[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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