    than that. There is a greater responsibility that you have
    because they could lose. And when they lose, it could make a
    determination of whether or not they can pay their mortgage or
    their rent, and they could be taken advantage of.
        Oftentimes, we find in the financial industry, it is those
    who have the least, who are really taken advantage of. So, the
    big guys--it becomes a reverse Robinhood situation which really
    concerns me.
        Let me get to this really quickly because it was something
    that you said in regards to liquidity. You said that you didn't
    borrow the money because you needed it at the time, but later
    in the question, you raised the additional money, and I want to
    know how you spent the money for future situations, which says
    to me that you did have a liquidity problem or you anticipated
    possibly having a liquidity problem or would have one in future
    transactions. What is the deal there?
        Mr. Tenev. I appreciate that question. I stand by what I
    said. Robinhood was able to meet our deposit requirements. We
    were in compliance with firm net capital obligations throughout
    the period, and that additional capital, the $3.4 billion,
    wasn't to service our existing requirements. It was entirely to
    prepare for a future, even greater black swan event, and to
    unrestrict and remove restrictions on the trading and the
    buying of these securities.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Huizenga, you are next for 5 minutes.
        Mr. Huizenga. Thanks, Madam Chairwoman. And this would have
    been a little nicer 10 minutes ago, when I was supposed to go,
    but I am going to go back to Mr. Griffin and the Chair of the
    Capital Markets Subcommittee. The ranking member, I think, was
    filibustering himself, and I just wanted to make sure, Mr.
    Griffin, that you had the opportunity to feel comfortable with
    the explanation of that best execution, and what was attempted,
    apparently, to try to be asked.
        Mr. Griffin. Congressman, I hope so. I think it is
    important to emphasize that we have vigorously advocated for
    execution quality to be one of the dominant decision-making
    factors in the routing of order flow in the United States. This
    has saved retail investors billions of dollars over the years
    in contrast to the executions that they would receive through
    other execution strategies.
        Mr. Huizenga. Okay.
        Mr. Griffin. With respect to payment for order flow, we
    simply play by the rules of the road. Payment for order flow
    has been expressly approved by the SEC. It is a customary
    practice within the industry. If they choose to change the
    rules of the road, if we need to drive on the left side versus
    the right side, that is fine with us.
        I do believe that payment for order flow has been an
    important source of innovation in the industry. As the CEO of
    Robinhood has testified, they drove the industry towards zero
    dollar commissions. This has been a big win for American
    investors.
        Mr. Huizenga. I am going to Ms. Schulp from the Cato
    Institute. I know that Greenwich Associates had a study, and
    others are out there. Do you concur that this has been good for
    consumers, for the most part?
        Ms. Schulp. I think that there are still ongoing studies,
    but I do think that payment for order flow and the price
    improvements have largely been good for customers. And I agree
    with Mr. Griffin that this has helped drive innovation in the
    industry.
        I think disclosure can always be better, and I think people
    should understand that their broker still needs to make money,
    even if they are providing a zero-commission trading service.
        Mr. Huizenga. Okay. I have about 3 minutes left. I was
    going to start, actually, with this and ask each one of you why
    you thought you were here today, but I am going to dispense
    with that because it is going to take too much time, and I will
    provide the answer. Political theater for the most part. That
    is what this hearing is today. And we are on the business
    channels right now and on C-SPAN. I think you will see a few of
    my colleagues playing to the cameras.
        But we need to have some of these fundamental and important
    questions answered at the end of the day. And one of the
    assertions that you have heard already today is that investing
    is, ``casino gambling, it is using monopoly funny money,'' and
    I guess I want to know, is individual retail participation in
    the marketplace gambling, casino gambling, or using funny
    money?
        Mr. Gill, why don't we just start with you? Very quickly.
        I don't hear him. So, Mr. Huffman, let's move to you.
        Mr. Huffman. No. I believe that investing is investing.
        Mr. Huizenga. Okay. Mr. Griffin?
        Mr. Griffin. I believe the vast, vast majority of retail
    participants are people saving to meet their dreams.
        Mr. Huizenga. Mr. Tenev?
        Mr. Tenev. Congressman, thank you. As I mentioned in my
    opening statement, Robinhood customers have essentially made
    over $35 billion in unrealized and realized gains--
        Mr. Huizenga. Very quickly.
        Mr. Tenev. --on all of their assets.
        Mr. Huizenga. It has been a good thing for them, correct?
        Mr. Tenev. Absolutely. It is investing, and it is building
    wealth.
        Mr. Huizenga. I'll go back to Mr. Gill.
        Mr. Gill. Yes. I believe it is an opportunity for investors
    to participate in the market just as institutionals
    participate.
        Mr. Huizenga. Okay. So actually, the business channels had
    a good question from one of the Reddit readers, which is, you
    recommended GameStop before. Would you buy their stock now at
    roughly $45? It started at $48 earlier today. You were talking
    about buying it and being happy when it hit cross 20. So are
    you buying that stock today?
        Mr. Gill. Let me just say that investing can be risky, and
    my particular approach to investing is rather aggressive and
    may not be suitable for anyone else, but for me personally,
    yes.
        Mr. Huizenga. So, yes or no, are you buying the stock,
    and--
        Mr. Gill. For me personally, yes. I do find it is an
    attractive investment at this price point.
        Mr. Huizenga. A quick question, did you invest in GameStop
    because you were not aware of the payment for order flow? That
    is one of the accusations that people bought into this because
    they don't know that.
        Mr. Gill. Sorry. Could you repeat that question?
        Mr. Huizenga. Did you buy GameStop because you were not
    aware of the payment for order flow?
        Mr. Gill. My investment in GameStop was based on the
    fundamentals.
        Mr. Huizenga. Okay. I think that answers it. I believe my
    time has expired.
        Chairwoman Waters. Ms. Velazquez, you are recognized for 5
    minutes.
        Ms. Velazquez. Thank you, Madam Chairwoman.
        Mr. Tenev, Robinhood seems to have perfected the definition
    of trading, providing the user with a perception that investing
    through the Robinhood app offers a recreational game, playing
    with little or downside risk. Of course, many of us understand
    that investing is not a game and carries significant risk.
        How does Robinhood balance disclosures and the potential
    downside risk of investing, including the risk of substantial
    loss and the more enticing claims of profitability and the ease
    of trading?
        Mr. Tenev. Congresswoman, I appreciate that question.
    Giving people what they want in a responsible way is what
    Robinhood is about. We don't consider that gamification. We
    know that investing is serious, and we are investing in all of
    the educational tools and customer support to help people on
    their investing journey.
        What we see is most of our customers are buy and hold. A
    very small percentage are trading options, about 13 percent,
    and less than 3 percent borrow on margin. So, most people use
    Robinhood to build up portfolios over time, and--
        Ms. Velazquez. But can you answer my question? How do you
    balance disclosures and the potential downside risk of it?
        Mr. Tenev. We make lots of disclosures, Congresswoman. We
    are also a self-directed brokerage, so that means we don't
    provide advice, and we don't make recommendations for what
    customers should or should not invest in.
        Ms. Velazquez. So, you are saying that as a result of
    emphasizing profitability and ease of trading over the risk of
    loss, many amateur investors were unaware of the situation in
    which they could find themselves?
        Mr. Tenev. I want to mention again, as in my opening
    statement, Robinhood customers have earned more than $35
    billion in unrealized and realized gains on top of what they've
    deposited.
        So, I think this shows us that the product is working for
    customers, and our mission is working.
        Ms. Velazquez. Okay. Thank you.
        Mr. Plotkin, over the course of my time in Congress, I have
    been concerned and have spoken out about the dangers of short
    selling. While I understand that short selling can be used for
    legitimate purposes, too often, I have seen abuse, and it ends
    up harming ordinary workers and families.
        I first saw it against the people of Puerto Rico, and now
    we are seeing it here against GameStop. Large investors,
    including hedge funds like yours, have to disclose their long
    positions when they own 5 percent or more of the company's
    shares, but no such disclosure is required for short positions.
        As we consider reforms, is this type of disclosure for
    short positions something you will support? Mr. Plotkin?
        Mr. Plotkin. Yes. Congresswoman, thank you very much for
    the question. I think it is a really good question. Whenever
    regulation is put forth in the marketplace, we will obviously
    operate within those rules. It is certainly something I would
    be happy to follow up with the committee on.
        Ms. Velazquez. What about my question about short selling?
        Mr. Plotkin. Yes. I think it is a really good question. It
    is not for me to decide, but if those are the rules, I will
    certainly abide by them.
        Ms. Velazquez. Okay. I am glad to hear that answer.
        Mr. Gill, public reports credit with you helping to start
    the GameStop craze by encouraging other amateur investors to
    bet against the short position that Mr. Plotkin and others
    took. But the stock has now fallen from its high, and many
    amateur investors have lost hundreds of thousands of dollars.
    It is my understanding that you are a registered broker. Is
    that correct?
        Chairwoman Waters. The gentlelady's time has expired.
        Ms. Velazquez. Okay. Thank you. I yield back.
        Chairwoman Waters. Thank you. And I appreciate all of the
    Members who are participating today. This is not political
    theater at all. This is serious oversight responsibility, and
    Members are reminded not to impugn the motive of other Members.
    Thank you.
        Mr. Luetkemeyer, you are recognized for 5 minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman. My first
    question will go to Mr. Gill.
        Mr. Gill, you are a very serious investor, somebody who
    does his homework, and invests in the market your own personal
    funds. We are discussing the actions around Robinhood, all of
    the transactions that took place. Do you think we need more
    legislation as a result of what happened here, or did the
    system actually work?
        And let me just make a couple of comments on that part.
    From the standpoint that it did work, was it self-correcting?
    Did the fact that somebody like yourself was able to invest and
    maybe take advantage of the overshorting positions by the hedge
    fund guys who were trying to really drive down the price of
    stock for other reasons, whatever, or did it point out perhaps
    that we had some companies, perhaps like Robinhood, where I
    would argue it was undercapitalized or underreserved, or maybe
    there was overaggressive other types of investing that was
    taking place.
        The algorithms that were there, the different business
    models, they didn't work because you outsmarted the system, so
    to speak. Would you like to comment on these questions and how
    I formatted that?
        Mr. Gill. Thank you for the questions, Congressman. I would
    say my expertise is in analyzing the business, the fundamentals
    of the business, not so much on the inner workings of the
    market. I am not so sure about legislation, per se. What I
    would say is that increased transparency could help, that if
    someone like me could have a better understanding of how those
    types of things work, I feel as though it would be quite
    beneficial to retail investors.
        Mr. Luetkemeyer. Thank you for that.
        Mr. Tenev, Robinhood has an interesting name. As I recall,
    the old story is to take from the rich, and give to the poor. I
    assume what you are doing is allowing the poor to compete with
    the rich, which is interesting.
        You made the comment in your testimony, Mr. Tenev, about
    settling this in real time. We have the electronic ability to
    do this. I think that would probably help the situation that
    occurred here, but what other problems occur when you do this
    in real time? What are the things we have to look at? What
    other unintended consequences would there be if you did
    something like that?
        Mr. Tenev. Thank you, Congressman, for the question. I
    believe that right now, certain market participants rely on
    next-day settlement to be able to take advantage of intra-day
    netting and run up larger, one-sided positions in certain
    stocks with the knowledge that they can close those positions
    or reduce them by the time settlement happens.
        And I understand that would be the limitation to the
    trading activities of some of these institutions, so that's
    certainly one area to consider.
        The other is around securities lending. We would have to
    make changes to how securities lending works. I don't think any
    of these are insurmountable challenges, and I would be happy,
    as I mentioned earlier, to deploy our intellectual capital and
    our team's engineering resources to help solve these problems
    very quickly.
        Mr. Luetkemeyer. Thank you for that.
        Mr. Plotkin and Mr. Griffin, the question is for both of
    you here. Whenever you are short selling--I understand that
    GameStop stock was short sold at 140 percent. And, Mr. Plotkin,
    you made the comment in your testimony a minute ago that you
    were not trying to manipulate stock. Yet, if you are short
    selling a stock 140 percent, for me, on the outside looking in,
    it looks like that is exactly what you are doing. Explain to me
    why that is not manipulating the stock?
        Mr. Plotkin. Thank you, Congressman. I can't speak to other
    people who were shorting. For us, any time we short a stock, we
    locate a borrower. Our systems actually force us to find a
    borrower. We always short stocks within the context of all of
    the rules.
        Mr. Luetkemeyer. Mr. Griffin, would you like to comment on
    that? You guys are both market makers, and brokers and hedge
    fund guys. You do all of it. Why is this not considered
    manipulating the stock whenever you can short sell at 140
    percent? Don't you think there should be a limit on something
    like that?
        Mr. Griffin. I believe that the short interest in GameStop
    was exceptional, and I am not sure it is worth us delving into
    legislative corrections for a very unique situation in terms of
    the extreme size of the short interest.
        I will say that all of the large markets, in fact, every
    bank, every hedge fund does have to comply with the requirement
    to borrow shares to short shares in the course of their day in
    and day out business. The practice of naked shorting was
    largely curtailed by SEC mandate years ago.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Scott, you are recognized for 5 minutes.
        Mr. Scott. Thank you, Chairwoman Waters. And let me just
    say that the people of this country appreciate you for pulling
    this Financial Services hearing together because this is a
    threat to the future of our financial system, and we have to
    get to the bottom of it.
        Let me start with you, Mr. Tenev. Let's go through this.
    The sequence of events that led to the extreme rise in value of
    GameStop stock and the subsequent market volatility originated
    through a Reddit discussion, and then that was fueled through
    social media. And as the story gained traction, tweets by well-
    known figures with the influence to move markets sent the stock
    value even higher and higher.
        Let me start with you, Mr. Tenev. What policies does
    Robinhood have in place to monitor what happened on social
    media and how it drives the use of your trading platforms?
        Mr. Tenev. Thank you for the question, Congressman.
    Currently, Robinhood does not perform any sort of moderation of
    social media. We simply don't have the data that the social
    media platforms have at their disposal to tie these posts to
    identities. We do, however, within Robinhood Securities conform
    to all regulatory requirements around monitoring and trade
    surveillance and all things of that nature.
        Mr. Scott. Mr. Tenev, don't you see something has gone
    terribly wrong here? What do you do to monitor the trades in
    individual stocks, particularly when in the case of GameStop,
    they are singled out and moved on social media? What do you do?
        Mr. Tenev. I appreciate the question. Our priority
    throughout the exceptional market conditions in January and
    early February was to maintain the uptime and performance of
    our platform and make sure that we are available to customers--
        Mr. Scott. Let me try to get to a point here. Do you,
    Robinhood, have any policies in place to ensure that investors
    are making trades based on legitimate material financial
    information and not the influence of social media, the design
    of trading platforms, or any other superfluous information? Do
    you have anything, any guards up?
        Mr. Tenev. Absolutely. Congressman, we provide educational
    resources to our customers, including our redesigned Robinhood
    Learn Portal, which is not just available to Robinhood
    customers but to the general public, and it had over 3.2
    million people visiting in 2020.
        Mr. Scott. But you are at the center of this. Don't you see
    and agree that something very wrong happened here and that you
    are at the center of it? And we are looking on this committee
    at how we can protect our wonderful, precious financial system.
    We need it from you.
        What about you, Mr. Hoffman. Do you have anything?
        Mr. Huffman. Congressman--
        Mr. Scott. What steps is your company taking to guard
    against this, anything at all?
        Mr. Huffman. Congressman, we spend a lot of time at Reddit
    ensuring the authenticity of our platform, so we have a large
    team dedicated to this exact task. Everything on Reddit, all of
    the content is created by users, voted on by users, and ranked
    by users, and we make sure that it is authenticated and as
    unmanipulated as possible. And in this specific case, we did
    not see any signs of manipulation.
        Mr. Scott. Madam Chairwoman, I just want to conclude, I
    have maybe 10 seconds left. But this episode exposes a serious
    threat to our financial system when tweets and social media
    posts do more to move the market than material, legitimate
    information, and this is enormous.
        Chairwoman Waters. Thank you very much.
        Mr. Stivers, you are now recognized for 5 minutes.
        Mr. Stivers. Thank you, Madam Chairwoman. I appreciate you
    calling this hearing. The American financial markets, I
    believe, are the envy of the world, but they are still
    imperfect. I would have liked to seen this committee have a
    meaningful discussion about capital requirements and the T plus
    2 clearing rules that may have contributed to some of
    Robinhood's customers not being able to purchase stock,
    including GameStop, for a period of time.
        But because the Majority didn't include the SEC, the
    Depository Trust & Clearing Corporation, or the National
    Securities Clearing Corporation to testify, we are left with
    what we have. That is because I believe the Majority is
    attempting to use this hearing to drive a narrative about the
    U.S. capital markets being rigged. But I do have several
    questions.
        Mr. Tenev, you decided to stop allowing your users to buy
    GameStop and other stocks as a result of capital requirements
    on Robinhood securities. Is that correct?
        Mr. Tenev. That is correct, yes, deposit requirements with
    our clearinghouses.
        Mr. Stivers. And those got resolved, but for a period of
    time, some of your users could only sell and not buy, and that
    could have contributed to the stock actually not going up as
    fast because some of your users were prohibited from buying. Do
    you think it is possible that that could have happened?
        Mr. Tenev. I shouldn't speculate on what could have
    happened.
        Mr. Stivers. If there are more sellers than buyers, does
    the stock price go down or up?
        Mr. Tenev. Congressman, to be clear, Robinhood is a
    minority of trading activity in--
        Mr. Stivers. I understand.
        Mr. Tenev. --these securities.
        Mr. Stivers. I understand. But if your buyers can only sell
    and not buy, then it clearly keeps you from putting upward
    pressure on the stock price. Is that correct?
        Mr. Tenev. On Thursday--
        Mr. Stivers. Among your users.
        Mr. Tenev. --customers on our platform could only sell.
        Mr. Stivers. Correct.
        Mr. Tenev. There was no ability to buy, that is correct.
        Mr. Stivers. Right. You said earlier--by the way, I know
    some people have attacked your arbitration agreements, but I
    want you to be clear. If your users were harmed as a result of
    these actions, they can recover through arbitration. Is that
    correct, yes or no?
        Mr. Tenev. Yes. That is correct, and our arbitration is
    FINRA-supervised and overseen, and we do believe arbitration
    gives customers a fair and speedier resolution to their claims.
        Mr. Stivers. Thank you. Does your user agreement and your
    arbitration allow for group arbitration or only individual
    arbitration?
        Mr. Tenev. Let me get back to you on that.
        Mr. Stivers. If a group was treated similarly and similarly
    affected or lost upside or lost money, can they do it as a
    group, or is it only individuals in your arbitration agreement?
        Mr. Tenev. Congressman, I am sure you are familiar with the
    number of class action lawsuits filed against Robinhood for--
        Mr. Stivers. And I am not asking about a class action
    lawsuit. I am asking in your arbitration system, can a group of
    people come together as an individual? And this is not a trick
    question. I am not a fan of trial lawyers. I am just trying to
    understand.
        Mr. Tenev. Yes. I appreciate the question, Congressman. I
    think the best thing I can do is get back to you after making
    sure that we get you the right answer.
        Mr. Stivers. That would be great. Thank you. That would be
    helpful.
        Mr. Plotkin, are you a frequent short seller, yes or no?
        Mr. Plotkin. We run a long short portfolio. The majority of
    our investments are long investments, but we also have short
    investments to hedge out market risk.
        Mr. Stivers. Thank you, Mr. Plotkin. Has Melvin Capital
    ever engaged in short selling of Tesla stock?
        Mr. Plotkin. We have shorted Tesla in the past, that is
    correct.
        Mr. Stivers. Did you see the tweet from Tesla CEO Elon Musk
    about GameStop stock?
        Mr. Plotkin. I did see that after market hours on--yes, on
    the Tuesday.
        Mr. Stivers. Do you believe that Mr. Musk's tweet had any
    significant effect of driving the rise in GameStop stock?
        Mr. Plotkin. I don't want to speculate on what the actions
    of his tweet were. The stock did rise after hours.
        Mr. Stivers. Then, do you believe that tweet was targeting
    you because you had shorted Tesla stock in the past?
        Mr. Plotkin. We had a very small short position years ago
    in Tesla. That would be pure speculation as to his motives in
    putting that tweet out.
        Mr. Stivers. Okay. Thank you.
        I will go back to Mr. Tenev. On the regulatory
    requirements, do you believe that the SEC and the Depository
    Trust & Clearing Corporation should modify any of their rules
    as a result of what happened to your users because of capital
    requirements?
        Mr. Tenev. I believe--
        Chairwoman Waters. The gentleman's time has expired. And
    the SEC is not here today because they are in transition with a
    temporary Chair, awaiting the confirmation of the person who
    has been appointed by the President of the United States. This
    is a serious hearing. Members are reminded not to impugn the
    motives of others. Thank you.
        Mr. Green, you are recognized for 5 minutes.
        Mr. Green. Thank you, Madam Chairwoman.
        Ms. Schulp, there is a reason for penalizing a market maker
    for improperly trading its own accounts ahead of its clients'
    accounts. Note that I said, ``improperly trading.'' I don't
    want to go through the scenario of there being a time for
    proper trading ahead of accounts. I would like for you to tell
    us what that reason is, please.
        Ms. Schulp. Trading ahead of customer accounts is illegal,
    and it does not--
        Mr. Green. I understand that it is illegal. I don't mean to
    be rude, crude, and unrefined, but I have to ask this question
    quickly. What can happen that can benefit the market maker? How
    can that be monetized such that the market maker profits
    greatly from doing it?
        Ms. Schulp. If a market maker trades improperly ahead of
    the customer accounts, he can get a better price and can move
    the market in the process, depending on how big the trade is.
    That is hurting the customer.
        Mr. Green. And if this trade is huge, and you can see that
    this trade that the client has is huge and will have an impact
    on the market, how does that benefit the market maker to trade
    ahead of the client?
        Ms. Schulp. The market maker can get a better price for
    himself before the price changes by the client's trade. He can
    also engage in self-dealing that way as well.
        Mr. Green. So, does it benefit a huge market maker to have
    a great deal with, let's say, a Robinhood, because of the flow
    that will be coming through that the market maker can take
    advantage of?
        Ms. Schulp. I don't think that they are necessarily
    congruent situations. When you are trading ahead of a customer
    order, which is something that is illegal and that the SEC does
    monitor for, it is very different from having knowledge as to
    the way that the market might be moving based on--
        Mr. Green. I understand, but I want to talk about the
    circumstance where it is improper, not where it is proper.
    Remember, we started with improper trading. And here is my
    point. Let me go to it quickly. The market maker, Citadel,
    traded over-the-counter stocks for its own accounts in 2012,
    from 2012 to 2014, while simultaneously delaying client orders
    for the same shares and was fined for this.
        Citadel has been naughty for some time: In 2014, Citadel
    faced $800,000 in penalties; 2017, $22.6 million; 2018, $3.5
    million; 2020, $97 million, and another 2020 of $700,000. This
    seems like a lot of money. It is for me. More than $124
    million.
        But over the same period of time, Citadel had revenues
    generated in the amount of $13.2 billion. It seems to me that
    the punishment for these improper trades and improper extants
    because it wasn't just trading. Citadel also did some other
    things that were not proper. They messed with their clients. It
    seems that the punishment is so small, given the amount of
    revenue generated over this same period of time. It seems that
    Citadel has at least an opportunity to build into its cost of
    doing business paying penalties, and that concerns me.
        It concerns me that the punishment doesn't seem to deter
    Citadel. It concerns me because I know of circumstances wherein
    persons who are not in the market do things that are much less
    harmful, and they can possibly go to jail.
        So the question that I have is this: What kinds of systems
    do we have in place, and back to you again, ma'am, to prevent
    the very things that I have called to the attention of my
    colleagues?
        Ms. Schulp. As a former enforcement attorney at FINRA, I
    can say that regulators have the same concern with fines and
    other punishments becoming just a cost of doing business, and
    it is one of the things that is considered, along with the lack
    of regulations around what can be punished.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Green. May I, for the record--
        Chairwoman Waters. The gentleman's time has expired. Mr.
    Green, as you know, we are going to have a series of hearings,
    and our next panel will include a whole bevy of experts also on
    some of these issues.
        With that, Mr. Green--
        Mr. Green. Madam, may I say something in the record,
    please? I have--
        Chairwoman Waters. Without objection, you may enter into
    the record. Thank you.
        Mr. Green. Thank you.
        Chairwoman Waters. Mr. Barr, you are recognized for 5
    minutes.
        Mr. Barr. Thank you, Madam Chairwoman.
        Mr. Griffin, I want to revisit this issue of payment for
    order flow. Payment for order flow has been around for decades,
    correct?
        Mr. Griffin. I know it has been around for at least 1 or 2
    decades. I can't answer before that period of time.
        Mr. Barr. And it is a recognized and approved practice by
    the SEC, correct?
        Mr. Griffin. Yes, it is.
        Mr. Barr. And payment for order flow is set by the
    brokerage firm, not the wholesaler, right?
        Mr. Griffin. It is ultimately a negotiated number, but it
    is a number that is set by the brokerage firm and not by us as
    the market maker.
        Mr. Barr. As a market maker that provides execution
    services to retail brokers, you are required to meet best-
    execution requirements. Is that correct?
        Mr. Griffin. Yes, it is.
        Mr. Barr. In other words, market makers are required to
    provide the same or better pricing than the exchanges, correct?
        Mr. Griffin. That is correct.
        Mr. Barr. And how can market makers offer that better
    pricing to Mr. Sherman's line of questions?
        Mr. Griffin. There are a number of drivers that permit us
    to offer better pricing than what is available on exchanges.
    The first is that exchanges have legally-mandated minimum tech
    sizes of a penny. So if you look at a stock like AMC, that
    trade's $5 bid, $5.01 offered, the exchange could trade with a
    half-cent increment, it would probably trade $5 point 005 bid
    501 offer or vice versa, but the exchanges are limited to a
    $0.01 minimum tech size.
        And we have been clear on the record in prior testimony
    that exchanges should be permitted to have a smaller and more
    competitive tech size. That's factor number one.
        Mr. Barr. Okay.
        Mr. Griffin. Number two, is that the average retail order
    is much smaller in totality than the average order that goes on
    to an exchange. Because this order is smaller--and I will share
    a number with you, the typical Robinhood order is ballpark
    about $2,000 in size. Because it's a small order, the amount of
    risk that we need to assume in managing that order is
    relatively small as compared to an order that we have to manage
    from our on-exchange trading.
        And as I'm sure you're well-aware, we are the largest
    trader of stocks on exchanges in the United States--
        Mr. Barr. Let me move to Mr. Tenev really quickly on that
    point. What impact might greater restrictions on the payment
    for order flow model have on your ability to offer zero-
    commission trades?
        Mr. Tenev. We do believe, Congressman, that that's an
    important question and payment for order flow helps cover the
    costs of running our business and offer commission-free trading
    to customers. When we started, people didn't even think that
    there was enough margin left to make this business work, but
    we've been fortunate to make it work and to make it work for
    our customers.
        Mr. Barr. I'm talking about why Robinhood restricted
    trades. I think your explanation about margin requirements
    charged by your clearinghouse makes sense. Is your
    clearinghouse supervised by the Fed and the SEC?
        Mr. Tenev. I believe that--
        Mr. Barr. Are the margin requirements charged by your
    clearinghouse in turn approved by Federal regulators?
        Mr. Tenev. Yes.
        Mr. Barr. And did Federal regulators approve the value of
    risk charge that was imposed on Robinhood?
        Mr. Tenev. I believe, Congressman, the value of risk charge
    is outlined in general terms in Dodd-Frank, but I'm not sure
    who approved the specific implementation of that formula.
        Mr. Barr. So 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?
        Mr. Tenev. Congressman, I'm not trying to throw anyone
    under the bus in direct frustration anywhere. All I can say is
    Robinhood Securities played this by the books and played it
    basically the only way that we could remain in compliance with
    our deposit requirements.
        Mr. Barr. Mr. Plotkin, I appreciate your testimony that
    Melvin always follows laws governing shorting stock, but Melvin
    lost $6 billion in 20 trading days. Let me ask you about your
    risk management. Did your short positions exceed float?
        Mr. Plotkin. No, they did not.
        Mr. Barr. Shorting has an important role to play in our
    markets, allowing for legitimate hedging and price discovery,
    but we are interested in naked shorting. And so, we would hope
    that you would clarify that and how it is that you make sure
    that you're first locating the borrower?
        Chairwoman Waters. The gentleman's time has expired. Mr.
    Cleaver, you're recognized for 5 minutes.
        Mr. Cleaver. Thank you, Madam Chairwoman, and I, too, would
    like to thank you for this hearing. It's a question that a lot
    of people are asking, probably many of us as we go through our
    districts, but let me start with you, Mr. Tenev. I'm just
    curious if you can answer, in a short period of time, how did
    you come up with the name of your company?
        Mr. Tenev. Absolutely. Thank you for that question,
    Congressman. Robinhood stands for lowering the barrier to entry
    and democratizing finance for all. The idea is the same tools
    that institutions and wealthier, high-net-worth individuals
    have had for a long time should be available to the people
    regardless of their net worth or how much money they have.
        Mr. Cleaver. Okay. I appreciate that answer. Because it's
    something that I would also embrace; however, I have a 23-year-
    old on the other side of the house whom I love dearly, but he
    has no training, no income, and no qualifications. How in the
    world could he get a million dollars worth of leverage?
        Mr. Tenev. Thank you, Congressman. The leverage that we
    provide to our customers, which less than 3 percent of our
    customers actively use, is regulated strictly by requirements.
    So, the only way to get that amount of leverage in a margin
    account through borrowing is to deposit a similarly-sized
    amount of capital.
        Mr. Cleaver. Or by mistake?
        Mr. Tenev. Congressman, I'm not sure what you're referring
    to.
        Mr. Cleaver. There's a record of a young man getting a
    million dollars worth of leverage. He was only 20-years-old, so
    I'm just saying if that's not a policy, that was an error.
        Mr. Tenev. Congressman, I appreciate the opportunity to
    address that really important point. You're referring to Mr.
    Kearns.
        Mr. Cleaver. I am.
        Mr. Tenev. The man who, unfortunately, passed last year.
        Mr. Cleaver. Yes.
        Mr. Tenev. First of all, I'm sorry to the family of Mr.
    Kearns for their loss. The passing of Mr. Kearns was deeply
    troubling to me and to the entire company, and we have vowed to
    take a series of steps, very aggressive steps, to make our
    options products safer for our customers, including changing
    the customer interface, adding more additional options,
    education, as well as strengthening and tightening the
    requirements for people getting options and adding a live
    customer support line for acute options cases.
        It was a tragedy, and we went into immediate action to make
    sure that we made, not just the most accessible options trading
    product for our customers, but the safest as well.
        Mr. Cleaver. Okay. In my real life, I'm a United Methodist
    Pastor and I read your statement after the tragedy of this
    young 20-year-old, and I don't think you or I want to get into
    litigating that right here today, but what improvements did you
    make in the aftermath to your platform or were there
    improvements?
        Mr. Tenev. Thank you, Congressman. There were several
    improvements. One, we added the ability to instant exercise as
    well as exercise options positions in-app. We clarified the
    display of buying power, specifically negative buying power, in
    situations where one leg of a complex multi-leg options
    transaction were to be assigned.
        We also added an options education specialist. We also
    added live phone base customer support for acute options cases,
    which has gotten very great feedback from customers and is
    something we're expanding to other use cases such as places
    where customers' accounts have had off-platform hacking
    incidents.
        Mr. Cleaver. The last one is what I was concentrating on
    because this young man was trying to get into your system to
    find out what was going on. He was confused, he was scared, and
    so he sent emails. And to be fair, there was a response, but it
    was hours later. And, as I became more and more familiar with
    this particular case--
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Cleaver. Thank you, Madam Chairwoman. I appreciate it.
        Chairwoman Waters. You're so welcome.
        Mr. Hill, you're recognized for 5 minutes.
        Mr. Hill. Thank you, Madam Chairwoman, for holding this
    hearing, and I want to thank our witnesses for their expertise
    and their patience. Madam Chairwoman, I have a letter from the
    American Securities Association I'd like to insert in the
    record, please.
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. Hill. Thank you very much.
        Mr. Tenev, what a treat to see you, and congratulations on
    being part of the American Dream. I had the pleasure of working
    for President Bush 41 in Sophia, Bulgaria, in 1990 and 1991 to
    try to bring capitalism to Bulgaria after the wall fell, so I'm
    glad to see you're an American citizen and innovating here in
    our country.
        Mr. Tenev. Thank you.
        Mr. Hill. I think you've done a good job talking about
    the--I'd say the acknowledged lesson that you've learned in
    terms of these deposits for clearing and the important risk
    management issue for your firm. So, I'd like to follow up on
    some of the discussions about retail service that you've also
    touched on today.
        Do you have a call center generally for Robinhood
    investors?
        Mr. Tenev. Thank you for that question, Congressman. And I
    want to start by saying customer service is fundamental to
    everything that we do and it's one of the areas where we're
    investing the most. We have customer service centers in a
    number of States--Colorado, Florida, Texas, and Arizona, and
    we're looking to expand aggressively--
        Mr. Hill. Well, do you have a call center that I can call,
    a 1-800 number if I'm having trouble in the middle of the
    trading day?
        Mr. Tenev. We do offer, Congressman, live phone support in-
    app for certain use cases. We're expanding that as fast as we
    can. As I mentioned earlier, options, advanced options cases,
    as well as account takeovers, which typically happen through a
    customer's email, personal email, who has been compromised, and
    the feedback has been great. And we're looking to expand the
    live phone channel, as well as make improvements to our email
    channel and--
        Mr. Hill. Thank you. Thank you. That's helpful.
        And on the subject of margin and options, you've talked
    about that today, but I've spent 40 years in this business and
    been the general securities principal in three different firms,
    and this issue of granting margin and option approval to retail
    clients is always an important issue. You've addressed that
    today, so I want to turn to a different topic that has not been
    raised, which is low-dollar stocks.
        As I understand it, your policy and procedure manual simply
    says that you allow low-dollar stocks if they're on an
    exchange, but many, many brokerage firms are very reticent to
    allow retail investors to invest in stocks that are under $5.
    Could you address that issue today?
        Mr. Tenev. Yes, I'd be happy to Congressman. Robinhood
    allows customers to trade in and invest in exchange-listed
    securities, so that's the objective criteria that we use. And
    it actually excludes several types of securities that customers
    commonly request a trade in.
        On Robinhood, you can't trade over-the-counter bulletin
    boards except in limited cases where a listed stock falls to
    over-the-counter. You can't trade pink sheets and, of course,
    you can't short sell or enter undefined risk options trades.
    Our objective criteria involve whether exchanges list these
    securities.
        Mr. Hill. Thank you. And I think that probably--I'm sure
    you'll re-evaluate that after these effects.
        Let me turn to Ms. Schulp. Thank you for being here. The
    WallStreetBets Reddit platform--I'm curious when you think
    about the obligation of this SEC pending investigation, based
    on your FINRA background, do you think the SEC should look at
    the bulletin board participants under Section 9a2 or
    potentially inducing trading in a certain direction? Is that
    worthy of their review?
        Ms. Schulp. Thank you for the question, Congressman. I
    think that there has been little evidence to this time that
    there has been any sort of false or deceptive conduct taking
    place on the WallStreetBets' forum. That does not mean, though,
    that I think that the SEC should not take a deeper look.
    Because of the anonymity in the forum, there could have been
    people who were engaging in deceptive behavior that's not
    readily apparent to the public.
        So I do think the SEC should look, but to this point, I've
    seen very little that would meet a test for manipulation, which
    generally involves false or deceptive behavior.
        Mr. Hill. Thank you. I appreciate that.
        Mr. Tenev, I thought of another question for you. Would a
    securities transaction tax be beneficial to retail investors in
    the United States?
        Mr. Tenev. Thank you, Congressman. I don't believe it
    would.
        Mr. Hill. Thank you.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Hill. Thank you, Madam Chairwoman.
        Chairwoman Waters. We will take a short recess. The
    committee stands in recess for 5 minutes. Thank you.
        [brief recess]
        Chairwoman Waters. The committee will come to order. Mr.
    Perlmutter, you are recognized for 5 minutes.
        Mr. Perlmutter. Thanks, Madam Chairwoman.
        Mr. Gill, let's start with you, since you seemed to have
    started all of this. You began analyzing GameStop in the summer
    of 2019. Was that your testimony?
        Mr. Gill. Congressman, I've been following GameStop for a
    number of years. I started to buy into it in June of 2019, most
    recently.
        Mr. Perlmutter. So back then, what was the price of the
    stock when you started investing in it?
        Mr. Gill. At the time, it was in the ballpark of around $5
    per share.
        Mr. Perlmutter. Okay. And in your analysis, what did you
    think that was a proper price for the share, because you
    thought you were getting a good buy?
        Mr. Gill. Sure. At the time, I thought that the value of
    the business could be worth up to roughly $2 billion.
        Mr. Perlmutter. But how much is that per share? Bring it
    back to the--you bought at $5, you thought it was worth $10,
    $20?
        Mr. Gill. I felt as though that it could be worth at the
    time in the range of, say, $20 to $25 per share.
        Mr. Perlmutter. Okay. And you continued to invest on and
    off through 2019 and 2020. Is that true?
        Mr. Gill. Yes.
        Mr. Perlmutter. Okay. And you bought some shares, but you
    also did some options trading, did you not?
        Mr. Gill. Correct. I did.
        Mr. Perlmutter. And options trading is not really for the
    novice investor, is it?
        Mr. Gill. It is a riskier investment, yes.
        Mr. Perlmutter. Okay. On January 27th, I think the stock
    price hit $483 or something like that. Is that true?
        Mr. Gill. I believe it was in that area, yes.
        Mr. Perlmutter. In your analysis, back when you started
    investing in the stock, did you ever see it being valued at
    $483 per share?
        Mr. Gill. At the time, I thought it was possible, but a
    very low probability, I thought.
        Mr. Perlmutter. Thank you. In terms of the platforms where
    you visited and discussed this stock with others, one was the
    Reddit, subreddit WallStreetBets' platform, correct?
        Mr. Gill. Correct.
        Mr. Perlmutter. And at any given time, how many people were
    you talking to on that platform?
        Mr. Gill. I wasn't so much talking to anyone individually,
    but rather making posts on that public forum.
        Mr. Perlmutter. That GameStop was an attractive stock?
        Mr. Gill. Yes. Early on, I had felt that it was an
    attractive investment opportunity and I had shared some of my
    thoughts as to why that was.
        Mr. Perlmutter. Did you discuss this on any other
    platforms? Are there any other kinds of Reddit or other kinds
    of platforms where you talked about the stock?
        Mr. Gill. Yes, I have talked about the stock on some other
    platforms.
        Mr. Perlmutter. Okay. Did you ever talk about the short
    sellers that had bet against this company?
        Mr. Gill. Yes, the topic did come up.
        Mr. Perlmutter. And about when did that occur?
        Mr. Gill. Oh, since around the time I had begun investing
    in it. Someone else thought it was an exceptional level of
    short interest in the stock since the time I had started
    investing in it.
        Mr. Perlmutter. Okay. Let me turn my attention now to you,
    Mr. Plotkin.
        When did Melvin first take short position in GameStop?
        Mr. Plotkin. Thank you, Congressman. That was in 2014,
    really right at our inception of the fund.
        Mr. Perlmutter. And when you did that, you continued to
    maintain a short position?
        Mr. Plotkin. That's correct.
        Mr. Perlmutter. So you said you analyzed the value of the
    stock, and by taking a short position, you, unlike Mr. Gill,
    thought that the stock was overpriced. He thought it was
    underpriced; you thought it was overpriced?
        Mr. Plotkin. That's a good conclusion, yes.
        Mr. Perlmutter. In your analysis when you started into the
    short position, what did you think the stock was worth?
        Mr. Plotkin. I don't remember exactly at the time. I think
    when we launched it, it was probably $40 stock. I think we
    believed the company had a lot of structural challenges. We've
    seen their earnings go from, I think, north of $3 a share to
    almost negative $3 a share, so it's been a lot of challenges
    fundamentally.
        Mr. Perlmutter. Last question for you, were you in a naked
    position in your short position because this stock was
    oversold?
        Mr. Plotkin. No. Our systems won't even allow that, so that
    would be impossible for us to do.
        Mr. Perlmutter. Okay. Thank you. My time has expired. I
    wanted to get some facts out for Mr. McHenry.
        And I yield back.
        Chairwoman Waters. Thank you very much. The gentleman's
    time has expired. I now recognize Mr. Zeldin for 5 minutes.
        Mr. Zeldin. Thank you, Madam Chairwoman, and Ranking Member
    McHenry, for holding this hearing. And thank you to the
    witnesses for being here today. I represent the first
    congressional district of New York, which encompasses much of
    Suffolk County on Long Island. My home district is full of
    people from all different walks of life and industries, and
    having access to cost-efficient investing is crucial.
        While there are always ways to make a system work better,
    our capital markets are the envy of the world with their
    liquidity and diversity of investment opportunities.
    Innovations in securities trading brought by the private sector
    have increased access for retail investors.
        For better or for worse, this situation is a perfect
    example. For example, one of our witnesses here, Mr. Gill, or
    should I say, ``Roaring Kitty,'' turned $53,000 into almost $50
    million, and that's what you would call some deep you-know-what
    value. Of course, we know that not all those who invested in
    these stocks share the same success story. However, I want to
    highlight a potential vulnerability in these innovations.
        I've been concerned for some time in general with the
    sharing of U.S. individual user data with the Chinese Communist
    Party (CCP). I sent a letter to the Treasury Department in
    October 2019 expressing concern with the potential sharing of
    user information by TikTok to its parent company, ByteDance,
    and asked for a review by the Committee on Foreign Investment
    in the United States (CFIUS).
        Chinese companies are required by law to regulate online
    behavior that deviates from the political goals of the CCP.
    Obey the CCP's censorship directives and participate in China's
    espionage.
        These policies regulate companies like TikTok in the China
    market, and increasingly, their overseas business. Webull and
    Moomoo are two examples of broker-dealers that are subsidiaries
    of Chinese parent companies.
        According to Bloomberg, funds affiliated with Xiaomi Corp
    own at least 14 percent of Webull. Xiaomi is a Chinese company
    that risks being delisted from U.S. exchanges after the U.S.
    Department of Defense put the company on a blacklist on January
    14, 2021.
        Moomoo is owned by Futu Holdings, which is a company that
    received a significant investment from entities affiliated with
    Tencent, a company with known ties to the CCP.
        On December 8, 2020, Bloomberg Business Week ran an article
    on Webull stating that the company, ``has increased its roster
    of brokerage clients by about tenfold this year to more than 2
    million by offering free stock trades with a slick online
    interface.''
        On January 29, 2020, the day after trading activity for
    long trades on certain stocks discussed on Reddit threads were
    limited, Bloomberg ran an article with the headline,
    ``Robinhood rival Webull sees 16 fold jump in new trading
    accounts.'' It's clear that these apps have rapidly increased
    their user base, which has me concerned.
        Ms. Schulp, do you think we should be concerned about the
    potential for Chinese entities with ties to the CCP receiving
    personally identifiable information (PII) or other user data
    from their subsidiary broker-dealers that are licensed and
    registered in the United States?
        Ms. Schulp. I think it's a potential national security
    concern, which is a bit outside of my area of expertise. What I
    can say is that the rules that the brokers have to apply and
    comply with regarding personally identifiable information and
    other material data should be applied equally to companies that
    are based offshore and companies that are based onshore, and I
    hope that that's the case with respect to Webull or any other
    competitors that are not domestically-owned.
        Mr. Zeldin. Having a diversity of choice for different
    trading apps is generally good for market competition, however,
    is it a good outcome for millions of Americans to flood into
    trading apps that could be required to share user data to
    parent companies that have ties to the CCP?
        Ms. Schulp. Again, I think choice is key here, as well as
    understanding from a consumer perspective what companies you
    are choosing to do business with. Again, the national security
    concerns are a bit outside of my area of expertise.
        Mr. Zeldin. I thank you for being here. This is another
    angle to this issue with these new options that are being
    provided to average retail investors and we want these retail
    investors to have as much information as possible to be set up
    for success.
        I yield back.
        Chairwoman Waters. Thank you very much. Mr. Himes, you're
    recognized for 5 minutes.
        Mr. Himes. Thank you, Madam Chairwoman, and a big thank you
    to our panel today for a very interesting conversation. One of
    the chairwoman's ways of characterizing this hearing was who
    wins and who loses, and I've spent a bunch of time in the last
    couple of days looking at the various players here.
        I'm pretty convinced that Citadel is one of the winners;
    they make a lot of money. They're the casino in this story, and
    the casino tends to win over time. Robinhood has a valuation of
    $5.6 billion, and makes a lot of money from the casino, so who
    loses? And I want to spend some time talking about the person
    who usually loses, and that's the retail investor.
        And while I have supported for many years the
    democratization of finance, as we say, 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. And I think it's worth looking at that because as
    much as we're celebrating Mr. Gill here, we're not talking very
    much about Mr. Salvador Vergara, who was featured in a Wall
    Street Journal story, who took out a $20,000 personal loan
    through Robinhood and invested it in GameStop only to see the
    value of his position go down 80 percent.
        So, Mr. Vergara is out $16,000 he doesn't have, that he
    owes to somebody else. And as much as I support the
    democratization of finance, we need to be thoughtful about
    this.
        Mr. Tenev, my question is for you. You quoted a $35 billion
    number as what I interpreted to be profits in excess of
    deposited funds and securities. If you just look at your
    customers who traded in GameStop over the period of its
    increase and subsequent decrease, Mr. Tenev, how did your
    customers in the aggregate do? Did they win or did they lose?
        Mr. Tenev. Thank you, Congressman, for that question. I
    don't have that particular cut of the data top of mind, so
    maybe we can get back to you on that one.
        Mr. Himes. You don't have that. But you do have a $35
    billion figure. That figure doesn't mean a lot to me, because
    it's just a dollar number. Help me convert that to a rate of
    return. First of all, is that $35 billion gross or net? In
    other words, is that actual profit or does it include margin
    shares, or other forms of leverage that may not actually belong
    to the account holder?
        Mr. Tenev. It does include, Congressman, unrealized gains,
    so it's the value of assets, both including positions in
    securities and cryptocurrencies.
        Mr. Himes. I get that, but, again, $35 billion doesn't mean
    anything to me unless you can convert that into a rate of
    return. So, do that for me? On what asset under management
    number is that $35 billion unrealized against?
        Mr. Tenev. The asset under management number is not one
    that Robinhood has publicly shared--
        Mr. Himes. Okay, but you can't share $35 billion--sorry,
    Mr. Tenev. I just don't have a lot of time, and $35 billion is
    a meaningless number. I need to know what that is in terms of
    return. So, convert that for me into rate of return so I can
    compare it to Treasury, so I can compare it to the S&P 500.
        Mr. Tenev. Congressman, with respect, I think the proper
    comparison is to customers not investing at all. Many of our
    customers are investing for the first time and are taking money
    that they, otherwise, would have spent or consumed and put--
        Mr. Himes. Mr. Tenev, again, I don't want to be rude, but
    it's my time. Again, you offered up the $35 billion number,
    which as you and anybody else schooled in finance knows is
    meaningless unless you convert it into a rate of return.
        So, just please convert that $35 billion number, which to
    the folks watching at home sounds like a lot of money, but what
    does that actually convert to in terms of rate of return which
    is what matters?
        Mr. Tenev. Congressman, $35 billion is indeed a large
    amount of money, especially for our customers who are mostly
    small investors. It's more than most corporations, nearly all--
        Mr. Himes. Mr. Tenev, don't make me be rude here. You and I
    both know that $35 billion of unrealized gains, if that's on a
    base of $100 billion, that's a 35 percent of return. If that's
    on under a trillion dollars, it's a radically different rate of
    return.
        So what I'm trying to get at, Mr. Tenev, here is, you threw
    out the number of $35 billion. I actually think the right
    comparison is, what if your clients had simply invested in the
    long run in an S&P index fund. Would that number be more than
    $35 billion or less?
        Mr. Tenev. Congressman, with respect, I don't believe the
    right comparison is investing in an S&P index fund. I think the
    right comparison is not having invested at all and having spent
    that money and consumed it.
        Mr. Himes. No, no. It's most certainly not, Mr. Tenev. I'm
    out of time, but, again, you put out the $35 billion number, so
    I think it's only decent, because you and I both know that a
    hard-dollar number is meaningless unless you can convert is to
    returns. So, I'm going to ask you to convert that--obviously,
    I'm out of time--into a rate of return for us.
        Chairwoman Waters. You're out of time.
        Mr. Loudermilk, you're now recognized for 5 minutes.
        Mr. Loudermilk. Thank you, Madam Chairwoman, and I
    appreciate all of the members of the panel being here. I think
    you've seen that there are occasions with some on the committee
    here that if you're not giving them the answer that they want,
    that they can use, they're just going to continue to push you.
    So, I just encourage you to continue speaking the truth and
    you'll always stand up head and shoulders above everyone.
        Not surprisingly, the situation with GameStop trading has
    resulted in commentators and even some of my colleagues
    engaging in knee-jerk reactions calling for new laws and
    regulations to be hastily enacted. It just seems to be a trend
    in Washington, D.C., to never let a crisis go to waste. Some
    have even spread conspiracy theories and alleged that crimes
    were committed before knowing what even happened.
        I can even testify to what was just being said--I know a
    number of people, personal friends who have never invested
    before, but because of Robinhood and other retail platforms,
    many of them took the stimulus money that they received during
    the CARES Act, which, because they were still working, they
    didn't need, and they actually opened an account and started
    investing.
        So, yes, more and more people who have never invested
    before are now investing using these platforms. This hearing is
    a reminder that with complex situations, we should take time to
    understand what actually did or did not happen, especially with
    this GameStop situation.
        Now, the SEC is the proper authority to determine if any
    rules were broken, and they are looking into it. Congress has
    already given the SEC broad authority to oversee the capital
    markets and we do not need to rush to enact even more big
    government regulations that could ultimately harm the
    investors.
        Mr. Tenev, can you remind us, again, why Robinhood
    temporarily paused trading of GameStop and other stocks?
        Mr. Tenev. Of course. Thank you, Congressman. Robinhood
    paused trading temporarily or, I should say, paused buying of
    about 13 securities on Thursday so that we could meet our
    regulatory deposit and collateral requirements.
        Mr. Loudermilk. Okay. So what you're saying is, you were
    paused because you had to comply with regulations. Is that
    true?
        Mr. Tenev. Correct.
        Mr. Loudermilk. Okay. It's ironic that the people who are
    criticizing brokerage firms because they paused trading, which
    they sometimes have to do to comply with regulations, these
    same folks are now saying, we need to respond to this with more
    regulations. I would say if people don't like brokers
    occasionally having to pause trading, I suggest they look at
    the regulations that required it.
        At some point, we need to recognize that piling on more and
    more regulations only increases complexity and does not help
    investors.
        Ms. Schulp, despite the volatility and the frenzy of media
    and social media activity, it seems to me that the markets
    functioned as they were supposed to do during this situation,
    that the markets are not broken; in fact, they are working
    well.
        Do you agree with that?
        Ms. Schulp. I agree with that.
        Mr. Loudermilk. Okay. Thank you. I appreciate that. I think
    most reasonable people who are listening to this would agree
    that there are regulations in place, the SEC has those to pause
    activities that could be harmful, not only to the markets, but
    to the individual investors. And so what I'm understanding you
    saying is that it did work in the way it was supposed to?
        Ms. Schulp. As the facts that I know now, it does appear to
    have worked the way it was supposed to. This is not a sign to
    me that the market is broken.
        Mr. Loudermilk. Thank you.
        Mr. Griffin, what are some of the issues that policymakers
    should consider in the T plus 2, T plus 1, T plus 0 debate?
    Obviously, margin requirements exist to make sure firms have
    enough capital to settle transactions, but faster settlement
    and lower margin requirements can be positive for the retail
    investors, and we need to balance those needs.
        Can you address what some of the issues are in the T2, T1,
    and T0 debate?
        Mr. Griffin. Congressman, I cannot profess to be an expert
    on these issues, but I will give you my perspectives from
    having been in this for 30 years. We started at T5. We will one
    day be at real-time settlement, and the question is, is how
    long does that journey take?
        From T2 to T1, which reduces the amount of capital required
    by broker-dealers to meet the needs of their customers, that
    reduction in capital would have been very helpful to Robinhood
    during this period of time. It reduces counterparty risk
    holistically, which is good for everybody in the market. We
    should push for T1.
        As we go to same-day settlement, you now bring into
    question the complexity [inaudible] movement and you bring into
    play the necessity for all systems to be functioning every
    moment of every day with no room for error. On a T1 settlement
    site--
        Chairwoman Waters. The gentleman's time has expired. Let me
    remind the Members that we're going to have a series of
    hearings. Today is the first. There will probably be two more.
    I didn't hear anyone here today say that they were ready to
    pile on regulations, so let's make sure we know that our
    statements are accurate.
        Mr. Foster, you're recognized for 5 minutes.
        Mr. Foster. Thank you, Madam Chairwoman, and I thank our
    witnesses for being here.
        Mr. Tenev, I'd like to follow-up a little bit on payment
    for order flow and best order execution issues. Democratization
    of finances is a good and noble goal, but for democracy to
    work, consumers need transparency and high-quality information.
    And not only about fees, but about order execution quality.
        Your customers actually don't care directly about who you
    subcontract order execution to or any payment for order flow,
    but they need a simple way to compare the execution quality
    between your app and competing apps or other accounts, while
    institutional investors can afford to run their own tests and
    they do.
        And I'm sure Mr. Griffin is quite often on the receiving
    end of those tests, and trying to measure up to his competitors
    to compete for market share there. The institutional investors
    have the market power to demand best-execution statistics for
    their prime brokers. And everyday investors do not get the same
    transparency.
        In fact, I believe there's an SEC rule, Rule 606, that
    requires brokers to disclose at least some order execution data
    to institutional investors, but this requirement does not apply
    to retail investors.
        So, Mr. Tenev, since Robinhood's mission is to democratize
    finance for all, I ask, what are the mechanisms that you would
    accept and support to provide transparent order execution
    quality statistics so that your customers can engage in a
    clean, apples to apples comparison between other brokers,
    between your app and other peoples' apps in terms of the total
    cost of trading?
        Mr. Tenev. Thank you, Congressman, for that very important
    question. I'm generally in favor of a greater amount of
    transparency than what we've typically seen in the financial
    industry, and recently, Robinhood, and me personally, have
    engaged publicly on the topic of payment for order flow, short
    selling, and, of course, T plus 2 and real-time settlement.
        We do publish 606s via Robinhood Securities that detail our
    payment for order flow arrangements with various market makers.
    And just this past year, the industry implemented more detailed
    606 requirements, which we, of course, conform to.
        Also, back in December of 2020, we released a public page
    on our website that provided detail about the execution
    quality, including price improvement that our customers
    received. And we're proud to announce that in 2020, our
    customers received in aggregate over a billion dollars of price
    improvement on their executions.
        Mr. Foster. Right, but that's not a comparison to your
    competitors. There are a lot of questions about the accuracy of
    the best execution reference price, and independent of whether
    it should be improved, it seems like, if I was a customer of
    you or one of your competitors, what I'd want to see is, I just
    executed a trade of $2,000, and on average, I got X percent
    better or worse than a reference price.
        And then over time, and seeing not only the trade that I
    just executed, but perhaps a running average over the last
    month or two that you can compare to the running average of
    whether you're exceeding some benchmark for trade execution
    quality that can really be compared with potential competitors.
        And is that a workable system? Are there difficulties? Is
    there a reason why industries should move that way in the name
    of transparency to customers?
        Mr. Tenev. Congressman, this is a very interesting topic to
    me. I'd love to have the conversation. I don't know if this is
    the right forum to necessarily ideate and brainstorm on all of
    the solutions, but I just want to say I'd be happy to engage
    with this in a detailed forum and figure out the right path.
        Mr. Foster. Okay. We do intend to continue to engage with
    the industry on this subject because it's very easy to make
    payment for order flow sound really creepy. You're basically
    selling a list of rubes to the sharks, okay?
        On the other hand, you make part of an argument that this
    can net out positive for consumers, but for it to fully net out
    positive, they have to be able to make the apples to apples
    comparison. That's really an important issue.
        And I think that probably your reaction to that, if you
    found your customers were leaving you because of poor execution
    quality, you would do what large funds do, which is to split
    your order flow between multiple order execution firms and then
    demand of them the best order execution and move your business
    to whomever does the best for your customers.
        Mr. Tenev. Congressman, we already do that. We have seven--
        Chairwoman Waters. The gentleman's time has expired. Mr.
    Mooney, you're recognized for 5 minutes.
        Mr. Mooney. Thank you, Madam Chairwoman.
        Let me just start by saying that in the last Congress, 30
    of my Democrat colleagues, 4 on this very committee,
    cosponsored a bill that would impose a financial transaction
    tax on the purchase of securities and certain derivatives.
        And just recently, after the market volatility surrounding
    GameStop in January, many Democrats renewed the call for a
    financial transaction tax. On January 28th, Congresswoman Ilhan
    Omar tweeted, ``How about this financial transaction tax now?''
    Congressman Peter DeFazio is the lead sponsor of the bill. He's
    already put the bill back in for this session of Congress. It's
    now House Resolution 328--it's called the Wall Street Tax Act
    of 2021. I actually have a copy of it from the last session
    here. It's in again now. And Congressman DeFazio says that a
    financial transaction tax would, ``help create a more level
    playing field for Main Street.''
        So with that background, Mr. Tenev, this question is
    directed at you. The Robinhood platform has more than 13
    million users and most of them are small-dollar retail
    investors. If the Federal Government levied a .1 percent
    transaction tax on the sale of securities--and I know one of my
    colleagues, my good friend mentioned this earlier, and I want
    to expand upon it a little more. How would that .1 percent
    transaction tax on the sale of securities affect your platform
    and the retail investors who are your customers?
        Mr. Tenev. Thank you, Congressman. And we'd be happy to
    engage in this discussion much more in the future. A 10 basis
    point financial transaction tax would eat into the returns of
    our customers, which, as you pointed out, are largely smaller
    investors. And in that sense, it would be a cost to the retail
    investor.
        Of course, that would have to be weighed against the
    potential benefits of this tax, and I know it's a more
    complicated issue than meets the eye at first glance.
        Mr. Mooney. Okay. Thank you for that answer. My next
    question is actually for Jennifer Schulp. I know you spent your
    career specializing in financial regulation. In your expert
    opinion, would a financial transaction tax directly prevent
    fraud or market manipulation?
        Ms. Schulp. No. I don't think a financial transaction tax
    would have an effect on fraud or manipulation. I also don't
    think that it ultimately--financial transaction taxes often
    fail to raise money, and they distort trading in a way that's
    not necessarily foreseen initially by the tax.
        And I'd like to just add in there as well that the
    financial transaction taxes, while they initially might seem
    like a small imposition on an individual investor, those taxes
    often hurt individual investors and their long-term retirement
    goals by affecting the institutions that also do the trading in
    mutual funds and with retirement money. I don't think a
    financial transaction tax is a good idea.
        Mr. Mooney. And a quick follow-up to that, Ms. Schulp, do
    you think that a financial transaction tax would have done
    anything to prevent the market volatility and disruption we saw
    just this past January?
        Ms. Schulp. No, I don't think it's related here. There's
    been some discussion that it might've decreased the amount of
    trading and thus changed the volatility. It's my opinion that
    that would not have had any effect in this particular
    circumstance.
        Mr. Mooney. Thank you. I only have a minute left, so let me
    just summarize. The financial transaction tax supported by many
    Democrats would do nothing to prevent market manipulation or
    fraud, would have not prevented the market disruption in
    January, and, most importantly, it would hurt retail investors,
    yet Democrats are claiming that the events surrounding GameStop
    and Robinhood in January make it imperative to implement this
    financial transaction tax. It just doesn't add up.
        A financial transaction tax would make it more expensive
    for small retail investors to trade, and so much for looking
    out for Main Street. I believe we should be working together to
    find ways to open up markets to retail investors, not close
    them. Instead of making trade more expensive with a burdensome
    tax, let's look for ways to empower retail traders.
        Thank you, Madam Chairwoman. I yield back.
        Chairwoman Waters. Thank you very much. Mrs. Beatty, you're
    recognized for 5 minutes.
        Mrs. Beatty. Thank you, Madam Chairwoman, and thank you to
    the witnesses. My first question is to Ken Griffin. In the
    first 3 quarters of 2020, your company paid online brokerages
    like Robinhood $700 million for their order flow.
        Do you believe that brokers like Robinhood can serve the
    best interests of their users while selling their order flow to
    companies like yours? And that's a yes or a no.
        Mr. Griffin. Congresswoman, I believe that Robinhood
    actually goes further in the best interests of their customers
    by, in fact, routing their order flow to Citadel. We give a
    better price, a better execution for American retail investors
    than the alternative of going to exchanges.
        Mrs. Beatty. I'm going to take that as a yes, since you
    said they go further. Then, can you tell me, why does your
    company urge the SEC to ban the payment for order flow models
    in a filing to the SEC?
        Mr. Griffin. Congresswoman, that is a terrific question.
    That filing relates to the U.S. options market--it was a filing
    back, I believe, in 2004. And in the U.S. options market at the
    time, trades were committed against listed quotes.
        We were apprehensive about the direction in which the U.S.
    options market was heading towards the existence of these price
    improvement auctions which diminished the incentives to
    aggressively provide bids and offers in the options market.
        We felt that legislative or regulatory efforts to encourage
    tight quoting, to discourage the existence of these auctions--
    and this was being, in some sense, fueled by a series of
    payment for order flow programs was in the best interest of
    American institutional and retail investors.
        Now, regretfully, we did not prevail in our reasoning. The
    rise of price improvement auctions came into, in essence, the
    day-to-day model for options trading in the United States. And
    I do believe that this is a setback for our capital markets.
        Mrs. Beatty. Because my clock is ticking, let me ask you
    this: Are you saying that you no longer believe that the model
    is anticompetitive and distorts order routing decisions?
        Mr. Griffin. I think it's important to distinguish between
    a market where you must trade on an exchange. In the options
    market, we must print the trade on the exchange, versus a
    market where you can trade off exchange, which would be the
    U.S. equities market.
        So just to be very clear, because your question's very
    good, every single options trade must be executed on an
    exchange. Equity trades do not. And because of that, I can save
    Robinhood exchange fees, and offer a tighter bid-ask spread
    than--
        Mrs. Beatty. Clearly, we're going to have to have a further
    discussion. Let me interrupt you only because my time is
    running out, and I want to follow up with a question for
    Robinhood's CEO.
        Mr. Tenev, several of the brokers offered their users order
    flow for the sale to the firm, like with the previous CEO at
    Citadel. However, the price that Robinhood gets for the order
    flow is much higher than any other brokers receive. And I could
    go on and tell you we pulled the SEC filings, and that
    Robinhood received 17 percent per 100 shares of stock traded,
    and 58 percent to 100 shares, and I could go on. But the
    question is, why do companies like Citadel pay a premium for
    their order flows of Robinhood's users?
        Mr. Tenev. Thank you, Congresswoman, for that very
    important question. There are several reasons that may be the
    case. One important one is that our model and formula for
    payment for order flow works a little bit differently. We
    actually receive payment for order flow as a percentage of the
    bid-ask spread rather than on a per-share basis, and we do
    believe that's the most optimal way to structure payment for
    order flow arrangements.
        Mrs. Beatty. Okay. Is it not because companies like Citadel
    can make more money off of Robinhood users than others? And
    that's a yes or a no, because my clock is going to run out.
        Mr. Tenev. No.
        Mrs. Beatty. I'm sorry. I yield back. My time is up.
        Chairwoman Waters. Thank you very much. Next, we will have
    Mr. Davidson.
        Mr. Davidson, you are recognized for 5 minutes.
        Mr. Davidson. Thank you, Madam Chairwoman. And I thank our
    witnesses and I appreciate the work you've done today.
        I just want to share that in May of 2020, the Depository
    Trust & Clearing Corporation (DTCC) unveiled a working proof of
    concept called Project Ion. In this project, DTCC said they
    would examine the potential use of distributed ledger
    technology in accelerating the clearing and settlement process.
    Now, since Project Ion was publicly announced, we've received
    little information pertaining to its progress.
        As a long-time advocate for this emerging technology,
    distributed ledger technology and blockchain, today I've sent a
    letter to the DTCC to request that they provide an update on
    the status of Project Ion. And I look forward to hearing back
    from them, and hope to include them in our next hearing.
        Mr. Griffin, with Project Ion in mind, could you briefly
    state what would be your biggest concern if DTCC implements
    same-day clearing and settlement?
        Mr. Griffin. Same day clearing and settlement requires that
    every bit of the workflow is perfectly synchronized across all
    parties, and we have no time for recoverability or for the
    error management that you have in the overnight batch process.
        Mr. Davidson. Right. The technology makes that essential,
    in my assessment, that is inherent for the architecture for
    blockchain to move forward with each proof. And, so, I guess,
    clearly, in your business, just to follow up there, the
    technology exists for trading firms that are engaged in high
    frequency trading, you measure success in the course of the day
    in what, milliseconds for high frequency trading?
        Mr. Griffin. As you know, we are the largest market maker
    in the world and the largest in the United States in equities.
    We put great emphasis on the performance of our systems. That
    was one of the reasons that on the week of January 24th, we
    were the only major market center for retail order flow that
    was responsive every minute of every trading day.
        Mr. Davidson. Perfect. I just wanted to make the point that
    I think the technology exists, whether you use blockchain or
    not, and I applaud you for having the ability to execute with
    precision swiftly already, and I don't think it's a barrier.
    I'd love to have more dialogue, but unfortunately, I have to go
    to a few others.
        Mr. Tenev, do you believe that the root cause of January
    28th, for the problems that you and others experienced, were
    market infrastructure-related, particularly related to T-2
    versus T-0?
        Mr. Tenev. Thank you, Congressman. I do believe if we had
    real-time settlement capability and the infrastructure was
    modernized, we would not have seen similar problems.
        Mr. Davidson. Yes. And thanks for that. I think one of the
    related things, and it's related to your mission at Robinhood
    of more democratic access to capital--it's just not the ability
    for more people and a broader portion of America to become
    savers and investors. It's also to engage in corporate
    governance, even. Do you believe that if market infrastructure
    would guarantee--this is really related to the musical shares
    where someone could be left with no share when the music stops,
    mobile claims on a shorted stock. If the market infrastructure
    would guarantee an investor could retain custody of their
    shares so that the shares can't be lent to short sellers, there
    could be a downside. How do you feel that only one claim on the
    shares would resolve this, and that relates to proxy voting as
    well or shareholders voting the shares?
        Mr. Tenev. Congressman, I believe that's an important
    question. It's one that Robinhood, and me, personally, have
    engaged with. I do believe that the ability for the same share
    to be shorted an indefinite number of times is somewhat of a
    pathology, and that should be fixed. And I think step one of
    that is modernizing the antiquated settlement infrastructure
    that everything is built on. We simply don't have the ability
    to properly track what shares have been shorted, and how many
    times, as they're moving through our settlement system
    currently.
        Mr. Davidson. Yes. Thank you for that. And I appreciate
    that you see the relationship. Hopefully, broadly we do, and we
    provide the nudge the market needs.
        I want to commend Vice Chancellor Travis Laster on the
    Court of Chancery of the State of Delaware for his letter and
    paper, ``The Blockchain Plunger,'' which explains how this
    could be done, and I ask unanimous consent to submit that for
    the record.
        As my time expires, I want to commend you, Mr. Gill, for
    just representing a large segment of the industry, in my view,
    where savvy investors have had an opportunity to engage, and it
    relates to people with diamond hands that hold. You might not
    call yourself a holder, you might use the words, ``diamond
    hands,'' but thanks, and congratulations for your success. I
    yield back.
        Chairwoman Waters. The gentleman's time has expired, and,
    without objection, your submission is taken. Thank you.
        Chairwoman Waters. Mr. Vargas, you are recognized for 5
    minutes.
        Mr. Vargas. Thank you very much, Madam Chairwoman.
        First of all, I want to apologize to Mr. Plotkin. You spoke
    of the anti-Semitic attacks that you suffered online. As a
    person of color, I always feel the need to confront hate speech
    and speak out, and I don't think there's ever been a more
    hateful, evil, sinful event in human history than the
    Holocaust, so I want to apologize to you and your family for
    those attacks. You brought it up, and I think we owe you an
    apology, so I want to apologize for that.
        Sometimes, I think some of my colleagues on the other side
    of the aisle are devoid of any contact with real people when
    they say this is just political theater, or they don't want to
    know the rate of return, when that's exactly what people want
    to know. In fact, there's been a great deal of interest in this
    hearing, and I think it speaks to a great distrust in our
    society of government, markets, and institutions.
        And then, along comes the story of GameStop, and it's a
    story, really, of Robinhood turned on its head. And the reason
    I say that is, and Mr. Luetkemeyer brought it up, Robinhood was
    an English folk hero, in the 13th, 14th Century, and he was
    supposed to steal--Robin of Loxley was supposed to steal from
    the rich and give to the poor, and here, you almost have the
    opposite. You have a situation where you have stealing from the
    small retail investor and giving it to the large institutional
    investor.
        From an outsider's perspective, you have, at least, the
    hedge funds and their armies of analysts and lawyers and
    regular old suits attacking the trust [inaudible] GameStop by
    shorting its stock. And to the rescue, here comes the retail
    investors, and they're taking stock to these incredible levels.
    And all of a sudden, Robinhood steps in, but not to help the
    little guy. He steps in and says, I'm going to help the big
    guy, and stops the sale, because no one knows how high this is
    going to go. And who is getting it? Who is getting socked in
    this thing? The bullies are, the hedge funds. And that's why
    people were excited about this.
        But all of a sudden, Robinhood steps in, and they say, No,
    no. We had to do this because of other conditions, and my good
    friends, the Republicans, say it was the government, really. It
    was because the government regulations forced them to do this.
    Well, that's not what the public thinks. The public thinks that
    there was collusion, that the big guys, all of you guys were
    figuring out how to do this, and, ultimately, come out ahead as
    you always do. And it seems that my colleagues on the other
    side want to help people.
        Now, Mr. Griffin, if I could just ask you the first
    question: How many people are in the room with you? If you
    could just count how many people are in the room with you.
        Mr. Griffin. There are five people, including myself in
    this room, sir, Congressman.
        Mr. Vargas. Thank you. So, I don't think my colleagues need
    to help the CEOs or anybody else. They have plenty of help.
        I have to ask this: You said that you didn't talk to
    anybody at Citadel, Citadel Securities. Did anyone in your
    organization, since January 1st, contact Robinhood?
        Mr. Griffin. Are you asking if we've had contact with
    Robinhood?
        Mr. Vargas. With respect to GameStop, and what we're
    obviously talking about.
        Mr. Griffin. Congressman, we offered to have my colleague
    who manages that relationship be here today instead. He has
    firsthand knowledge. We, of course, are talking to Robinhood
    routinely in the ordinary course of business. We manage a
    substantial portion of their order flow.
        Mr. Vargas. I understand that, but did you talk to them
    about restricting or doing anything to prevent people from
    buying, not selling, but buying GameStop?
        Mr. Griffin. Let me--
        Mr. Vargas. Anybody in your organization?
        Mr. Griffin. Let me be perfectly clear: Absolutely not.
        Mr. Vargas. So if we depose everyone in your organization,
    we'll find that.
        Mr. Griffin. That is correct.
        Mr. Vargas. Okay. Thank you. I do want to ask you one
    thing, and Mr. Sherman was pursuing this. How do you balance
    the best execution for the order flow for your purchase from
    Robinhood with the need to profit from the purchase order flow?
    How do you do that?
        Mr. Griffin. As a market maker, we have to provide to the
    customer a better price than they can achieve on an exchange.
    Order flow is routed to us on the merits of the execution
    quality that we provide in contrast to our competitors with
    whom we are competing.
        Mr. Vargas. Okay. My time's about to expire, but I have to
    say, Mr. Tenev, when you say that Robinhood has made $35
    billion, and you don't say how much your people lost on
    GameStop, people who invested with you, that's like taking the
    Fifth. Thank you.
        Chairwoman Waters. Thank you. The gentleman's time has
    expired.
        Mr. Budd is recognized for 5 minutes.
        Mr. Budd. Thank you, Madam Chairwoman. And I also want to
    thank the panel.
        Now, I really care about a level playing field for retail
    investors to access the market, and I have long been a
    supporter of financial innovation in fintech, and the shared
    goal of democratizing finance and making access to the
    financial system easier for all.
        So, Mr. Tenev, your company boasts that it's helping to
    democratize finance and is at the forefront of innovation. Can
    you talk a little bit more about what Robinhood is doing to
    push innovation forward, and create a level playing field for
    all investors, while at the same time, making sure that those
    investors are well-informed?
        Mr. Tenev. Absolutely, Congressman. Thank you for that very
    important question. The first thing I should note is that many
    of the witnesses and representatives here have stated that it's
    never been a better time to be a retail investor in America
    than it is right now. I think the combination of zero
    commissions, no account minimums, and fractional shares,
    really, things that Robinhood has helped make the industry
    standard, have helped small investors, and helped level the
    playing field for people to participate in the markets.
        Over the past year, Robinhood has released fractional
    shares, the ability to do dividend--automated dividend
    reinvestments, recurring investments so that you could take $1
    or $5 and create a habitual investment into a particular stock.
    And the theme of this year for Robinhood is, how do we take a
    first-time investor and turn them into a long-term habitual
    investor? How do we make long-term investing accessible for
    people around the country?
        And we're making huge investments in education and customer
    support, to support that. We recently released a revamped Learn
    Portal, we call it Learn 2.0, with the aim of taking a customer
    from basic concepts such as, what is a share? What is a stock?
    What's an ETF? And taking them all the way through to more
    advanced concepts. And we're continuing to invest more and more
    on Learn as well as on Snacks, which is our popular podcast,
    and all other forms of content that we distribute. Last year,
    more than 3.2 million--
        Mr. Budd. I want to interrupt you there. I know you have a
    lot more things. These are great, and I know we could probably
    talk for a lot longer than this, but I want to shift gears just
    a bit. But I do want to keep talking about the retail investor,
    and I want to switch to Ms. Schulp.
        Ms. Schulp, back in December, there was an article that you
    wrote prior to all of these events that we're having the
    hearing on today. And in the article, I think that you said
    that it's inappropriate to refer to these very retail investors
    that we're talking about that are using these platforms like
    Robinhood, that we're talking about, and referring to those
    investors as, ``dumb money.'' I think that is pretty insulting,
    and my colleague from across the aisle from Connecticut used
    that term. I think it's insulting. And instead, retail
    investors are, in fact, revolutionizing the stock market. So
    would you elaborate on those views, Ms. Schulp?
        Ms. Schulp. Absolutely. Thank you, Congressman. Retail
    investors are often referred to as, ``dumb money,'' by Wall
    Street, and it's because they don't have access to the same
    level of research, or some use the term because they think
    retail investors make dumb decisions. I think it's insulting. I
    think that the term needs to go out the window. Retail
    investors are investors who make their decisions based on the
    information known to them, and we should focus on educating
    people so that they can understand the risks and rewards of
    investing.
        Here, I think the GameStop situation is proof that the
    retail investors are revolutionizing the market. No one would
    have guessed, when I wrote that article in December, that
    retail investors were going to initiate a sophisticated short
    squeeze. I think the retail investors here are learning,
    learning by doing, which is one of the best ways to learn, and
    we should expend effort making sure that people are equipped
    with the knowledge to understand the risks of being in the
    market.
        Mr. Budd. I appreciate that, and I would like to ask for
    unanimous consent to insert that letter into the record, Madam
    Chairwoman.
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. Budd. Thank you. I just want to look--Robinhood wrote
    about the need for--and this is open to anyone. And I just have
    a few seconds left, but I'd like for someone to talk aboutx, is
    it possible for clearinghouses in real-time settlements on the
    blockchain to exist? And I don't have time for that, but that's
    something we can come back to at a further point. And, Madam
    Chairwoman, I'll go ahead and yield back.
        Chairwoman Waters. Thank you very much. And, without
    objection, I want to make sure that that's in the record, that
    your insertion was accepted. Thank you. With that, we'll turn
    to Mr. Gottheimer.
        Mr. Gottheimer, you are recognized for 5 minutes.
        Mr. Gottheimer. Thank you, Madam Chairwoman, and thank you
    to our witnesses for being here today. Before I begin, Mr.
    Gill, I read your testimony, and I'd like to offer my heartfelt
    condolences for the loss your family suffered last year.
        It's not just Melvin Capital that lost money as part of the
    frenzy around GameStop. Whether it's a security guard losing
    $20,000, or a dog walker losing a few hundred dollars, everyday
    retail investors were left holding the bag after GameStop's
    stock fell back to earth. Not every investor lost money. Mr.
    Gill, sitting before us here today, remains bullish on the
    stock. Still, Bloomberg reported yesterday that he was served a
    lawsuit accusing him of misrepresenting himself and his
    motivations.
        I'm not here to take sides in the litigation. However, it
    does raise important questions about the role of social media
    websites, like Reddit, especially in the context of the
    volatility we experienced with GameStop, AMC, and numerous
    other stocks last month.
        Mr. Huffman, what kind of authentication exists for Reddit
    users to confirm their identities to verify that they're even
    real people?
        Mr. Huffman. Reddit--and this an important quality of
    Reddit, so thank you for the question--doesn't require people
    to reveal their full identity to use the platform. One of our
    pillars of privacy, and privacy is something that's critically
    important to us, is that users should be masters of their own
    identity, and they can choose to reveal as little or as much as
    they would like.
        I'll point out that there are two sides to this that are
    really important. On one side, this allows Reddit to work.
    Something like WallStreetBets would not exist if users had to
    reveal their full identity, because in WallStreetBets, people
    are revealing gains and losses. They're effectively revealing
    their financial position in life, and we would not put that
    burden on anybody to force them to do so.
        I'd like to point out that other platforms have real
    identity, and it doesn't do anything to improve their behavior.
        Mr. Budd. Is there any way for a regular user of
    WallStreetBets to know what content is genuine, written by
    other users just like themselves, retail investors who are
    looking for honest information to invest on? Is there any way
    for that?
        Mr. Huffman. There are a couple of aspects to this. The
    first is that we, as a company, invest significant resources in
    enforcing the veracity of our voting system. It's something
    we've been doing for 15 years, long before events like this,
    long before even the election and the politics of the last few
    years where these things have become top of mind for everybody.
    This has been critically important to us.
        Also, our user base is exceptionally good at sniffing out
    untruths, misinformation, and fake stories both within this
    community and Reddit at large. So, in order for any piece of
    content to be successful on Reddit, it has to be accepted by
    that community and receive the same votes that anything else
    would.
        Mr. Budd. Okay. Do you have any heightened standards for
    places like WallStreetBets or other investing subreddits where
    people can manipulate content to their own financial gains?
        Mr. Huffman. We keep a high standard across the entire
    site. And with this particular community, over the past few
    weeks, we've been looking especially closely, anticipating
    these sorts of issues and questions. And, to date, we have not
    found any nefarious behavior.
        Mr. Budd. Got it. But we could have a situation where
    thousands, possibly millions of dollars of retail investor
    money may be being manipulated. We don't know that for sure.
        Mr. Huffman. People in the United States talk about stocks
    on Reddit. They talk about it on TV, in magazines. People can
    say--in fact, they do, on television, all the time encourage
    people to make what I would call bad investment decisions. On
    Reddit, I think the investment advice is actually probably
    among the best because it has to be accepted by many thousands
    of people before getting that sort of visibility.
        Mr. Budd. Do you see any difference between someone on
    Reddit offering advice versus an analyst at a major bank or a
    financial services firm?
        Mr. Huffman. Absolutely. I think on Reddit, you're seeing
    retail investors who are giving authentic advice based on their
    knowledge, and you would not, I think, call into question what
    their motivations are, or what large positions they may hold
    before going on TV and talking about them.
        Mr. Budd. Do you plan to do more in this space, and is this
    something that's going to be a major priority of yours? And do
    you think overall, social media companies, like yourself,
    should be held to a different standard? Should you be
    responsible for what happens in your content? If someone
    manipulates something or if it's a bot, should that be on you,
    or do you think that's just buyer beware?
        Mr. Huffman. We take manipulation of Reddit incredibly
    seriously. That is one of our, I think, first duties in all of
    this is to ensure the authenticity of our communities, yes.
        Mr. Budd. Yes. But do you think you should be held
    responsible if somebody puts something--if there's some
    collusion or if there is somebody who is a--it's a Russian,
    it's a bot that's online. Do you think you should be on the
    line, or this is just a site you offer for people to exchange
    ideas?
        Mr. Huffman. Reddit can be held responsible, and we do take
    our responsibilities here incredibly seriously.
        Chairwoman Waters. Thank you. The gentleman's time has
    expired.
        Mr. Budd. Thank you. Thank you, Madam Chairwoman.
        Chairwoman Waters. Mr. Kustoff is now recognized.
        Mr. Kustoff. Thank you, Madam Chairwoman. And I want to
    thank you and the ranking member for convening today's hearing.
        If I could, Mr. Tenev, I'd like to echo what many of my
    colleagues have said today. We do appreciate the fact that
    you've created this platform. To a large extent, you've leveled
    the playing field so that small, individual investors can have
    a shot at the American Dream of investing. A lot has been said
    about the situation that occurred in late January. My question
    to you is, how did you misjudge your capital requirements to
    prevent people from being able to trade during that period in
    January?
        Mr. Tenev. Thank you, Congressman. I wouldn't say we
    misjudged our capital requirements. This was a 1-in-3.5 million
    occurrence event, one that had never been seen before in
    capital markets, and we had to play this by the book. Robinhood
    Securities made the decision that we did so that we could
    remain in compliance with our regulatory capital and deposit
    requirements. Unfortunately, it required us to restrict the
    buying of these securities for Thursday, and limit it to some
    degree on subsequent days until additional capital came in that
    allowed us to relax the restrictions.
        Mr. Kustoff. It was Robinhood's mistake, though, correct?
        Mr. Tenev. Robinhood owns what happened, certainly, and we
    need to make sure it doesn't happen again, but Robinhood--
    really, Robinhood Securities had limited options on how to
    address this. And I fully support the team in making the
    decision that they did, and I believe they did the right thing,
    and the only thing.
        Mr. Kustoff. You said at the beginning that you're
    privately held. With that said, is your primary source of
    revenue from the order flow payments that you receive from some
    of the players we've talked about today?
        Mr. Tenev. That is correct, Congressman. Payment for order
    flows is one of our largest revenue sources.
        Mr. Kustoff. Is it the largest?
        Mr. Tenev. It's the largest, yes.
        Mr. Kustoff. In both your written and oral testimony, you
    talked about the settlement period, and we're probably capable
    of doing it in real time, or instead of T plus 2, making it T
    plus 1. If we had real-time settlement, would the situation
    that occurred in January have been preventable? In other words,
    that wouldn't have happened if we had real-time settlement?
        Mr. Tenev. Congressman, if we were to have real-time
    settlement, and of course, there's some implementation details
    that would govern this, there would be less of a need for
    collateral at clearinghouses because the cash and securities
    transactions would be exchanged in real time. Collateral for
    counterparty risk would be less necessary. So, real-time
    settlement would lead to reduction, perhaps, and elimination in
    some of these collateral requirements, a reduction in the money
    that's sort of clogging up the plumbing of the system, and that
    would have avoided some of these problems altogether.
        Mr. Kustoff. Thank you very much. And just to be clear,
    does the same answer apply if I asked you if settlement was T
    plus 1 instead of same-day settlement, would your answer be the
    same?
        Mr. Tenev. Congressman, T plus 1 would be better, but it
    doesn't--it reduces the scope of the problem, but it doesn't
    eliminate it from a technology standpoint.
        Mr. Kustoff. Thank you very much.
        Mr. Huffman, I'd like to follow up on some of the questions
    that my colleagues, Congressman Hill and Congressman
    Gottheimer, asked. You've done an investigation into Reddit and
    into WallStreetBets. You don't see anything--any bad actors--
    I'm paraphrasing, but you don't see any bad actors that caused
    any role in the GameStop frenzy. Am I characterizing that
    correctly?
        Mr. Huffman. Congressman, that's right.
        Mr. Kustoff. You know that Congress is looking at amending
    Section 230. What are your thoughts about that as it relates to
    Reddit?
        Mr. Huffman. Sure. Section 230, I think, is a critically
    important law to the internet as we know it. And it was
    created, in fact, to protect a forum in the early internet for
    talking about stocks. Section 230, I think it's also important
    to point out, doesn't protect platforms or companies like ours
    from civil litigation, so there are mechanisms for coming after
    companies like ours. What it does protect is our ability to
    evolve the way we moderate our content, which we have done in
    many ways over the last decade.
        Chairwoman Waters. The gentleman's time has expired.
        The gentleman from Texas, Mr. Gonzalez, is recognized for 5
    minutes.
        Mr. Gonzalez of Texas. Thank you, Madam Chairwoman, and
    Ranking Member McHenry, and I want to thank everyone here with
    us today.
        This is for Citadel. Mr. Griffin, in 2020, Citadel violated
    Regulation SHO, which governs short selling. Citadel is now
    involved in another short-selling problem, and Robinhood routes
    half of its customers' orders to you. Robinhood halts buying on
    a position that you're long on, and you own the hedge fund and
    the clearing broker. What is there to prevent you from taking
    advantage of that situation and making sure you profit off of
    the confusion and retail investors?
        Mr. Griffin. Congressman, I'm trying to understand the
    question.
        Mr. Gonzalez of Texas. Let me give it to you again. In
    2020, Citadel violated Regulation SHO, which governs short
    selling. Citadel is now involved in another short-selling
    problem, and Robinhood routes half of its customers to you, its
    orders to you. Robinhood halts buying on a position that you're
    long on, and you own the hedge fund and the clearing broker.
    What is there to prevent you from taking advantage of that
    situation and making sure you profit off of the confusion of
    retail investors?
        Mr. Griffin. In no particular order, I just do not
    understand the reference to us owning a clearing broker. We do
    not own DTCC. We do not control DTCC. We are not a party to the
    discussion, dialogue, or demands between DTCC and Robinhood.
    So, I do not understand the premise of the question, because we
    have literally nothing to do with DTCC other than being a
    member of DTCC for providing settlement services for us, and
    for doing real-time trade affirmation and clearing.
        Now, Citadel Securities owes a duty of best execution for
    every order that comes from Robinhood, and I will tell you that
    I'm incredibly proud of how seriously my team takes that duty
    of best execution. Some of the most earnest, hard-working, and
    thoughtful people that I've ever met in my life work on our
    retail execution business here at Citadel, and take great pride
    in the execution quality that we give to each and every trader,
    not only at Robinhood, but at every single one of the--
        Mr. Gonzalez of Texas. Thank you.
        Mr. Griffin. --of the retail--
        Mr. Gonzalez of Texas. Thank you for your response.
        Mr. Gill, I understand that you made your position known on
    GameStop as far back as 2019, and are lauded as a diamond hands
    hero by the WallStreetsBets community. Have you ever previously
    experienced or observed the type of restrictions Robinhood and
    other applications performed on January 28th?
        Mr. Gill. Thank you, Congressman. No, I have not.
        Mr. Gonzalez of Texas. Thank you. That was it for the
    question.
        And, Mr. Huffman, I'm not a Redditer, but I do understand
    the problems around social media and freedom of speech and the
    tightrope act that goes on where these intersect. In the near
    decade of WallStreetBets and subreddit, have they shown
    themselves to be an exceptionally problematic forum, or just
    one of the many eccentric communities that call Reddit home?
        Mr. Huffman. Congressman, I think your latter description
    is more accurate. They are an eccentric community, but they're
    well within the bounds of our content policy. And though we do
    have difficult decisions to make here and there regarding
    specific communities, one of the things we look to first is
    whether the community is trying and putting their best efforts
    toward being a good citizen of Reddit. And towards that end,
    we've had consistent communication with the moderators of that
    community, and they've been doing, I think, an excellent job.
        Mr. Gonzalez of Texas. Thank you. The last financial crisis
    was caused when we turned a blind eye to the bad practices of
    our financial institutions. Perhaps today, we've seen a warning
    about the clearing process, and I hope today can be a jumping-
    off point for us to take a hard look at our markets, and the
    practices of these institutions.
        In a two-day clearing process, the liability risk and
    potential financial stress limited trading, but in a key time
    in market, and, perhaps, in a way that materially affected
    investors in these recent events. So, I'm hoping that we all
    get to take a closer look at what is happening.
        And with that, I yield back. Thank you.
        Chairwoman Waters. Thank you very much.
        Mr. Hollingsworth is now recognized for 5 minutes.
        Mr. Hollingsworth. Thank you, Madam Chairwoman.
        Mr. Griffin, I'm going to direct my questions to you,
    specifically, but I'm hoping to talk a little more
    philosophically about the market writ large, rather than just
    Citadel itself. Certainly, there's been a significant amount of
    evidence supporting the advantages that market makers offer
    retail investors.
        Through sophisticated infrastructure and high-speed
    technology, bid-ask spreads have decreased from $0.33 to less
    than a penny over the last 5 decades, and according to some
    research, saved retail investors $1.6 billion just in the first
    6 months of last year alone. None of our discussion after this,
    and the questions I'm going to ask, is intended to be
    pejorative to that reality, but I just wanted to pick your
    brain, given your deep experience about some of the
    implications of off-exchange trading, specifically. We've seen
    this year that off-exchange trading has eclipsed nearly 50
    percent of all trading.
        Can you talk a little bit about what factors have
    contributed to off-exchange trading's growth versus on-exchange
    trading? Certainly, I want to talk about the concerns we may
    have as market participants about that, but first, just the
    factors that you think are driving that?
        Mr. Griffin. I think one of the most significant drivers of
    off-exchange trading is that exchanges are handcuffed in their
    ability to fulsomely compete.
        Mr. Hollingsworth. Can you talk a little bit more about
    that? Is this just regulatory arbitrage?
        Mr. Griffin. I hate the word, because it has a negative
    connotation. I believe that the exchanges should have greater
    latitude in setting their kick sizes in the most liquid
    securities. That will allow order flow that's currently going
    to dark pools to go to exchanges and to receive better
    executions. So, let me just be very clear: It's not that we
    want to inhibit dark pools, or market makers like Citadel, from
    competing.
        Mr. Hollingsworth. Right.
        Mr. Griffin. It's that we want to enable and empower
    exchanges to be better competitors. I started my career as a
    retail investor in the day where I used to spend $0.25 in a
    bid-ask spread if I was lucky. I know the days you're referring
    to. We've come a long way. But to continue on this journey, the
    next step is to allow exchanges to be more competitive in the
    market.
        Mr. Hollingsworth. I think you answered this question, but
    just to put a fine point on it, there is public policy work
    that needs to be done in order to help resolve some of this
    challenge that exists in the movement of volume from on-
    exchange to off-exchange. That's incumbent upon us. It's
    incumbent upon regulators to find a better solution. Is that
    what you're saying?
        Mr. Griffin. Congressman, I'm saying that yes, it's
    legislators or the SEC. I believe much of this can be done by
    the SEC as a policy matter.
        Mr. Hollingsworth. Right.
        Mr. Griffin. Think of it as the next step forward in
    regulation en masse.
        Mr. Hollingsworth. Love it. Great. Thank you for all of
    those answers. I want to highlight this further. Can you talk
    about some of the challenges or deleterious impacts on the
    market if more and more volume is off-exchange versus more--
    versus [inaudible] trading? Can you talk a little bit about why
    we should be concerned about that, to make sure we all
    understand how important it is to make these changes to
    empower, as you said, exchanges to be better competitors?
        Mr. Griffin. I think there are three salient points I'd
    like to make. First, price discovery is the most important part
    of our capital market's function, because price discovery
    combined with liquidity fuels our free enterprise system. It's
    how companies raise capital. It drives down the cost of
    capital. The more trading on-exchanges, the better price
    discovery we have. That is good for our capital markets.
        The second is that dark pools are often willing to engage
    in business practices where they discriminate against one class
    of investors versus another. I find it very unsettling that we,
    in any way, prohibit discrimination against one group of
    investors to the benefit, or at the expense of another in any
    part of our capital markets. We want our capital markets to
    represent the values of our country.
        The third is that the dark pools themselves create a level
    of concern and apprehension about the integrity and fairness of
    our markets. And I believe that we should always be taking
    steps to advance public confidence and the confidence of retail
    investors and institutional investors that the United States
    capital markets are a fair place in which to transact business.
        Mr. Hollingsworth. Mr. Griffin, thank you for those
    answers, and I would call upon my colleagues to recognize the
    deep experience Mr. Griffin has in these areas, and how
    important it is that we take the steps, either via agency or
    via legislation, to help empower exchanges to compete on a
    level playing to make sure that we create a public policy.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Lawson, you're recognized for 5 minutes.
        Mr. Lawson. Thank you, Madam Chairwoman. Thank you to you
    and Ranking Member McHenry for this hearing today, and I want
    to thank the rest of the panel, the panelists too, for this
    great forum.
        One thing, Madam Chairwoman, I want to clarify for the
    record is that one of my colleagues earlier said that when
    people got their stimulus money, they went out and started
    investing. I want to let them know that my people got their
    stimulus money and were trying to pay the rent, trying to take
    care of their kids, and I don't want the panel to think that we
    worked so hard on the stimulus dollars so that people could run
    out and invest their money. That's not the norm.
        Mr. Plotkin, Wall Street is supposed to be tied to revenue
    and property fundamentals. We saw these fundamental changes
    when amateur investors gained control. They publicly stated
    that this isn't about investing based on their fundamentals and
    that this is an investment about making a profit in that way.
    It's about making a profit to demonstrate that they can
    manipulate the system, and if not, better than professionals
    such as yourself.
        The Reddit trade won, and Wall Street was losing billions
    of dollars. Melvin Capital bet against GameStop, and was on the
    verge of bankruptcy. Clearly, there is manipulation and
    distrust within the system, and inequality in American finance.
        Mr. Plotkin, do you believe that there is manipulation,
    distrust, and overall inequality within American finance? And
    what do you believe are the consequences to a big guy like
    yourself, but, also, little guys in this process?
        Mr. Plotkin. Thank you for the question. I really can't
    speculate in terms of the broader system. I think Melvin--my
    focus is on running our portfolio and building a great
    organization and a strong team. I think some of the issues you
    speak about are much greater societally, and it's not really my
    area of expertise.
        Mr. Lawson. Okay. One other thing, you guys have a Series
    67 license and everything, but these amateur investors don't
    have to go through those same standards. And because they do
    not have to go through those same standards, how are they able
    to go in and manipulate the market--maybe someone here can
    answer--over people who have been involved in just research and
    calculation and investors for so many years? Can anybody
    answer, how are they able to go in and manipulate markets like
    this and cause billions of dollars to be lost?
        Mr. Plotkin. Sure. I think, as we've spoken about today,
    the financial markets are changing. There's a lot of new
    players. I think they saw an opportunity to drive the price of
    the stock higher. And today, with social media and other means,
    there's the ability to kind of collectively do so. That was a
    risk factor that, up until recently, we had never seen.
        I think sometimes with retail investors, they've been
    really adept at this, investing in the internet or software
    stocks or electric vehicles, ideas with big opportunities, and
    they chase them because they believe in the fundamentals. I
    think this was very different in that a lot of the mean stocks
    were businesses with real challenges. But they exploited an
    opportunity around short interest and the way that was
    approached. And I think Melvin will adapt, and I think the
    whole industry will have to adapt.
        Mr. Lawson. I understand that. And I guess from our
    standpoint, and I don't have much more time, but what do you
    recommend to us to try to keep this from happening again?
        Mr. Plotkin. I think to some degree, markets are self-
    correcting, moving forward, stocks--I don't think you're going
    to see stocks with the kind of short interest levels that we
    saw prior to this year. I don't think investors like myself
    want to be susceptible to these type of dynamics. I think there
    will be a lot closer monitoring of message boards. There will
    be software providers. We have a data science team that will be
    looking at that. Whatever regulation that you guys come up
    with, certainly, we'll abide by. And I look forward to helping,
    if you guys want to have future conversations about that.
        Mr. Lawson. Okay. Thank you.
        Madam Chairwoman, my time is running out, so I yield back.
        Chairwoman Waters. Thank you very much.
        Mr. Gonzalez of Ohio, you're recognized for 5 minutes.
        Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. I want
    to thank Ranking Member McHenry for his leadership in calling
    for this hearing today, and also you, Madam Chairwoman, for
    bringing us together.
        Mr. Tenev, I'm going to start my questions with you by
    walking through a series of events from that day in January,
    just to make sure we're all on the same page. In your
    testimony, you mentioned that the automated deposit
    requirements from DTCC came in at 5:11 a.m. Eastern time, and
    it showed a $3 billion deficit, correct?
        Mr. Tenev. I believe that's correct, yes.
        Mr. Gonzalez of Ohio. At that point, 5:11 a.m., did you
    have the liquidity to meet the additional $3 billion deposit
    requirement?
        Mr. Tenev. As I wrote in detail in my written testimony,
    there were a series of steps that the Robinhood securities team
    took to--
        Mr. Gonzalez of Ohio. Reclaiming my time, sir. At that
    exact moment, did you have the liquidity for $3 billion? At
    5:11 a.m.?
        Mr. Tenev. At that moment, we would not have been able to
    post the $3 billion in collateral.
        Mr. Gonzalez of Ohio. Okay. So when you said, and you've
    said this multiple times, that you did, in fact, have the
    liquidity, and you didn't have a liquidity problem, at that
    moment in time, that is not necessarily true, correct? You had
    to take steps to get there?
        Mr. Tenev. Congressman, we did have to--the Robinhood
    Securities team had to work with our relevant clearinghouses to
    adjust the risk profile of the trading day in order to meet our
    collateral requirements.
        Mr. Gonzalez of Ohio. Right. And in order to do that, your
    choice was to throttle trading to prevent your clients from
    being able to purchase certain shares, correct?
        Mr. Tenev. That's correct. Robinhood Securities had to
    restrict buying in about 13 securities.
        Mr. Gonzalez of Ohio. Okay. And if you had not been able to
    de-risk the portfolio, you wouldn't have been able to raise the
    money and get the bar requirement and the excess capital charge
    waived to de-risk the portfolio, then DTCC would have stepped
    in and liquidated the portfolio, correct?
        Mr. Tenev. I'm not sure what exact steps that they would
    have taken if we weren't in compliance with the deposit
    requirements, but it would not have been a good situation for
    the firm or the customers.
        Mr. Gonzalez of Ohio. Reclaiming my time, I would draw
    everyone's attention to the letter that Ranking Member McHenry
    submitted for the record. I'll just read this, ``If a clearing
    member fails to satisfy a margin call, it exposes other
    clearing members to risk and can put NSCC out of compliance. In
    a case of nonpayment, NSCC may cease to act for the clearing
    member and liquidate its unsettled clearing portfolio.''
        So, that was definitely in the cards. For my constituents
    who are Robinhood clients, what would this have done to their
    portfolios if it would have been forced liquidation as a result
    of missing the capital call?
        Mr. Tenev. Congressman, if there was forced liquidation, at
    the very least, it would have resulted in a total lack of
    access to the markets for your constituents, not just to the 13
    securities that we restricted buying in.
        Mr. Gonzalez of Ohio. Right. So, this would have been an
    enormous catastrophe for Robinhood, correct, and the clients?
        Mr. Tenev. That's correct. And not just Robinhood, but the
    over 13 million customers that we serve.
        Mr. Gonzalez of Ohio. Yes. And I think that's really sort
    of the crux of the issue. In a sense, I love your company,
    because it does, when correctly managed, provide investment
    opportunities for individuals who are currently frozen out of
    the markets for one reason or another. At the same time,
    though, I believe a vulnerability was clearly exposed in your
    business model, and, perhaps, in the regime that governs your
    capital requirements, and we just can't live in a world where
    my constituents could have their shares liquidated without
    their consent, because you all aren't able to make a capital
    call. I appreciate that you were able to ultimately satisfy it.
        But the amount of time you had, from 5 a.m. to 10 a.m., to
    figure this out is scary for the company. And, frankly, I care
    more about my constituents than anything, and it was scary for
    them, and, so, I hope we'll continue to look at that.
        Beyond that, though, I also hope that this hearing
    highlights a very real problem with our financial markets today
    and how they're accessed by everyday investors. Today, the
    Melvins and Citadels of the world, as well as major private
    equity (PE) and venture capital (VC) funds have access to the
    world's greatest investment opportunities on the planet,
    whereas the retail investor world, of which Mr. Gill is a great
    member, doesn't. It has access to an ever-diminishing set of
    investment opportunities. While we're debating these
    vulnerabilities, we're also serious about finding ways to
    expand access for Main Street investors.
        And with that, I yield back.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. San Nicolas, you're recognized for 5 minutes.
        Mr. San Nicolas. Good morning from Guam, Madam Chairwoman.
    I've been with the hearing since 3 a.m. The sun is starting to
    come up out here, but it's always a pleasure to be joining you
    in these very, very important hearings that you call for the
    American people. Thank you very much.
        I wanted to first begin by congratulating everybody who
    made money on the Robinhood trade. You guys found a low-float,
    low-volume, massively-shorted stock, and you guys squeezed it.
    And 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, and that was absolutely something
    to behold, and Robinhood made that possible.
        Mr. Tenev, you mentioned in your testimony that you've
    secured $3 billion in funding to address the regulatory deposit
    requirement situation that you faced. Where did that $3 billion
    come from?
        Mr. Tenev. Thank you, Congressman, for that question. To be
    clear, we were in compliance with all regulatory net capital
    and deposit requirements without the additional capital
    infusion. It was simply to provide an extra cushion, allowing
    us to unrestrict trading and be prepared for other black swan
    events that might happen in the future. The capital came from
    mostly existing venture capital investors that Robinhood
    already had.
        Mr. San Nicolas. So, basically, you had to further dilute
    your position in Robinhood in order to make sure that you
    secured all of the liquidity and customers affected [inaudible]
    that additional $3 billion.
        Mr. Tenev. That's correct, Congressman.
        Mr. San Nicolas. That's why I have a serious concern, Mr.
    Tenev, because not only was your business model designed to
    profit off of order flow, which caused you to take
    extraordinary risks in having 13 million customers with access
    to large margin trading that facilitated the GameStop
    situation, but you halted buys on that stock, and you allowed
    sells in order to mitigate the capital requirement situation,
    and you materially benefited from it. You materially benefited
    from it because it reduced the amount that you would have had
    to go out and raise in additional capital in order to prevent
    these kinds of crises from recurring.
        You took from your customers in order to minimize the $3
    billion from being larger than it probably would have been
    because you wanted to protect your position, and that is very
    troubling. It's very troubling that the order flow model that
    you built and the risk that you took on resulted in that halt,
    and it's very troubling that that halt also materially
    benefited both you and the existing shareholders by minimizing
    the amount of additional capital you had to raise in order to
    prevent that from happening again.
        You basically took from the shareholders in order to do
    that, and that's just--I don't know what to say about that. But
    I think that this, Madam Chairwoman, presents a very serious
    situation where we need to ensure that companies are not taking
    advantage of customers in this way.
        Mr. Tenev, you're quoted as saying in this hearing that,
    ``buying increases capital requirements; selling does not.''
    So, it was something that you knowingly did. It was beyond just
    trying to protect the existing customers. And at the end of the
    day, while you had to raise an additional $3 billion, it
    minimized that from being a larger sum. We have customers who
    purchased the stock, who are now bag holders after the price
    came down, because they couldn't continue going up with buying,
    additional buying, and that was willful. That was intentional.
        So I'm glad, Madam Chairwoman, that we've called this
    hearing. I'm glad we're able to put these things on the record,
    and I'm just very, very concerned with the implications of
    this. And I only hope that at the end of the day, those bag
    holders get a lot more than an apology.
        Thank you, Madam Chairwoman, and I yield back.
        Chairwoman Waters. Mr. Rose, you're recognized for 5
    minutes.
        Mr. Rose. Thank you, Madam Chairwoman, and thank you,
    Ranking Member McHenry, for holding this important hearing
    today, and thank you to our witnesses for your testimony and
    your participation today and for the dedication of time that
    you've made to this hearing.
        There is still so much for us to learn from this market
    event. Obviously, speculation has been rampant, and I believe
    we should not get ahead of our skis, so to speak, and rush to
    policy recommendations before we understand the full scope of
    this situation. The committee investigation is barely underway,
    and I would view a large majority of the policy proposals
    suggested today as half-baked at this point.
        At the end of the day, we should all want retail investors
    to have access to the market and to ensure that they have the
    information they need to participate in the market in an
    informed way.
        Mr. Griffin, my colleague, Representative Loudermilk, asked
    you to explain the advantages of cutting down on the settlement
    time, but you were cut off before you could complete your
    answer. Would you like to finish your thought there?
        Mr. Griffin. Congressman, to be brief, the issue in going
    to real-time settlement is that everything has to work
    perfectly in a world where there are still people involved in
    many of the processes.
        We'll get there one day as an industry. I just think it's a
    bridge too far in the next couple of years.
        Mr. Rose. And then, you were also cut off earlier when
    answering my colleague, Mrs. Beatty's, question regarding the
    difference between payment for order flow for the options
    market versus the equities market. Would you like to continue
    that explanation?
        Mr. Griffin. I think we covered that reasonably well. I
    think the salient difference is that in the options market,
    every trade must take place on an exchange to start with.
        In the equities market, the current market structure has
    been arrived at with the blessing of the SEC as the best way to
    give retail investors in America price improvement as compared
    to the exchanges.
        And to be succinct, we should make exchanges more
    competitive, not make internalization or dark pools more
    privileged.
        Mr. Rose. Thank you.
        And then finally, Mr. Griffin, earlier, Representative
    Luetkemeyer asked about how we got to where GameStop was short
    sold to 140 percent. Given that naked shorting is an illegal
    practice, how did that happen, given current U.S. law?
        Mr. Griffin. Clearly, a number of the purchasers of the
    short sales--of the shares sold short--are institutions that
    also lend their securities.
        And it's very important to remember that institutional
    investors earn substantial returns from participating in the
    securities lending markets.
        So if you are lending your GameStop stock out, for example,
    over the period of the recent crisis, you may have been earning
    an annualized rate of return of 25 or 30 percent on the shares
    that you lent out. That accrues to the benefit of pension
    plans, of ETFs, and of other pools of institutional lending
    that participate in the securities lending market.
        And keep in the back of your mind, when a bank lends money
    to a business, that business may turn around and lend money to
    its suppliers. Just because, in some sense, somebody can on-
    lend what they've bought doesn't necessarily mean something has
    gone wrong in the chain itself.
        Mr. Rose. Would you see that as an area ripe for regulatory
    adjustment or do you think that's not a problem?
        Mr. Griffin. I think if we were to think about legislative
    priorities to make our capital markets work better, this
    doesn't make the top 100 list.
        Mr. Rose. Thank you.
        Despite the intense volume and exposures presented in the
    markets, the broader infrastructure of our financial markets
    has performed very well, I believe. My concern, like those of
    my colleagues, is that forging ahead with new regulations at
    this point would be harmful and have unforeseen consequences.
        In the few moments that I have left, Ms. Schulp, can you
    speak to what the potential dangers are of increased regulation
    to retail investors?
        Ms. Schulp. That's going to take me more than 12 seconds.
        But there's a lot of potential for unintended consequences
    here, and increased regulation can drive retail investors out
    of the market. It can cause them to have less good prices.
        Mr. Rose. I'm sorry not to give you more time. Maybe one of
    my colleagues will give you a chance to complete that.
        I yield back.
        Chairwoman Waters. Thank you very much.
        Next, we will have Mrs. Axne for 5 minutes.
        Mrs. Axne. Thank you, Madam Chairwoman.
        And thank you to the witnesses for being here today.
        I just want to quickly follow up on a question that my
    colleague, Mr. Foster, asked you earlier, Mr. Tenev.
        You said that Rule 606 reports detail the arrangements you
    have with firms like Citadel. However, those only detail the
    payments you receive.
        Are you saying that you're prepared to publicly disclose
    the detailed terms of your payment for order flow with Citadel
    and other market makers?
        Mr. Tenev. Thank you for the question, Congresswoman.
        The 606 reports do publicly detail the payment for order
    flow arrangements we have with Citadel Securities and our other
    market makers.
        Mrs. Axne. Okay. I'll look forward to seeing those details
    then. Will you make sure that you get those over to our
    committee?
        Mr. Tenev. Certainly. We can have that arranged.
        Mrs. Axne. Okay. Thank you.
        Last month, of course, as we saw this volatility with
    GameStop and AMC and the stocks started to rally, everybody
    seemed to get involved. And one survey recently said that 30
    percent of Americans purchased one of those viral stocks. That
    includes people like my nephew and his two friends who stayed
    up until 4 a.m., to see if they could get a piece of this
    action.
        One of the most concerning pieces, though, of this whole
    episode is how many people really felt like that's what they
    needed to do to get ahead. To me, this just exemplifies the
    income inequality across America and it's one that we need to
    deal with.
        And I do appreciate the opportunity for retail investing.
    However, I want to make sure that it creates a good outcome for
    the people who are using it. And right now what I'm seeing is
    gambling on the stock market, and it's not a real solution to
    that income inequality, and I don't think we should pretend
    that it is.
        Just last June, when Hertz declared bankruptcy, and after
    that, Robinhood was actively pushing the stock on its site, it
    was trending on Robinhood, and I don't think the promotion of
    that worthless stock is good for investors. That's a gamble
    that they shouldn't have taken. And that's just one example.
        People having access to the stock market is nice, but if
    they don't have the money to invest, then really it's not
    democratization. And that's the real reason that 80 percent of
    the stock market is owned by 10 percent of the people.
        And, of course, those are people who don't have to put all
    their money into healthcare or childcare or a car payment or
    whatever it is that's just keeping them going through their
    day-to-day.
        Earlier, Mr. Tenev, you said that you couldn't tell us what
    your clients' rate of return is, but generally, 99 percent of
    short-term traders underperform the market.
        So, Mr. Tenev, you say that Robinhood's mission is to
    democratize finances. Is that correct?
        Mr. Tenev. That's correct, Congresswoman. Yes.
        Mrs. Axne. Okay. So I want to ask you then, you've invested
    significantly in behavioral research. And just so you know, I
    own a digital design firm with my husband, so I'm familiar with
    what behavioral research can do for platforms and websites. And
    that behavioral research has really shaped how your app is
    designed. Is that correct?
        Mr. Tenev. Congresswoman, like many technology companies,
    we employ data scientists, user researchers, and designers to
    provide a better customer experience and to understand our
    customers' needs.
        Mrs. Axne. So on the specifics, when people sign up, they
    get a scratch-off ticket to see what they get, confetti falls
    every time they place an order, they get push notifications,
    and they're encouraged to trade. If a friend signs up, they get
    a free stock, and on and on.
        Why have you added specific gaming design developments to
    look like gambling to your app? That encourages more frequent
    trading.
        Mr. Tenev. Congresswoman, as I mentioned earlier, we want
    to get people what they want in a responsible, accessible way.
    We don't believe in gamification. We know investing is serious.
    And that's why most of our customers are buy and hold. A very
    small percentage of our customers utilize margin.
        Mrs. Axne. I appreciate that. But folks like my nephew
    actually aren't your customers; they're your product. Your
    customer is sitting right next to you, Mr. Griffin with
    Citadel.
        So when you don't pay as much for index funds or Apple or
    anything like that, your app to me shows me that you're really
    just trying to encourage more trade, which puts more money in
    your pocket, not helping people build equity through smarter
    investing.
        Mr. Tenev, I'd ask two things. Who exactly do you believe
    you're democratizing finance for? And how do you plan to
    address these conflicts of interest?
        Mr. Tenev. First of all, I believe in our business model,
    Congresswoman. I believe our business model has become the
    industry standard for a reason. It's because it's good for
    customers, it's led to the democratization of the markets, and
    it works.
        And we're very proud to route to market makers on uniform
    terms without taking into account any of the payments that we
    generate from them in the routing and based purely on the
    execution and quality we provide to our customers.
        Chairwoman Waters. The time has expired.
        Mr. Steil is recognized for 5 minutes. Thank you.
        Mr. Steil. Thank you, Madam Chairwoman, and thank you for
    holding today's hearing.
        I'm concerned about investors in the State of Wisconsin and
    across our country, to make sure that they have access to the
    market, access that is fair and equal to the big banks and the
    hedge funds and Wall Street.
        We've seen great improvements in access, the
    democratization in finance, and I'm concerned that these
    hearings are going to lead us down the path of additional
    regulations before we've fully investigated the facts.
        It was stated earlier that that may not be the case. And
    I'd like to insert in the record a Bloomberg article dated
    January 28th, entitled, ``GameStop trades show need for more
    regulation, Democrat says.''
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. Steil. Thank you.
        I think it'll be helpful for everyone to review that with
    the concerns being that we're going to drift away from the
    democratization of our finance systems.
        I'm also a bit disappointed that we don't have
    representation in our first hearing here today from the SEC or
    the DTCC, especially in the early days of the Biden
    Administration. I think that would be helpful. And hopefully,
    we'll be able to have that participation in a future hearing.
        If I can direct my first question to Mr. Gabe Plotkin at
    Melvin Capital Management, there's obviously a lot of attention
    that came pouring in on a stock, GameStop, that you held a
    short position in. People were tweeting about it, things were
    building.
        Do you have any information as to why folks on Twitter and
    on Reddit and others uniquely targeted that stock?
        Mr. Plotkin. First of all, thank you for the question. I
    think it's a really good one.
        I think ultimately--I'm not sure how the momentum built
    around that. There were certainly some signs, as we kind of
    discovered after the fact. And there were even website names
    bought, like nasty things about our firm, as far back as
    November.
        So I'm not sure how it started, but I think ultimately,
    they saw an opportunity with a very high short interest stock
    that a lot of people could relate to because it was a retail
    experience, and that's sort of the genesis of it.
        Mr. Steil. Thank you very much.
        I'm going to shift gears over to Robinhood and Mr. Tenev,
    if I can.
        As my colleague, Mr. Gonzalez, was talking about, at some
    point, it became clear that additional collateral would likely
    be needed.
        How many of your customers owned GameStop stock or options
    on January 27th?
        Mr. Tenev. I don't have the exact numbers--
        Mr. Steil. Suffice it to say, had it increased dramatically
    over the days leading up to the 27th?
        Mr. Tenev. Yes. That's accurate.
        Mr. Steil. That's fair. And you saw additional order flow
    coming into this.
        Was it reasonable to believe that there would be additional
    capital requirements, and did you take any steps, either
    internally or working in concert with the National Securities
    Clearing Corporation, to mitigate the risk posed by the
    volatility before the January 28th collateral call?
        Mr. Tenev. We did. On January 21st, we went to 100 percent
    market requirement for AMC, which requires all purchases for
    those stocks to be fully paid for, so customers would have been
    unable to use margins to buy those. And that was January 21st
    in the case of AMC, and January 26th for GME.
        Mr. Steil. But this was still insufficient ultimately, as
    related to the collateral call that came in, in the early
    morning hours of the 28th. Is that correct?
        Mr. Tenev. That's correct. The limiting margin was
    ultimately insufficient.
        Mr. Steil. And as you look to your peers, do you know any
    other brokerages that were putting in place limitations on
    their buy orders?
        Mr. Tenev. Yes, I do, Congressman. I think that's an
    important question. Many brokerages put in place similar
    limitations on buy orders for many of these securities.
        Mr. Steil. For the record, I've heard conflicting reports
    on that. I think that's something that this committee needs to
    further look into, is the differential between what occurred
    under your control at Robinhood, and some of the other
    brokerages. I think it's a question that we should fully
    investigate on this committee, and make sure we have all the
    facts as we're moving forward.
        Could you detail, Mr. Tenev, your plans going forward as it
    relates to making sure that an event like this doesn't occur
    again, and that you have the foresight to prevent these late
    collateral needs?
        Mr. Tenev. Absolutely, Congressman. Thank you for that
    important question.
        Certainly, the additional $3.4 billion helps provide a
    significant cushion. In addition, you could see that between
    Thursday and Friday, Robinhood replaced the PCO, which is a
    position closing only setting, with a much more granular
    position--
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Casten, you're now recognized for 5 minutes.
        Mr. Casten. Thank you, Madam Chairwoman.
        And thank you so much to our witnesses.
        There's a whole bunch of themes in today's hearing, and I
    want to, if I can, just tie a couple of threads together that I
    think are relevant that have been--we've had corners of.
        In June 2020, Alex Kearns, who was 20-years-old at the
    time, from Naperville, Illinois, killed himself, largely thanks
    to a bug in the Robinhood system. The bug was that he turned on
    the app, and it said that he owed $730,000 that he did not
    have, because of options positions that he thought canceled
    out, but didn't appear to.
        He called the help line. The help line, of course, was not
    manned, as we've discussed. He sent several panicked emails,
    three to be precise, but did not receive a response.
    Ultimately, there was a response in an email saying that, in
    fact, his positions were covered, but by that point, it was too
    late, because he had taken his own life.
        This is a gentleman who was 20-years-old. Under Illinois
    law, he was not allowed to buy a beer, but he was allowed to
    take on $730,000 in positions and exposure that he did not have
    the liquidity to cover.
        Your mission, Mr. Tenev, is to democratize finance, but the
    history of financial regulation is to protect people like Alex
    Kearns from the system.
        As the old joke goes, if you're playing poker and you can't
    figure out who the fish is at the table, you should leave the
    table because you're probably the fish.
        And there's an innate tension in your business model
    between democratizing finance, which is a noble calling, and
    being a conduit to feed fish to sharks.
        I want to cover a little bit of timeline.
        In December 2019, Robinhood was assessed a $1.25 million
    fine by FINRA for failing to disclose payment for order flow
    agreements to your customers.
        Six months after that, Alex Kearns committed suicide.
        Six months after that, on December 20th, Robinhood paid a
    $65 million fine to the SEC for, among other things, failing to
    disclose payment for order flow agreements to your customers.
        There is a tension in your model.
        Now, along with that, according to your 606s, as has been
    reported by CNBC, you attract a higher rate for equity trades
    from payment for order flow than any of your competitors, 17
    cents per hundred trades, versus about 11 cents for your
    competitors, and even more, over 50 cents per hundred trades,
    for options.
        I would ask unanimous consent to enter the CNBC article
    into the record.
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. Casten. Mr. Tenev, when did you start offering options
    on your platform?
        Mr. Tenev. Thank you, Congressman Casten. And first, let me
    say--
        Mr. Casten. We're tight on time. When did you start
    offering options?
        Mr. Tenev. Options trading was offered starting in Q1 of
    2018.
        Mr. Casten. Okay. Thank you.
        That's relevant because prior to 2018, your revenue grew
    basically linearly with user growth. Your revenue in a year,
    your payment for order flow revenue was about $10 per user, per
    year. In 2020, it got to $50 per user, per year.
        So, your revenue model went from growing revenue by growing
    users, to growing revenue by growing revenue earned on the back
    of each user consistent with taking on options.
        How many firms do you route options orders to, Mr. Tenev?
        Mr. Tenev. Congressman, we have seven market makers. I can
    get back to you with the precise number for options. It's under
    seven.
        Mr. Casten. According to your 606 disclosures, you only
    list four--Citadel, Susquehanna, Wolverine, and Morgan Stanley.
    Are there any others besides the ones listed in your 606
    disclosures?
        Mr. Tenev. If that's in the 606s, Congressman, I'm sure
    it's accurate.
        Mr. Casten. Okay. So, do you route options trades to anyone
    with whom you do not have a payment for order flow agreement?
        Mr. Tenev. Currently, we have, Congressman, uniform payment
    for order flow arrangements with all of our market makers. So,
    they would all be under the same arrangements.
        Mr. Casten. Okay. So how do you ensure that you're getting
    best pricing if every single firm you're ruling out anybody who
    is not paying you for the privilege to trade?
        Mr. Tenev. Congressman, we believe having uniform payment
    for order flow arrangements with all market makers ensures
    structurally that there is no conflict of interest, because it
    prevents payment for order flow from being an input in
    decision-making for where to route orders.
        Mr. Casten. Okay. I'm almost out of time, but there is an
    innate conflict in your model.
        Let's imagine right now that we are today's version of Alex
    Kearns. I'm nervous, I have an exposure, and I call your help
    line now. Let's call and let's listen in the time we have
    remaining to what I'm going to hear on the other end of the
    phone.
        [Audio recording played.]
        Chairwoman Waters. Mr. Casten, you may wrap up.
        Mr. Casten. I yield back my time.
        Chairwoman Waters. You may wrap up. Go ahead, Mr. Casten.
        Mr. Casten. I have no further questions, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        I will now recognize Mr. Gooden for 5 minutes.
        Is Mr. Gooden on the line?
        Voice. Madam Chairwoman, Mr. Gooden is in Texas, and he's
    unavailable.
        Chairwoman Waters. Thank you very much.
        I now recognize Mr. Timmons for 5 minutes.
        Mr. Timmons. Thank you, Madam Chairwoman.
        It seems we're here today to try to find culpability in the
    events that transpired last month. I seem to spend a lot of my
    time thinking about capital requirements and the time it takes
    to execute these trades. So, I'm going to focus my questions
    there.
        Mr. Tenev, you have repeatedly invoked capital requirements
    that both your company and your clearinghouse are required to
    abide by in order to explain the restriction of trading last
    month.
        My friend and colleague, Mr. Barr, asked you about this
    earlier, but I would like to hone in on this a little bit.
        Could you explain what specifically about the nature or
    volume of the trades being ordered by your customers caused
    these increased capital requirements to be triggered? And how
    did the level of collateral required compare to what you would
    normally have to abide by?
        Mr. Tenev. Thank you for that question, Congressman.
        To give you a sense for the increase, our capital
    requirements--our deposit requirements with NSCC from January
    25th to January 28th, so a span of 3 days, increased tenfold.
        Mr. Timmons. What is the most your capital requirements had
    been prior to this event?
        Mr. Tenev. I believe there was a table, Congressman, that I
    provided in my written testimony that had the precise value at
    risk and special charges in the prior days.
        Mr. Timmons. But, obviously, it had never been close to
    this amount. And now, you have additional capital that you've
    raised, and so this should not happen again. Again, I think you
    referenced one in three and a half million was the likelihood
    of this situation occurring. Is that correct?
        Mr. Tenev. That's correct. And that's not a Robinhood
    number. That's actually a third-party industry number.
        Mr. Timmons. Are you aware of the origin of these capital
    requirements?
        Mr. Tenev. I do believe that these capital requirements,
    and specifically the NSCC deposit, was spelled out in Dodd-
    Frank.
        Mr. Timmons. So, the Dodd-Frank Wall Street Reform and
    Consumer Protection Act is arguably to blame for what happened?
    You would not have halted trading in this case but for this
    exorbitant capital requirement that you were unable to meet?
        I think that when we're searching for culpability, we need
    to realize that the well-intentioned legislation from over 10
    years ago is somewhat culpable in this entire conversation.
        Ms. Schulp, will you elaborate on that? Do you agree that
    Dodd-Frank is somewhat responsible for the situation in which
    Robinhood found themselves?
        Ms. Schulp. I think the capital requirements in Dodd-Frank
    can be seen as responsible.
        I think it's incumbent on us to evaluate those capital
    requirements, and whether they are appropriate, given the
    business models at issue. I think that's also a question of
    settlement times and modernizing our system.
        But I agree that the capital requirements here put into
    place are one of the reasons that we're having these
    conversations today.
        Mr. Timmons. And you went to the next place I wanted to go,
    which is the time it takes to settle these transactions.
        So, 12 years ago, 10, 11 years ago, we never really
    considered the whole concept of a Robinhood, of an app-based
    trade platform that democratizes access to purchasing and
    selling publicly traded companies.
        So, I do think that needs to be revisited, especially
    because it is unfair. There are other companies that have far
    more resources that are not in the situation, and those
    companies have larger investors. So, we really are picking on
    the little guy in this entire conversation.
        Between reconsidering capital requirements for retail
    investor platforms, number one; and, number two, trying to find
    a way to settle these transactions faster, those two things
    seem to be the best way to achieve our objective of making sure
    this doesn't happen again.
        I do hope that we can hear from Michael Bodson from the
    DTCC in the next hearing or perhaps someone from the NFC.
        I'll end with this. One of my colleagues across the aisle
    said the deck is stacked against the little guy, and I couldn't
    agree more. But in this case, the very committee that is
    conducting this hearing has more culpability, I would say, than
    any of the witnesses whom we have brought before us today.
        We need to make sure this doesn't happen again. I look
    forward to working with my colleagues across the aisle.
        With that, I yield back.
        Chairwoman Waters. The gentleman yields back.
        At the request of one of our witnesses, we will take a
    short recess. The committee stands in recess for 5 minutes.
        [brief recess]
        Chairwoman Waters. The committee will come to order.
        Mr. Torres, you are recognized for 5 minutes.
        Mr. Torres. Thank you, Madam Chairwoman.
        One of the concerns about payment for order flow is that it
    creates a perverse incentive for a brokerage firm like
    Robinhood to send detail orders not to the firms that provide
    the best execution to retail investors, but rather to firms
    that provide the highest payment to Robinhood.
        There's a concern about a conflict between the interests of
    brokers and the interests of retail investors, and that concern
    seems to have been vindicated by the conduct of Robinhood.
        The SEC previously found that Robinhood misled its
    customers about how it makes its money. Both the SEC and FINRA
    previously found that Robinhood failed to ensure the best
    execution for retail customers, depriving those customers of
    $34 million, resulting in a $65 million civil penalty from the
    SEC.
        My first question for the CEO of Robinhood, how much of
    your revenue comes from payment for order flow?
        Mr. Tenev. Thank you, Congressman.
        Let me first state that regulatory compliance is at the
    center of everything that we do--
        Mr. Torres. I want to reclaim my time. How much of your
    revenue comes from payment for order flow? Please answer the
    question as asked, given the time constraints.
        Mr. Tenev. Congressman, I don't recall the exact
    percentage. It's over 50 percent.
        Mr. Torres. And do you know how much of your order flow
    revenue comes specifically from Citadel?
        Mr. Tenev. Citadel is indeed an important counterparty.
    It's our largest counterparty in terms of where we route orders
    to, and I want to explain that a little bit, Congressman.
        Mr. Torres. I want to move on, because I want to cover the
    concerns about gamification.
        The stated mission of Robinhood is the democratization of
    finance, but I worry that the real world impact of Robinhood is
    the democratization of financial addiction.
        Robinhood has gaming features that seem to manipulate
    retail traders into making rash and reckless and potentially
    ruinous investments. We all know the tragic story of Alexander
    Kearns.
        According to a memo from the Financial Services Committee,
    there's one feature in particular that encourages retail
    investors to tap on the Robinhood app up to a thousand times a
    day in order to improve their position on the wait list for
    Robinhood's highly-coveted cash management feature.
        Do you share my concern that a retail trader tapping on a
    Robinhood app a thousand times a day is a sign of addiction?
        Mr. Tenev. Congressman, that particular feature that you're
    discussing was to get access to our debit card plus high yield
    savings product, which is one of the many features targeting
    passive investors that we've rolled out over the past--
        Mr. Torres. Mr. Tenev, a thousand times a day? You are
    encouraging your customers to tap on an app a thousand times a
    day? That to me is a sign of addiction, and it worries me that
    you fail to see it in the same light.
        Mr. Tenev. Congressman, we didn't encourage anyone to tap
    on anything. To get access to the debit card, people were
    placed on a wait list. And we wanted to give our customers
    delightful features so that they know that we're listening to
    them and that we care about them, and this is just one example
    of how we add great features, that customers love, to our
    products.
        Mr. Torres. Addictive trading might be bad for your
    customers, but it's good for Robinhood. Addictive trading means
    more trading, and more trading means more money for Robinhood.
    There's a sense in which Robinhood monetizes addiction. You
    make money from the quantity rather than the quality of
    trading.
        Much has been said about price improvement. One of the
    arguments for payment for order flow is price improvement.
    According to The Wall Street Journal, Citadel Securities claims
    to have saved investors a total of $1.3 billion last year.
        But I'm wondering, how can Citadel possibly know how much
    it saves retail investors? Citadel does not transact directly
    with retail investors; it transacts directly with brokers.
        And even if you stipulate that there has been a cost
    savings, it's unclear to me how much of that cost savings is
    being passed on to the retail investors, and how much of that
    cost savings is actually being pocketed by Robinhood as profit.
        We know that there's no commission, there's no visible fee
    at the front end of the transaction. But what is the hidden
    cost to investors at the back end of the transaction? Can you
    give me clarity about the hidden cost to investors?
        Mr. Tenev. Congressman, I appreciate the question. I think
    that's a very important question.
        In 2020, Robinhood provided our customers in excess of $1
    billion in price improvement. That price improvement is
    measured relative to the National Best Bid and Offer (NBBO),
    which is the reference price per security on all major LID
    exchanges.
        Mr. Torres. I ran out of time, so I will yield back.
        Thank you, Madam Chairwoman.
        Chairwoman Waters. Mr. Taylor, you're recognized for 5
    minutes.
        Mr. Taylor. I will point out that today and this week has
    been very hard for my home State of Texas and for my district
    in Collin County. We have faced a record-breaking freeze across
    the State, which has crushed our power-generation capability.
    And we have had some really heartbreaking stories of need.
        In fact, during this hearing, I was called away to help a
    mayor try to get power back to their water pumping stations to
    make sure that they have water for their citizens in Anna,
    Texas, today.
        So, members of the committee, I encourage you to send your
    thoughts and prayers to the people of Texas as they go through
    this really challenging time.
        On to the topic of this hearing. Mr. Tenev, I just wanted
    to go--and I know there has been a lot of questions about the
    margin call that you got on the morning of the 28th of January.
    But I'm not sure that we really understand how the margin call
    changed from $3 billion to $1.5 billion to $600 million.
        Can you sort of go through, how did you negotiate the
    margin call down? And these are very sizeable decreases, right,
    50 percent, then 50 percent again, to something that you could
    then in turn manage?
        How did you decrease the margin call?
        I'm sorry. You're on mute. You're still on mute. I haven't
    been able to hear a word you said, unfortunately.
        Mr. Tenev. How about now?
        Mr. Taylor. I can hear you now.
        Mr. Tenev. Congressman, I appreciate the question. And,
    first, I want to send my thoughts and prayers to the people of
    the great State of Texas. I appreciate you mentioning that.
        I'd like to just refer to my written testimony, which gives
    the details of everything that happened on, I believe, pages 9
    to 11--
        Mr. Taylor. I've read that. But did you go in and say,
    ``Hey, you need $3 billion, but I won't sell these stocks if
    you reduce it,'' and that's how you got to the point where
    people could only sell the stock, not buy it? Is that what you
    did?
        Mr. Tenev. I believe--
        Mr. Taylor. Because that's not in your written testimony.
    So, I'm just trying to get your answer.
        Mr. Tenev. I don't believe we have made any decisions on
    PCO'ing the stocks between the initial $3 billion request and
    the subsequent $1.4 billion request.
        But between the $1.4 billion and the roughly $700 million,
    there was a discussion between our operational team at
    Robinhood Securities and their relevant counterparts at NSCC
    regarding what measures we intend to take to lower the risk of
    our portfolio.
        Mr. Taylor. Okay. So in other words, if you had $3 billion,
    your customers would have been able to do everything they
    wanted to do, including purchase more GameStop. Is that
    correct?
        Mr. Tenev. I don't want to speculate on that. If we had
    infinite capital, certainly.
        But I think it's also important to note, Congressman, that
    this was an evolving situation. We hadn't seen it before. We
    had no idea what Friday would have looked like had we been able
    to allow customers to buy these securities unrestricted on
    Thursday.
        So, I think it's difficult to speculate exactly how things
    would have been different.
        Mr. Taylor. But isn't the reason they said you need $3
    billion was because your customers wanted to buy GameStop and
    then by saying, ``Hey, they can't buy it, they can only sell
    it,'' that reduced the capital that you needed?
        It seems to me that's what happened, but I'm just trying to
    get--
        Mr. Tenev. They weren't saying specifically that--nobody, I
    believe, didn't want our customers to buy GameStop. These are
    regulatorily-mandated deposit requirements, Congressman, that
    we had to comply with, that were heavily influenced by the
    concentrated activity in GameStop, AMC, and the other
    securities.
        Mr. Taylor. Wouldn't it be fair to say that your firm was
    undercapitalized to allow your customers to do what it is that
    you wanted them to be able to do?
        Mr. Tenev. I think, Congressman, that in this case,
    certainly if we had the additional capital, we would have been
    able to ease restrictions, or perhaps, with sufficient capital,
    unrestrict altogether.
        I think it's important to note that lots of other firms did
    essentially similar things, if not the same thing, in
    restricting the buying. Sox, this was really more of a systemic
    problem rather than a uniquely Robinhood problem.
        Mr. Taylor. But didn't the fact that you went out and
    raised more capital so that you can actually answer this
    problem in the future--doesn't that also belie that you were
    undercapitalized on the 28th of January?
        Mr. Tenev. Again, Congressman, we met all of our regulatory
    capital requirements and deposit requirements.
        Mr. Taylor. Your customers wanted to buy the stock. You
    wouldn't let them do it because you didn't have the capital to
    allow them to do it, right?
        Mr. Tenev. Yes. We didn't have the deposit requirements.
        Mr. Taylor. I think that's really a core problem that I
    think this committee hearing has shown me, is that you were,
    unfortunately, undercapitalized to help your customers do what
    they wanted to do.
        I yield back.
        Chairwoman Waters. Thank you very much.
        Mr. Emmer, you're recognized for 5 minutes.
        Mr. Emmer. Thank you, Madam Chairwoman. I appreciate it.
        Mr. Gill, as was previously noted at this hearing, one of
    your colleagues at the witness table has as many as five people
    in the room with him.
        I guess, Mr. Gill, my first question for you is, how many
    people are in the room with you right now?
        Mr. Gill. Zero, Congressman.
        Mr. Emmer. That's what I thought, Mr. Gill.
        And I just want to note for the entire committee that Mr.
    Gill is actually appearing before our panel by himself while
    many others are receiving significant [inaudible].
        [Inaudible] underestimating the sophistication and the
    independence of these individual investors.
        Now, we've heard a lot of reasons for concern today, and
    some are legitimate, but there have also been some proposed
    overreactions by Members of Congress that could create even
    more problems.
        Attention has been given to the positive sides of this
    story [inaudible] temporarily limiting its investors from
    trading, which deserves an investigation.
        What we saw was a movement of individuals investing to try
    to make money. I don't see what's wrong with that, even if that
    motivation is fueled by a desire to stick it to a hedge fund
    they don't like.
        Mr. Gill, you're the only retail investor involved in this
    GameStop situation on our panel today--why, I don't know, but
    you are--yet members on the committee have hardly asked you any
    questions. We've heard from a lot of the companies whose funds
    were involved in this event, but we've barely heard from the
    people who made this happen.
        Is there anything you would like to add to this hearing
    that you haven't been able to add yet, given that we're past
    the 4-hour mark on this hearing?
        Mr. Gill. I appreciate that, Congressman. I do.
        I don't have anything to add at this time, just that I
    would be the first to acknowledge that investing in stocks and
    options is incredibly risky and it's so important for people to
    do their own thorough research before investing.
        But that said, I tend to agree with you that folks should
    be able to freely express their views on a stock and they
    should be able to buy or not buy a stock based on those views
    that they may have.
        Mr. Emmer. Mr. Gill, on that note, how would you feel if
    these brilliant people who are asking you these questions today
    decided that you should not take the risks that you're making
    these thoughtful decisions on? What do you think about that?
        Mr. Gill. I would probably ask for an explanation,
    Congressman, and to try to understand their viewpoint as to why
    they might think that, and perhaps we'd be able to talk through
    it.
        Mr. Emmer. Right. I appreciate it, Mr. Gill. I think we
    need to value the right of the individual to make decisions for
    themselves.
        And it's fantastic to see so many people getting involved
    and participating in the greatest financial markets in the
    world. We should be encouraging individual participation in the
    market by you and others.
        And we should want more people--more, not less. We don't
    need the people from the mountaintop deciding who's capable and
    who's incapable. We need more people having the opportunity to
    develop financial literacy, to build their own portfolios, to
    secure a safe and comfortable retirement, to grow their wealth
    so they can send their kids to college.
        And most importantly, in my opinion, we should strive for
    individuals to have the autonomy to do all that they themselves
    want to do without having to rely on others or, God forbid,
    their government.
        I also want to thank Mr. Budd for using his time to mention
    blockchain technology applications in the post-trade
    [inaudible] settlement and clearing process.
        In light of this whole situation, it's important now more
    than ever that we utilize the technology that we have access
    to, and we do have access to technology that is decentralized
    and can provide real-time trade settlements.
        Mr. Lynch and I have a nonpartisan bill that we introduced
    last [inaudible] reintroduce very soon that concerns this.
        If we should exercise oversight of anything here, it's to
    ensure that individuals maintain access to our markets,
    individual investors. And discussions about over- and
    undervalued companies only continue to increase.
        Unfortunately, average investors were locked out of the
    markets at a time of extreme volatility, while institutional
    investors were not. While I understand that a lot of what
    happened during this market frenzy came down to liquidity
    issues, individual investors were in a vulnerable position and
    were at the will of online brokerages.
        We should be taking this time to discuss how to move
    forward in a way that promotes market access to all investors,
    just like we did last month. [Inaudible] clearly does not
    understand what Reddit is and how you utilize social media and
    catalyze the market's movement.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Emmer. We've significantly underestimated the
    sophistication of America's retail investors and we've not been
    focusing on improving market access.
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Emmer. Thank you, Madam Chairwoman.
        Chairwoman Waters. Mr. Lynch, you're recognized for 5
    minutes.
        Mr. Lynch. Thank you, Madam Chairwoman.
        And speaking for the families of the Eighth Congressional
    District, we just want the gentleman from Texas to know that we
    are, indeed, praying for all of the good people of Texas and
    hope you come out okay and get the power that you need.
        I do want to follow up on Mr. Perlmutter's questions, Mr.
    Gill. I represent the Eighth Congressional District, which
    includes Brockton, Massachusetts, your home. So I figure I,
    more than anyone, owe you the opportunity to respond.
        You said earlier that you began your trading in GameStop
    when it was around $5 a share, with the hope that it might go
    to $20 or $25.
        And I want to say, I accept your analysis, your initial
    analysis that GameStop was undervalued, and I think your belief
    was sincere, and I think it was fact based.
        And, in your defense, we are talking about GameStop, right?
    It's a shopping mall retailer. We all know it. It's a well-
    known commodity.
        But at some point the stock really takes off, right? It
    goes from $5 to $100 to $200 to $300. It gains escape velocity,
    as they say, and it ends up at almost $500 a share.
        But we're still in the midst of a pandemic, right? And you
    can land a jumbo jet in the parking lot of the Westgate Mall in
    Brockton, or any major mall in America, right? No one's going
    to the malls, nobody's feeding this company, and so, it's up
    around $400, $500.
        Is there a role for someone to play here, for you to play,
    or the SEC, or Robinhood, to, say, okay, the price dislocation
    has become detached from reality and a note of caution might be
    given to other day traders and individuals, retail traders who
    might get jammed if they get into this trade?
        You have a unique perspective, so what do you think is the
    proper thing that should have happened? At some point, this
    thing got away from you and went totally into the stratosphere.
    And I'm just wondering what your thoughts are on how this
    should have worked?
        Mr. Gill. Thank you, Congressman Lynch. I do know Westgate
    Mall quite well.
        I would say that, just to be clear, I had thought that
    maybe roughly $20 or $25 per share, I had thought that at that
    time, but investment theses evolve over time. As the
    fundamental events change over time, it's important to update
    theses accordingly.
        And I had mentioned that it appeared as though the stock
    price had gotten a little bit ahead of itself last month. But
    there's a lot outstanding. There's a lot that has happened in
    recent months to suggest that GameStop could indeed turn around
    its business significantly.
        And one big element of that is indeed one of the largest
    investors in GameStop, Ryan Cohen. And he has brought in some
    colleagues who could turn around this company. And their value
    could indeed--
        Mr. Lynch. I want to reclaim my time.
        Mr. Gill. Sorry.
        Mr. Lynch. Okay. I want to reclaim my time.
        Ms. Schulp, I want to ask you, we have this convergence
    between fintech, social media, and the traditional markets.
    And, if anything, the GameStop incident and the convergence of
    all this has demonstrated a certain vulnerability in our
    markets.
        And I'm just wondering, if a loosely associated association
    of day traders could cause all of this upset in our markets,
    isn't there a wider national security issue that's out there in
    terms of other people who might be nefarious actors who are
    actually intentionally trying to disrupt our markets?
        Isn't there a national security dimension to all of this as
    well?
        Ms. Schulp. Again, I can say that national security is not
    my area of expertise. But to the extent--
        Mr. Lynch. Well, something more specific then.
        You said earlier that you were with FINRA, and they're
    under Regulation Systems Compliance and Integrity (Regulation
    SCI.) Is it appropriate to put some of these trading platforms
    under that same regulation, which requires them to develop
    systems and policies that protect the integrity of their
    systems.
        Ms. Schulp. I think protecting the integrity of systems is
    important for all trading platforms, not simply the Robinhoods
    of the world. We need to look to make sure that there is
    integrity on the platforms.
        I would agree with that, not necessarily Regulation SCI in
    particular, but having platforms that are strong is important
    here.
        Mr. Lynch. Okay. Thank you.
        Madam Chairwoman, I yield back the balance of my time.
    Thank you.
        Chairwoman Waters. Thank you very much.
        Ms. Adams, you are recognized for 5 minutes.
        Ms. Adams. Thank you, Madam Chairwoman. It's been a very
    interesting hearing. I do want to thank you for organizing
    this. I think it has certainly been very helpful.
        Ms. Schulp, let me ask you, first of all, in the case of
    GameStop and AMC stocks, the prevailing narrative has been that
    a band of Reddit-inspired folks rose up against Wall Street,
    and forced a short squeeze by professional hedge fund managers
    who were forced to cover their negative bets or risk
    catastrophic losses.
        But, according to a JPMorgan analyst, several signs are
    pointing to institutional investors as big drivers of the wild
    price action on the way up.
        In your opinion, and based on historical data on retail
    investors' ability to move the markets, what is the likelihood
    that GameStop and AMC's market volatility was largely driven by
    institutional investors looking to ride the wave?
        Ms. Schulp. I think these are questions that we are going
    to find out the answers to as we get deeper into the data. But
    I think that it's likely that at some point in this increase in
    value for all of these stocks, institutional investors were
    involved. Retail investors traditionally have not been able to
    move markets in the same way.
        But it's important to note here that these were not large
    stocks to begin with. This was not a massive increase in price
    in Apple or Google. It was GameStop, a much smaller company.
    So, the ability of retail investors to have outsized influence
    here is entirely possible as well.
        Ms. Adams. Thank you, ma'am.
        Mr. Griffin, or Mr. Plotkin, do you have any thoughts on
    this likelihood as well?
        Mr. Griffin. Congresswoman, I believe you are asking one of
    the single most important questions posed today. I believe that
    the decline in the short interest as reported over the 2-week
    period of time--the U.S. updates short interest reporting every
    other week--indicates that roughly--and I apologize for not
    having the exact number--but roughly 35 to 40 million shares
    were bought back by parties that were short the stock.
        This would be a dramatic degree of short covering that
    could cause a dramatic increase in the price of GameStop.
        Ms. Adams. Okay. Thank you.
        Mr. Plotkin?
        Mr. Plotkin. Yes. Thank you for the question.
        I don't have the exact answer to your question, but I do
    think it's worth noting that as the stock price moved higher,
    there was a 3-day period where it traded almost 11 times the
    entire float.
        And so, I think that kind of volume gave anyone who was
    short ample opportunity to cover, and probably suggests
    tremendous either frenzied buying or institutional buying or
    some sort of combination.
        We did look at some of the options activity in the stock,
    and on Friday, January 22nd, there were options that were
    expiring which would have equated to 35 to 40 million shares of
    stock ownership.
        So, I actually don't think the short covering was the
    biggest driver of the stock when you kind of look at the
    volume. I really think the biggest driver was the aggressive
    options activity and then whether it was institutional retail
    or just the collective buying.
        Ms. Adams. Okay.
        Mr. Griffin, prior to the GameStop volatility in January,
    did Citadel have any investments in Melvin Capital? And, if so,
    how much?
        Mr. Griffin. We first invested in Melvin Capital on Monday
    of the week in question. I want to say that it was the 24th of
    January. And prior to that, we had had no investment with
    Melvin Capital.
        Obviously, Gabe Plotkin is, by reputation, one of the best
    money managers of his generation, and is well-known to my
    partners here at Citadel. Gabe actually trained one of my best
    portfolio managers, who worked with me over the course of his
    career. So, he is well-known to my colleagues here at Citadel.
        Ms. Adams. Okay.
        Mr. Plotkin, can you confirm that you worked at Citadel LLC
    before--
        Mr. Griffin. I'm sorry. He trained--my portfolio manager
    worked for Gabe at a different firm and then joined Citadel
    subsequently.
        Ms. Adams. Okay.
        Mr. Plotkin, can you confirm that you worked at Citadel LLC
    before eventually starting your own hedge fund, Melvin Capital,
    in 2014?
        Mr. Plotkin. When I was 23-years-old, I worked at Citadel
    for 1 year.
        Ms. Adams. Okay. Did you solicit or receive any advice from
    Mr. Griffin during the GameStop volatility that occurred in
    January?
        Mr. Plotkin. All of my conversations with Mr. Griffin
    really centered around his investment in our firm.
        Ms. Adams. Okay. And did you reach out to Citadel or
    Point72 for significant investments?
        Chairwoman Waters. The gentlewoman's time has expired.
        Ms. Adams. Thank you, Madam Chairwoman. I yield back.
        Chairwoman Waters. You're welcome.
        Ms. Tlaib, you're recognized for 5 minutes.
        Ms. Tlaib. Thank you, Madam Chairwoman.
        Hello, everyone. I'm so glad that we're having this
    hearing. And I'm super appreciative of the leadership of our
    chairwoman, so that we can at least have some sort of
    transparency in exactly what happened.
        As we all know, the wealthiest 10 percent own 84 percent of
    all stocks. In fact, 50 percent of American families own no
    stock at all.
        I say this to emphasize that, to many of my residents, the
    stock market is simply a casino for the rich whose gambling
    hurts pension and retirement funds. And when you all screw up,
    the people end up paying the tab through losses or bailouts.
        I want to talk about the high frequency trading. We know
    about half of all stock trading in the U.S. is done by
    computers. They analyze market activity and instantly complete
    trades at a profit. This high frequency trading allows Wall
    Street traders to get ahead of transactions done by pension
    accounts and retirement funds.
        Mr. Griffin, and this truly is a yes-or-no question, is
    Citadel's trading algorithm programmed to identify and trade
    ahead of large trades done by pension and retirement funds? Yes
    or no?
        Mr. Griffin. Congresswoman, today, virtually all trades
    executed by institutional investors are in the form of program
    trades such as volume-weighted average price (VWAP) and other
    algorithmic trades.
        Ms. Tlaib. So that's a yes, right, Mr. Griffin? Just so
    it's clear.
        Mr. Griffin. I'm answering the question. It's a very
    complex question that deserves an appropriate level of answer.
        Ms. Tlaib. Okay.
        Mr. Griffin. These VWAP trades are not large trades that
    you can--it's not like there's 10 million shares to be bought.
    It is a trade that is sliced into small slices, 100 or 200
    shares, and executed over the course of a day, a week, or a
    month.
        Ms. Tlaib. Help me out with this one. Does this increased
    cost, this kind of algorithm or whatever program to identify
    and trade the computers doing the trading, does this increase
    costs for people who have pension and retirement funds? Yes or
    no?
        Mr. Griffin. Given that we, for example, manage money on
    behalf of pensions--
        Ms. Tlaib. There's no time. This is not out of disrespect.
    We just have to limit the time.
        Mr. Griffin. We use VWAP orders to execute on behalf of our
    hedge fund and have generated exceptional returns for pension
    plans and for endowments, so--
        Ms. Tlaib. Well, I'm going to help you out, Mr. Griffin. In
    effect, some estimates indicate that as a result of the high
    frequency trading, pension and retirement accounts pay nearly
    $5 billion in taxes. This means that Wall Street firms like
    yours engaging in high frequency trades are actually making
    money at the expense of my residents' retirement funds.
        One way to ensure that this enormous wealth generated on
    Wall Street actually reaches the real economy, what's happening
    right here in our communities, and in my district, is to enact
    and look at proposals like a financial transaction tax.
        And let me tell you, according to recent polling, the
    majority of Americans--all of you need to hear this--support
    taxing Wall Street transactions. Taxing them at just 0.1
    percent would actually raise $800 billion over 10 years which
    could fund programs like helping my district expand healthcare,
    nutrition, and public education.
        I heard my friend from Texas--and we are all praying that
    all of the families will be taken care of--talk about access to
    water and electricity, but guess what? Right now, in my
    community, it's so poor that I have families melting snow so
    that they can flush their toilets, because they have no access
    to water. So this tax, to me, would discourage risky and high
    frequency trading, unfair high frequency trading.
        Mr. Griffin, has Citadel's lobbyist right now been hired to
    oppose Federal proposals of a financial transaction tax because
    it would make high frequency trading less profitable?
        Mr. Griffin. We firmly believe that a transaction tax will
    injure Americans hoping to save for retirement. I believe that
    Vanguard has publicly come out and said that we'd have to work
    about 2\1/2\ years longer--
        Ms. Tlaib. I want to make this--
        Mr. Griffin. Let me finish my answer. I think it's
    important to--
        Ms. Tlaib. No, no, no. I'm reclaiming my time. The Hong
    Kong stock market, Mr. Griffin, imposes a 0.2 percent tax on
    transactions, and as a result, sees little high frequency
    trading, but this hasn't stopped the Hong Kong stock market
    from thriving or becoming the third-largest in the world, after
    New York and London.
        So just to be clear, let's not gaslight the American
    people. You will all be fine with the tax. And it's fair,
    because let me tell you, our folks are tired of bailing you all
    out when you screw up and gamble with the retirement funds, and
    that's exactly what happens every single moment. And that's the
    reason why we're having this hearing, is that sometimes you are
    irresponsible, and it's set up in a way that helps only the
    wealthy and leaves people like my community here with this
    large income inequality that I feel like never, ever gets the
    bailout it deserves.
        Thank you so much. I yield back.
        Chairwoman Waters. Thank you very much.
        Ms. Dean, you're recognized for 5 minutes.
        Ms. Dean. Thank you, Madam Chairwoman, and I appreciate
    this hearing for the opportunity to get detailed information
    and to gather the facts as to what happened over the course of
    these transactions.
        Let me start by saying, and I saw that Members on both
    sides of the aisle are interested in this question--that the
    core question that I'm going to be asking is, what did the
    customers know? What did the users know, and when did they know
    it? That's the theme of what I want to ask.
        Because I believe if we understand what happened, and what
    they knew and what they didn't, we're going to be able to
    prevent some of the harm in the future.
        Let's go to the narrative. Mr. Tenev, I want to take a look
    at your page 9. You said that at approximately 5:11 a.m.,
    Robinhood Securities received the automated notice saying that
    you had a deposit deficit of approximately $3 billion. You then
    said that between 6:30 and 7:30 a.m., Eastern Standard Time,
    Robinhood decided to impose the trading restrictions, meaning
    no more purchases of GameStop. And you said in your testimony
    that in conversations with NSCC staff, early that morning, you
    notified NSCC of your intention.
        In that time period from 5:11 a.m. to the time you were
    having the conversations, what did you tell your users? What
    notice did they have?
        Mr. Tenev. Thank you, Congresswoman. I believe during that
    time period, shortly after the restrictions on purchasing of
    these relevant securities were made, we communicated to users,
    to our customers, that these securities would be restricted
    from purchasing. And then subsequently, we issued broad
    communications and communication on social media explaining the
    reason being enhanced deposit requirements due to high
    volatility.
        Ms. Dean. I'm going to ask you to be much more specific,
    because in your testimony, you wrote that you offered three
    different ways of notification. You said that first, the
    notification to your customers was what they agreed to in their
    customer opening agreement. That was your first backstop,
    which, who knows what that boilerplate said or when customers
    or users agreed to it.
        Second, you said they were notified 2 days later by an SEC
    alert, and we know what that SEC alert was. It was quite
    general, much more vague.
        And third, you said that you also list a more ambiguous
    mention of targeted messages to customers.
        When did you specifically send your customers an alert,
    ``This is what we have had to do, because we were short
    capital?'' When did you do that? What time?
        Mr. Tenev. I believe, Congresswoman, that happened at
    several different points in time. There was a blog post that
    was published in the afternoon, Pacific time. I don't recall
    the specific time. Maybe it's in my written testimony.
        Ms. Dean. Would it be after the SEC notice? It seems to me
    that you didn't notify your customers for at least 2 days. You
    relied upon the SEC notice 2 days later. Would I be correct?
        Mr. Tenev. Congresswoman, that's inaccurate. Customers were
    notified several times on that day, and they were notified of
    other restrictions as they happened days prior to January 28th
    as well.
        Ms. Dean. But you don't say what those notifications were
    in your testimony. What did you notify them? Specifically, what
    would I, as a user, have heard from you immediately upon your
    imposing the restrictions?
        Mr. Tenev. Congresswoman, immediately upon imposing the
    restrictions, customers would have received communications
    saying that they would be prevented from opening further
    positions in the relevant securities. Later in the day, on
    January 28th, around early afternoon Pacific time, we published
    a blog post which explained that the decision to restrict these
    securities was due to collateral requirements at NSCC and
    clearinghouses, and not at the direction of special interests
    or hedge funds.
        Ms. Dean. Forgive me. Let me interrupt you there. You
    admitted to making mistakes. Specifically, what mistakes did
    you make?
        Mr. Tenev. I admit to always improving. And certainly,
    we're not going to be perfect, and we want to improve and make
    sure that we don't make the same mistakes twice.
        Ms. Dean. But what were those mistakes? That's what we're
    here to learn about.
        Mr. Tenev. Thank you for the question. It's an important
    question. On Thursday, we did restrict the buying of these
    securities. On Friday, we imposed position limits, which I
    believe was a much better long-term solution, one that we'll
    have in the future if anything like this happens again. We also
    raised $3.4 billion in capital to allow our customers to trade
    what they want.
        Ms. Dean. Thank you. I yield back. I think my time has
    expired.
        Thank you very much, Mr. Tenev.
        Chairwoman Waters. Thank you very much.
        With that, we'll go to Ms. Ocasio-Cortez for 5 minutes.
        Ms. Ocasio-Cortez. Thank you so much, Madam Chairwoman.
        Mr. Tenev, Robinhood has engaged in a track record of
    outages, design failures, and most recently what appears to be
    a failure to properly account for your own internal risk.
    You've previously tried to blame clearinghouses for your need
    and scrambled to raise some $3.4 billion in a matter of days.
    But you've also blamed a lack of industry-wide real-time
    settlement, or rather, a lack of that settlement of trades.
        But Robinhood's requirements for margin have long been far
    more lax than other brokers--in December, just a couple of
    months ago, you bragged about having some of the most
    competitive rates in the industry, and this is evidenced by
    your recent decision to raise those requirements.
        When Robinhood prohibited its customers from purchasing
    additional shares of several stocks, other brokerages merely
    adjusted the margin requirements on these stocks.
        So Mr. Tenev, given Robinhood's track record, isn't it
    possible that the issue is not clearinghouses but the fact that
    you simply didn't manage your own book or failed to
    appropriately manage your own margin rules or failed to manage
    your own internal risks?
        Mr. Tenev. Thank you for the question, Congresswoman. Let
    me address the margin point, because I think this is an
    important one that has been underdiscussed.
        In December, when we lowered our margin rates to 2.5
    percent, one of the details that I think was missed is that
    most other brokerages have tiered margin rates where the
    wealthier customers pay much lower margin rates than lower-net-
    worth customers.
        You'll have someone who has $10,000 paying 9 to 10 percent
    for margin, whereas someone with a million dollars pays 2
    percent. So, our approach was to give everyone a uniform rate
    so that wealthier customers are not advantaged with lower rates
    than lower-income customers, and I think that's a unique
    approach in our industry and is representing--
        Ms. Ocasio-Cortez. Thank you. I apologize. I have to
    reclaim my time for questioning.
        As many of my colleagues have also pointed out, Robinhood
    generates much of its revenue from the payment for order flow
    arrangements with market makers like Citadel, as well as Two
    Sigma and VIRTU. And in 2016, the SEC highlighted ways that the
    payment for order flow created a, ``potential conflict of
    interest with the broker's duty of best execution.'' And then,
    one of the ideas that the Commission floated in 2016 for
    addressing these conflicts of interest was to require that
    brokers pass on the proceeds of a payment for order flow.
        Earlier, one of my colleagues, Representative San Nicolas,
    said that Robinhood owes its customers a lot more than an
    apology, and I happen to agree with him. I believe that the
    decisions made by you and this company have harmed your
    customers.
        Mr. Tenev, would you be willing to commit today to
    voluntarily pass on the proceeds of the payment for order flow
    to Robinhood customers?
        Mr. Tenev. Congresswoman, I appreciate that question. When
    the statement you refer to was made, I believe in 2015 or 2016,
    it was before Robinhood forced the entire industry to drop
    commissions and replicate our business model which made--
        Ms. Ocasio-Cortez. So, I should take that as a no, you're
    not willing to pass on the proceeds of payment for order flow
    to your customers?
        Mr. Tenev. When the other brokers dropped--
        Ms. Ocasio-Cortez. I'm just talking about today, right now.
        Mr. Tenev. Payment for order flow, Congresswoman, allows
    for commission-free trading in the context of trading
    commissions. It's a much larger source of revenue in the past
    than payment--
        Ms. Ocasio-Cortez. Mr. Tenev, I apologize. I don't want to
    be rude. I just have limited time.
        But if removing the revenues that you make from payment for
    order flow would cause the removal of free commissions, doesn't
    that mean that trading on Robinhood isn't actually free to
    begin with, because you're just hiding the cost, the cost in
    terms of potentially poor execution or the cost of lost rebates
    to your customers?
        Mr. Tenev. Certainly, Congresswoman, Robinhood is a for-
    profit business and needs to generate some revenue to pay for
    the costs of running this business. People were initially
    skeptical that the model, even with payment for order flow,
    would work when you removed the commissions, and I think we've
    proven that otherwise by making this the standard model by
    which brokerages operate now.
        Ms. Ocasio-Cortez. I see. Okay. Mr. Tenev, I have to move
    on very quickly.
        I have a timeline question here for Mr. Plotkin. Mr.
    Plotkin, earlier today, you mentioned that Melvin Capital had
    not engaged in a naked short of GameStop, and Melvin closed out
    its position on GME on the--is that correct?
        Chairwoman Waters. I'm sorry. The gentlelady's time has
    expired. We have to go to Mr. Auchincloss for 5 minutes.
        Mr. Auchincloss. Thank you, Madam Chairwoman, and I want to
    thank our panel for being with us through a very substantive
    and long afternoon. I think I might be a welcome face for them
    because I, as the most junior member, am the last one to ask
    questions here.
        And I want to talk with Mr. Tenev about options. I agree
    with what other members of the committee have said in both
    parties about the value of democratizing access to assets, and
    we should give latitude for independent retail investors'
    judgment.
        But in fields where there is an information asymmetry
    between the user of a product or a service and the provider of
    it, there's always a professional code of ethics around that.
    When you go to a doctor, when you go to a lawyer, there is a
    code of ethics wrapped around that interaction which protects
    someone who doesn't understand as much about the service being
    provided. And in finance, as you're well aware, there's a
    fiduciary responsibility to do what's right.
        In Massachusetts, where there are 500,000 users of
    Robinhood, we hold broker-dealers to a fiduciary standard, and
    the Secretary of State Securities Division filed a complaint
    against Robinhood for violating that fiduciary standard, and
    some of it was premised on options. Two-thirds of customers
    approved in Massachusetts for options trading identified as
    having limited to no investment experience.
        The first question I would ask you, Mr. Tenev, and please
    take no more than a minute, is what do you think is the
    appropriate amount of financial literacy that a user should
    have before they should be allowed to trade options?
        Mr. Tenev. Thank you for the question, Congressman. Let me
    first say that Robinhood really pioneered commission free and
    zero contract fee options trading, and I think our market
    leadership in this space is due to the fact that we not only
    provide that access but have improved upon the safety of our
    product in several ways over the past few years. Number one, we
    don't allow undefined risk options trades so no selling of
    naked calls, no undefined risk.
        Number two, we made several enhancements to the safety of
    the product over the past year, including the ability to
    perform an instant, in-app exercise of an options position,
    clarifications around the user interface, and live customer
    support by phone for urgent options cases. So, we've actually
    proven and are committed to improving in the future the safety
    of our options offering.
        Mr. Auchincloss. But to be clear here, options are decaying
    assets. They're binary in outcome, so they are qualitatively
    and quantitatively different than stocks and bonds in the sense
    that you can lose all your money very fast. You can make a lot
    of money very fast as well, but this is getting very close to
    gambling. And especially when you gamify the option-buying
    experience as your app does, it can very quickly turn into a
    casino-like feel.
        So, I'd ask you just to address the question again. What
    level of investment sophistication do you think a retail trader
    should have before they're buying options?
        Mr. Tenev. Sure. Congressman, I appreciate the follow-up. I
    should first say there are strict FINRA rules and regulations
    governing who gets access to options that, of course, Robinhood
    complies with. I also should note we're in a competitive
    market. Several others have mentioned Chinese-based brokerages,
    and other brokerages that are essentially offering similar
    products, all having to comply with these regulations.
        We're certainly willing to engage in a discussion about how
    rules should change, if at all. And as long as they're applied
    uniformly and are fair to small investors and not just
    benefitting high-net-worth individuals and institutions, we'd
    be open to having that conversation.
        Mr. Auchincloss. The standard for my constituents in
    Massachusetts is not going to be what the Chinese regulators
    think is appropriate. It's going to be a fiduciary standard.
        I regret that you really haven't addressed the question,
    and so I guess I would ask a separate one, which is, would you
    commit here to offering a higher in-app threshold, including,
    but not limited to, financial education before allowing people
    to purchase options?
        Mr. Tenev. Again, Congressman, I'd be happy to engage on
    this topic substantively. I think as long as those requirements
    are uniformly applied to all brokerages and not just startup
    brokerages or brokerages catering to small investors, we're
    open to having that conversation.
        Mr. Auchincloss. The fiduciary standard is applied equally
    to all brokerages, and yours is the one that was singled out by
    the Massachusetts Securities Division as having violated, given
    the way that your users are using the options.
        I will cede the balance of my time, Madam Chairwoman, and I
    thank you for arranging this hearing.
        Chairwoman Waters. Thank you very much.
        And with that, Mr. Garcia, you are recognized for 5
    minutes.
        Mr. Garcia of Illinois. Thank you Madam Chairwoman, and
    Ranking Member McHenry. It has been a long day. I wanted to ask
    Mr. Griffin some questions. Mr. Griffin, would you consider
    your firm successful? This is an easy yes or no.
        Mr. Griffin. Yes. I would consider Citadel to be
    successful, and I would consider Citadel Securities to be
    successful.
        Mr. Garcia of Illinois. And, of course, I'd agree that
    you've done pretty well for yourself. As you mentioned earlier
    in your testimony, your company handles over 40 percent of
    retail trading. Did I get that correct?
        Mr. Griffin. Citadel Securities is the largest destination
    for retail flow in the United States. It reflects the execution
    quality that we give.
        Mr. Garcia of Illinois. And Citadel is a leading market
    marker for interest rate drops as well. Is that correct?
        Mr. Griffin. Due to the great work of the House and Senate
    on the back of Dodd-Frank, where we permitted competition to
    exist in the interest rate swap market, and I am grateful for
    that opportunity to compete in that market, we are now a swap
    dealer at Citadel Securities and a significant participant in
    that market, and I'd like to express my gratitude for Dodd-
    Frank's derivatives reform.
        Mr. Garcia of Illinois. Good. You're hedge fund managers.
    Do you manage over $30 billion? Is that correct?
        Mr. Griffin. Congressman, yes, that is correct. We manage
    approximately $35 billion of assets for pension plans, for
    endowments, for colleges, and for charities.
        Mr. Garcia of Illinois. Very well. That's pretty
    significant. I'd say that's a lot. It seems to me that your
    company is systemically important to our financial system.
    Would you agree with that?
        Mr. Griffin. I believe that we play an important role in
    the U.S. capital markets. I believe that our hedge fund would
    not be in the category of systemically important. With $30-some
    billion of equity, it is simply not at the scale or magnitude
    of a JPMorgan, a Bank of America, or a Wells Fargo. And in
    particular, having worked on these policy issues with members
    of the Fed in various contexts, we don't have to make payroll
    on Friday.
        Mr. Garcia of Illinois. Okay. But you're doing pretty well,
    and yes, you're not one of the big guys that we have visit us
    frequently, at least a couple of times a year. Was Citadel
    Securities fined recently by FINRA for trading ahead of
    customer orders in the past? Is that what I heard from a couple
    of questioners earlier today?
        Mr. Griffin. I believe this was brought up earlier, that we
    paid a fine to FINRA for trading ahead in the OTC market back
    in the, let's say, roughly 2012 through 2014. It was due to a
    systems failure. Now, we have no tolerance internally for
    having made such a mistake. We, of course, have taken actions
    to rectify such a mistake.
        Mr. Garcia of Illinois. But that did occur.
        Mr. Griffin. That did occur.
        Mr. Garcia of Illinois. Okay. I appreciate that. It seems
    to me that the retail investors using their savings are not
    exactly an even match for a complex, deeply connected firm like
    Citadel. Would you agree with that?
        Mr. Griffin. I don't actually understand the premise of the
    question. Retail investors who do good research, and I--one of
    our fellow panelists said earlier, many retail investors have
    understood the game-changing technologies unfolding before us,
    electric cars, solar energy, and have done extraordinarily well
    investing their assets into these newly emerging parts of the
    economy.
        Mr. Garcia of Illinois. Okay. And your firm has done and
    you've personally done well during the pandemic, right? There
    hasn't been much of an adverse effect on your firm?
        Mr. Griffin. Congressman, we've all been adversely impacted
    by the pandemic. I think all of us long for the return back to
    life as it was a year-and-a-half ago.
        Mr. Garcia of Illinois. But you haven't done badly, right?
        Mr. Griffin. There are two dimensions to this. There's the
    personal impact on everybody, and we've all had to deal with
    family, with friends--
        Mr. Garcia of Illinois. But in terms of your bottom line,
    sir?
        Mr. Griffin. Our bottom line over the course of the last
    year has been successful, Congressman.
        Mr. Garcia of Illinois. Okay. Good. That's what I thought.
    Is it true that last year in Illinois, you were involved in an
    effort, and you spent close to $50 million to defeat a tax
    increase in Illinois that would have forced the big income
    earners like yourself to pay more in taxes in Illinois, a
    progressive tax?
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Garcia of Illinois. Thank you, Madam Chairwoman.
        Chairwoman Waters. All Members on the platform today have
    been heard and have had an opportunity to raise their
    questions.
        Before we get to closing statements, I would like to ask
    unanimous consent to enter letters in the record from the
    following entities: Bear Markets; Public Citizen; the
    Depository Trust & Clearing Corporation; and Healthy Markets.
        Without objection, it is so ordered.
        I now yield 1 minute to the gentleman from Missouri, Mr.
    Luetkemeyer, for brief closing remarks.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman, and I thank
    all of the witnesses for being here today. I thought you all
    did a great job, and we really thank you for spending time with
    us and educating us on the market and all of the activities
    surrounding GameStop investing in short selling.
        I'd like to reiterate the ranking member's commitment that
    the House Financial Services Committee Republicans stand ready
    to work with the Majority to continue to provide oversight on
    and investigation of the GameStop activities. And going
    forward, I hope that we always have an eye towards protecting
    and giving more choice and access to America's everyday
    investors.
        With that, Madam Chairwoman, I yield back.
        Chairwoman Waters. I now yield myself 1 minute.
        Today, the committee has heard firsthand from witnesses
    about their roles in the market volatility in late January.
    This hearing has allowed us to begin to assess what transpired
    and whether our guard rails have not kept up with the rapid
    changes the markets have experienced.
        For example, I'm more concerned than ever that some
    investors are being fleeced, and massive market makers like
    Citadel may pose a systemic threat to the entire system. The
    committee is going to continue to examine these issues.
        Our next hearing will include securities market experts and
    investor advocates to discuss the policy issues that are
    involved, and potential solutions to problems with our system
    that these events have illuminated.
        I will also convene a hearing to hear testimony from the
    regulators, including the Securities and Exchange Commission
    (SEC) and the Financial Industry Regulatory Authority (FINRA).
        All of these hearings will inform the committee's role and
    help us to determine potential legislative steps to protect
    investors and ensure Wall Street accountability.
        With that, I'd like to thank our distinguished witnesses
    for their testimony here today.
        The Chair notes that some Members may have additional
    questions for these witnesses, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        And I sincerely thank you, and I want all of us to pay
    attention to what is happening in Texas and to do what is
    necessary to be able to give assistance to all of our people,
    all of the families in Texas who are experiencing this very,
    very difficult time. Thank you so very much. This hearing is
    adjourned.
        [Whereupon, at 5:25 p.m., the hearing was adjourned.]

                                A P P E N D I X

                              February 18, 2021

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