[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, PART II ======================================================================= VIRTUAL HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTEENTH CONGRESS FIRST SESSION __________ MARCH 17, 2021 __________ Printed for the use of the Committee on Financial Services Serial No. 117-10 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ______ U.S. GOVERNMENT PUBLISHING OFFICE 44-343 PDF WASHINGTON : 2021 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: March 17, 2021............................................... 1 Appendix: March 17, 2021............................................... 81 WITNESSES Wednesday, March 17, 2021 Arnuk, Sal, Partner/Co-Founder, Themis Trading LLC............... 5 Blaugrund, Michael, Chief Operating Officer, New York Stock Exchange....................................................... 7 Bogan, Vicki L., Associate Professor, Cornell University......... 8 Goldstein, Alexis, Senior Policy Analyst, Americans for Financial Reform......................................................... 10 Grujic, Alan, CEO, All of Us Financial........................... 13 Kelleher, Dennis M., Co-Founder, President, and Chief Executive Officer, Better Markets........................................ 12 Piwowar, Hon. Michael S., Executive Director, Milken Institute Center for Financial Markets................................... 15 APPENDIX Prepared statements: Arnuk, Sal................................................... 82 Blaugrund, Michael........................................... 91 Bogan, Vicki L............................................... 95 Goldstein, Alexis............................................ 102 Grujic, Alan................................................. 112 Kelleher, Dennis M........................................... 117 Piwowar, Hon. Michael S...................................... 162 Additional Material Submitted for the Record Green, Hon. Al: ``Trading hot stocks like GameStop seems fun until you look beneath the surface.''..................................... 176 Hill, Hon. French: Coalition Letter............................................. 217 Security Traders Association Letter.......................... 220 Huizenga, Hon. Bill: Cadwalader Cabinet Commentary, ``GameStop: Regulators Should Focus Less on `Solving the Problem'; More on `Improving the Situation'''............................................... 186 Q1 2020, ``The Impact of Zero Commissions on Retail Trading and Execution''............................................ 200 Wall Street Journal, ``Instant Settlement May Not Be Gratifying for All''....................................... 212 McHenry, Hon. Patrick: Letter to Chairwoman Waters dated March 11, 2021............. 215 Letter to Chairwoman Waters dated March 15, 2021............. 216 Coalition Letter............................................. 217 Security Traders Association Letter.......................... 220 Written statement of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness........................ 223 Williams, Hon. Nikema: Written responses to questions for the record submitted to Vicki Bogan................................................ 237 GAME STOPPED? WHO WINS AND LOSES WHEN SHORT SELLERS, SOCIAL MEDIA, AND RETAIL INVESTORS COLLIDE, PART II ---------- Wednesday, March 17, 2021 U.S. House of Representatives, Committee on Financial Services, Washington, D.C. The committee met, pursuant to notice, at 10:02 a.m., via Webex, Hon. Maxine Waters [chairwoman of the committee] presiding. Members present: Representatives Waters, Maloney, Velazquez, Sherman, Scott, Green, Cleaver, Perlmutter, Himes, Beatty, Vargas, Gottheimer, Gonzalez of Texas, Lawson, San Nicolas, Axne, Casten, Pressley, Torres, Lynch, Adams, Tlaib, Dean, Garcia of Illinois, Garcia of Texas, Williams of Georgia, Auchincloss; McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Stivers, Wagner, Barr, Williams of Texas, Hill, Emmer, Zeldin, Loudermilk, Mooney, Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, Gooden, 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. The staff has been instructed not to mute Members, except where 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 preceding, please turn your camera off. Before we begin today's hearing, I would also like to note that my staff and I are continuously monitoring the evolving situation around vaccinations and the COVID-19 pandemic, and looking for opportunities to begin to return the committee to normal proceedings as soon as medical experts advise that it is safe to do so. I have appreciated the coordination from the ranking member in ensuring proper safety protocols in committee proceedings thus far, and I am committed to working with him to ensure that we are following the recommendations of medical experts, moving forward. Today's hearing is entitled, ``Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II.'' I now recognize myself for 3 minutes to give an opening statement. Good morning, everyone. Today, this committee convenes for our second hearing on the ongoing volatility involving GameStop and other stocks. In our first hearing on this matter, I called for a number of those involved in those events to testify before the committee. The goal was to get the facts, and so we heard directly from the CEOs of the trading app, Robinhood; Wall Street firms Citadel and Melvin Capital; and social media company, Reddit; as well as Keith Gill, one of the retail investors involved in WallStreetBets. The committee asked those witnesses questions on a broad range of issues, touching upon topics including conflicts of interest and payment for order flow, gamification of trading and harm to retail investors, the process for clearing and settling stock trades in the United States, and the ways that social media and technology are changing the way our markets function, as well as other related issues. I concluded our first hearing by voicing my concerns on how Robinhood's retail investors are sometimes treated more like a product than a customer, and Robinhood's actual customer, Citadel, with its expansive role in our capital markets, may pose a systemic risk to our financial system. Today, as a next step, I am convening this hearing with a panel of capital markets experts and investor advocates so that the committee can hear their perspectives on these issues and possible reforms. As the events in January put a spotlight on gaps in regulation of our capital markets, the committee must assess what legislative steps may be necessary. Following this hearing, I plan to convene a third hearing to hear the perspectives from the regulators who oversee these markets and are supposed to be putting investors first. My goal in continuing to scrutinize these events and the related policy issues is to ensure that our capital markets are fair and transparent, that investors have strong protections, and that Wall Street is indeed accountable and beneficial to the American economy. I now recognize the ranking member of the committee, the gentleman from North Carolina, Mr. McHenry, for 4 minutes. Mr. McHenry. Thank you, Madam Chairwoman, and thank you for holding today's hearing. I fear a pattern is emerging here that regardless of the facts or data, Democrats are going to use every opportunity to justify their priorities. Whatever is in the news, whatever fears people have, they are going to exploit it to justify advancing an extreme progressive agenda, simply repackaging old, outdated policy failures with the wrappings of whatever else is in the news this week, and using that to sell the American people on the idea that this time, it is different. Ask yourself, for example, why it is that in the Biden plan, signed into law last week, the Congressional Democrats landed on $350 billion in State and local aid when States only have a shortfall of $1.75 billion right now? That is like your friend needing $2, and you say, no problem, here is $350. Will that cover it? The reality is that Democrats are stuck in their thinking no matter what the data actually tells us. Trust me, that massive spending bill is just the start, and the same thing is going to happen with the infrastructure bill and climate change disclosures as well. I fear the same thing is happening today with this GameStop hearing. Democrats are using GameStop to justify more regulations, greater restrictions, and putting more costs onto businesses and everyday investors. They will say this technology is the new scary thing and that it is dangerous, but let's be honest: None of these ideas are new. Regardless of what information may be gleaned from conducting oversight or an investigation, Democrats have already come up with the same old tired ideas: more taxes; more disclosure; more regulation; more limitation; more fees; and more government bureaucrats telling Americans how and what they should be able to invest in. But these ideas come with a track record. We know their agenda creates perverse incentives, bad policy outcomes, and rampant inequality that they then can seize on politically to say they are going to fix inequality, but their policies only make things worse, and enhance inequality. To repeat my point I made in last month's hearing, because of the Democrats' progressive policies, it is easier for most Americans to buy a lottery ticket than it is to invest in the next Google. Because of the regulatory structure, we have the, ``accredited investor'' definition, which, in the D.C. spin on regulation, ensures that only the rich get to invest in things that make you rich. That is backwards and wrong. Let's remove these hurdles and move forward. Let's find a way to work together to harness the power of financial innovation that benefits everyday Americans. Instead of clamping down on innovation and shutting the American people out of opportunities, let's stand with the American people who want a better life. And on a final note, I want to thank the Chair for laying out her approach to holding hearings, and I would ask unanimous consent to submit for the record the letter exchange that we have had over the last week. Look, folks have been vaccinated. As an institution, Congress has had opportunities to be vaccinated. We had hybrid hearings before the vaccine was even available, and so I am asking, Madam Chairwoman, if we could return to those practices that we had last Congress, so that we can actually have both sides represented, and we can have more productive, better hearings when we have a hybrid model or in person. And I think that is commensurate with almost every committee member being vaccinated. So with that, I yield back, and I look forward to the hearing. Chairwoman Waters. Thank you. Without objection, the letter exchange will be added to the record. I now recognize the gentleman from California, Mr. Sherman, who is also the Chair of our Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, for 1 minute. Mr. Sherman. Madam Chairwoman, I thank you for holding this hearing, and I couldn't disagree more with the ranking member when he says this hearing is about raw meat for the woke left- wing masses. I have been to far more left-wing demonstrations than he can imagine. And let me tell you now, there may be shouting of slogans like, ``Impeach Trump,'' but I have never been at a left-wing rally where people are shouting, ``End payment for order flow. Price improvements for all.'' This is a hearing on important technical issues that affect investors which both parties should be trying to protect. We need to look at short selling and the fact that we disclose far less here than in Europe. We need to look at the conflicts of interest involved in payment for order flow. We need to look at a system where you have best execution versus Congress getting price-improved best execution and the gamification and glorification of high-frequency trading. None of that is partisan, none of it is ideological, and none of it will get you cheered at a left-wing rally. Chairwoman Waters. I now recognize the ranking member of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, the gentleman from Michigan, Mr. Huizenga, for 1 minute. [No response.] Chairwoman Waters. Mr. Huizenga? [No response.] Chairwoman Waters. Is Mr. Huizenga on the platform? Voice. He is on the platform. He is just muted. Chairwoman Waters. Mr. Huizenga, you are muted. [No response.] Chairwoman Waters. Mr. Huizenga, unmute. Mr. Huizenga. Finally. Okay. Sorry, Madam Chairwoman. Technology is one of our challenges. I have been trying to unmute that entire time. Chairwoman Waters. You are recognized for 1 minute. Mr. Huizenga. Retail trading has surged in popularity and in practice due to the rise of app-based trading. These app- based interfaces, combined with zero-commission trades, fractional share trading, and lowered account minimums, have ushered in a new era of investment. Advancements in technology have improved access to our capital markets and created new opportunities for countless Americans to participate in our markets who were previously excluded. Today, nearly 25 percent of market trading volume is attributable to retail orders. This is up from 10 percent of trading volume just a mere 2 years ago. The median age of Robinhood customers is 31, and more than half of new Robinhood accounts for the first half of 2020 were opened by first-time investors. At Charles Schwab, since 2019, half of their new clients have been under the age of 40. This is good. How have my colleagues across the aisle responded to this new era of investment? By falsely claiming this increase in market participation has caused, ``gamification of the trading experience'', that markets are rigged, and some have even gone so far as to equate it to gambling in a casino. We should be working together to understand how innovation and technology can improve access to our capital markets instead of jumping to conclusions. I yield back. Chairwoman Waters. Thank you. I now recognize 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, Madam Chairwoman. I am grateful for this hearing, and the salient question is, should we continue to allow a middleman or market maker, who is a high-speed, high-frequency trader, to execute trades for itself and its clients. If the answer is yes, then are there sufficient penalties to deter self-dealing and unlawful trading, mainly buying or selling ahead of one's clients when the trades of the clients are known? I thank you, and I yield back. Chairwoman Waters. I want to welcome today's distinguished witnesses to the committee: Sal Arnuk, who is a partner at and co-founder of Themis Trading, an institutional equities agency brokerage firm; Michael Blaugrund, who is chief operating officer at the New York Stock Exchange; Vicki Bogan, who is an associate professor at the SC Johnson School of Business at Cornell University; Alexis Goldstein, who is a senior policy analyst at Americans for Financial Reform; Dennis Kelleher, who is co-founder, president, and chief executive officer of Better Markets; Alan Grujic, who is chief executive officer of All Of Us Financial; and Michael Piwowar, who is executive director of the Milken Institute Center for Financial Markets. Each of you 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. Mr. Arnuk, you are now recognized for 5 minutes to present your oral testimony. STATEMENT OF SAL ARNUK, PARTNER/CO-FOUNDER, THEMIS TRADING LLC Mr. Arnuk. Thank you, esteemed members of the House Financial Services Committee, for inviting me to participate in this hearing. Joe Saluzzi and I co-founded Themis Trading in 2002, and we trade as agents on behalf of money managers, collectively managing trillions of dollars for long-term investors. We believe the most damaging elements of what has come to be called the meme stock craze are playing out because of extremely poor investor education, conflicts of interest in the form of order routing inducements, referred to as, ``payment for order flow'', and a lack of accountability for this poor investor education and these misaligned incentives. In our written testimony, we have included more detail and nuance on why we think there is an issue with how Robinhood conducts its business. Therefore, we will use our opening statement to instead talk about payment for order flow, which is the practice that makes their model exist. Payment for order flow presents an undeniable conflict of interest. While it may enable free commissions and explicit cost, there are implied costs we feel everyone ignores. While payment for order flow is legal, we have long wondered how it possibly could be. How can a broker, charged with the duty of getting its clients the best available prices, do so by selling the clients' orders to sophisticated high-frequency trading firms, who, in turn, will make billions of dollars trading against these orders? While retail brokers and market-making firms claim to provide price improvement (PI) to these orders, it is a flawed calculation. It is based off of a slower price feed called the SIP. It doesn't take into account odd lots and midpoint exchange order flow, and the NBBO reference price it uses is largely set by the very same market-making firms bestowing this PI in the off-exchange environment. Regulators know this. The SEC recently fined Citadel $22 million for mishandling retail orders, and they also fined Robinhood $65 million for failing its best execution responsibilities. They know the concept of PI is flawed as well. They approved a huge market structure change which included odd lots in the SIP, and protected them as a quote, yet our industry sued to block this overhaul. Payment for order flow increases overall costs in the market for all investors, including pension funds. When a few HFT market makers buy up orders that account for as much as a third of the trading volume each day, the orders are less informed and benign so that they don't go to the exchanges. What is left on those exchanges is much, much more toxic and costly to trade with. Market impact costs are higher and spreads are wider as well. Two studies that confirm this are the Babelfish Study of Transaction Costs and Meme Stocks and another academic study that amazingly points out that when Robinhood experiences technical outages, spreads in the general market become narrower. Wider spreads mean that retail investors receive the worst prices, even after accounting for PI, and all other investors see their costs increase as well. The practice of payment for order flow also provides a disincentive for displayed limit orders on exchanges. These displayed orders are often stepped in front of by HFT market makers who piggyback the price set by them. Those market makers step in and are rewarded with a sale that was only made possible by the displayed order, which narrows the spread in the first place. Would any of you, when buying a home, for example, put a sign in front of the home with the price you would pay, only to help someone else buy the house ahead of you for the same price or a dollar more? Yet, this is what happens to displayed orders in the market every day. Payment for order flow also takes the form of maker-taker rebates on exchanges. The practice creates race conditions to be first in line to get a rebate every time the quote changes. Investor orders do not dominate these races; market makers do. Investor orders are typically further back in the queue and miss opportunities at buying cheaper stocks, but despite this, brokers representing those investor orders still route largely to these exchanges for that rebate, and regulators know this behavior is problematic. In December 2018, the SEC adopted a transaction fee pilot, whose purpose was to test the effect of rebates on market quality. Sadly, the exchanges sued and blocked the pilot. What were the exchanges afraid that the pilot would confirm? Finally, maker-taker has taken fixed exchange costs to the moon. This has resulted in less diverse public markets, which hurts price discovery. Which market will have better price discovery, one where the prices are determined by an oligopoly of four large HFT trading firms, or one where the prices are determined by diverse investors and traders from all walks? To conclude, we are all witnessing the dangerous intersection of poor investor education by a broker that should know better, and the payment for order flow that creates the massive incentive in their business model to sell the orders on its platform to its real customers, the HFT market makers. Payment for order flow is a flawed and conflict-ridden practice. [The prepared statement of Mr. Arnuk can be found on page 82 of the appendix.] Chairwoman Waters. Thank you, Mr. Arnuk. Mr. Blaugrund, you are now recognized for 5 minutes to present your oral testimony. STATEMENT OF MICHAEL BLAUGRUND, CHIEF OPERATING OFFICER, NEW YORK STOCK EXCHANGE (NYSE) Mr. Blaugrund. Chairwoman Waters, Ranking Member McHenry, and distinguished members of the committee, thank you for the opportunity to testify today. I am Michael Blaugrund, the chief operating officer of the New York Stock Exchange. The NYSE is the world's largest exchange, and our listed companies employ more than 43 million people worldwide and represent roughly 30 percent of the world's public market value. The New York Stock Exchange's purpose is to help companies raise capital so they can change the world and provide an opportunity for investors to share in their growth. The events of January have raised questions as to what, if anything, policymakers and regulators should seek to reform in the equity markets. Whatever conclusions the regulators reach about what ought or ought not be done, public policy should build investor confidence in the markets. The first of four areas that merit reform is shareholder disclosures. At the NYSE, we sit at the nexus of issuers and investors, and both groups have strong feelings about shareholder disclosures under Section 13(f). Corporate issuers feel that the current limited frequency and lengthy lag time for 13(f) reporting prevents them from engaging efficiently with their investor base, while institutional investors are concerned that increased disclosures would erode the value of their fundamental research. We facilitated joint discussions with representatives of both groups in hopes of identifying a middle ground. Based on this dialogue, we believe the SEC should consider shortening the delay for 13(f) reporting and consider mechanisms that enable direct disclosures to corporate issuers when a reportable position is established or fully divested. The second area for reform is securities lending. Short selling is an essential practice for liquidity price discovery and risk management, but the securities lending market on which it depends is opaque and inefficient. The Financial Industry Regulatory Authority (FINRA) collects short position information from its member firms twice a month, but this aggregate data is insufficient for market participants or regulators to understand how supply and demand are changing for stock loans. The NYSE believes the SEC should consider establishing a consolidated tape for securities lending. A system that anonymously published the material terms for each stock loan would provide the necessary data to understand shifts in short-selling activity while protecting the intellectual property of individual market participants. Third, the SEC should eliminate competitive barriers for public investors. Over the past year, retail trading has been the fastest-growing segment of the market. It is encouraging to see increased direct investment as public markets are a powerful mechanism for reducing economic inequality. The vast majority of retail order flow, however, never makes it to the public market. Instead, retail orders are typically routed to a broker-dealer wholesaler for internalization, a process that guarantees an execution to the retail customer in exchange for granting the wholesaler an opportunity to trade with the order before other market participants. Investors trading on public exchanges, including the NYSE, have a limited ability to compete for much of the retail volume due largely to the difference in the regulatory framework for broker-dealers and exchanges. For example, unlike exchanges, wholesalers can offer privately-negotiated terms for price improvement or payment for order flow. However, investors trading on exchanges are also on unequal footing in a more straightforward way. Off-exchange trading is permitted at price increments as small as one-one- hundredth of a cent, while investors trading on exchanges are limited to price increments of a full penny. The NYSE believes that it is time to level the playing field for on-and-off exchange price increments. Reducing the minimum pricing increment on exchanges and active, low-price securities with lower investor trading costs improves transparency and provides an increased opportunity for investors trading on exchanges to interact with retail orders. Finally, NYSE supports the growing consensus to accelerate industry settlement cycles from 2 days to 1 day after the trade. Though a shorter settlement cycle increases the potential for an operational error, the capital efficiency to be achieved by the industry is likely worth the risk. In conclusion, smarter regulation of today's equity market structure will improve investor confidence, encourage entrepreneurs to access the capital markets, and allow the U.S. to extend its global leadership. We look forward to working with the new Congress, the SEC, the Biden Administration, and all of our stakeholders on these matters. And I thank the committee for the opportunity to participate today. [The prepared statement of Mr. Blaugrund can be found on page 91 of the appendix.] Chairwoman Waters. Thank you very much. Dr. Bogan, you are now recognized for 5 minutes to present your oral testimony. STATEMENT OF VICKI L. BOGAN, ASSOCIATE PROFESSOR, CORNELL UNIVERSITY Ms. Bogan. Chairwoman Waters, Ranking Member McHenry, and distinguished members of the committee, thank you for the opportunity to provide my views on an important matter that has been referred to as a gamification of investing. In my remarks, I will focus on what research tells us about behavioral influences with regard to retail investing and the ways in which policies could better protect retail investor interests while maintaining individuals' access to financial markets. Research in the area of household finance is clear and consistent in finding that participating in financial markets is a pathway to economic mobility and wealth building for households in the United States. Thus, it is important to remove barriers that hinder individuals accessing and safely participating in equity markets. I strongly believe this, as I have spent more than 20 years studying household finance and individual investment decision-making behavior. My own research has shown the importance of reducing market frictions, like transaction and information costs, to household participation in equity markets. The payment for order flow business model used by Robinhood and other online brokers does, in fact, reduce the significant market friction that historically inhibited access to financial markets for retail investors. Specifically, no direct fee per transaction is a beneficial way in which the barriers to participation have been lowered. The payment for order flow model, however, does not mean that there are no transaction costs for the retail investor. Transaction costs due to bid-ask spreads remain, but the exact amount of these costs are not transparent to the investor. The recent GameStop incident has highlighted several acute financial market functioning issues related to payment for order flow conflict of interest and duration of settlement clearing. However, one critical issue resurfaced during this time that is not unique to the GameStop incident and has the potential for long-lasting negative effects on the finances of households, the gamification of investing. The practice of financial institutions responsibly serving retail investors does not start and end with giving lower-cost access to financial markets. Robinhood CEO, Mr. Tenev, is quoted as testifying that, ``Robinhood works to give people what they want in a responsible, accessible way.'' The gamification of investing, which has been pioneered by Robinhood, is not responsible because it has the demonstrated ability to harm the lives of people by creating financial fragility through wealth erosion. Beyond merely developing a user interface to facilitate ease of use for retail investors, online brokers like Robinhood employ powerful behavioral science-based techniques to influence investor behavior in a particular direction. These online brokers use prompts, push notifications, and other nudges for the purpose of eliciting a specific behavior: increased trading by the investor. The nudges to increase trading are not based upon a sound investment strategy for the specific investor, so why are they used? Given the payment for order flow model, it is in the firm's best interest to have more trading volume. More volume equates to more revenue. Thus, the core of these practices increase from profits while potentially harming customers. The realm of financial planning rarely supports day trading strategies for households. Buy and hold is conventional wisdom for retail investors. While a special few may have the time, energy, and knowledge to watch the markets with the keen attention required to practice day trading successfully, most households have limited quantities of those resources. With or without direct transaction fees, it is generally not advantageous for the majority of households to trade multiple times per day. From the perspective of traditional finance theory, one could argue that if individuals behave rationally, they will not trade if it is not in their best interest to do so. However, a key insight from behavioral science research is that nudges have strong and powerful effects. Nudges exploit behavioral biases to trigger specific responses. Knowledge of a bias is not sufficient to mitigate its effect on one's behavior, and mistakes are made even when the stakes are high. Online brokers can be important vehicles for retail investors to access financial markets. For the past few years, Robinhood and similar online platforms have marketed themselves as working to democratize finance for all. However, this narrative does not ring true. This rhetoric detracts from the reality that these firms are reinforcing the status quo by converting customer orders into the actual products that are being sold. The customers of these payments for order flow online brokers are, in fact, market makers, like Citadel Securities. Hence, it is imperative for the retail investors to be provided more protection through regulation. There is a significant opportunity for more consumer safeguards governing online broker app user interfaces and enhance regulation around fee transparencies. Improving and strengthening customer financial protection laws and regulations is as critical to facilitating economic mobility as accessing the markets themselves. Thank you. [The prepared statement of Dr. Bogan can be found on page 95 of the appendix.] Chairwoman Waters. Thank you very much. Ms. Goldstein, you are now recognized for 5 minutes to present your oral testimony. STATEMENT OF ALEXIS GOLDSTEIN, SENIOR POLICY ANALYST, AMERICANS FOR FINANCIAL REFORM Ms. Goldstein. Chairwoman Waters, Ranking Member McHenry, and distinguished members of the committee, thank you for inviting me to testify today. My name is Alexis Goldstein, and I am senior policy analyst at Americans for Financial Reform. Previously, I spent many years on Wall Street, first as a programmer at Morgan Stanley in electronic trading, and then as a business analyst at Merrill Lynch and Deutsche Bank in equity derivatives. There, I worked primarily as a product manager for the trading and risk management software that was used globally by our equity options flow trading desks. I want to start by thanking Chairwoman Waters for her leadership in convening the very first congressional exploration of the issues raised by the volatility in GameStop equities last month. Many have framed the GameStop mania as a David versus Goliath struggle. I believe it is more likely a story about Goliath versus Goliath, where the Goliaths are the largest Wall Street players, including hedge funds and the flow trading desks at major banks like Goldman Sachs and Morgan Stanley. Institutional players have structural advantages over retail traders: superior data; high-frequency trading algorithms; and access to trading venues not available to retail clients. GameStop's 1,700-percent price run was not the end of Wall Street's dominance. In fact, it may be a source of major first quarter profits at large banks with flow trading desks. The derivatives trading desk that I used to work with took in the biggest profits on the most volatile days, and that is because they are mostly agnostic to price movements. They often profit on market churn rather than on the traditional ways that retail investors make money, by buying and holding. My time on Wall Street showed me that institutional players ferociously guard information about their positions while spending large sums of money and time trying to figure out what their competitors are holding. Thousands of Reddit users posting their positions online is another data point for Wall Street players who are already creating software to extract and mine it for information. It is understandable why a narrative of David versus Goliath emerged at this moment. Wall Street profits have been soaring during the pandemic while Main Street has endured intense and prolonged suffering in a phenomenon that has been called a K-shaped recovery. In November, 10.7 million workers were officially unemployed. A disproportionate burden of the impact of the pandemic has fallen on Black and Brown Americans. Latinx Americans have faced large losses in employment, and White workers are getting hired back twice as fast as Black workers. Given the extreme imbalances in the economy, it makes sense that the media and the public might be drawn to a story of the little guy taking down Wall Street, but GameStop shines a spotlight on issues in the market that long predate this incident. Policymakers should focus on examining the footprint of institutional players in the volatility, investigate if large hedge funds are creating undue risks and regulatory blind spots, improve hedge fund trading disclosures, scrutinize payment for order flow, and consider changes to capital requirements at brokerages. In the wake of the 2008 crisis, playing the lottery increased among people who were still struggling financially. Reddit and Robinhood are driving a new kind of financial lottery: trading cheap options that require giant price moves to become profitable. I, myself, have used Robinhood. I found it to be very streamlined. It has a slick user interface, but that simplicity has a downside: It provides its users with far less context and information compared with other retail brokerages. The way to truly rebalance the economy is not to democratize the Wall Street casino, but instead to invest in rebuilding public institutions. Canceling Federal student loan debt, which President Biden can do without Congress, would grow the economy, relieve the disproportionate debt burdens carried by Black and Brown borrowers, and incentivize science and engineering graduates to consider careers benefiting the public good rather than writing algorithms to optimize trading. A modest wealth tax could be redirected to priorities like universal child care or tuition-free education, and a very small financial transaction tax could fund investments in reducing the racial wealth gap through programs like baby bonds. I also want to flag that while this committee, under previous leadership, has advocated for vastly expanding the definition of, ``accredited investors'', they have also voted to limit the oversight tools and the budget of the Securities and Exchange Commission, essentially making retail investors sitting ducks for powerful special interests. Trying to democratize the zero-sum game of trading is not the answer to our dire economic state. Instead, the country needs transformational policies that tackle the deep inequalities the pandemic has exacerbated. Thank you very much, and I look forward to your questions. [The prepared statement of Ms. Goldstein can be found on page 102 of the appendix.] Chairwoman Waters. Thank you very much, Ms. Goldstein. Mr. Kelleher, you are now recognized for 5 minutes to present your oral testimony. STATEMENT OF DENNIS M. KELLEHER, CO-FOUNDER, PRESIDENT, AND CHIEF EXECUTIVE OFFICER OF BETTER MARKETS Mr. Kelleher. Good morning, Chairwoman Waters, Ranking Member McHenry, and members of the committee. Thank you for holding this important hearing, and for the invitation to Better Markets to testify. We have already heard many of the market structure and regulatory issues addressed by this hearing are complex, hotly disputed, and often difficult to understand, but it is important to remember that they directly affect the economic activity and growth of the country. In fact, these issues actually impact how businesses form, grow, and create jobs or not, and that is what is really at stake and why everyone has a stake in these issues. Simply put, the purposes of our financial system and markets are supposed to be a wealth creation system for the many, not a wealth extraction mechanism for the few, and that is why the work of this committee is so important to the lives and livelihoods of all Americans. However, because of the limited time and the format for hearings like this, many of those issues won't be able to be adequately covered today, and that is why the written testimony I have submitted is so long. It covers many of the issues extensively and in detail. It is intended to be a resource to you and your staffs long after this hearing. While all of that written testimony is, of course, fascinating and well worth reading, I want to draw your attention in particular to the attached Appendix C. That appendix has seven slides that I created to visually show how payment for order flow works and how retail investors do not get best execution. Indeed, as I show in those slides, retail investors are virtually guaranteed to get the worst execution. That written testimony and those slides demonstrate that the markets are not a level playing field. They are rigged to advantage the sell side against retail investors, pension funds, and the buy side generally. But these markets are too often a wealth extraction mechanism to enrich the few at the expense of the many. That is detailed in my written testimony. I want to make just two quick points before my time is up. First, our markets may be the envy of the world today, but that is not preordained, guaranteed, or destined to always be the case. It is only because people believe our markets are relatively transparent, well-regulated, and policed. That is due to the hard work of legislators like yourselves and regulators like the SEC. That work has engendered faith and confidence that our markets are fair and relatively free of fraud. That confidence underpins our markets. Lose that, and our markets will not function. If they don't function, then our economy will be hurt. Jobs, growth, and living standards are at stake. That, unfortunately, is the precipice we currently stand on. While the world may be envious of our markets, poll after poll shows many Americans are losing faith and confidence in our markets, and that is why the many issues raised by the GameStop frenzy are so important. If not properly addressed, they will happen again, and if they do, they will crush investor confidence, then our markets, and then our economy. Remember, a growing, thriving economy is the very purpose of the markets, capital allocation and formation to fuel economic growth, rising living standards, decreasing inequality, and making the American Dream available to more people. That requires a level playing field, full and fair price discovery, and serious investor protection. Anything that interferes with that erodes investor confidence and should be eliminated. That is why payment for order flow and the many other wealth extraction activities and conflicts of interest revealed and highlighted by the GameStop frenzy have to go. Second and finally, Congress must remain deeply skeptical of the disingenuous argument that retail investors have never had it so good. While that is arguably true, it is not attributable to payment for order flow. The actual causes of increased market access and narrowing spreads over the last 25 years are due to technological innovations, cost reductions, the introduction of electronic trading, the implementation of decimalization, and other elements of the regulation MNS framework. In fact, without payment for order flow and the other intentionally-created complexity used to disguise the wealth extraction activities, retail investors would be significantly better off today, and investors and public confidence would be higher. That could be the foundation for a virtuous cycle where more people invest, more capital is available, more businesses are formed and funded, more jobs are created, and economic growth increases and broadens, benefitting all Americans. That is our collective goal. Thank you, and I look forward to your questions. [The prepared statement of Mr. Kelleher can be found on page 117 of the appendix.] Chairwoman Waters. Thank you very much, Mr. Kelleher. Mr. Grujic, you are now recognized for 5 minutes to present your oral testimony. STATEMENT OF ALAN GRUJIC, CEO, ALL OF US FINANCIAL Mr. Grujic. Thank you. Good morning, Chairwoman Waters, Ranking Member McHenry, and distinguished members of the committee. My name is Alan Grujic. I am founder and CEO of All of Us Financial, a new San Francisco-based online broker launched in May 2020, and on a mission to empower retail investors. Thank you for the opportunity to add to this important discussion regarding January's unprecedented activity in GameStop and the associated lessons learned from an entrepreneurial perspective. Let me start by saying that I have learned from decades of direct practitioner experience that most of the choices before us involve tradeoffs. Most have both costs and benefits and must be considered in that silver light. I am an engineer by training, but my career has been in capital markets. For a decade, I worked for Toronto Dominion Bank across the globe, and in 2002, I co-founded a high-frequency trading firm, Infinium, and in 2011, I built and ran a quantitative hedge fund, Galiam. After looking at market issues from all of these angles, I found that no one was properly solving a critically important problem, which is leveling the playing field for retail investors. Retail investors don't have the same tools as large institutions, and underperform the broader markets over time. I decided to apply my experience to try to address this critical societal need. The narrative that markets are rigged and that big institutions steal from little girls and guys out there is mostly not correct. That narrative exploits fear and reduces rich complexity to a simple fairy tale: find a victim, finger the villain, promote a hero. We don't live in Sherwood Forest. Our markets are well- structured, highly competitive, and expertly regulated. There is plenty of room for improvement, no doubt, particularly as we adapt to an ever-changing world. One needed improvement is to deliver institutional-grade capabilities to reach all investors, including in the areas of data, knowledge, access, and influence, and that is our mission at All of Us. Let me be clear that we currently are pay for order flow (PFOF) at All of Us, and because we believe in radical transparency and alignment, unlike some other brokers, we share this revenue with our customers. We believe this aligns our interests with our customers, and it helps educate them about how markets work. Some view disclosure as a point-in-time regulatory requirement. We take the view that transparency is a real-time foundation for our entire business. PFOF is not a necessary component of our market structure, but it is an effective way for markets to operate and should not be banned without careful consideration of its costs and benefits. Importantly, regulation requires all market makers to trade with customers at or better than best prices available on exchanges, and there is a comprehensive execution audit trail for brokers and regulators to monitor. As we consider PFOF in this light, there are some truths to consider. First, market makers and exchanges all provide valuable services and need to be paid for them. Market makers provide liquidity, price discovery, and critical customer services. Exchanges provide, among other things, order matching and settlement services. These services cannot be provided for free. Second, market makers are indifferent between PFOF and price improvement, because that price for them is the same. Brokers care, however. They also need to be paid for providing services in a highly-competitive environment. If we prohibit PFOF, commissions will likely increase, and valuable retail innovations, such as fractional shares, may become uneconomical. Finally, some claim separating retail institutional flow harms retail investors. In fact, because market makers' value is thought of more highly than institutional flow, if we force them into the same market structure--and this is important--the average price received will be worse for retail orders and better for institutional orders than it is today. In terms of gamification and social investing, social media platforms and gamification are powerful forces, and, like most implements, can be used for both good and bad purposes. But society is evolving, and younger generations want products and services delivered via social media. Good gamification and social investing can drive financial literacy and education, and encourage healthy behaviors, such as regular savings and investment, and that is a standard we hold ourselves to at All of Us. Brokerage is highly competitive, and innovations in social investing will continue to emerge. The right regulatory balance is to encourage innovation for the benefit of retail investors while ensuring investor protection. Our markets can be a wonderful means for Americans to invest and build wealth, but as the GameStop activity shows, our markets can be improved, and efforts to educate and improve the experience of retail investors are critical as markets become increasingly accessible and more and more people invest for the first time. I appreciate this opportunity to appear before the committee today. I look forward to answering your questions from an entrepreneurial perspective at the appropriate time. Thank you. [The prepared statement of Mr. Grujic can be found on page 112 of the appendix.] Chairwoman Waters. Thank you, Mr. Grujic. And Mr. Piwowar, you are now recognized for 5 minutes. STATEMENT OF THE HONORABLE MICHAEL S. PIWOWAR, EXECUTIVE DIRECTOR, MILKEN INSTITUTE CENTER FOR FINANCIAL MARKETS Mr. Piwowar. Good morning. Thank you, Chairwoman Waters, Ranking Member McHenry, and members of the committee, for inviting me to testify today. My name is Mike Piwowar, and I am the executive director of the Milken Institute Center for Financial Markets. Previously, I had the pleasure of serving as a visiting academic scholar, senior financial economist, Commissioner, and acting Chairman of the Securities and Exchange Commission. Thank you for calling this second hearing on the lessons learned from the trading activity in GameStop and other so- called meme stocks. In the first hearing, members of this committee identified a number of issues that the SEC could prioritize in its regulatory compliance and enforcement roles. I hope that my testimony today will be helpful in guiding some of those priorities. The Commission has already said that they are reviewing actions taken by regulated entities to determine whether they may have disadvantaged investors or otherwise unduly inhibited their ability to trade certain securities. The SEC's Division of Examinations has said that one of their 2021 examination priorities will be to examine broker-dealers to assess whether they are meeting their legal and compliance obligations when providing retail customers access to complex strategies, such as options trading, and the Commission has said they are investigating whether abusive or manipulative trading activity prohibited by the Federal securities laws occurred during this episode. I have complete confidence that the Commission and its compliance and enforcement staff will identify and pursue any evidence of noncompliance or wrongdoing. Accordingly, I will focus my testimony on the regulatory policy issues that have been raised in the aftermath of the January trading. The first part of my testimony focuses on achieving more equitable access to investing in private companies. The second part focuses on improving three specific areas of market structure and market infrastructure policy. Here is a quick summary. Retail investors enjoy more choices and face lower costs when investing their hard-earned savings in public companies than ever before. Retail investors have taken advantage of these beneficial trends over the past few decades. The fraction of U.S. households that own stocks, either directly or indirectly through funds and retirement savings accounts and pension funds, increased from less than one-third in 1989 to more than one-half in 2019. Low-income households saw the biggest gains over this period, but they still lag high-income households in public stock ownership rates. In 2019, 15 percent of households in the lowest-income quintile held stocks in public companies compared to 88 percent of households in the highest income quintile. While I am not aware of any statistics on ownership rates by household income level for private companies, the gap is undoubtedly worse, because SEC rules currently effectively prohibit low-income investors from investing in this high- growth sector of the economy. Accordingly, I believe the SEC should revisit the, ``accredited investor'' definition, and solicit public feedback on achieving more equitable access to investing in private companies across all income levels. Based on that feedback, the SEC should engage in rulemaking to open up these investment opportunities to all Americans. I also recommend that the SEC should: one, evaluate whether and how to move to a shorter trade settlement cycle; two, study how payment for order flow is working in a zero-commission environment with a focus on order routing and best execution requirements; and three, evaluate various alternatives to increase regulatory reporting and public transparency in securities lending. My written testimony provides an in-depth discussion of each of these issues, and I am happy to answer any questions you may have. Thank you again for bringing attention to these critical issues and for the opportunity to testify before you here today. [The prepared statement of Dr. Piwowar can be found on page 162 of the appendix.] Chairwoman Waters. Thank you very much, Mr. Piwowar. I now recognize myself for 5 minutes for questions. Last month, the committee reviewed the actions of various market participants surrounding the volatile trading in GameStop and other stocks. We discussed how Robinhood, which caters to retail investors, earns nearly all of its revenue from selling its customers' orders to firms like Citadel, raising questions about who really is Robinhood's customer. Robinhood claims it does its customers a service because it doesn't charge any commissions, but it costs its customers more than $34 million last year, and Robinhood paid $65 million to settle an enforcement action related to selling its customer stock orders. I understand the allure of Robinhood. When I first learned about Robinhood, I thought it showed great promise. Ms. Goldstein, payment for order flow, which was pioneered by the fraudster, Bernie Madoff, allows brokers like Robinhood to make huge profits by routing their customers' orders to market makers like Citadel, instead of sending them directly to an exchange, like the New York Stock Exchange, even if it means brokers won't obtain the most favorable trading terms for investors. Can you please explain whether you think these disturbing conflicts can ever be truly mitigated in such a way that guarantee brokers and other market participants are acting in the best interests of their customers? Ms. Goldstein. Chairwoman Waters, thank you for the question, and thank you for holding this hearing today. If we look back to 2016 and the Obama Administration, the Securities and Exchange Commission wrote a memo to its Equity Market Structure Advisory Committee, and it identified a series of potential conflicts with payment for order flow. They thought it might interfere with a broker's duty to receive best execution for their customers. They thought it might create perverse incentives for them to route their orders to market makers instead of to exchanges, and they identified that it may, in fact, be obscuring the true cost that customers are paying for their order flow. I liken it, sort of, to Facebook. If you are not paying for something, that often means that you yourself are the product, and Robinhood, many years ago, made upwards of 80 percent of their revenue from payment for order flow. In that SEC enforcement action that you identified, they pointed out that they hid that information from their customers after the publication of the best-selling book, ``Flash Boys'', made payment for order flow somewhat unpopular. They took it off of their frequently-asked questions page. So, I do think that the Securities and Exchange Commission should revisit all of those questions that they had previously in 2016 in the Obama Administration. They should ask, should this practice be prohibited? Is it too confusing? Does it mask the true cost of the trade, or should brokers be required to pass these payments on to their customers, which could be another way to address the problem? Chairwoman Waters. Thank you. You indicated that you had at some point been involved with Robinhood, that you had done some trading, and that is how you became very knowledgeable about how they operate. Could you tell us what that experience was? Ms. Goldstein. I would be happy to, Congresswoman. I have used Robinhood. I have also used a number of other brokerages. I was, quite frankly, very shocked at how quickly I was able to get set up for trading on Robinhood. I have a lot of expertise in options because I have a history of working with options trading desks on Wall Street, but even with that expertise, it is usually much slower when I have tried to use other brokerages to get permission to trade in certain kinds of options tradings, like what are known as option spreads, but in Robinhood, there was no friction. I did not have to fill out any kind of complicated forms. I was honestly quite surprised at how easy it was, and I do think that the folks who have criticized Robinhood for the gamification of it, there is something behind that. When you place your first trade, this confetti bursts on your screen. There are lots of recommendations about the products you trade. It says, oh, you traded this, so you might be interested in this other company. So, I do think there are a lot of questions about the ways that Robinhood may be enticing people who may not have the needed expertise to trade, for example, options strategies, where you can lose a lot of money called spreads, put spreads. So I was, quite frankly, pretty surprised at how different it was from other brokerages, especially when it came to how much outstanding risk I had. I think it is very simplified, and that is often cited as a benefit, but it is simplified in a way that can be very dangerous if people don't understand their risk. Chairwoman Waters. I thank you very much for the testimony. I now recognize the distinguished ranking member, Mr. McHenry, for 5 minutes for questions. Mr. McHenry. Thank you, Madam Chairwoman. Mr. Piwowar, I would like to actually go to you, and I just want to take a step back and look at the evolution of retail investing over the last decade or so and the impact of rules prohibiting everyday investors from investing in high-tech, high-growth, or a number of segments of our economy that are currently prohibited. What was the rationale behind the rules, and what impact did the prohibition have on investors and investment opportunities, the accredited investor standard in particular? Mr. Piwowar. Thank you, Congressman McHenry, for that question. The original rationale for this rule was quite well- intended. It was an investor protection rule, and the idea was that it would protect investors from investing in riskier securities. Now, I question the premise of that as an economist. I am only the third Ph.D. economist to be a Commissioner at the SEC. Most of the SEC Commissioners and staffers there are lawyers, and they tend to think of the risk of securities in isolation, the risk of any particular security. But when I look at it through the lens of an economist, what we know is that individual retail investors and institutional investors don't hold securities in isolation. They hold portfolios of securities. And so, once I apply the principles of economics to this, you can add riskier securities to your portfolio, which, as you point out, also tend to be higher-growth, and higher-expected returns to your portfolio without increasing the overall risk that you are facing within the markets. And what you are essentially doing is limiting the upside of these individual portfolios. Mr. McHenry. Does that have any impact on inequality? Does that exacerbate inequality? Mr. Piwowar. Absolutely. We know that younger companies tend to be higher growth, and so what we have seen over the long term is, over the last 20 years, we have had about half as many public companies as we did about 20 years ago. And so, by limiting non-accredited investors to that public company universe, we are limiting them to a smaller portfolio of securities, right? We know that there are fewer companies that are going public at all. We also see in the trend that growing companies are going public later in their life, so when they do finally become public, a lot of the growth opportunities to invest in them have gone by the wayside. And individual, retail, non-accredited investors didn't get the opportunity to invest in those companies during that growth cycle, whereas accredited investors have had that opportunity, which by the definition of, ``accredited investor'', is somebody who is already rich, so the rich get richer. Mr. McHenry. It sounds like this dual track system is outdated and the rationale is outdated. Mr. Grujic, let's go to you. Technology platforms like yours are attempting to democratize investor access to public markets, making it easier, and we have seen this move over the last really 50 years in this country, attracting a whole new class of investors, but that has been heightened because of technology, obviously. Do you think that FinTech could be similarly useful to everyday investors if they were able to access early-stage investment opportunities? Mr. Grujic. Yes, absolutely, and there are a lot of platforms now. The crowdfunding platforms that are opening up in this space and the recent regulations, I think, are very helpful with changes to the regulations to open up this space. I also concur that the accredited investor rules are outdated. I have always been very uncomfortable with them. The concept that we don't have equal rights as citizens to participate in investments has always troubled me. I do actively participate in the markets as an accredited investor. I invested in Facebook before it went public. I have invested in other companies. That really should be accessible to everyone. At the same time, if we are to look for investor protections in this area, they should come in the form of assessing people's understanding and ability to make these investments, certainly not based on their wealth. Mr. McHenry. Okay. It sounds like we need to update our system and allow more people access to investment opportunities. And, Mr. Piwowar, I will just close by saying I agree with your assessment that payment for order flow and given the regulation of our market structure as it is, they are only tradeoffs. There is no simple win-win. We need good disclosures, but it is all a series of tradeoffs. So, I yield back. Thank you. Chairwoman Waters. Thank you very much. The gentlewoman from New York, Ms. Velazquez, who is also the Chair of the House Committee on Small Business, is now recognized for 5 minutes. Ms. Velazquez. Thank you, Madam Chairwoman. Mr. Kelleher, Robinhood seems to have perfected the gamification of trading, providing the user with the perception that investing through the app offers recreational game playing with little or no downside risk. First, are you concerned with the gamification of the Robinhood app, and second, do you believe Robinhood's disclosures are properly balancing 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. Kelleher. Thank you for your question, and, yes, we should all be concerned about the gamification of the Robinhood app. Its primary function is not to get people to invest; it is to get people to trade. And it wants people to trade because the more people trade, the more payment for order flow it receives, the more revenue it gets, the richer they get, and the bigger the IPO that they have in the pipeline coming. That is what gamification is about. And Professor Bogan has very well stated the academic literature about so many aspects of the app driving people to thoughtlessly engage in trading rather than thoughtfully engage in trading. One of the big problems we have here is, unlike Mr. Piwowar, we do not have Ph.D. economists applying economic principles here. We have a game-like mechanism that is meant to actually cause people to drop their defenses, to not think at all about losses and risks, and to only think about gains and trading, and everybody should worry about that. Ms. Velazquez. As we consider issues associated with gamification, what type of reforms would you recommend? Mr. Kelleher. I think one thing that should be done, and Professor Bogan, again, has talked about this, is the aspects of these apps that actually are scientifically designed to hit the endorphins of the trader, which is to say, to short circuit and cut off thoughtful processes that people engage in, balancing risks and rewards, balancing the need to do something versus the reflex to do something because something unconscious has been engaged. And indeed, as Sal Arnuk showed in his testimony, if you look at the other platforms, they actually thoughtfully present material on, for example, options and the risks of options. You don't see that on the Robinhood app. And indeed, on the Robinhood app, one of the most often-asked questions, according to an article I read on the app, is, ``What is a stock?'' Another frequently asked question is, ``What is the S&P 500?'' So, you have a base of customers with extremely low knowledge, who are being intentionally activated unconsciously to trade more and more often for the sole purpose of enriching Robinhood. Ms. Velazquez. Thank you. Mr. Kelleher, during last month's hearing, I also brought up the important issue of short selling. While I said at the time, and continue to understand that short selling has legitimate purposes, I also said that too often, I have seen the strategy used against working individuals and families, first, against Puerto Rico, and now here with the GameStop craze. Currently, large investors, including hedge funds, must disclose their long positions when they own 5 percent or more of a company's share, but no such disclosure is required for short positions. As we consider reform, is this type of disclosure for short position something you will support? Mr. Kelleher. There absolutely should be greater disclosure for short positions, both on the institutional investor side and on the broker-dealer side, and that disclosure should be increased in terms of frequency and particularly in terms of content. There is a great deal of synthetic shorting happening in these markets with total return swaps and other synthetic products that actually disguise and understate what we even now publicly know. So, across-the-board, in terms of the actual entities, in terms of the timing, and in terms of the content, disclosure should be increased, and it should actually be pretty well-studied. But regardless of the outcome of that study, we need more information to the market so that people can act in a more informed manner. Ms. Velazquez. Thank you, Mr. Kelleher. And thank you, Madam Chairwoman. I yield back. Chairwoman Waters. The gentlewoman from Missouri, Mrs. Wagner, is now recognized for 5 minutes. Mrs. Wagner. Thank you, Madam Chairwoman. This is a question for both Mr. Grujic and Mr. Piwowar. Just briefly, are there any regulatory barriers to help facilitate increased access for everyday investors that you see, that we in Congress could work on removing? Mr. Grujic? Mr. Grujic. Yes, there certainly are. As I stated in my opening statement, I think we always have tradeoffs, and so there are always ongoing frictions where regulations exist, and sometimes the benefit exceeds the cost. In particular, the ones that trouble me are the credit investor rules we just touched on. While not my area of professional expertise, I really feel that that is highly limiting to the opportunity set for retail investors. I also think that over the next decade or two, expansion in private markets is going to be a greater opportunity for retail investors than public markets, and I emphasize that that is an area that perhaps is the most important. Mrs. Wagner. Great. Mr. Piwowar? Mr. Piwowar. Thank you, Congresswoman Wagner. I agree with Mr. Grujic about revisiting the accredited investor definition. That is the most direct way that the SEC could deal with it. There are a couple of indirect ways also, if people are still uncomfortable with investors investing in [inaudible] in a private company, there is a way to address this indirectly. Congressman Anthony Gonzalez had a bill last Congress that would open up the ability of closed-end funds to invest in private funds that invest in private companies. I think closed- end funds--a particular type of them are called interval funds--would be a particularly useful investment vehicle, and then people would have comfort that the investor would be protected through a regulated investment advisor. And there are a number of other things that the Commission could do along those lines, so they could do it directly and indirectly. Mrs. Wagner. Thank you. Mr. Grujic, if payment for order flow were to be banned, how would that impact the commission- free trading that millions of Main Street investors, who are currently benefiting from it in order to save for retirement, buy their first home, or pay for their child's education--how would that be impacted? Mr. Grujic. These things are always somewhat indeterminate. It depends on the innovation that occurs around the changes that happen. My expectation is that with brokers needing a return, commissions would return. The problem with commissions in their former implementation is that they also have the same misalignment issues of trying to promote more trading correlated with higher revenues for brokers before there was any payment for order flow. So, this highlighting of payment for order flow is tapping that misalignment issue. It is really not any different from what the State was before payment for order flow in terms of that aspect. The things that worry me about reinstituting those commissions are that there are two things that are less optimal about fixed commissions. First, they don't reflect the true economic value of the underlying trade, so if a large trade and a small trade both build the same fee, that is not an economically-sound approach. Second, I believe fractional shares, which haven't gotten a lot of discussion here, are extremely important and valuable to retail investors. We talk about giving smaller investors access to markets, but we have securities that trade at very high prices. How do we expect those investors to be able to buy an Amazon or another high-price stock? And one way that we can do that is we can offer fractional shares and we do, and as an industry, we have made great strides there. That also allows a retail investor, even with a small portfolio, to rebalance it in ways that are optimal. And so I also worry whether fractional shares would become uneconomical if we removed payment for order flow. Mrs. Wagner. Interesting. Mr. Piwowar, is it possible for payment for order flow to be aligned with the SEC's best execution requirements for broker-dealers when routing orders for retail investors? Mr. Piwowar. Yes, absolutely, and Mr. Grujic brings up excellent points about how payment for order flow can't be looked at in isolation. You need to look at unintended effects of banning it. In fact, the SEC enforces its best execution obligations all the time and is continually looking at these issues. And, in fact, as I pointed out in my opening remarks, one of the exam priorities for the Division of Examinations at the SEC is going to be looking to make sure that brokers are fulfilling their best execution requirements. And as Mr. Grujic points out, in the commission-based world, you just have a different type of time. Mrs. Wagner. Thank you. My time has expired, and I yield back, Madam Chairwoman. Chairwoman Waters. Thank you. The gentleman from California, Mr. Sherman, who is also the Chair of our Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, is now recognized for 5 minutes. Mr. Sherman. American wages are too low. Those opposed to unionization, progressive taxation, and other efforts to put money in the hands of working families have a solution: Tell working families to go play the stock market every day, every hour, and if you don't get rich, if you can't get by, don't demand higher wages because it is really your fault. You are a bad day trader, which is the same as being a bad person. Casinos and lotteries pay high taxes. Real investment in equities finances our economy. It is hard to see how day trading has any ascertainable social benefit. I want to commend Dr. Bogan for pointing out that zero commissions does not mean zero cost to investors. It is correct that it just means zero disclosed costs. The main cost is the spread, the difference between the bid and the ask. And the gamification drives you to this, but also the illusion that Robinhood is able to create that there is no cost to you because there is no commission, and Dr. Bogan points out the gamification, the nudges, the confetti. And I just want to say that if you want an exciting video interface, go to GameStop and buy a video game. It is not a reason to go to Robinhood and buy GameStop. Mr. Kelleher, thank you for pointing out that just saying investors have never had it so good is hardly an answer. I am not going to send a love letter to T-Mobile because my phone is cheaper and better than it was 20 years ago. I expect to get the lion's share of the benefits of technology. During the last hearing we had on this subject, I asked the CEO of Citadel, Ken Griffin, whether the customers of Robinhood get the same trade execution quality as customers of Fidelity, a broker that does not accept payment for order flow. Mr. Griffin twisted, turned, filibustered, and did everything to avoid giving me a straight answer. That is why I want to commend the CEO of perhaps his number-one competitor, Virtu Financial, who went on CNBC and said, ``Overall, though, during the course of a month, we will provide more price improvement to Fidelity than we do to Robinhood. Now, of course, Fidelity charges zero commissions for online trades, but Fidelity does not accept payment for order flow, so clearly we could have no payment for order flow and zero commissions. Further, payment for order flow offered by market makers was banned in the U.K. almost a decade ago, and their markets continue to function well.'' Is there any reason the U.S. shouldn't take a similar step of banning any payment to brokers when they are acting as an agent for directing their order flow? Mr. Kelleher? Mr. Kelleher. No, Congressman Sherman. Thank you for your question. It can be banned and it should be banned. It does not mean that the intermediaries will not be well-compensated. They will still be well-compensated because they compensate it as a spread, and what it would do is if you banned payment for order flow, it would have the additional benefit of driving a lot more trading to the public markets, which now are less liquid and have less trading because so much of it is being skimmed off, about 47 percent. We detail this in Appendix C of my testimony. Forty-seven percent of all the trading is flowing into dark, unregulated, low-investor-protection, non-disclosure markets by these internalizers, who are using legalized kickbacks and payment for order flow to retail brokers like Robinhood. And everybody is getting rich, but that money is coming from somewhere, and where it is coming from is the pockets of retail investors. Mr. Sherman. And I will point out that even if I get a good execution of my trade in one of these dark pools, the country is deprived of information about that trade that would be available if we traded on a market. Mr. Kelleher. Exactly. Mr. Sherman. I will just also point out that we live in a strange world where some people get best execution and some get price improved excess. And I yield back. Chairwoman Waters. The gentleman from Oklahoma, Mr. Lucas, is now recognized for 5 minutes. Mr. Lucas. Thank you, Madam Chairwoman, and I appreciate the opportunity to hear from our witnesses today. Mr. Piwowar, the payment for order flow process was in use when you were a Commissioner at the SEC and well before then. You suggest in your testimony that the SEC should hold a roundtable to discuss payment for order flow and its possible effect on order routing and best execution obligations. Could you explain to us what factors the SEC might weigh in evaluating if any changes should be made to the practice of payment for order flow, based on your experiences? Mr. Piwowar. Yes, thank you, Congressman, for the question. What the SEC would do in that case would be to open up a public forum and to ask for public comment on it. As much as we think that the agency is staffed with experts, and they certainly are, the best available information they have is oftentimes given from market participants and investors. And through that process, what they would do is lay out all of the alternatives, ranging from keeping payment for order flow the same, to, on the other end, banning it and anything in between, either maybe changing the regulations around it, or improving disclosure around it. And then what they would do is, once they have all of those alternatives on the table, explicitly look through the costs and benefits of each, and then choose the appropriate regulatory path forward based upon that. It may end up on one extreme or the other, it may end up somewhere in the middle, or it may end up--things have changed as they are. One of the reasons why I suggested they looked at it now is because the SEC has not done a deep dive on it since we have entered into a zero-commission environment. And so, of course, they should be looking at this in terms of how the market technologies change. Mr. Lucas. Mr. Grujic, you explained in your testimony that separating retail and institutional investment flows largely benefits the retail investor. Could you elaborate on why the retail investor would be worse off if both retail and institutional investors receive the same average price? Mr. Grujic. Yes, I would be happy to. On the one hand, retail flow is much more benign to market makers because of its characteristics. It tends to be smaller orders. They tend to be more dispersed. They tend to be less correlated. There have been some experiences with social media, and gamification, and Reddit that have caused the behavior to be more clumpy. But generally speaking, market makers love payment for overflow, on the one hand, because of how it is unsystematic and small. On the other hand, it has been stated, and I want to speak to this, that it is dump flow, and that is why they make more money on it. The reality is that investors do need to be educated and do need to make better and better investment decisions, but their orders will still be smaller, and because they are a larger constituent of people, there will be more diversity amongst that order flow, and institutional flow is very different. Institutional flow is often sliced up, and big flows that happen in small pieces are very adversarial to a market maker. When I ran high-frequency trading, we could not get access to market makers. We had to go directly to the exchanges. They did not want our flow because they knew that it had certain characteristics to it that were undesirable. Those undesirable characteristics are sometimes just size. Very, very large institutional orders will continue to move markets, and it is very hard for a market maker who needs to buy and sell to be able to handle those sorts of risks. Finally, one thing that payment for order flow does, and it works very well in a retail context, is it decreases the amount of time that a market maker is holding risk in their inventory. So when a market maker tries to make a bid-offer spread, one of the things that is not appreciated about why a market maker wants to pay for order flow is they want to find a larger chance that an order will offset one they have already put into their books. And so for all of these reasons, when you take a look at and run mathematical models, you find that the retail flow is easier to make money on than the institutional flow. And if we combine them by definition, mathematically, the average price will get worse for retail and better for institution? Mr. Lucas. Mr. Blaugrund, in your testimony, you advocate for the SEC to develop a system for publishing the quantity, duration, and other terms for each stock loan. Could you explain how this would benefit the securities lending market? Mr. Blaugrund. Thank you for the question. The concerns that are raised around short selling need to go upstream further and understand that short positions are established with a stock loan, and right now, it is an entirely opaque part of the ecosystem. The Dodd-Frank Act asked the SEC to promulgate rules in this space. We think they have the authority to do so, and it would benefit investors and issuers. Mr. Lucas. I yield back, Madam Chairwoman. Thank you for the indulgence. Chairwoman Waters. Thank you very much. The gentleman from Georgia, Mr. Scott, who is also the Chair of the House Agriculture Committee, is now recognized for 5 minutes. Mr. Scott. Thank you very much, Madam Chairwoman. Ladies and gentlemen, there are great dangers to our financial services system when non-financial, non-verified information posted on social media platforms has more market influence than what is disclosed through our regulated process. And we on this Financial Services Committee have spent years debating the standard of care for financial advisors, for broker-dealers, and for investment advisors. It was a suitability standard for the financial advisors, and then there was a movement for a fiduciary standard, and then the SEC came out with the best interest standard. Now, regardless of where any of us on this Financial Services Committee stand, Democrats or Republicans, with regard to best interest versus fiduciary, we all agree that there should be some sort of standard, which leads me to this current situation we are in today. Where is the standard of care as it applies to Robinhood? This is not the first time that Robinhood, a broker-dealer, whose stated mission is to democratize our financial system, has failed to provide critical protection to its investors, who have suffered greatly as a result. For example, what standard of care is present when an inexperienced trader can take out $30,000 in a home equity loan to make a very speculative trade? How, under standards of care, is this allowed? Should Robinhood question the source of funds when consumers are borrowing money on their credit cards to speculate on risky trades? Should those who post on Reddit or other social media sites be required to close when they stand to benefit from encouraging others to buy stock and drive up the price? Should the social media sites themselves be held to some kind of standard when investment advice is posted on their platforms? Obviously, Dr. Bogan, these are rhetorical questions, and I don't expect everybody on the panel to have time to answer, but here is my point. My point remains that there is a huge hole in our regulatory structure when we are dealing with individual investors using platforms like Robinhood to trade stocks and options, and are relying on sites like Reddit for investment advice and ideas. Is it simply because the platform is considered high-tech that traditional rules put in place to protect the investors do not apply? I think, absolutely not. Dr. Bogan, please give me your thoughts on this predicament that we are in? Ms. Bogan. I will say that you make a very interesting point about the need for thinking about consumer protections, and I think a primary issue that we need to think about is the utilization of these behavioral science techniques to encourage users to trade in a particular direction, and these are new. This is kind of cutting-edge behavioral economics and behavioral finance, and we are just now understanding the power of it. So, I think that it is critically important to regulate and understand these user interfaces where behavioral biases are being exploited. And I want to make a couple of points. I want to say that even knowledge of a bias is insufficient for it to mitigate the behavior of a particular user, and mistakes are made even when it is a large dollar type of transaction. Mr. Scott. Thank you so much. Chairwoman Waters. Thank you. The gentleman from Florida, Mr. Posey, is now recognized for 5 minutes. Mr. Posey. Thank you, Chairwoman Waters and Ranking Member McHenry, for holding this hearing today. As many of my colleagues said at our first hearing on GameStop, our focus should be on an equity market that efficiently allocates corporate capital investment to the best-performing sectors of the economy and provides a powerful framework for risk management to those who take the entrepreneurial risk that makes our economy the best in the world. By and large, our stock markets do achieve these goals. With due credit to the financial regulation that followed the Great Depression, we need to keep in mind that regulation, like any activity, can eventually lead to diminishing returns. We captured the big benefits from rounds of regulation after the Depression, and more modestly since then, but with the exception of maintaining vigilance over the ever-present incentives that the market has to innovate, we should be restrained in our recourse to regulation. The next round of regulation could have far fewer benefits than costs. Common sense must prevail, and trying not to be too redundant, but bottom line, Mr. Piwowar and Mr. Grujic, what lessons have you learned so far from GameStop's short squeeze, and what lessons, if any, should this committee learn? Mr. Piwowar. Thank you, Congressman, for that question. This is just another example of lessons that I have learned throughout my career both in government and in the private sector is that when anything happens in the market, whether it is a flash crash on a global finance basis, or the trading activity here, or the volatility that occurred last March, is that, to use your words, we need constant vigilance in terms of innovation in the markets. The SEC has those tools, and those tools are what is called retrospective review of existing rules. So, as you pointed out, there were statutes that gave the SEC the authority to promulgate rules. The SEC promulgates rules that work at a particular time, for a particular state of markets and technologies, and as markets and technologies change, and as innovators innovate, the SEC, of course, has to revisit those rules. That is why in the majority of my recommendations in my testimony, I suggest that the SEC go back and re-evaluate. When it comes to markets of technologies, it is particularly [inaudible] all the time. So, that is why the SEC has to go back and look at their regulations under the current market. Mr. Posey. Thank you. And, Mr. Grujic, do you want to weigh in? Mr. Grujic. Yes, I would like to add to that that I think, exactly as we just heard, we have to try to innovate in a regulatory environment to a changing world, and this isn't just a social media effect on finance. Social media, the effect on news, the effect on politics, and the effect on finance is both, I think, empowering in that it delivers a lot more ability for people to be heard, and ability for people to hear alternative views, and for data to be synthesized for their benefit. There is a tremendous potential data benefit for people, but we have also seen some real problems. And I think that is inherent in a societal change that has not yet settled into some sort of an equilibrium. It has been on my mind a lot. The Reddit discussions are in many ways quite worrisome. They create volatility in the markets, and volatility is generally bad. It creates all kinds of dislocations. Some of the behaviors are, probably unintentionally, actually market manipulation. When groups of people take action just to move a market price, whether it is a large player or small players, that is undesirable. There isn't a fundamental reason for doing that. At the same time, these are people that, 30 years ago, would have had to have gone to their broker and accepted that the broker knew better, and they would pay a whole bunch of money talking to that person on the phone and had no right to execute their own trades. So the real tradeoff is that to empower people, it also creates situations where that empowerment can lead to actions we didn't anticipate. We really need to think this through, but I believe we need to move forward. I believe the changes we are seeing are in the right direction. I think we do need to start to have a balanced view on which of these are bad for markets, and bad for individuals. The game is cost-benefit. Everything we do to restrict things always has costs, and we just have to carefully weigh that against the benefits of how we are going to handle this new rule. Mr. Posey. Okay. My time is going to expire in 10 seconds, so I yield back. Thank you. Chairwoman Waters. Thank you very much. The gentleman from Texas, Mr. Green, who is also the Chair of our Subcommittee on Oversight and Investigations, is now recognized for 5 minutes. Mr. Green. Thank you very much, Madam Chairwoman, and thank you ever so much for the hearing. Madam Chairwoman, I would like to submit for the record an article styled, ``Trading hot stocks like GameStop seems fun until you look beneath the surface.'' This can be found at NBCNews.com on their website. Chairwoman Waters. Without objection, it is so ordered. Mr. Green. Thank you. I would like to just read some excerpts, if I may. ``Payments for order flow are banned in other countries, and some of those countries would include the United Kingdom, Australia, and Canada.'' I would also like to call to the attention of Ms. Goldstein the following: ``When a firm like Citadel executes orders, it also receives valuable information on the direction of stock it is likely to take. Market maker firms handling flow get to see unfulfilled orders from customers at specified prices the market hasn't hit yet. These include a type of sell order known as a stop-loss that is triggered at a price below the prevailing market price. Knowing how many stop-loss orders are awaiting execution and at what prices signals where the floor is in a stock. It is information any professional trader would cut.'' And it also goes on to indicate in this article, ``It is not trade by trade that matters. It is the aggregate of them all that allows you to figure out which way the market is going.'' With this said, and understanding that Citadel has a disciplinary history totaling up fines of $124 million in recent years for misconduct over a 3-year period, including trading ahead of customers who were forced to pay $34 million more for their trades, and over the same period of time, Citadel realized revenues totaling $13.2 billion--$124 million paid in disciplinary fines, but Citadel had revenues of $13.2 billion. So, Ms. Goldstein, it looks to me like we can have a circumstance where taking the risk of getting caught can be built into your cost of doing business, such that you are willing to take that risk because of the possibility of having such great gains. Would you care to comment on this, please, ma'am? Ms. Goldstein. Congressman Green, thank you for the question. I agree with you completely that too often, I think, violations of the law are treated merely as the cost of doing business, and I think that there are a number of things that we could do to avoid that in the future. One of the things that the regulators could do, for example, is to eliminate no-fault/ no-penalty settlements where they don't require the firm that they have taken the enforcement action against to admit any wrongdoing. Another thing, and this is something I believe that you yourself have looked into in some of your legislation, is to go after not just firms, but individuals. One thing you could do, for example, is create an attestation, either for the CEO or other executives or the board of directors, that there is some particular wrongdoing that they are also responsible for and they may face criminal penalties. And I would just flag that there are two other things that the regulators could look at, and that would be implementing Dodd-Frank Section 954 or 956. Section 956 had a rule proposed that was never implemented, prohibiting incentive-based arrangements that the agencies determine encourage risk taking. So, I think there are a lot of things that the regulators could do to help prevent recidivism by firms. Mr. Green. Thank you. A quick follow up, it seems to me that knowing the direction the market is moving in, having the ability in high-frequency, high-speed trade to enter the market, take advantage of that, knowing that you have clients that are following you that are going to buy into it, gives you the opportunity to literally commit what I see as a fraudulent act, because you know what you are going to be able to pay for it, and you also know by going ahead of your clients, which is not permitted under these circumstances, you now get to buy and sell in such a way as to defraud your clients. Your thoughts? Ms. Goldstein. Congressman, I think it is a good question. Citadel and other market makers undoubtedly have huge amounts of data as a result of the orders that they receive, both the ones that are executed and the ones that are canceled, and I think regulators should look very closely if there have been subsequent violations like the one that you identified where Citadel was, in fact, found to be trading ahead of its customers. I hope they continue to scrutinize them. Mr. Green. Is this a form of self-dealing? You can say yes or no. Ms. Goldstein. I think that is a question for the regulators. Mr. Green. Thank you. Chairwoman Waters. Thank you. The gentleman's time has expired. The gentleman from Missouri, Mr. Luetkemeyer, is now recognized for 5 minutes. Mr. Luetkemeyer. Thank you, Madam Chairwoman. My first question is for Mr. Blaugrund. In my opinion, the market self- corrected itself on multiple occasions throughout the events in January surrounding GameStop. I asked this question of the last witnesses in the last hearing, and I have since talked to lots of folks involved in the financial services world with regards to these issues, and they seem to agree with that. Institutional investors overly shorted GameStop, and retail investors were able to take advantage of those extreme short positions. In addition, Melvin Capital and Robinhood were both in need of capital infusions and found it through the private markets. Mr. Blaugrund, from your seat at the New York Stock Exchange, do you believe the market was largely able to correct itself throughout the events in late January? Mr. Blaugrund. Thank you for the question, Congressman. Certainly, the market infrastructure performed in a very resilient, very stable, very predictable fashion, which I think is critical for investor confidence, and I would agree that there were no systemic issues that were presented. I do think, however, and I think the existence of multiple hearings on the topic suggest, that there was a fascination with what happened with these particular stocks, and that in and of itself is a cause for concern if it erodes investor confidence. So while we have the best markets in the world, there is always an opportunity to further perfect them. Mr. Luetkemeyer. In response to that, yes, it is an unusual situation, but I think my question is, because it wasn't a usual situation, we are having these hearings to see if there was a problem here, if there is something we need to do, was there fraud, was there somebody else doing something illegal or wrong? And yet, the system appeared to work in that the retail investor saw an opportunity to see an overly-shorted stock to bring the pendulum back, so to speak, and the companies that had overly shorted were able then to find money in the markets to shore themselves up. I think it shows that there is some resilience there. And to that point, SEC Commissioner Allison Lee recently wrote in a letter in response to Senator Warren, ``It does appear that our core market infrastructure has proven resilient through these recent events'', as my colleagues and I have noted, ``To date, the Commission staff are not aware of any structural issues resulting from the recent significant volatility in price of certain stocks that indicate a disruption of core market infrastructure.'' So, Mr. Piwowar, would you agree with the statement that the market infrastructure remains resilient? Mr. Piwowar. I would, but I definitely have not seen any problems with the market infrastructure. But as this pointed out, that doesn't mean we can rest and assume that it is going to continue to work in the future. And so, one of the things I put forward is that we should look at whether we want to think about shortening the trade settlement cycle. Mr. Luetkemeyer. I have some questions on that, but to me, as an outsider looking in, when you have a stock shorted 140 percent, to me, that is a problem. You have more stock shorted than there is stock available. Do you think we need to limit the number of shares that can be shorted, or do we limit the number of times a share can be lent to allow this rollover to be able to get to 140 percent to stop this? To me, this will be a way to fix the problem versus other extraneous things. To me, the market actually worked here. People saw an advantage, that somebody was doing something wrong and jumped in and took advantage of it. Now, we have some guys who literally got taken to the market on it. So, would you like to respond to that? Mr. Piwowar. Sure, thank you. I think well before the SEC looks at either limiting short selling or looking at potential limitations there, I agree with Mr. Blaugrund, we need to start to upstream. The short-selling market relies on securities lending. And to your point, the same shares can be lent out multiple times, and you can end up with the odd situation where the short interest exceeds the number of shares that are outstanding. Right now, with that securities lending market, the SEC could go in and gather up information on an ad hoc basis and try to piece together what it looked like in the past, but it doesn't have real-time information. It doesn't have consolidated information. And so, before we start directly looking at limitations on short selling, I think we need to address the opacity issues in the securities lending market, and the SEC does have authority to do that. And so my suggestion would be, first, let's gather the data, and then, based on data, we can make additional policy decisions going forward. Mr. Luetkemeyer. To me, with the number of times that you can lend a share, it seems like you have a situation that is ripe for musical chairs with your money there. My time is up, so I yield back, Madam Chairwoman. Chairwoman Waters. Thank you. The gentleman from Missouri, Mr. Cleaver, who is also the Chair of our Subcommittee on Housing, Community Development, and Insurance, is now recognized for 5 minutes. Mr. Cleaver. Thank you, Madam Chairwoman. I apologize. I am medically indisposed, but I didn't want to miss this hearing, so thank you. Let me associate myself with the comments of the gentleman from Missouri, Mr. Luetkemeyer--the chairwoman has titled this committee hearing today, ``Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide?'' And so, let me ask this to Ms. Goldstein. In that whole scenario of short sellers, retail investors, and social media, when there is a collision, when there is some congestion, who wins and who loses, and is that predetermined? Ms. Goldstein. Congressman Cleaver, thank you for the question. I am also sorry to hear you are indisposed. I hope you feel better soon. I think when all of these forces clash, generally, the largest Wall Street players are typically the ones who come out on top. I used to work at Morgan Stanley. They had incredibly profitable days when there was volatility. The same was true at Merrill Lynch. They just have these certain inherent structural advantages, not just over retail traders, but even over smaller Wall Street players. And I think Citadel Securities, in particular, is becoming a larger and larger force in the marketplace, so it is not just the large banks. But I think Citadel Securities, in this particular situation, has profited quite well because they take up such a large portion of the retail order flow. And I think one of the things that the CEO of Citadel, Ken Griffin, said the last time he came before this committee was that when no one else could provide liquidity, Citadel was there, and I think he was very proud of that. But I think that actually raises questions about Citadel's systemic significance to the financial system. Mr. Cleaver. Okay. Thank you for your response. And this is for any of our panelists, shouldn't Congress be irreversibly committed to ensuring strong investor protections and making sure that we maintain a fair financial system? Are any of the panel members in disagreement with that? Mr. Kelleher. I think you have hit on a bipartisan unanimous view. Mr. Cleaver. Yes, because I agree with every question, every statement that Mr. Luetkemeyer just made, not just because he is from Missouri, but because I think he is right on target. So you understand or you would agree, I believe, that we need to do something, that there is some legislative cure to prevent this from becoming an unfair financial trading system, that we have to protect investors? And if you agree with that, put yourself in my seat. What do you do think we ought to do? Mr. Grujic. I would like to add my thoughts here, if I could. I absolutely agree that we need a framework and regulations that protect society and individuals. I also think there are a couple of things to carefully consider with my theme of feeling, my experience of there being tradeoffs here, is that financial markets are more than just the activities within those markets. They are an information signaling and capital allocation mechanism. We have to be very careful about any frictions we put into the markets. Even if they achieve certain positive results within the context of the structure of the markets, they will decrease information signaling, and they will decrease some of their efficiencies to the wider economy if we are not careful. So, those are some of the costs and benefits. The other side is that technology is very empowering. We should, in our approach to financial markets, look for all kinds of different ways that technology can deliver information, analysis, and empowerment for retail investors. There is a tremendous opportunity here to dig into that to level the playing field, because the last thing I just want to say is, an individual has a very hard time having the same capabilities as an institution, but technology can bring them closer to having those capabilities. Mr. Cleaver. Thank you very much. Thank you, Madam Chairwoman. I yield back the balance of my time. Chairwoman Waters. Thank you. The gentleman from Michigan, Mr. Huizenga, is now recognized for 5 minutes. Mr. Huizenga. Thank you, Madam Chairwoman. And first, without objection, I would like to submit the following articles for the record: A Wall Street Journal article from March 16, 2021, titled, ``Instant Settlement May Not be Gratifying for All''; a Greenwich Associates report titled, ``The Impact of Zero Commissions on Retail Trading and Execution''; and a February 16, 2021, Cadwalader Cabinet memorandum: ``GameStop: Regulators Should Focus Less on `Solving the Problem'; More on `Improving the Situation.''' Chairwoman Waters. Without objection, it is so ordered. Mr. Huizenga. Thank you. I appreciate that. Let me start there. It seems like some of my colleagues would maybe like to return to a pension system where someone else controls the investments, and you get a guaranteed outcome no matter what, versus sort of the more individual responsibility that we now see. Well, that is just not reality. And the ``accredited investor'' definition has been touched on. I have to tell you, I know some accredited investors whom I wouldn't have invest $10 of mine, because these people--I would never call them ``dumb'', but they are ``un-smart.'' And they may have just fallen into it from a family or from whatever else, but these are not people who should be investing their own money, much less my money. And I know some people who are not accredited investors who are wise, who are smart, who are temperate, and to whom I would give my money, and I think they ought to have that ability. And what it seems like we are having here is this debate about whether we are going to have access, and that really is part of it, and gamification has been pointed to and blamed in many ways. I am here watching the Business Channel while we are in the middle of this hearing, and I have to tell you, I counted--there were seven different moving parts on that screen at one point, seven. Ten years ago, that would have given us all a headache. Now, we expect that kind of thing. I have kids who are millennials, and I love movies. I think they ought to go see some of the classics, and 30 minutes into it, they will be saying, ``This is boring. You thought this was exciting, right?'' Expectations have changed. The same is happening with their own investments. We shouldn't be looking at investing as something that only grandma and grandpa do. It should be approachable, and accessible, and safe, and we have to make sure that we are distinguishing between eye candy and malicious intent. And what I am hearing a number of folks talk about is that eye candy equals malicious intent, and that simply isn't the case. So, Mr. Piwowar, I do have a question for you on sort of that subject. While you were at the SEC, and to your knowledge, has the SEC ever regulated advertising style or product delivery platforms? Mr. Piwowar. Thank you, Congressman, for that question. There are certain advertising rules that the SEC has with respect to things like past returns and investment performance, say, in mutual funds and things like that. But to your question directly on one platform itself, no. Mr. Huizenga. Advertisement, right, not too many blinking lights, not too much movement, no confetti. That is not something that has to do with materiality, correct? Mr. Piwowar. That is not something that we looked at when I was at the Commission. Mr. Huizenga. Okay. I have a couple of things I want to hit on. The financial transaction tax (FTT), the payment for order flow versus a rebate system, that maker/taker system, and then also the T+3 going to T+2 to T+1, so let's see if we can get to those. Mr. Grujic, what would be the effect of a financial transaction tax? Mr. Grujic. The benefits would have to be defined. The cost would be that it would increase, obviously, the cost of transacting. That would decrease the number of transactions and the liquidity in the market. That is just an effect of having any kind of a friction. So, you would get some amount of decreased liquidity, some amount of decreased transactions, and some amount of loss of signaling of optimal prices because there would be certain price points at which people wouldn't participate because the tax would price them out. The size of the tax matters. Mr. Huizenga. Okay. Mr. Piwowar, while you were at the SEC, did they ever do a study on this? Mr. Piwowar. On financial transaction taxes? No, but when I was in the White House during the Obama Administration, I was asked to do a memo to some senior advisors, and based upon that memo and some other information, they decided not to pursue a financial transaction tax for the reasons that Mr. Grujic pointed out. Mr. Huizenga. I suggest you trot that back out. With that, I yield back. Thank you. Chairwoman Waters. Thank you. The gentleman from Colorado, Mr. Perlmutter, who is also the Chair of our Subcommittee on Consumer Protection and Financial Institutions, is now recognized for 5 minutes. Mr. Perlmutter. Thank you, Madam Chairwoman. Mr. Huizenga was talking about classic movies, and this whole GameStop thing reminds me of two classics. One is, ``The Sting'', and the other is, ``The Producers.'' In, ``The Sting'', somebody had a little information earlier than the rest of the folks and was able to parlay that into some wins, and, ``The Producers'' was about overselling a position. So, I want to start with overselling a position. Mr. Kelleher, in the previous hearing--and I think Mr. Luetkemeyer was right on point, and I really want to understand this area-- I asked Mr. Plotkin of Melvin Capital whether his firm was ever naked short selling on GameStop stock, and he said, ``No, the systems won't even allow that. That would be impossible for us to do.'' And according to a report from Bloomberg Government, which analyzed the SEC data, $359 million of GameStop shares failed to deliver or be covered, suggesting many of the shares had been borrowed more than once. I think Mr. Plotkin's testimony was truthful, but can you explain what is happening when so many shares fail to deliver? Mr. Kelleher. Sure. Thank you for your question. The current regulation only requires broker-dealers to have a reasonable, or institutions to have a reasonable ground to believe the security can be borrowed so that it can be delivered on the delivery date, so it is a reasonable belief. Now, I don't know about Mr. Plotkin's system, although it sounded like a pretty good system when he said it, which is, he says, unless his firm has identified, in fact, the security and to have a deliverable, it doesn't even allow them to short a position, but that is not actually the law as I understand it. As I understand it, it is a reasonable belief that people can have a lot of reasonable beliefs. And we had massive failures to deliver GameStop stock in January, so not only do we have a short position that exceeds about 140 percent of the available float at the time, but then subsequently, we have a massive failure to deliver those securities at the time of delivery. And I am sure, as Mr. Piwowar said earlier, that the SEC is looking carefully at this, and I would expect their report to provide us with a lot more information. But as of right now, the publicly-available information certainly indicates that there is a very high likelihood of some abusive short selling by somebody. Mr. Perlmutter. Okay. So, let me ask you this. Mr. Luetkemeyer talked about sales, 140 percent of existing shares, how does that happen? Mr. Kelleher. In the securities lending business, it happens because somebody lends a security to somebody, who lends it to somebody else, who lends it to somebody else. It goes by the technical name of, ``rehypothecation.'' And what it does is, you have this cascade effect where you, in fact, have the same security lent out multiple, multiple times, and then, arguably, you have short sellers having a reasonable belief at a period in time that that is the security they could reasonably deliver at the delivery date. The problem is that security has now moved to somebody else, who also has a reasonable belief that the very same security is the one that he or she can deliver. The way the system works now, it is almost a house of cards. I agree with several of the witnesses who said one of the things that needs to be understood and disclosed at a much more granular level is not only the activities of the short sellers, but we need to have greater disclosure and granular knowledge of what is happening in the securities lending market. Mr. Perlmutter. Thank you for that answer. Let me go to something else that is kind of old time. In Colorado, years ago, we faced dealing with penny stocks and manipulation of the market with penny stocks. And what we are dealing with here in GameStop and some of these others is very low-dollar value, initially, kinds of stocks. Is there any limit to when something is delisted? Mr. Piwowar, I don't know. Should GameStop have been on the pink slips at some point? Mr. Piwowar. Thank you, Congressman, for that question. I may also defer to Mr. Blaugrund for this because the choice of listing standards and delisting of stocks, as long as they meet all of the SEC disclosure requirements, based on the price, is up to the exchanges themselves. And they have very nice parent rules on those sorts of things, so I would leave that up to the exchanges to comment on that. Mr. Perlmutter. Thank you, Madam Chairwoman. My time has expired. I yield back. Chairwoman Waters. The gentleman from Ohio, Mr. Stivers, is now recognized for 5 minutes. Mr. Stivers. Thank you, Madam Chairwoman. I appreciate this hearing and a chance to ask some questions. My first question is for Mr. Piwowar. Let's kind of set the table, Mr. Piwowar. Can you sort of help us understand--everybody is talking about protecting consumers and retail investors. In this GameStop example, didn't the retail investors win? Mr. Piwowar. Thank you, Congressman, for that question. We know there was a lot of trading in the security. We know there was a lot of retail-sized orders in the security. We know that for every transaction, it is a zero-sum game, so there is a winner and a loser. I am not sure we have data in terms of who the net winners and losers were. We certainly had a situation where retail investors were empowered with full information about the risks of the securities and full information about the price of the securities at any point in time. And some were probably winners and some were probably losers. Mr. Stivers. Sure, so let's dig in a little more. There are some legitimate issues around this, including settlement time, and T+2 forces some of the broker-dealers, including the folks like Robinhood who have an app, to put up collateral and capital based on the time to settlement. If we were to shorten the settlement to T+1 or not quite instantaneous, but T+ something less than a day, would that have resulted in less capital required by Robinhood, and would it have then resulted in allowing some of those retail investors, whose opportunities to have a buy order were cut off, to keep buying the stock? Mr. Piwowar. In a short answer, yes, and, more importantly, it would have taken additional risks out of the system. The longer the settlement cycle, the more market risk, counterparty risk, liquidity risk that you have from failures to deliver. So, one side of the trade doesn't get the securities or the cash delivered, and maybe the market has moved against them, and there is an adverse selection problem that is there. And then also, systemic risk is taken out of the system to the extent that you have a large number of delivery failures within the clearinghouse across a number of brokers. But as you shorten the trading and settlement cycle, I think, as Mr. Grujic pointed out, you also run the risk of, if you try to get too close to real-time settlement, you potentially have the operational risk. And the reason for that is you have to have multiple systems that have to be operating at exactly the same way. In terms of why are we at T+2, well, I will raise my hand. It was me. When I was acting Chairman of the SEC, I brought us from T+3 to T+2. At that time, 4 years ago, going from 3 to 2 based on cost-benefit analysis was the easy regulatory lay up or slam dunk, whatever analogy you want to use. But we also recognized in our final rule that technologies change, markets change, and it would probably get to the point where we should probably move to T+1, potentially consider real-time settlement, although I think that it is probably a bridge too far. So in the final rule, we directed the staff to conduct a study of potentially moving to T+1, also looking backwards and seeing what were the benefits exactly of T+2, and do an updated cost-benefit analysis to see if it was time to move forward. That study was due to the Commission back in September. I have publicly called for them to release that study. Congressman McHenry and Senator Toomey sent a letter to the SEC to release that study. So, I think this is definitely something they should put out in the public domain and we should have a debate about. Mr. Stivers. And for sure, we are closer to being T+1, maybe not real-time settlement because there are some issues around that, but T+1 would have helped solve this problem. Let's take another step backward, Mr. Piwowar, about retail investors and the fact with some of these new apps and with zero-commission trading and partial-share trading, you are seeing more retail investors have an opportunity to get into the markets. Isn't that a good thing? Mr. Piwowar. Yes, to the extent that their brokers are complying with all of the Federal securities laws, absolutely it is a good thing. And there is often a comparison made to the fact that retail investors, on average, when they trade on their own, maybe overtrade a little bit, or maybe do not do as well as if they were to put their money into passive index funds. Remember, first off, that is an average. There are some investors that do quite well and some that don't do so well. There is also the opportunity for younger Americans to learn that maybe they have an aptitude for trading, or maybe this is a career for them, that they otherwise would not have expected. Maybe 10 years from now, we will be seeing somebody interviewing the top hedge fund manager on CNBC, and they ask, ``Well, how did you learn to trade?'', and the answer is, ``I learned to trade from one of these trading apps and found out I had an aptitude for it.'' So, there are a lot of benefits, and then also, obviously, for saving for retirement. People learn over time from their mistakes and then maybe move into more [inaudible] investments that are better for them. But there is no substitute for learning. Mr. Stivers. I yield back. Chairwoman Waters. Thank you. The gentleman from Connecticut, Mr. Himes, who is also the Chair of our Subcommittee on National Security, International Development and Monetary Policy, is now recognized for 5 minutes. Mr. Himes. Thank you, Madam Chairwoman, and thanks very much to our witnesses. This is a very interesting conversation. And I am really excited to follow up on Mr. Stivers' line of questioning. He asked, ``Didn't retail investors win?'', and Mr. Piwowar had a view of that, and I want to explore that a little bit, because I really think an education here is important, so I want to devote a couple of minutes to that. Are retail investors winning when they trade on any platform? And let me be very clear so that nobody lights themselves on fire right now. I certainly support the right of people to do what they want with their money. I can go to the window behind me and peel out $10 bills and throw them out the window. I can drive 20 minutes and be in a casino where I know I will lose money, a little bit more slowly than throwing it out a window, but assuredly, I will lose money. So, look. We are a free country. People have a right to do what they want. But that is not what we are talking about here. What we are talking about is investing in savings. I keep hearing people say that this is about building wealth and saving for education. So, I want to figure out whether what we are talking about here is saving and investing or whether it is gambling, which was a word that was sort of--somebody cacheted on that word. By the way, I think we may be a little complicit in this. We were all excited--let them trade, let them trade, we said, and we featured Mr. Keith Gill, a retail trader known as, ``Roaring Kitty'', or something, who apparently made some money. But I have reviewed the literature here. There is no ambiguity. I have looked at the academic studies. I won't list them all but DALBAR has one out there, and Barber and Odean. It is very, very clear what happens when retail investors trade a lot. Mr. Kelleher, in terms that the folks watching at home can understand, what happens when retail investors trade a lot? Mr. Kelleher. They lose, and they lose consistently, and they lose because they are paying more for every single one of their orders because we have an order-routing system that is intentionally complex and designed to extract the maximum amount of wealth from the retail investor. Mr. Himes. I get that, Mr. Kelleher--sorry, let me interrupt. Thank you. That is what I thought you would say. But it is not just the structure of the system, right? When you look at the literature, retail investors lose because of a whole series of human biases, because they do not have teams of Ph.D.'s studying the stock that they are buying, right? Mr. Kelleher. Absolutely. It is like saying, let's send the local Little League team up against the New York Yankees or the Boston Red Sox or the L.A. Dodgers. Frankly, you have these institutions that have maximum informational advantage, maximum technological advantage, maximum sophistication. They get to use all of that that they have paid billions for, for the purposes of extracting wealth. Mr. Himes. Right. And Mr. Piwowar is not wrong, correct? There is going to be a distribution curve here. There will be some people who get lucky or who are at the narrow end of the curve or who do win. But on average, retail--again, for the folks at home, the more a retail investor trades, the less well they are going to do, from an investment and savings standpoint, right? There is no ambiguity in the literature about that, is there? Mr. Kelleher. None at all. Mr. Himes. Okay. So this leads me to my second question. Mr. Tenev, who runs Robinhood, annoyed me a little bit, because he told this committee that his customers made $35 billion. Mr. Arnuk, you are a trader. If I told you that last year my portfolio made $3,500, would you be impressed? Mr. Arnuk. No, I wouldn't, and what is really interesting about the individual anecdotes is that everyone has an anecdote. I have a young man who is very close to my family, who called me up saying that on Robinhood, he bought a certain stock much higher, and he asked for my advice on what he should do. And he asked me specifically, ``Should I put out a put?'' And I said, ``Do you even know what a put is? Do you know how to trade options?'' And he said, ``Yes, I am able to trade options.'' I said, ``What is a put?'' He said, ``It is when you put out stock for sale.'' So, the very problem here is that we have a broker-dealer that has abandoned its education and its suitability requirements, and it has done so because it has this massive incentive to do so. Mr. Himes. Thank you. I appreciate that. By the way, do any of the witnesses quibble with the conclusion that I think I have been able to tease out here, that the literature shows that lots of trading by retail investors is really not going to be a wise investment strategy in the aggregate? Do any of the witnesses dispute that? Okay, hearing none, look, let me be clear again here. I believe that Americans should have the right to do with their money what they will, but--and let me close, Mr. Arnuk, since you are an investor, what is a smart strategy for a retail investors who actually want to make money and save and invest successfully? Mr. Arnuk. I don't know if I should answer that. They should add a dollar cost average monthly into Vanguard index funds, and buy and hold. Mr. Himes. Thank you. I yield back the balance of my time. Mr. Sherman. [presiding]. The gentleman's time has expired. I now recognize Mr. Barr from Kentucky. Mr. Barr. Thank you, Mr. Chairman. I have to say, this is an interesting conversation, and what I hear in some of the testimony is, I do detect a paternalistic hostility to what I consider to be the foundation of our free markets, and that foundation is the freedom to take risk. It is paternalistic, because I hear an elitist sentiment that only sophisticated, highly educated, or institutional investors know what they are doing, and governments should intervene to restrict commission- free trading to protect retail investors from themselves, that government knows best and retail investors are simply not smart enough to allocate their own capital for themselves. I think there is hostility, because it sounds like some of the witnesses want to pull risk-taking completely out of the system. Let's be honest, that is code for doing away with free market capitalism. Now, this is the second of what is expected to be a three- hearing episode on this topic. The Majority has concocted a series of villains in this saga. First, it was the hedge funds, who supposedly collaborated and colluded with Robinhood. Then, it was the practice of short selling. Then, it was payment for order flow. Now, it is the so-called gamification of investing, as if creating user-friendly platforms that attract wider swaths of investors is a bad thing. Provided that no securities laws are broken or consumer protections are compromised, it is not the role of Congress or regulators to dictate the constructs of a user experience. If investors like the platform, it will succeed. If they don't, it won't. Mr. Piwowar, how might additional poorly tailored regulations on financial technologies like app-based investment platforms slow the expansion of retail investor participation in the capital markets? Mr. Piwowar. Thank you, Congressman Barr, for that question. One of the concerns about slowing down access for retail investors is the equitable access. What impact will it have on low-income households who are already put at a disadvantage from the accredited investor definition? And if I may just address--I think it was the straw man argument brought up by Congressman Himes, there is not this world where people are putting all of their money into a Robinhood app and trading all of their portfolio all the time, or they are putting all of their money into a Vanguard index fund. What we see is that a lot of investors are very sophisticated. They put some of their money into passive index funds, low cost, and then take a little bit of it and try to create a little bit of [inaudible] and see how good they are at it. And some-- Mr. Barr. Mr. Piwowar, that is a very good point, and I think we shortchange the intelligence of some of these retail investors when we just assume that they are not diversified. Let me ask you another question about payment for order flow. Would restrictions on payment for order flow or an outright ban on payment for order flow impact price improvement for retail investors, and if so, what would that impact be? Mr. Piwowar. The first likely event we are going to see is that we are going to return to commission-based trading. Free- commission trading would go away, again a [inaudible] impact. And to the second point, we are back in a world where there is another conflict of interest, and that is the turning of accounts in order to generate commissions. It has been said that there is an incentive to generate revenue by more trading for payment for order flow. That same incentive exists in a world where you have commission-based trading. And in a prior part of my career, I actually worked as an expert witness on behalf of plaintiffs who were arbitrating against--broker customers [inaudible] arbitration for turning accounts. And so, again, that is another thing that just has to be monitored for compliance. Mr. Barr. I don't have time to ask the question to Mr. Grujic again, but I think his point about forcing a combination of retail and institutional flow will have a negative impact on price improvement for retail investors, and I think that stands repeating, and an unintentional consequence of excessive restrictions on PFOF. Final question, Mr. Piwowar. Mr. Kelleher and some of the other witnesses have argued today that existing best execution requirements do not sufficiently address what they consider to be conflicts of interest associated with payment for order flow. Do you agree, and has payment for order flow in any way cancelled broker-dealers' duties to route customer orders to achieve best execution? Mr. Piwowar. The answer to your last question is no, they have not cancelled that. What I have said in my testimony is that of course the SEC should revisit its best execution rules in light of zero-commission trading. Best execution is a multifactor, multidimensional thing that the SEC looks at, and so markets evolve, technology evolves. Of course, the SEC has to consider that. But there has been no diminishing of it. In fact, the SEC vigorously enforced its best execution rules. Mr. Barr. Thank you. My time has expired. I yield back. Mr. Sherman. Thank you. I ask unanimous consent to put in the record a 2016 report from the Charter Financial Analyst Institute which found that following the UK's ban on payment for order flow in 2012, the portion of retail site trades executing at the best quoted price went up substantially. Without objection, it is so ordered. And I now recognize Mr. Vargas, my colleague from California. Mr. Vargas. Thank you very much, Mr. Chairman, and again, I want to thank all of the witnesses for being here. I heard a speech toward the beginning of this hearing that we Democrats want to, ``enhance inequalities.'' I always find that an amazing and staggering quote when my good friends on the other side of the aisle give a $1.9 trillion tax giveaway to the wealthiest Americans. I always find that interesting, and the other notion that somehow we are paternalistic and we should allow people to trade and be able to do all of these things, which I agree with, but, here we have a defined benefit plan in Congress, where we can't make those decisions. So, I always find that interesting. Now, there seems to be an inherent conflict in this payment for order flow that the retail investors get the worst execution, and I will quote some of the statements made here today: ``It is really a wealth extractor for the few.'' ``Legalized kickbacks coming from retail investors.'' So, Mr. Arnuk, should we prohibit payment for order flow? We just heard something put into the record by my good friend, Congressman Brad Sherman. Should we prohibit it? Mr. Arnuk. Thank you for the question, Congressman. I absolutely believe we should ban payment for order flow in all of its forms. It distorts order routing. It distorts order routing on exchanges. It distorts order routing and best execution in the off-exchange markets as well. Consider this: Robinhood, with its carrot of payment for order flow, has a duty to get best execution, as well as the suitability I referred to earlier. But to get that best execution, they would need to access the 20 percent of New York Stock Exchange midpoint orders that are the 50 percent of the orders and trades that take place in the market that are odd lots, which are predominantly what so many of the Robinhood traders are trading due to their small account size. Yet, why can't Robinhood do that? Because they aren't even connected to any of the exchanges. The only relationships that they have developed are wholesaler relationships where they receive payment for directing orders to high-speed market makers uniquely tooled to profit over those orders. Mr. Vargas. Thank you. Mr. Kelleher, do you disagree with anything that you just heard from Mr. Arnuk? Mr. Kelleher. No. He is exactly right. And, in fact, I would go a little bit further. The Congress doesn't have to ban payment for order flow. The SEC should take the position right now that payment for order flow violates, or facilitates the violation of the best execution duty. We know, for a fact, that today about 47 percent of all trading is happening off exchange, in dark, unregulated markets. None of that flow goes to the public exchanges. And we also know that the trading in those exchanges gets worse execution than they do on the public exchanges. And what has happened over time is this artificial construct of best execution based on what is called the National Best Bid and Offer (NBBO), on the exchanges. So they are claiming, and Mr. Tenev said in the last hearing, ``We got price improvement. We do great for our customers.'' According to what? It is according to the NBBO, but the NBBO only reflects about 40 percent of total orders, in the least liquid market that there is at the time right now, which is the LIT markets. And Mr. Arnuk is right. It doesn't include odd lot and it doesn't include, by the way, hidden trades, also 20 percent of the market. So what they are saying is, we do great things. You can look at this. We do price improvement. We do better than the NBBO. But both of those benchmarks are misleading, if not intentionally false, and the SEC should take the position that that violates the duty of best execution today. Mr. Vargas. Let me ask Ms. Goldstein, would you agree? Ms. Goldstein. Congressman, it is a great question. I think that there are a number of ways to approach this problem. I think you could prohibit payment for order flow. I also think that you could ask that brokers have to pass on payment for order flow to their customers, or allow their customers to opt out of payment for order flow. I don't know that there is a single solution for how we address this, but I do think that it needs to be addressed, in some way. Mr. Vargas. Let me go to Mr. Blaugrund. You represent an exchange. Should we prohibit it? Mr. Blaugrund. I think there is a real public interest in having the broadest set of market participants interact with one another from an order flow perspective. That being said, I think the SEC has announced their plans to study the question of whether payment for order flow is consistent with best execution obligations, and we look forward to reviewing their findings. Mr. Vargas. I yield back. Mr. Sherman. I see our chairwoman has returned, and I am happy to return the gavel to her. Madam Chairwoman? Chairwoman Waters. One moment please. Who is up next, Mr. Chairman? Mr. Sherman. It has been suggested to me, at the request of one of our witnesses, that we take a 5-minute break. We can do that or we can move on. Chairwoman Waters. Without objection, let us take a 5- minute break. Thank you. [brief recess] Mr. Sherman. [presiding]. The Chair has asked me to continue to preside, and I believe our break is over. I now recognize Mr. Williams from Texas. Mr. Williams of Texas. Thank you, Mr. Chairman. I am very concerned that there is going to be a Federal overreaction to this whole GameStop saga. CBOE's Volatility Index, better known as the VIX, has historically been used to gauge fear in our capital markets. When this number is approaching record highs, people are uncertain on the direction of how that market will move, and investors, quite frankly, get nervous. Just one year ago, in March 2020, the VIX reached an all- time high of 82, and the Dow Jones proceeded to crash by 26 percent. On January 28th, the day that we have now dedicated two full committee hearings towards, and with more plans in the coming months, the VIX was in the 30s and the change in the overall market barely even registered. So, while a few stocks such as GameStop may have seen some historic individual metrics in January, none of these individual securities appear to have posed a systemic risk to the markets as a whole. Rather than pursuing radical changes to our capital market structure, we should be looking at the very tailored issue that prevented retail investors from placing trades on securities that day, when they wanted to. Mr. Piwowar, can you discuss your views about how changes to market structure should be done, and if it makes sense for Congress to step in now instead of waiting for the SEC to study that issue and go through a thorough rulemaking process with a cost-benefit analysis? Mr. Piwowar. Thank you, Congressman, for that question. Having served both on the staff of the Senate Banking Committee, and at the Commission, I feel like I can address this question. Because markets and technologies change all the time, I believe the SEC is better-positioned to look at these changes and put it through their cost-benefit analysis. The SEC is bound by statute, by a number of statutes, to take into account the costs and benefits of various alternatives that are out there, including the baseline scenario of what the existing situation is, for example, shortening the trade settlement cycle. The current situation is T+1, and they could evaluate that through the lens of cost-benefit analysis and say, well, what would be the relative cost and benefits of going to--we are at T+2, what would be the relative cost and benefit of going to T+1 or T-zero, and explicitly look at this. It's the same thing in payment for order flow. They could look at likely effects. They can get the benefit from market participants, investors, and academics, and take all of that information and address their regulations accordingly, within the broad context of the Federal securities laws. That does not mean Congress doesn't have a role here. I think you all have a very important role here. To the extent that you think any of these market structure or market infrastructure policy changes should be prioritized by the Commission, I believe that would be an important role for this committee to try to come together and find consensus on what are the two, three, or four most important areas for the SEC to focus on. Because, as you know, you have given them a broad mission, with broad authorities, sometimes, for prioritizing those. Mr. Williams of Texas. Okay. Thank you for that. [Inaudible] Americans be able to put some of their hard-earned paychecks in the stock market and have the same ability to succeed as any large institutional investor. Unfortunately, many Americans believe that the system will always be rigged against them and they have no way to compete against the big players, after watching this situation play out. Whether that view is warranted or not, we need to be working to continue to empower the retail investors. So, Mr. Blaugrund, I know there have been a lot of conversations around access to market data. Can you talk about the New York Stock Exchange and what it is doing to get better market data into the hands of the average American looking to make more informed investment decisions? Mr. Blaugrund. Thank you for the question, Congressman. NYSE publishes market data through the Consolidated Tape, which is an industrywide utility, and also through proprietary market data products. All of these products are filed with the SEC, available broadly, and according to a standard rate card. In general, the retail community consumes market data through the Consolidated Tape, which has largely kept prices steady for many years. The retail investor typically has their market data paid for by the broker, and it costs about $1 a month. Market data is now consolidated in a matter of about a dozen microseconds by NYSE and NASDAQ systems, and then rebroadcast to the retail community. Mr. Williams of Texas. Thank you for that answer, and, Mr. Chairman, I yield back. Mr. Sherman. Thank you. Mr. Lawson of Florida is now recognized. Mr. Lawson. Thank you, Mr. Chairman, and Chairwoman Waters, and I welcome all of the members to this panel today. This question I have is for the whole panel. Citadel Securities reportedly handles almost as much trading volume as NASDAQ. Further, Citadel [inaudible] traded along with the market maker were two financial account products, more of the overall equity market than the New York Stock Exchange. With respect to Citadel, some have raised concerns about a single market maker managing such a large volume of retail order flow, and what that means in terms of pricing. Why does Citadel have such dominance in financial markets that it imposes a systemic risk to our entire U.S. financial system? Can you all speak more on these concerns? Mr. Piwowar. Congressman, this is Mike Piwowar. Having served as acting Chairman and sat on the Financial Stability Oversight Council and met with the other principals and the deputies and looked at sources of systemic risk, I don't have any concerns that the Citadel market-making business poses any systemic risk to the system, and the reason for that is even though they are a dominant player right now, we have to look at what would be the scenario if they failed. And the concerns that we have for systemic risk ultimately go to cascading failures, and what we really ultimately worry about is whether the banks fail, because they are [inaudible]. In the case of Citadel Securities, if their market-making function were to cease, let's say, tomorrow, what would we see? Well, we would see that there is an incredible amount of competition within that industry among market makers. And we would see that those market makers would come in and compete very quickly to capture that market share, and due to technology, they would be able to scale up very quickly at low cost in order to do that. So, I don't see any systemic problems with the Citadel-- Ms. Goldstein. Congressman Lawson, may I offer a differing view? Mr. Lawson. Go ahead. Ms. Goldstein. I believe that there are a lot of questions about systemic risk of Citadel overall and Citadel Securities. One thing that is important to do would be to look back a decade. Citadel Securities actually tried to become an investment bank in 2008, and one of the things that reports and analysts said at the time is that they had certain regulatory advantages over the large U.S. banks, because as a hedge fund and a market maker, they are not overseen by the Federal Reserve, and so there was no one looking at the holistic risk across all of Citadel's firms. They gave up on their dream of becoming an investment bank in 2011, and they shifted to retail trading, which people on Wall Street widely see as easier to profit from, quite frankly. Whether that is right or wrong, that is the perception on Wall Street. And Mr. Griffin, the CEO of Citadel, said, in his written testimony to this committee that, ``When no one else was able to provide liquidity, Citadel was there'', and he has really talked up their dominance in the marketplace. And so, I don't know that it is an open-and-shut case. I do think that there are risks of interconnection. I think there are questions about liquidity, and I do think that the FSOC should investigate it. Mr. Grujic. I would like to add that as a market participant, I see the market makers as highly competitive and there is excess capacity, and I think the removal of Citadel, even though the largest, would have very little impact as someone looking to execute in the financial markets. And also, liquidity is not a point in time; it is a continuum. So when Citadel makes statements like, they were the only ones there, perhaps they were the only ones there at the very, very best price, but an incrementally worse price was available from other market makers. So, I would concur with Mr. Piwowar that the impact of Citadel stopping trading tomorrow would be minimal to the execution quality we receive. Mr. Kelleher. I don't think there is any circumstance under which Citadel Securities is not a systemically significant firm, and FSOC should investigate it. In addition, the SEC should not exclude companies like Citadel from Regulation SCI (Systems Compliance and Integrity), which is supposed to have resilient infrastructure. And the SEC inexplicably excluded broker-dealers like Citadel from that regulation and those requirements. So, there is a risk on the infrastructure side, and there is a risk on the systemic institution side. For anybody to say that if Citadel shut down today, even for a day, that means 26 percent of all U.S. equities volume, in 8,900 listed securities, would stop. It executes 47 percent of all U.S. listed retail volume. It represents 99 percent of the traded volume of 3,000 listed options. To say that the system would work perfectly fine if all that evaporated today and competitors came into the market, that may ultimately happen, but until it ultimately happens, you are going to have a systemic event, and to deny that is to deny reality. Mr. Lawson. Thank you. Mr. Sherman. The gentleman's time has expired. I now happily return the gavel to our chairwoman. Chairwoman Waters. The gentleman from Arkansas, Mr. Hill, is now recognized for 5 minutes. Mr. Hill. Thank you, Madam Chairwoman, and let me say that both of the hearings that you have convened on this important topic have had excellent witnesses, and the hearing discussions are among the best I have seen in my service in Congress. I would first like to ask unanimous consent to insert two letters for the record. The first is a March 19, 2021, letter from a coalition of organizations interested in our tax system, in opposition to the imposition of a financial transaction tax. And the second letter is dated March 17th, from the Security Traders Association, also in opposition to a securities transaction tax. Chairwoman Waters. Without objection, it is so ordered. Mr. Hill. Thank you, Madam Chairwoman. This has been, as I said, such a very interesting discussion. I really appreciate the extensive discussion we had on securities lending. I think the committee took away good information there that we can ask the Commission to follow up on. And I think we have had a lot of discussion about best execution and the obligations under best execution, that it is a mandate on the part of all market participants, and that the SEC, in their exam process in this current period, will be looking at that as a special exam focus. Those are helpful points. Dr. Piwowar, there were a couple of points made that I thought I would get your comments on. Mr. Sherman asked about the ultimate cost, which, of course, in a retail trade is the spread between the bid and the ask. There is no doubt about that in a non-commission world. Does the competition among market makers, under payment for order flow or not, really improve that spread and thus lower the cost to retail investors? Mr. Piwowar. Thank you, Congressman, for that question. We do have some insight into that. As some people have mentioned, there is some transparency on this issue, so the SEC requires each of the market makers to file an execution quality report in the language of the SEC Rule 605 reports. So we can see, for example, Citadel is the one that comes up--we can see for them, or any other market maker has to put out their statistics, and we can look at things like the speed of execution for various order types and what is called price improvement for those various order types. But we can actually see, measured against the NASDAQ offer whether, in fact, they are offering net price improvement, whether they are executing at the spread or whether they are executing outside the spread. Mr. Hill. Yes, that is helpful. And also, Mr. Sherman talked about the LIT market, those quotes that go across an exchange, but as noted by our friend from the New York Stock Exchange this morning, all quotes are presented at retail in milliseconds, whether they took place off the exchange or on the exchange. Is that correct? Mr. Piwowar. That is correct. Mr. Hill. Yes. Thank you. I also was concerned--my friend, Mr. Green, from Texas, made some comments about Citadel, and had obviously some discussion just a moment ago about Citadel Securities. And I was curious as to your views about the separation of businesses owned by Citadel. Mr. Green's allegation--and I do not want to put words in his mouth--is that somehow, Citadel could use the information that they garner from being a market maker, payment for order flow, understanding the stop-loss position, and a number of names, and somehow prey on that information over at Citadel's hedge fund. Really, I found that shocking. That is against the law, is it not, Dr. Piwowar? Mr. Piwowar. Absolutely, it is against the law. The SEC has put in place a number of restrictions, and so, effectively, the hedge funds and securities market making divisions at Citadel have to operate separately. The SEC regularly examines to make sure that they have put in place proper protections in there, and if they find that any firm is violating those, they will vigorously enforce them. Mr. Hill. Yes. Thank you. Mr. Grujic, I really appreciated your testimony. I really enjoyed learning about your company today. We had a lot of discussion about the sales practices of Robinhood in the previous hearing. Quickly, could you address your policies on low-dollar stocks, not penny stocks, but even if they are exchange-listed, what your position is there and how you qualify your investors for either options or margin on your platform. Mr. Grujic. We don't yet offer options on our platform. I have a lot of experience trading options and we are thinking through how to best do that. We have taken note of the issues that have occurred at Robinhood and general [inaudible] with retail investors accessing options. Mr. Hill. Thank you, Madam Chairwoman. I may submit some additional questions for the record. I want to thank the panel for their participation, and I yield back. Chairwoman Waters. Thank you. The gentlewoman from Iowa, Mrs. Axne, is now recognized for 5 minutes. Mrs. Axne. Thank you, Madam Chairwoman, and thank you, witnesses, for being here today. My husband and I have a digital design firm, so one of the areas that I have been focused on in regard to this is some of the newer brokers having designed their platforms and how they have done that. Dr. Bogan, you have done some tremendous research in behavioral finance. Just a quick question to start, can app design influence what decisions people using that app make? Ms. Bogan. Thank you for the question. Absolutely. App design and the way the platform is designed and the user interface can influence the type of decisions that a retail investor makes, almost on an unconscious level. And I want to make a clear point, there is a difference between retail investor access, which is great and provided by appropriations; retail investor environment, which kind of is ease of use; and retail investor manipulation, in that there are certain behavioral science techniques that are used to trigger investors to behave in a particular way that may not be in their best interest. Mrs. Axne. And that is why Robinhood has behavioral researchers, correct? Ms. Bogan. I can't speak to why they have behavioral researchers, but I can say that some of the features of their platform have been shown in research to elicit particular behaviors, like more trading. For example, they have a list of kind of the most popularly traded stocks. That brings attention to particular types of stocks, and we know from the research that just having attention to particular stocks increases trading in those stocks, whether or not it is in the best interest of the investor to do so. Mrs. Axne. So as you mentioned, it increases trading, and do you think that encourages savings and investment or do you think that just encourages greater tendency towards more trades? Ms. Bogan. Yes, there is a difference between investment and trading. Just trading multiple times a day for trading's sake, the research is very clear that is never in the best interest of a household. Buy and hold is the conventional wisdom. And so, buying is fine, but this multiple trading and turning portfolios has never been shown to be beneficial to a retail investor. Mrs. Axne. I appreciate that. I am especially concerned about this given the fact that Robinhood's incentives are so heavily weighted on making sure that their users trade more, because that is what puts money in their pocket. Mr. Arnuk, Robinhood has said that if its payment for market makers like Citadel is based on a percentage of bid-ask spread, can you explain why that is different from other firms and how that incentivizes Robinhood to have their users trade wider stocks or even riskier products, like options? Mr. Arnuk. Thank you for the question. I really appreciate it. The first thing we should notice is that 92 percent of Robinhood users' trades are outside of the S&P 500, which is to say that they are in stocks where the spreads are 5 times as wide as they are for the S&P 500. These are wide-spread stocks. At some point, in late 2019, Robinhood understood this and renegotiated the way they collect payment for order flow from the other market makers. It has always been a fixed mil per share, in other words, 15 mils per share, or 20 mils per share. That is how it has always been done. But presumably because Robinhood noticed the trading patterns of its users, they negotiated to instead receive a percentage of the spread. So, this is an amazing misalignment of interest. The Robinhood trader wants the stocks they trade to have the smallest spread as possible, the market maker who is buying the orders wants the spreads to be as wide as possible, and Robinhood, their agent, the broker, wants their spreads to be as wide as possible. I think that is fantastic in a negative way. Mrs. Axne. Massachusetts found that 68 percent of Robinhood's options-approved users in the Commonwealth had limited or no user experience. When you talk about the options and the risk of the spread there, what do you think is going to be the outcome for 99 percent of these users who don't have the experience and getting into this type of market? Mr. Arnuk. It is going to be unfavorable, and in the end, if you look at the average account size across different retail trading platforms, the average account size at E*TRADE may be $250,000. At TD Ameritrade, it is $150,000 or $110,000. At Robinhood, it is $5,000. And they are outsized trading options. And while spreads in stocks are wide--I yield back. Mrs. Axne. Thank you so much. Chairwoman Waters. Thank you. The gentleman from New York, Mr. Zeldin, is now recognized for 5 minutes. Mr. Zeldin. Thank you to the witnesses for being here, and to Chairwoman Waters and Ranking Member McHenry for holding today's hearing. 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 walks of life, and industries, so having access to cost-efficient investing is crucial. Mr. Piwowar, a lot of my constituents were concerned with the inability to buy certain stocks when some broker-dealers placed limits on trading those stocks. And the main reason why this happened is because many broker-dealers had to post additional collateral to comply with capital requirements at clearinghouses. You have written about shortening the trade settlement period to both increase efficiency and lower the cost of investing. Can you speak a little bit more to how using technology to shorten the trade settlement period could benefit retail investors and limit the potential for broker-dealers to have to impose restrictions on certain trades? Mr. Piwowar. Thank you, Congressman, for that question. Yes, the shorter the trade settlement cycle--a couple of things. One, investors get access to their cash sooner, or their securities; and two, the less margin that brokers have to post at the Depository Trust & Clearing Corporation (DTCC) in order to guard against failures to deliver. So, it takes a number of risks out of the system, as I mentioned, counterparty risk, market risk, credit risk, and liquidity risk, as well as systemic risk of cascading list of failure. Shortening the settlement cycle would provide those benefits. Again, going to real time, it possibly increases operational risk to make sure everything works correctly. So, what we need to do is find the right balance. Mr. Zeldin. Thank you. It is also important that the data privacy for these investors is protected against any potential vulnerabilities. At the first hearing in this series, back in February, I asked Ms. Schulp from the Cato Institute whether we should be concerned with companies with ties to the Chinese Communist Party (CCP) investing in broker-dealers operating in the United States. She responded that it is a potential national security concern and that the rules that the broker- dealers have to comply with regarding user data should be applied equally to broker-dealers, no matter whether the parent company is a U.S. or foreign company. I have been concerned for some time, in general, with the sharing of U.S. individual user data with the Chinese Communist Party. I sent a letter, for example, to the Treasury Department in October 2019, expressing concern with the potential sharing of U.S. user information by TikTok to its parent company, ByteDance, and asked for a CFIUS review. Additionally, yesterday I urged Treasury and Commerce to take immediate regulatory action against companies with ties to the CCP, that have the capability to acquire Americans' biodata, specifically by sending letters to Treasury Secretary Yellen, urging her to direct the Committee on Foreign Investment in the United States (CFIUS) to reassess the Chinese company BGI's acquisition of Complete Genomics, and to acting Secretary of Commerce Wynn Coggins, urging her to place all of BGI's subsidiaries on the Department's entity list. 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. I remain concerned that broker-dealer trading appropriations that are subsidiaries of Chinese companies with ties to the CCP like Weibo, which has significant investment from Xiaomi, have not received enough regulatory scrutiny, and cause data privacy concerns for U.S. retail investors. Mr. Piwowar, I think these issues are particularly timely to discuss in light of the upcoming U.S.-China meeting in Alaska. This isn't the first time Chinese investors have tried to buy into our capital markets. You were an SEC Commissioner in 2018, when the Commission rejected the proposed acquisition of the Chicago Stock Exchange by a Chinese-led group of investors. Can you speak a little to the concerns the SEC had at that time? Mr. Piwowar. Yes. Thank you, Congressman. As you mentioned, there was a Chinese-led investor group that wanted to buy the Chicago Stock Exchange. It had passed CFIUS review and it came to the Commission, and under our State, there are certain prohibitions and limitations in terms of ownership of the exchanges, to make sure that we are protecting investors and that they are fulfilling all of their obligations. All we did was simply ask questions about who their investors were, and very quickly, some of those investors fell away, and in other cases, they were not able to provide us with answers that made us comfortable that they would, in fact, be able to fulfill their duties under the Federal securities laws. So, that was the basis for us rejecting that application. Mr. Zeldin. Thank you. I yield back. Chairwoman Waters. Thank you. The gentleman from Illinois, Mr. Casten, is now recognized for 5 minutes. Mr. Casten. Thank you, Madam Chairwoman, and to all of our witnesses, I want to echo what my friend, Mr. Hill, said. This has really been an exceptional hearing. I have been learning a ton. Mr. Arnuk, you made a comment in your opening remarks that really struck me, and I want to make sure I understood this right, if I scribbled it down right. You said the spreads become narrower when Robinhood's servers go down. That is a heck of a statement. Can you explain that in a little more detail, and to the degree you have any confidence on whether that is a correlation or a causality? Mr. Arnuk. Thank you for the question, Congressman. When Robinhood would have a technology outage, those retail orders would not go to off-exchange venues and would come back to the exchanges. And when those orders came to the exchanges, not surprisingly, more order flow migrating to the exchanges with narrow spreads. First of all, that meant that the retail investors who are trading through any other app are getting narrower spreads and better price improvement and an improved experience and less cost, but it also means that the rest of the market--the institutions, the pension funds, the mutual funds--that really represent 90 percent of the long-term investors, are able to interact with that order flow on the exchanges, and that order flow, for the same reasons that the market makers want to monopolize it just for themselves, when it is participating in a diverse environment on a public sunlit exchange, the best outcome accrues to everybody, with those narrower spreads and less toxicity on the exchange. Mr. Casten. That is really helpful, and as I am sure you saw, last month when Robinhood's CEO Vlad Tenev testified before us, he said that Robinhood customers received more than $1 billion in price improvement in the first half of 2020. Can you just tell us briefly, is price improvement a proxy for best execution? Mr. Arnuk. No, not at all. Thank you, again. Price improvement is an arbitrary calculation. It is based on a construct that we created, the National Best Bid and Offer (NBBO). It does not include odd lots; 50 percent of the orders and trades on the exchanges are odd lots, and the NBBO does not include those, and those odd lots are in between the spreads. It doesn't take into account hidden orders on the exchange. Exchanges have hidden midpoint orders. It doesn't take into account dark-pool midpoint orders. There is a whole mess of liquidity that demonstrates that the best available price is certainly not the NBBO. So to say that, I price-improved the NBBO by X, I don't care--$1 billion, $2 billion, $3 billion in aggregate, it rings false. It is not the truth. Mr. Casten. I want to then get to a more general question, and it is not just about Robinhood, but again, that is why we are here. As you mentioned in your exchange with Mrs. Axne, it was really remarkable, about the trajectory of Robinhood shifting from flat rates to a percent of the spread payments for their payment for order flow. But in his testimony, Mr. Tenev not only acknowledged that point but said that in their options market--this may be true in equities as well--but he said in their options business, they categorically do not route trades to anyone with whom they do not have a payment for order flow agreement. So without speaking to Robinhood generally, if you are a brokerage that is earning your revenue as a percent of the spread, and you are only routing trades to people with whom you earn payment for order flow, is there any universe where that is consistent with actually fulfilling your best execution obligations? Mr. Arnuk. Absolutely not. They have no mechanisms to trade directly on any of the numerous venues that exist to trade. Dark pools exchanges, these cost money, and apparently Robinhood is more interested in the revenue side of their business model than actually incurring costs where they can fulfill their duties to seek best execution, the best prices everywhere. Mr. Casten. Mr. Kelleher, I have 30 seconds left. Is there anything you would like to add to what Mr. Arnuk has said? Mr. Kelleher. No. He is exactly right. Frankly, the SEC could consider taking fraudulent action for people who claim price improvement off of NBBO, because it is, at best, misleading, if not a fraudulent claim, and knowingly so. Mr. Casten. Thank you, and I yield back. Chairwoman Waters. Thank you. The gentleman from Georgia. Mr. Loudermilk, is now recognized for 5 minutes. Mr. Loudermilk. Thank you, Madam Chairwoman. I appreciate all of the witnesses being here. And I want to associate myself with Mr. Hill's comment earlier, which was regarding the content and the discussion that we have been having in these two hearings. I think it has been very informative. It has been very interesting, the content, and I think these are discussions that we should be having. Now, with that said, in the first hearing on this topic I raised concerns about the fact that some of my colleagues on the other side of the aisle were using this situation with GameStop as an opportunity to push for more regulations, even before we had all the information in. Now it is ironic, because regulation is exactly what paused the trading with Robinhood in the first place. As I mentioned that, the chairwoman responded and said that no one is calling for more regulations at that time, but I had already known at the time that some had been asking for regulations, and obviously we live in a political era to where a crisis can't go without using it to do something. And as we know, Elizabeth Warren and others are using this issue to demand a laundry list of new regulations on options trading, payment for order flow, short selling, even a devastating financial transaction tax that would require the average person to work 2\1/2\ years longer so they can recover. We all know in a free market system, which truly investing is within that free market, especially when you bring in the average consumer, they know that there is a risk involved. The greater the potential profit that you can make, or the return, the greater the risk you are going to have. That is just the basis of the market, any free market system. And so we have to be very cautious as we are going forward in trying to make a risk-free environment with high returns. It just doesn't work in that environment. In fact, I know of several people who have never been involved in the stock market, but they took their stimulus money, as several were working, and they said, ``Look, I don't need the stimulus money, but I know that eventually the government is going to tax it back from me, so I will, at least, start making some money. I can't make any money by investing in a savings account because interest rates are so low. Money markets are useless.'' So they have opened these trading accounts, and they are actually using some of the stimulus money to invest. And they are concerned about some of what is going on. These calls for more regulation, I think are ill-advised and premature, for multiple reasons. The witnesses at the first hearing said the markets are not broken, and the SEC Chair and SEC Commissioners have said that core market infrastructure has been resilient through all of this. What's more, the SEC is looking into these events, and so far has not indicated that there was market manipulation. Adding more regulations would now be like a judge handing down a sentence before any charges are actually filed. Mr. Piwowar, can you describe how options trading, payment for order flow, and short selling are already regulated by the SEC and other agencies? Mr. Piwowar. Yes. No, they are highly regulated. Short selling, there are a number of requirements that--I will take them one at a time. Short selling--the SEC has done a number of things to prohibit what is called abusive short selling, the illegal short selling, things like naked short selling, not locating or borrowing the securities before short selling. Regulation SHO, which was passed in 2004, and putting on not only obligations to make sure you deliver those shares but actually putting on the penalties for those, to the brokers themselves, not to the individual. So, it was an interesting way they dealt with that, and the number of fails to deliver went way down. Now again, that was 17 years ago. Is that a rule that the SEC should possibly revisit? Absolutely, they should be doing that. Options trading also is highly regulated by the SEC. There is a dedicated team within the Division of Trading and Markets that oversees just the options market, and the Examinations and Enforcement teams also have individuals who monitor for noncompliance and wrongdoing in those markets. And I apologize. Was there a third one that you asked about? Mr. Loudermilk. It was the short selling and order flow, payment for order flow. Mr. Piwowar. Payment for order flow. Yes, that is another one where the SEC has regulations on that. We talked extensively about the best execution obligations. Of course, they should revisit whether they are working well in here. Of course, they should revisit the transparency of payment for order flow. Some of the witnesses have talked about the fact that some of the measures of price improvement in the 605 statistics are not perfect. Rather than just throw them out and say we can't use them, I would take a different approach. Why don't we make them more transparent and more useful for investors so that we can actually see how much improvement is actually being given in the markets? Mr. Loudermilk. My time is up. I will submit the other questions for the record, and I yield back. Chairwoman Waters. Thank you very much. The gentlewoman from Massachusetts, Ms. Pressley, is now recognized for 5 minutes. Ms. Pressley. Thank you, Madam Chairwoman, for convening this hearing, and I thank all of the witnesses for joining us here today. I represent the Massachusetts Seventh Congressional District, which, like all districts across the country, is reeling from the economic impacts of this pandemic. In Massachusetts, since February 2020, over 200,000 fewer people are employed, children in 12 percent of households do not have enough food to eat, and many of the smallest businesses have permanently shuttered their doors. Research shows that following the 2008 recession, gambling in cheap lottery tickets increased among those who continued struggling financially. In this economic recovery, I am concerned that Robinhood has positioned itself well to take advantage of this trend but with much higher stakes from my lowest-income constituents. Robinhood boasted the platform is democratizing finance for the benefit of everyday Americans, positioning itself as the great equalizer of capitalism. Meanwhile, it is running targeted advertisements on social media that say, ``Millions of people will soon begin receiving stimulus checks. As you consider whether to spend, pay down debt, or save, we want you to be prepared,'' with a link back to their own blog, which says that, ``Never investing at all is a missed opportunity.'' Many of my constituents now just have a $1,400 stimulus, or what I call survival check, in their bank account to get them through months of expenses, and are positioned to lose hundreds of thousands of dollars in options trading if they take that gamble. Ms. Goldstein, what do you make of these targeted advertisements under the guise of promoting financial literacy? Is Robinhood really increasing its own profits by attracting new users after many existing users left the platform due to the trading halt in GameStop? Ms. Goldstein. Congresswoman, I have seen the same advertisements you are talking about. I keep getting them over and over again, in fact. And I do think that Robinhood--there was a survey that was done by Fortune in the wake of Robinhood freezing trading in GameStop and other main stock names, and they found that about half of their users were considering leaving Robinhood for another brokerage in the wake of that. So, I absolutely think that Robinhood is looking to attract a new user base that hasn't previously perhaps participated in the financial markets, to account for what I suspect is a large amount of users that they lost as a result of freezing trading in GameStop. And I should just flag that I disagree with the assessment that regulation is the reason that Robinhood froze trading or that the clearinghouse capital requirements are the reason. Most major brokerages have very serious, dedicated teams that evaluate the risk and the capital that they need to put forward every day, and I suspect it may be Robinhood's inability to manage its own risk and not the fault of any regulation. Ms. Pressley. Okay. Providing an opportunity for people to make informed investments in part of their financial planning is not a bad thing. However, targeting the vulnerable Americans who are receiving Federal relief during a pandemic suddenly is. And this is not the solution to their hardship. Ms. Goldstein, Robinhood proposes that turning everyday Americans into day traders is democratizing finance, but you have written that the real solution to breaking the power of finance is to rebalance the recession-wracked economy. What does democratizing the economy really look like? Ms. Goldstein. Congresswoman, I think it means that we need to rebalance our economy so everybody isn't struggling or looking for the next gold rush scheme in order to pay their rent if they are facing eviction. I think you have been a real leader in this space, and so has the chairwoman and so has Representative Adams and many others who have called on the President to cancel student debts through executive authority. I think there are a lot of different ways that we can tackle this problem. But I think one thing that we should think about, and you all, as policymakers, can think about, is there is no way to save for retirement right now that doesn't give a cut to Wall Street. Unless you buy a savings bond or unless you are rich enough to purchase a municipal bond, we always have to give a cut to Wall Street if we want to save for our future. And 47 percent of Americans have no exposure whatsoever to the stock market, and so they are not going to be able to use Robinhood to try and make some wealth for themselves. And I think we need to come up with other solutions in order to figure out how we can build wealth, and there are a lot of potential solutions. The American Rescue Plan is a part of it, but I think we need to do much more, and I thank you for your leadership on the resolution on cancelling student debt. Ms. Pressley. Thank you. I have tons of ideas: canceling student debt; Federal job guarantee; baby bonds. One thing is for sure, we need to be investing in people and in jobs, and thinking about transformational, bold policies, and that is what I will continue to push for to close the wealth gap and to create opportunities in our communities. Thank you for being here today. Chairwoman Waters. Thank you very much. The gentlelady yields back. The gentleman from West Virginia, Mr. Mooney, is now recognized for 5 minutes. Mr. Mooney. Thank you, Madam Chairwoman. In the aftermath of the market volatility in January, acting Chair of the SEC, Allison Herren Lee, released a statement saying that the SEC would, ``act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by Federal securities laws.'' So my question is for Mr. Piwowar. Will you discuss the types of fraud that are currently prohibited and detail the breadth of securities laws that govern manipulation and false statements? Mr. Piwowar. Thank you, Congressman, for that. I am not sure I can address all of them in 5 minutes but I will maybe give you an overview of some of them. One is you cannot trade on material nonpublic information in the breach of a fiduciary duty. So, that would be insiders having information that they are using to disadvantage retail investors. You cannot engage in manipulative trading activity, and that can take the place of doing, for example, the typical pump-and-dump schemes, where people put out into the marketplace and the internet, wherever, false and misleading information that would paint a rosy picture of a particular company, trying to increase the share price after they have already bought the security. So, they pump up the securities and then dump their shares at the high price, leaving retail investors holding the bag afterwards. You cannot engage in other manipulative trading activity, in the case of very high frequency trading. You cannot do spoofing and those sorts of things to give the appearance that you are providing liquidity and pull that away in order to induce traders to trade in those sorts of things. There are all kinds of different securities laws that protect investors. I will also note that the SEC's Enforcement Division has a specific enforcement group dedicated to market abuses, and it is one of, actually, the most effective and most productive enforcement teams at the SEC in rooting out these abuses. Mr. Mooney. Quick follow-up, Mr. Piwowar, you indicated in your testimony that you had confidence that the SEC is well- equipped to identify and act upon market manipulation as it relates to the GameStop case. Is that correct? Mr. Piwowar. Absolutely correct. One, they have the authority to do it, and two, they have an incredible enforcement staff, particularly the market abuse team is very good at looking at these. There is not only the enforcement staff in Washington, D.C., but also 10 different regional offices across the States are looking into this. Mr. Mooney. Okay. I just want to say, listening to the interviews from some on the left, you might not realize that the SEC already has the tools to go after market manipulation. Instead, you hear accusations, like those from Senator Elizabeth Warren, that our capital markets are rigged for the rich and powerful. If anything, the GameStop case is an example of how lots of small retail investors can bet against a large hedge fund and win. It is not a rigged market. It is a free market. So when I hear some of the so-called solutions offered by my friends, my Democratic colleagues, that they put forward, I am reminded of the quote from the great Milton Friedman: ``Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.'' As we hear these proposals from Democrats on these panels, I just think we should ask ourselves, will this actually help retail investors? A couple of questions, like, would restricting or banning payment for order flow really help retail investors that benefit from no-commission trading? Would a financial transaction tax benefit the retail investors that would be forced to pay it? The answer to both of those questions is no. So, instead of using January's market volatility to advocate [inaudible] protect investors from these attempted, failed, so-called solutions that will do more harm than good. Thank you, Madam Chairwoman, and I yield back. Chairwoman Waters. Thank you. The gentleman from New York, Mr. Torres, is now recognized for 5 minutes. Is Mr. Torres on the platform? [No response.] We are going to move on to Ms. Adams. The gentlewoman from North Carolina is now recognized for 5 minutes. Ms. Adams. Thank you, Madam Chairwoman. Thank you very much. And thank you to all of the witnesses as well. Mr. Blaugrund, did the markets operate the way they were supposed to, or are there some fundamental vulnerabilities that have been exposed? From the vantage point of the stock exchanges, where, if any, are the existing weaknesses within the system? Mr. Blaugrund. Thank you very much for the question. I think, as the SEC reported and as a number of the panelists have noted, the core market infrastructure operated very well. It is very resilient. It is very available. From the exchange's perspective, our job is really to do four things: ensure continuous price discovery; facilitate risk transfer; regulate our members' activity in the market according to exchange rules and securities laws; and ensure compliance of listed companies with their continued listing standard obligations. All of those functions operated well. However, it certainly is the case that the retail investor experience was uneven across retail brokerages, and it is the case that for a listed company like GameStop, you are left with a lot of confusion about how a modern market structure could result in your stock having such volatility in such a short period of time. I think when we look at potential reforms for the marketplace, there are a couple of relatively low-hanging fruits that we can focus on that would have significant benefits and reasonably low impacts in terms of unintended consequences. Ms. Adams. Okay. Thank you, sir. Let me move on. Ms. Goldstein, I would like to bring up the problematic use of forced arbitration by both financial institutions and tech companies. Section 921 of the Dodd-Frank Act gives the SEC the authority to limit or restrict forced arbitration, which currently is overseen by FINRA. Should the SEC use this authority under Dodd-Frank to examine whether it makes sense to curtail forced arbitration for gamified investment companies? Ms. Goldstein. Congresswoman, thank you for the question. Absolutely, I do think the SEC should take a long-overdue action to restore investor choice and make sure that we are prohibiting forced arbitration and prohibiting class action bans. There is a lot of talk in the discourse right now about cancel culture, but I like to think about forced arbitration as cancel culture for companies who try to cancel the victims of crimes by silencing them and putting them in arbitration and not letting them speak their voice in a court law and tell their truth. They don't have a right to appeal, and it is this secretive process that, in my opinion, tries to cancel their own customers. So I absolutely think that the SEC should do whatever it can to restore investor choice and prohibit forced arbitration. Ms. Adams. Thank you, ma'am. Do you believe the current arbitration process works, or should the SEC step in and exercise its authority under the Dodd-Frank Act when it comes to FinTechs, in particular? Ms. Goldstein. Congresswoman, I think that arbitration can work for some people, but it is by no means a guarantee, and I do not think that companies should be forcing their customers into arbitration without having the choice of going to argue their case in a public court of law if they choose to do so. I think it should be up to the customer, and I don't think that companies should be forcing them into arbitration. Ms. Adams. Thank you very much. Madam Chairwoman, I yield back. Mr. Sherman. [presiding]. Thank you. Our Chair is voting now and has asked me to take over and recognize Mr. Davidson of Ohio. Mr. Davidson. Mr. Sherman, I thank you, and I thank our witnesses for your explanations. We are all reading through your comments and drawing our own conclusions. I don't know if we will have moved any closer to consensus, but I hope that we will look at some important work done about blockchain. On the day of our first GameStop hearing, I sent a letter to the Depository Trust & Clearing Corporation (DTCC) to request a status update on two of their internal projects, Project Ion and Project Whitney. These projects explore the potential future use of blockchain technology within our capital market infrastructure. Last week, I received a response from them, and I would just like to take a second to thank DTCC for their ongoing transparency with me and with my staff. Between their response to my letter and their February 24th White Paper, I am optimistic that we will find a solution to improve upon our current capital market infrastructure. I look forward to continuing our ongoing conversations with the issue and hope to expand that with colleagues. When you talk about market structure, Mr. Piwowar, you are clearly an expert on the cycle, and as we talk about the clear feasibility of moving from T+2 to T+1, even to T-zero, could you differentiate between, say, T-zero and same-day settlement as an example versus real time, and basically focus on netting. Why is that something people focus on? You could be same-day and do it real-time or you could be same-day and do it in a netted effect. Could you explain that? Mr. Piwowar. Thank you, Congressman. And I think some people refer to that as same-day, but allowing meeting would be like T+1/2, or something like that, as I think people are talking about it. What happens is you have multiple market participants bringing a number of transactions to the clearinghouse, and they can clear those on a gross basis, which means they have to clear every transactions that is there. And that would be hundreds of billions of dollars. But what the clearinghouse can do to improve the efficiency of doing this is to net some of these trades. So, for example, if you and I are two market participants, maybe we are algorithmic traders and we have two orders that are of the same size and happen to be the same price, we can net those out and not even have to clear--I am on one side and you are on the other. And there are ways to do partial netting and those things, and it introduces a lot of great efficiencies to the system. Mr. Davidson. Thank you for that, and I understand some of those efficiencies are similar to a sweep account; there is no benefit beyond the one day, in terms of intraday for a lot of things. But there are times where it does make a difference. One of the key things is custody, and part of the challenge is, how do you prevent multiple claims to the same shares? As Mr. Perlmutter highlighted, clearly, when you have that gap you had people promising the same shares to multiple parties, and that is what you can clearly do with real time. Do you think you can get there if you settle for anything less than real time? Mr. Piwowar. There are a couple of points there. One is, we talked about the rehypothecation situation in securities lending, and I think that is where there is consensus among the panel members here to getting greater transparency into that market and to look at whether there are any regulatory actions that need to be taken there. In terms of T+1/2 or T+1, this is where the SEC should put this out for comment. There are competing costs and benefits on both sides of this. One issue that has not come up in this hearing, that I have pointed out in my Wall Street Journal op- ed and in other places is that the SEC, once you get the T+1 or same-day, the SEC can't do this alone. You also have to get the bank regulators involved, because we need to make sure the cash gets there, and now you are bringing in the bank-regulated payment system, PCH. Add to that, what about foreign currency transactions for cross-border trades? That has to be settled. So it's not something that you can't overcome, but this is one where the SEC is going to have to coordinate with the bank regulators to make sure that all of these pieces fit together. Mr. Davidson. I thank you for that, and I will say that the blockchain coupled with the payment system, smart contracts, could settle all that without an intermediary. And I think that, at scale, is the question, and we may be a ways out from that. I want to highlight just the SEC suspending trading for certain shares based off of essentially social media posts. You talked about stocks that are not paid much attention to. With the democratic access to capital that is happening because of FinTech, because of technology broadly, and because more people are looking at doing it, essentially the SEC is saying, well, we are going to intervene, and just because a stock gets more attention, we can suspend that. I think that is a dangerous thing for them to filter. Just because a stock starts getting attention, they are going to close off the market access. I wish I had time to explore this, but the ramifications for the SEC doing that are really big. It essentially says they are going to impose a value range, and when you deviate from that, it is a problem. Thank you, and I yield back. Mr. Sherman. Now, I yield 5 minutes to Ms. Tlaib of Michigan. Ms. Tlaib. Thank you so much, Mr. Chairman, and thank you all so much for being here. Mr. Kelleher, I know that earlier, you had testified that our markets are the envy of the world, and I think, to quote you, you said they are, ``transparent, well-regulated and policed.'' We have heard a lot from my colleagues across the aisle that retail investors should have more access to markets, like private equity. So, Mr. Kelleher, did you know that the private equity industry controls more than 8,000 companies in the United States? That is more than double the number of companies publicly traded on the U.S. stock market. Mr. Kelleher. Right. The premise of much of the discussion so far has been that-- Ms. Tlaib. I have questions related to that. Mr. Kelleher. Sorry. Ms. Tlaib. I have questions related to that. I just wanted you to be aware, as I am asking some of the questions. But across the country [inaudible]. Mr. Kelleher. I am not actually able to hear what the Congresswoman is saying. Mr. Piwowar. I can't hear it either. Mr. Sherman. Yes. We will try to deal with the technical difficulties. We will suspend the clock on the gentlelady's time. Mr. Kelleher. Congresswoman, nobody was able to hear what you just said. Ms. Tlaib. Sorry. Can you hear me now? Mr. Kelleher. I can. Mr. Sherman. We can hear you, Ms. Tlaib, so why don't you proceed? Ms. Tlaib. Thank you so much, Mr. Chairman. I apologize for that, Mr. Kelleher. One of the things that I would like to hear from you is, do you think the current regulation of private equity meets your standard of, ``transparent, well-regulated, and policed?'' Yes or no? Mr. Kelleher. Absolutely not. Ms. Tlaib. Is it true that private equity firms don't have to share data on their climate risks? Mr. Kelleher. Correct. Ms. Tlaib. How about how they treat their workers in their portfolio company? Mr. Kelleher. Not that I am aware of. Ms. Tlaib. Is it true they do not have to share data on whether they are promoting racial equity and diversity? Mr. Kelleher. They do not. They are private companies. The disclosure is almost zero. Ms. Tlaib. That is right. And even though they, again, control more than double the number of companies publicly traded on the U.S.--it is double. It is 8,000 companies in the United States. So, I thank you for that, Mr. Kelleher. Ms. Goldstein, would you agree that private equity firms use this lack of transparency to shield themselves from harm they do to our workers and our communities? Ms. Goldstein. Yes, Congresswoman, I agree. Ms. Tlaib. Ms. Goldstein, we know that pension funds are some of the largest investors in private equity. That is where it impacts my residents. Many of my residents in my district are relying on their pensions to retire with human dignity. Aren't their retirements at a higher risk because we don't require private equity firms to make the same disclosures as publicly traded companies? Ms. Goldstein. Congresswoman, yes, I think that is a risk of private equity. I think it is also a risk with hedge funds, which also lack many of the disclosure standards that other types of firms have to submit. So yes, I would agree with you. Ms. Tlaib. I am asking many of my colleagues, and I think this is something that we can work together on, in a bipartisan way, and I am really grateful for the committee to be focused on making public markets fairer and more transparent for retail investors. But we truly do owe it to our working people, our neighbors around the country, to hold private equity firms to the same standard, rather than allow them to continue looting businesses across the country. I yield back. Chairwoman Waters. Thank you. I now recognize Mr. Budd from North Carolina. Mr. Budd. Thank you, Madam Chairwoman. This is the second committee hearing on this topic, and once again, I am appalled by some of the comments I have heard from my colleagues on the other side of the aisle. The notion that retail investors are even being referred to as, ``dumb money'', I think it is absolutely insulting. Let's remember that retail investors are smart and they are a force to reckoned with, and that revolutionizing the market in any legislative or regulatory changes to interfere with their ability to trade and have access, I think that would be an absolute tragedy. Mr. Piwowar, do you believe that the SEC is well-equipped to make value judgments as to what constitutes a good or a bad game-like feature, and in your opinion, do you believe that gamification is actually this grave systemic danger that my friends on the other side of the aisle make it sound like? Mr. Piwowar. Thank you, Congressman, for that question. In terms of the gamification that Robinhood is apparently using, I am not a customer, I don't have the app, so I can't comment on that. Certainly, the SEC is well-equipped to look at whether certain gamification features violate existing standards under the law, and they will prosecute accordingly to that. One point I want to mention is that gamification, as a term as is being used here, very narrowly, is to point out that there are types of games that are out there, simulations, that are very valid ways for people to learn. In fact, business schools, MBA programs are abandoning many of the traditional case method and lecture-type classes and encouraging the students to learn through gamification, simplification. Cybersecurity classes are being taught through gamification. You can't teach it out of a textbook, and those sorts of things. So, this is part of our society that is going forward. It is obviously something the SEC has to look at. But to paint a broad brush and to say that gamification is necessarily bad or a systemic issue, I think would be too broad of a brush. Mr. Budd. My view is this makes the SEC take their eye off the ball. Do you think the SEC should instead focus on the traditional role of determining when investment advice has been provided by a brokerage? Mr. Piwowar. Yes, in fact they are well-equipped to do that and they, in fact, just updated the regulations on that. The SEC just recently promulgated Regulation Best Interest, which was on the broker-dealer side, what was the old suitability standard has now been enhanced to be called the Regulation Best Interest, making it very close to, if not higher than the fiduciary standard on the investment advisor side. And also, the SEC doesn't do it alone. They also have FINRA, the self- regulatory organization, that has its standards and polices those standards. Mr. Budd. Thank you. There has been a lot of attention given to the clearance and the settlement process. In your former capacity as acting Chairman of the SEC, you led the effort to move officially from T+3 to T+2. So following up on my friend and colleague from Ohio, I look at the blockchain and I see a potential avenue for innovation in this area. Is it possible for clearinghouses, in addition to real-time settlements on a blockchain, to coexist while pursuing something like T+1 or T-zero? Mr. Piwowar. Yes. I think there are a couple of ways that we could do this. When we move from 3 to 2 we put in the final rule that the SEC should continue to study and look at what the industry enhancements were in terms of technologies to facilitate moving to 1 or real-time settlement. I think real- time is further off, and the question is, do they want to put all their eggs in one basket and try to pursue real-time, which could take a long time, or the SEC could do a dual-track approach, which is, let's look at potentially moving to T+1 in the short term but also signal to the industry that in the long term, they are thinking about moving to same-day settlement, to the extent that things like blockchain evolve to that point, and again, having to coordinate with the banking regulators to make sure that the cash actually gets there through the bank payment systems. Their systems are outdated too. Mr. Budd. Thank you. As technology evolves, we still want to have the position that we are the financial envy of the world, the financial markets are the envy of the world. So, what sort of regulatory requirements should the SEC update in their review in order to remain and continue to grow in our strength? Mr. Piwowar. Thank you, Congressman. I think as a general matter, the SEC should be in the habit of periodically reviewing all of the rules. I think, to your point, in the markets, in particular, because markets and technologies evolve so quickly, things like payment for order flow, things like transparency in that market, things like making the securities lending market more transparent, are all fruitful areas for the SEC. And to your point, we are the envy of the world, but everybody is gunning for us, so we need to make sure that we maintain our leadership. Mr. Sherman. The time of the gentleman has expired, and I now recognize Mr. Torres from New York for 5 minutes. Mr. Torres. Thank you, Mr. Chairman. I have concerns that payment for order flow perversely incentivizes the highest payment for the broker rather than the best execution for the customer. There is a reason we call it payment for order flow. No one calls is best execution order flow. My first question is for Ms. Goldstein. Should payment for order flow be permitted? Ms. Goldstein. Congressman, thank you for the question. I always refer back to the 2016 SEC memo where they asked this question. I think that is one approach we could take. We could just outright prohibit it. Another thing the SEC could do would be to require the brokers to pass on the payments for order flows to their customers. And another approach could be requiring that customers be able to opt out. I think there are multiple approaches that they could take, but I do think that we do need to do something, yes. Mr. Torres. I am concerned about the conflict of interest. About a week ago there was a hearing in the Senate, and according to Duke University School of Law Professor Gina-Gail Fletcher, who testified at a Senate hearing, the racial gap in retail investing has been cut in half in 5 years. And so, here is what I am struggling with, how do we address the conflict of interest? How do ban the worst of payment for order flow without losing the gains that appear to have been made in market access? Ms. Goldstein. Congressman, I think it is a great question. I think we need to just ensure that the SEC can take all of the enforcement actions that it needs to take. I have been very enthusiastically listening to all of the Republican Members, in particular, giving the SEC lots of work to do, and I would encourage those Members to make sure that the SEC is adequately funded so it can pursue all of these investigations into whether or not best execution is being upheld by brokerages, and whether or not there are any particular conflicts of interest. And so, I would encourage them to make sure that there are the right appropriations. And I think we just need to make sure that the markets are fair, and that doesn't just mean funding our agencies, but that means looking into whether there are regulatory blind spots. I personally think that there is a big regulatory blind spot in hedge funds and in private equity funds. For example, we don't know what amount of stock hedge funds are shorting, because the Form PF that they have to disclose their positions on does not include shorts of stocks. So, I think we have a combination of, we need to make sure that we are enforcing the law and have the resources to do it, but also make sure that, perhaps we need more legislation to address regulatory gaps, and then we won't have to choose between those two things that you outlined. Mr. Torres. And I strongly support greater transparency. I have a question about brokers. The controversy surrounding the GameStop short squeeze arose from Robinhood's decision to restrict trading. Setting aside Robinhood for a moment, it seems to me that brokers, in general, have almost absolute power to restrict whatever retail trading they want, whenever it wants. Should there be any legal limits on the ability of a broker to impose trading restrictions? Should we limit trading restrictions to conditions of market volatility? What are your thoughts on that? Ms. Goldstein. Congressman, I think it is a good question for the committee to consider. I do think brokerages need to make sure that they don't go belly-up, and I do think that Robinhood, in particular, perhaps was facing a period where perhaps they didn't manage their own internal risk sufficiently. Perhaps they didn't predict what their capital requirements would need to be to the clearinghouse, and so I think that might have been a failure of their own business. But if the choice is between prohibiting trading in a stock that they might not be able to handle, because perhaps they haven't managed their business well, or just going under, I kind of understand that you might want to take the less drastic approach. Mr. Torres. I want to interject, because my time is running out. I have a question on market makers. Suppose there was a company named Goliath, with a market-making arm and a trading arm. And suppose the market-making arm collects vast quantities of retail and real-time information about vast numbers of retail investments. Could the market-making arm legally share that information with the trading arm? Ms. Goldstein. No. No, they need to have a firewall between. If they have a prop trading desk and their market makers, there must be a firewall. Mr. Torres. That is great. That takes care of my questions, so thank you. Chairwoman Waters. Thank you very much. The gentleman from Tennessee, Mr. Kustoff, is now recognized for 5 minutes. Mr. Kustoff. Thank you. I would like to thank the chairwoman and the ranking member for convening today's hearing. I would also like to thank all of the witnesses this morning and this afternoon. Director Piwowar, if I could, with you, I think one thing that--or at least I would think everybody could agree on, regardless of what side of the aisle you are on, is going back to GameStop, that day in late January, we don't want any investor or any trader being shut out, if you will, not being able to make a trade, to buy or to sell. When we had our hearing last month with GameStop, I questioned the CEO about his arguments that the settlement time, T+2, T+3. What I got out of it was that he essentially thought that if it were same-day settlement or even T+1, that they may not have been in the situation that they were in, having to deny people access to their app. My first question to you is, would you agree, if it were T+1 or same-day settlement, would we have seen the scenario that we did in late January, with GameStop? Mr. Piwowar. Thank you, Congressman. I don't know the exact numbers but I do know that if there was a shorter trade settlement cycle, Robinhood's margin calls would have been a lot less. Now, I don't know how much they would have been relative to their financial resources, but it would have been a lower likelihood certainly. And if I may, a point that Ms. Goldstein is bringing up is that the situation was uneven across broker-dealers here, right? So, one of the things the SEC is looking at is not only across the industry, whether to shorten the trade settlement cycle, but also whether or not Robinhood's risk management policies and compliance procedures were actually adequate. And that is something they are looking at in here too. So, when I say we should look at shortening the trade settlement cycle it is not because of the particular performance of one broker. They happened to bring the issue up and it is something that I felt very passionately about when I was at the Commission and started a path on, and they continue to do that. But I don't think we should overlook the fact that we had different impacts across different brokers. Mr. Kustoff. Thank you. I may have said, ``CEO of GameStop.'' I did mean, ``CEO of Robinhood'', and I appreciate you interpreting that and correcting it. You went through this exercise when you were with the SEC and helped to lead the effort to shorten the settlement time. Can you take the other side of the argument, if you would? Why would people advocate against going from T+2 to T+1? What are the arguments against that? Mr. Piwowar. Sure. So, one is cost. The industry is going to have to incur some costs in order to do that. Now, what the SEC has to do is weigh those costs against the benefits from shortening the trade settlement cycle. Again, the benefits are, you are lowering market liquidity, credit, and systemic risk in the system. Once you start approaching real-time, you are actually increasing operational risk, because everything has to work perfectly together at the same time--the cash has to get there, the securities have to get there, if you have a foreign currency settlement that has to happen at the same time. And so, the arguments against are just based solely on a cost- benefit framework. Now, 4 years ago, cost-benefit analysis showed that T+2 was the clear winner. Four years have passed and we have changes in technology, we have changes in markets. It is time for them to re-evaluate, and I wouldn't be surprised if T+1 were the clear choice, but maybe not. That is why I believe the SEC should at least go through the exercise. Mr. Kustoff. And if you were to project--let's assume that the SEC does make the decision to go to T+1, what is a realistic framework or time period? Mr. Piwowar. Thank you, Congressman. Again, the SEC can't do this in isolation. Once you go down to 1, they are going to now have to get the bank regulators involved, because you have to make sure that the cash payment systems align with the security settlement system. The SEC could put itself on a timeline, but you have to also get all the bank regulators. So, that is why I was advocating that Secretary Yellen should start a workstream at the Financial Stability Oversight Council, which is the coordinating body among all of the regulators. And so, using her power as Chair of the FSOC, she can actually help shorten that time period by getting the regulators to all row in the same direction. Mr. Kustoff. Thank you, sir, and I yield back. Chairwoman Waters. Ms. Dean is now recognized for 5 minutes. Is Ms. Dean on the platform? If not, we will move to Mr. Garcia. The gentleman from Illinois, Mr. Garcia, is now recognized for 5 minutes. Mr. Garcia of Illinois. Thank you, Madam Chairwoman, and Mr. Ranking Member, for the discussion today, and, of course, all of our witnesses. Last month's GameStop hearing revealed a lot of different viewpoints about what happened, who was responsible, and what we can do about it. As always, there are a lot of technical details, but when people in my neighborhood think about finance, they aren't thinking about these details. They are thinking about losing their house, as many did in 2008. They think about the stock market at record highs during this pandemic while unemployment soars. In short, they think about a game rigged against them. And if you ask me, what happened to GameStop earlier this year proves them right. I have some questions for a couple of our witnesses. Mr. Kelleher, people talk a lot about how retail trading is democratizing finance and helping the little guy, but from your testimony it seems like the current system of retail trading does the opposite. It rewards huge firms that can handle lots of trades and it rewards high-frequency trading. Do you think that payment for order flow model of retail trading actually entrenches big players? Mr. Kelleher. It does, and the fact that those big players have almost no disclosure obligations and very few regulations makes it even worse. The one thing that hasn't been brought up that is a major problem, is that the Citadels of the world are a big part of the shadow banking system. There is a lack of transparency. There is a lack of regulation. There is a lack of oversight. There is a lack of accountability. All of that enables secret wealth extraction by the big dogs in finance, all at the expense of the retail investor and the retail trader, and that all needs to be looked at and changed. But the one thing we know for sure, and Sal talked about this earlier, is the retail investor ends up getting, time and time and time again, the worst deal. That doesn't mean we are not in favor of more retail investors. We would love to see more retail investors. We just think it should be a level playing field. We think they should be treated fairly. Right now, they are discriminated against dramatically. They are in a terrible position and being picked off, and they shouldn't be. So, we are not against democratization. What we are for is a level playing field, transparency, accountability, and fairness, and that will increase confidence and that will increase retail investors. Mr. Garcia of Illinois. Thank you for that. Ms. Goldstein, in your testimony, you mentioned that the GameStop incident revealed more than just volatile stock prices. You mentioned that the rise of retail trading and the dominance of certain hedge funds like Citadel could threaten the stability of our financial system. What do you think that regulators such as FSOC should do to keep the volatility that we saw in January from affecting our whole financial system, and what can Congress do to help our regulators do their job? Ms. Goldstein. Thank you for the question, Congressman Garcia. I think there used to be a hedge fund working group at the FSOC, that was shut down under the Trump Administration. And before they created it, one of the things that they noted in a report was that there was no single regulator that had all of the information that they needed to look at a complete risk profile of hedge funds. And so, I think an easy thing for Secretary Yellen to do would be to restart the hedge fund working group, to look at risks to the system that hedge funds possibly contribute. I also think that Citadel Securities is a particular thing that they should look at closely. I want to flag that almost 10 years ago, when Citadel tried to start an investment bank, there was a lot of reporting at the time that people were confused about how they were going to have success in investment banking, because they were known as a business partner who charged their clients more than most funds did. And I feel like that reputation perhaps may have followed them into electronic trading. But Citadel has talked a lot about their importance in the marketplace. My question is, are they systemically important? Congressman, you, I think, have an important bill, to make sure the FSOC has the tools that they need to identify systemic risk, and I think Congress should continue to ask the question, is there more legislation that is required to make sure that we do have the tools we need to identify systemic risks in the system? And I think the regulators should ask themselves the same question. Mr. Garcia of Illinois. Thank you very much, and given that I have to go vote, Madam Chairwoman, I yield back. Chairwoman Waters. Mr. Rose is now recognized for 5 minutes. Mr. Rose. Thank you. Thank you, Madam Chairwoman, and thank you to Ranking Member McHenry, and thanks to our witnesses for your testimony and participation today. One month later, the committee investigation is barely underway, and I view any policy proposals so far as premature. At the core of market regulation is transparency, providing investors information and giving them the opportunity to make informed choices. We should not be adding regulatory barriers to keep people from participating in our capital markets. Instead, we should be opening up our markets to everyday investors and providing them with the information and transparency to participate in an informed way. Despite the intense volume and exposures presented in the market, the broader infrastructure of our financial markets has performed well. My concern, like many of my colleagues, is that forging ahead with new regulations or ideas like the financial transaction tax, at this point, would be harmful and would have unforeseen consequences. Dr. Piwowar, you highlight the importance of a comprehensive economic analysis as part of the rulemaking process, as it allows us to evaluate tradeoffs. I agree with you. Will you detail the implications of a knee-jerk reaction to the events that occurred in January? Mr. Piwowar. Thank you, Congressman, for that question. Yes, the SEC is well-equipped to do economic analysis, and, in fact, is required by law to do so. When it comes to market structure issues, as I said in my written testimony, there are no solutions; there are only tradeoffs. And the reason for that is multidimensional. One is that our market structure is very complicated. It is a consequence of dozens, if not hundreds of decisions that have been made over the course of decades. And so, any change in one area will necessarily have likely effects in another area. That doesn't mean we shouldn't go forward and make changes. What that means is that when we do think about making changes, we need to think about what the likely effects are. What are the tradeoffs? What are the costs? What are the benefits? What are the expected changes in behavior? And then evaluate all of those, but also explicitly look at alternatives to the possibility that is there. For example, payment for order flow, we could look at the existing situation. One alternative is to ban it and look at that, and Ms. Goldstein has brought up a couple of other sort of in-between steps in there, and explicitly look at all of those, and then based upon that analysis, you can do a reasoned, rational approach to come out with which of these is the best path forward. Mr. Rose. So if we were to review and reform payment for order flow, Dr. Piwowar, what reforms do you think the SEC could implement to increase transparency for retail investors? Mr. Piwowar. Thank you, Congressman. I think, as I mentioned, there are these things called 605 reports, which is just a fancy SEC rule on that, and they give a little bit of information in terms of execution quality for retail investors. And the SEC has revised them over time, and some of my fellow witnesses have pointed out some of the problems and holes in it. The National Best Bid or Offer doesn't necessarily include all of the odd lots, and there are some other things that we should do to that. I think what the SEC should do is consider looking at those 605 reports that firms like Citadel have to do, so we get a better sense of what the execution quality is, not just price improvement, but speed of execution, what is the real MBBO. Separately, there are different types of reports that firms like Robinhood have to do, which are called 606 reports. They are not very granular at all, and I think that we could do a lot to provide some more transparency into the 606 reports and the 605 reports so that we can find out, for particular customers, at particular brokers, that send their trades in particular stocks, to particular wholesalers, how well are they doing. I think that would help shed a lot of light in terms of public transparency of best execution. Mr. Rose. Thank you. In the challenging global economy, the strength of our capital markets is vital to long-term economic growth, yet regulatory burdens and increasing amounts of red tape prevents small businesses from thriving, and stifles American innovation. The advances we have seen over the last decade in technology have improved the way Americans and our businesses perform financial activities. Due to these advancements, we are seeing more investors, who have historically been left out, active in the markets, and we should not stand in their way. With that, Madam Chairwoman, I yield back. Chairwoman Waters. Thank you. The gentlewoman from Pennsylvania, Ms. Dean, is now recognized for 5 minutes. Ms. Dean. Thank you, Madam Chairwoman, and I thank all of our witnesses today for shedding light on these important questions and issues. I am thinking back, Madam Chairwoman, to our hearing a month ago. At that hearing, I questioned, and we all did, Mr. Tenev of Robinhood, and he acknowledged mistakes or failures by his company about actions that the company took to inform customers, but he struggled to tell us what he was acknowledging or what he was apologizing for. We did not receive a clear, direct answer about when and how customers were notified, and whether customers had the ability to contact a customer service representative with any concerns about their positions and holdings. He was simply unable or unwilling to express what he was apologizing for. Ms. Goldstein, I have had the chance, my office has had the chance to discuss with you servicing failures in other industries. What failures--and I am a former professor of English, and I just want plain English here--what servicing failures or failures or mistakes by Robinhood on January 28th would you observe? Ms. Goldstein. Congresswoman, thank you for the question. I think that they probably--I don't have a crystal ball and I don't have insight, but I think they may have failed to manager their internal risk. My understanding, anecdotally, is that major brokerages typically have very large teams of people who model the capital requirements that they will likely need to give to their clearinghouse on any given day. I would be very curious to know how many employees at Robinhood were dedicated to that task. Was it 10? Was it 20? Was it 5? Was it 0? I also think that, at least historically, they have not done a great job of disclosing to their customers how they make their money, although I don't think--to speak to your question--that was true on that day in January. Ms. Dean. I am wondering, what should we now consider new best practices or best practices going forward, to avoid what we saw on January 28th? Ms. Goldstein. Congresswoman, I think we need the regulators to do an investigation, and get all of the information. I think we need to make sure that there aren't data gaps. One of the big questions I have is not what was the retail footprint, but what was the footprint of institutional players, and were institutional plays exacerbating the volatility because they were watching what was happening on Reddit and deciding to go along for the ride and maybe make GameStop shoot up higher or come back down lower in the days that followed? And I think one of the questions that I have is, are there regulatory gaps in the reporting of what are called over-the- counter options, which are options that are not traded on exchanges but are traded between big Wall Street players, between themselves, and could that kind of trading, which is often counterbalanced or hedged with stock, have contributed to the volatility? And that is one of the questions that I have. Ms. Dean. That is really interesting. Dr. Bogan, I know I have very limited time, but could you tackle the same question? What were the failures? And I would also like to hear more about how these servicing practices nudge user behavior. Ms. Bogan. I will start with the last one first. I think when we think about these online brokers that use gamification, I think, just to be clear, access is a great thing for users to have. But developing techniques that push retail investors to trade a particular way or elicit particular behaviors, is not beneficial for retail investors. Some of the practices they have that have been mentioned, that are encouraging trading behavior to the detriment of the investor, are things like having lists of 100 popular stocks, which draw attention to particular stocks, which causes people to trade even though it may or may not be in their best interest, and there are push notifications which elicit this kind of response of fear of missing out, which encourages people to trade, because it is triggering a particular behavioral bias. Additionally, I know people have talked about kind of the confetti and it looks like a game. Yes, that does make it fun, but it does belie the real risks that investors are taking on. Another important point, too, that I don't think has been brought up, is that some of these investors are targeting the younger market, which is great to encourage new people into the markets, but they are specifically targeting a segment that is less financially literate, according to every survey, and less likely to be sophisticated. And so, I think those are concerns as well. Ms. Dean. Certainly, those are concerns. And quickly, with the time remaining, Dr. Bogan, you talked about clear, concise disclosures about customer risk. Can you point to any examples of those? Ms. Bogan. I'm sorry. Ms. Dean. I will yield back. I will submit questions. Chairwoman Waters. Thank you. Thank you so very much. The gentleman from South Carolina, Mr. Timmons, is now recognized for 5 minutes. Mr. Timmons. Thank you, Madam Chairwoman, and Ranking Member McHenry, for convening this hearing today, and to our witnesses for their time and expertise. Since the first hearing in the series, I have continued to research and attempt to understand the root causes of trading halts, retail investors, the dynamics of trade settlement, and the other issues in this hearing. While these topics can be overly technical, it remains imperative that our financial markets continue to function effectively while not limiting the increased market participation of investors of all income levels. We also should not rush to any rash decisions that could have unintended consequences further down the line. My first question is for Mr. Piwowar. As you have stated, you were involved in the transition from settlement going from T+3 to T+2. In your opinion, what roadblocks will market makers and participants face in the transition from T+2 to T+1, and do you believe that this can be achieved earlier than the initial timeline? Mr. Piwowar. Thank you, Congressman. I don't think there are any roadblocks from the market participant side. In fact, when we went from T+3 to T+2, we worked very closely with-- there was an industry coalition that came together called the T+2 Coalition, that was buy-side/sell-side exchanges, the clearing agencies, even a group representing retail investors. And what they did was they were able to tell us what a reasonable timeline was for all of them across the industry. And I think, similarly, they could start that group again, call themselves the T+1 Coalition, and talk about particular challenges. One of the things I will note is that 4 years ago, when we went through this, the big challenge of 2 versus 1 was that, with few exceptions, going from 3 to 2 was just taking existing back office processes, which are very complicated, and for many of the firms, it was just effectively speeding those up. They didn't have to retool and set up new systems. Once you start going to 1 or 0, the costs go up, because you are going to have to retool some of the systems. Now, the benefits may outweigh those costs, and so that is what the SEC should go through, from a public policy perspective, and look at those. I wouldn't say those are roadblocks but those are the challenges that they would face. Mr. Timmons. Sure. Thank you. Do you believe this can be done by the industry without any government or limited government involvement beyond cheerleading the effort? Mr. Piwowar. The SEC has to make it real. The industry came to us and said, ``Could you please make this real, and here is why.'' So yes, they could do it, but what would happen is, it is a collective action problem. If you get one holdout or a couple of holdouts, then you can't do it as a voluntary effort. So what they did was they did a lot of the work in terms of how they were going to get it done. They went out and got third-party thoughts and did timeframes and all of this sort of stuff. This is the one thing I think government can be very helpful in doing, is solving the collective action problem, and then explicitly looking through the costs and benefits. The other thing I will note, as I have mentioned before, is the SEC can't do this alone. Once you go to 1 or 0, because you have to get the bank regulators involved to make sure that the bank payment systems, the cash gets there too. So, it is a little bit more difficult going to 1 or 0 than it is going to 2. Mr. Timmons. Sure. Thank you. Mr. Grujic, what would be the tradeoffs if we were to eliminate the credit investor standard? Mr. Grujic. There is an obvious benefit to allowing more investors to access private markets, and as I previously said, I think this is a very important part of where investors should put their money. So, there are a lot of benefits on the side of concern about education and understanding. We have to see where we want to land on those, if we want to explore qualifications as a substitute for wealth, in terms of access is appropriate. I just want to say, I think we have to take the lessons of history. About 20 years ago, when we talked about electronic communication networks (ECNs) and the fragmentation of the dominant few market exchanges, there were these sorts of similar concerns. What we wound up with is a far better marketplace. We had to enact regulations to solve the issues of fragmentation, but where we landed was something much better. The post-ECN world is vastly better than what it was before. We should take the same approach here now with private markets, with PFOF, with gamification, where we recognize that innovation is good, and innovation and regulation are yin and yang. And so, when you look at gamification, building habits like regular savings, regularly looking at education, rewards for things that are healthy are clearly good. How to regulate that is challenging, but that is on a natural path forward. We should open up the private markets. We should open up gamification in healthy ways. We should innovate and regulate in lockstep. Chairwoman Waters. Thank you very much. Mr. Timmons. Thank you for that answer. I yield back, Madam Chairwoman. Thank you. Chairwoman Waters. Thank you. The gentleman from Massachusetts, Mr. Auchincloss, is now recognized for 5 minutes. Is Mr. Auchincloss on the platform? If not, the gentleman from Guam, Mr. San Nicolas, is now recognized for 5 minutes. If not, the gentleman from Indiana, Mr. Hollingsworth, is now recognized for 5 minutes. Mr. Hollingsworth. Good afternoon, and I appreciate all of our witnesses being here today, and I certainly appreciate the dialogue that we have had. I have touched on this several times in previous hearings but wanted to touch on it yet again. Again, none of my comments should be construed as being in favor of or opposed to dark pools or LIT trading or exchanges. I certainly believe in an even playing field where all competitors can compete for flow, but I wanted to really specifically dial in on some of this. [Pause.] Chairwoman Waters. Mr. Hollingsworth? Mr. Hollingsworth. Can you hear me? Chairwoman Waters. Yes, I can hear you. Mr. Hollingsworth. Okay, great. Sorry. I think it cut out there for a second. Sorry about that. Mr. Blaugrund, you mentioned in your testimony that 30 percent of market volume is artificially constrained by this, ``penny-wide regulatory requirement'' on exchanges. Can you expand on that a little bit? What are some examples of how tick size restrictions can affect liquidity in the nearly 8,000 stocks that trade above $1. Mr. Blaugrund. Thank you very much for the question. As I mentioned in my testimony, there are effectively two regimes functioning in parallel. On exchange, there is a rule, Rule 612, that requires that exchanges accept and display orders only in penny increments in stocks priced above a dollar. Mr. Hollingsworth. Right. And this doesn't apply in dark pools, correct? Mr. Blaugrund. Correct. Off exchange, they can trade at 100th of a cent increments. The implication is that price discovery, particularly in very active, low-priced names should occur within that penny-wide spread. As a result, public investors on exchanges are restricted. They can only narrow the spread to 1 cent wide when, in fact, there might be millions of shares that trade in some of these names in that sub-penny increment. As a result, if you haven't been invited into that particular dark pool or single dealer platform, that liquidity is simply inaccessible. Mr. Hollingsworth. Right. And there are some implications here for both price discovery, as you said, right? The ability for investors to be able to trade inside that increment, but also challenges from a competitive footing between the two. Can you talk a little bit about how volumes might be shifting to dark pools versus exchanges on account of the current disparity in regulatory regime? Mr. Blaugrund. Yes. Thanks for the question. So, as a number of the panelists have noted, in aggregate, on-exchange trading is now its lowest proportion of the overall market than it has ever been. And there were some days at the end of last year where actually most trading happened in the dark. In retail names, and particularly in these lower-priced, very active securities, 60, 70, sometimes 80 percent of trading activity will occur off exchange in sort of private pools. So, I think it is in the public interest in trying to ensure that, one, the price discovery process is efficient, which goes to questions we have been discussing previously about having good benchmarks for measuring things like price improvement, and also to encourage the broadest set of investors possible to compete and offer one another the opportunity to interact with their liquidity. Mr. Hollingsworth. Certainly, there has been an abundance of evidence that has shown the amount of savings retail investors are achieving by virtue of payment for order flow and other market makers that might lead to dark pools. However, there might be some hidden costs associated with the increase in volume on dark pools versus exchanges in price discovery or price movement. Can you talk a little bit about that? Mr. Blaugrund. I think you have two different regulatory regimes. You have a regime with dark pools, which doesn't have a fair access requirement, allows for privately negotiated commercial terms, allows for customer accommodation should there be some sort of dispute, and generally doesn't have any sort of Reg SCI or sort of stability regulation. We are not asking for those regulatory burdens to be shifted to dark pools as well. We are simply hoping for a level playing field. Let public investors who participate on exchanges trade at the same price points. Mr. Hollingsworth. And it certainly stands to reason that retail investors and investors writ large would benefit from a competitive platform that was agnostic between players? Mr. Blaugrund. Correct. To the extent that there is another public investor that is going to offer a more competitive price, that accrues to the benefit of the investor. Chairwoman Waters. Thank you very much. The gentleman from Guam, Mr. San Nicolas, is now recognized for 5 minutes. Mr. San Nicolas. Thank you, Madam Chairwoman, and thank you to our witnesses for being here today. This hearing has been very, very informative, and your background and expertise are very well-noted. And I am absolutely interested in considering policy options as a result [inaudible]. I wanted to circle back on the purpose of why we have markets. I think we get so caught up on the trading aspect of it and the volatility of it. But really, Mr. Kelleher, you, I think in your opening statement, really captured the fact that markets exist for us to be able to grow our commerce, grow our private sector, and it is supposed to be providing environments for those kind of activities to take place. And when I dug deeper into the whole GameStop trade that kind of precipitated all of these inquiries, one of the things that really jumped out at me was the fact that at least on what I was able to find as a layperson, the information on the short interest on the GameStop stock was indicating that it was at 150 percent, and that really just kind of jumped out at me for a number of reasons. And Mr. Blaugrund, your testimony about the opacity of short selling data really, really captured my attention as well. And I wanted to kind of tie it all together before I get into my questions by stating this. When we have short selling in the market, it is intended to kind of be a balancing component. But when you have 150 percent of a stock's float short sold and the price compressed as a result of that, you are inhibiting businesses from being able to go out and raise equity at a higher price point. And so, Mr. Blaugrund, can you expand on your testimony on the opacity of the short selling that is going on and how that potentially could be inhibiting businesses from being able to go out and raise equity capital at a rate that would be more, I think, reflective of the fair market value of the stock? Mr. Blaugrund. Thank you very much for the question. With respect to raising capital, you are certainly right that if a stock price is depressed, then the cost of capital for the company would be higher than it would otherwise be. With respect to the short positions, that data is now reported twice a month, and it certainly provides a lens into the relative activity, but it is really not actionable. It doesn't allow a market participant, whether they are hoping to borrow the stock or whether they are considering lending their securities, regulators or the insurers themselves, to understand if there is risk developing, if there is this potential for rehypothecation to introduce some significant problem. And so, our view, after discussing this issue with issuers and investors, is that you really need to go one step upstream. You have to look at the securities lending market itself, which currently is relatively anachronistic. And there is an opportunity for the SEC to promulgate rules that they were directed to promulgate under the Dodd-Frank Act. They have the authority today to bring transparency to this marketplace, and we would urge that the SEC consider doing that as a high priority. Mr. San Nicolas. Mr. Kelleher, would you be interested in offering some comments on this discussion? Mr. Kelleher. Yes, I agree that kind of the upstream disclosure increase for the securities lending part of these activities needs to be addressed either through legislation or through regulation. That is clear. But we also need increased disclosure of the short activity that we currently have, separate and apart from what we need for the securities lending. But for the short activity, we need greater disclosure on the timing and frequency--increased disclosure on timing and frequency of that disclosure. We need to expand the firms that are subject to the disclosure. It needs to cover hedge funds, broker-dealers, and everybody else engaged in those activities. And it has to expand to cover all of the products that are being used. It is not just puts and calls. You get equity derivatives, total return swaps, synthetic exposure of all sorts of ways. So, multilayered increased disclosure and transparency will benefit everybody in the market. Mr. San Nicolas. Thank you, Madam Chairwoman, and I yield back. Chairwoman Waters. You are welcome. Mr. Steil is now recognized for 5 minutes. Mr. Steil. Thank you, Madam Chairwoman. I also look forward to the day when we can be back in person and not on Zoom. I know we have had some broadband issues here in the House. It will be good to all be together soon. If I can dive in, in particular as it relates to settlement times, Mr. Piwowar, you originally wrote an op-ed--we have talked about it a little bit here today--supporting a move to faster settlement. In the op-ed, you wrote that U.S. securities markets may now be ready to really benefit from some of the technology and operational advances in back office administrative functions and a move to shorter settlement cycles. You oversaw the process of the SEC, in particular from T+3 to T+2, and during that process, the Commission looked at the possibility to move to T+1. I know Mr. Davidson earlier brought up the ability of blockchain and possibly being a solution. Can we look back a little bit, in particular at what has been changing since 2017 that may make the move to T+1 settlement feasible as you kind of look at a broader picture? Mr. Piwowar. Yes, thank you, Congressman. One, technology costs decrease over time, and market participants find greater efficiencies in their operations over time. There is new innovators in this space. There are new third-party providers that do a lot of things in the back office things. And you mentioned blockchain. So, 4 years ago, when we were going through this, and we started the process 2 years before that--so between 4 and 6 years ago--the advocates of a real- time settlement, we would say, well, how do you get there? And they would say, blockchain. And then we would say, well, explain to us how exactly that happens. And they would just say the word, ``blockchain'' louder. And so, there was no-- Mr. Steil. We have some of that in Congress. Mr. Piwowar. --thought process as to exactly how this would work. What was that? Mr. Steil. I said, we have some of that in Congress that occurs when people--with lack of depth, they will just go louder. Mr. Piwowar. Yes, no comment. And what I learned in the regulatory process is if somebody explains something back to you louder and makes it imply that you don't understand what they are saying, it really means they don't understand what they are saying. So, blockchain has a lot of promise to it. I really believe that it can be transformative in the future. We weren't there yet 4 years ago. Now 4 years have passed, and there has been a lot of cool innovation in this space. Again, some people just say, ``blockchain'' louder, but other people have actually come forth with some interesting ideas. So, it is time for the SEC to talk to those people and understand how feasible it is. Mr. Steil. So to build on this, what do you see going forward are the biggest obstacles we have to overcome to get from where we are today to T+1, if we look at it from the other direction? Mr. Piwowar. Yes, thank you. Again, I don't think they are really obstacles. I think the biggest challenge that we didn't have to face going to T+2 is the coordination with the bank regulators. Again, the cash has to get there, not only securities. I am not an expert in this, but some of my colleagues at some of the other think tanks, for example, Aaron Klein at Brookings, has written a lot about this, the antiquated bank payment systems. And he has been doing it in the context of the stimulus payments being so slow to get out there. There is kind of a fight going on between the Fed and the industry as to who gets to control that payment system. I hope they figure out that fight, because that is actually probably the biggest sticking point, and so that is why the SEC, shortening it even further, has to coordinate with the bank regulators. Mr. Steil. Thank you very much. I know this is an important topic for both myself and my colleague, Anthony Gonzalez, as well. Shifting gears to Mr. Blaugrund, if I can for a minute, I think you really touched on the unequal footing between trades that are placed on and off exchanges. You commented and we have discussed a little about the limited price increments to a penny on the exchange. Could you just go back and highlight again what you think the attractiveness would be to on-exchange trades if this was adjusted? Mr. Blaugrund. Thank you very much for the question. The way exchanges and, more specifically, the investors who are trading on exchanges compete for order flow is they display their prices. And in so doing, they signal to the market their intent, they draw in counterparties, and the trade is consummated. If they are unable to display that interest at a competitive price, one, they don't get the trade. So, they are discouraged from doing so in the first place. And two, the price discovery that ought to have occurred at that sort of intermediate price is impossible. We think that by permitting a level playing field in terms of the price increments, a broader set of market participants will be encouraged to participate. The price discovery process will be more robust. That will result in equal or better outcomes for the retail investors today, and that there is generally a public interest in having an efficient price discovery process. Right now, about 30 percent of all market volume occurs with securities that are pegged at 1-cent wide. Mr. Steil. Thank you very much, Madam Chairwoman. I yield back. Chairwoman Waters. Thank you. Mr. Auchincloss, you are now recognized for 5 minutes. Mr. Auchincloss. Thank you, Madam Chairwoman. I want to raise the issue of the wealth gap in this country as it relates to what we have seen over the last few months. The stock market overwhelmingly benefits higher-income households, and for many middle-income or lower-income households, the interaction they have with the stock market is through retirement accounts, pension plans. Only 10 percent of U.S. households own 87 percent of all stocks and mutual funds. I don't think that is sustainable for us to have a form of capitalism that works for everybody. I want to tackle this question of wealth inequality from two angles. First, with a question for Dr. Bogan. We have seen, I think, in the last few months, examples of what does not work in terms of FinTech and people psychology. I raised in the last hearing my concerns about inducing people to trade options through gamification on an app. But I would welcome, Dr. Bogan, any thoughts from you about what types of gamification, what types of FinTech actually promote healthy wealth-building activities that are more inclusive of the American population? Ms. Bogan. First of all, thank you for the question, Congressman. I appreciate it. And I think that it is important to make a distinction when we are talking about gamification between having a platform that is accessible for all households to participate in financial markets. And at the core, I think that is a good and beneficial thing. What I think we need to carefully think about is the way people access those platforms and the user interface. We have talked a lot about the evolution of technology, and that is how people interface with financial markets. But the research on sort of behavioral cues has advanced quite a lot over the past decade, and there is a lot of information about how to set defaults and push people to use it for good and for bad. And I think where we need to take a careful look is at these user interfaces. I think access is great, but are the nudges in behavioral techniques being used for good or for bad and to manipulate customers in a particular way? I think that is a key area to investigate. Mr. Auchincloss. To be looking at, as Cass Sunstein would say, the nudge factor for default choices in terms of how people save? Ms. Bogan. Exactly right. Richard Thaler does a lot of work with that, too, as well for retirement savings. Mr. Auchincloss. The second question is for you, Mr. Blaugrund, and it is about IPOs, which might seem like they are not really related to FinTech or to wealth inequality. But my concern is that over the last 20 to 25 years, IPOs have become more rare. And when we have less private companies going public, we have fewer Americans being able to access the value creation that happens. And increasingly, we have companies raising in the private markets for valuations that are astronomical by the standards of even in the 1990s or early 2000s, and a lot of that value capture is happening for a smaller and smaller pool of investors. Can you talk about things that the New York Stock Exchange and other organizations are doing to make IPOs easier and to democratize the access to the wealth that is being created there? Mr. Blaugrund. Thank you for the question. It is an issue that we spend a ton of energy thinking about and trying to influence in a positive way. As you know, public companies are now larger and older when they have their IPO, and so we are keenly interested in trying to find more innovative ways to bring younger, faster-growing companies to the public market. Two of the ways that have been introduced recently or have achieved more sort of interest recently--the first is a direct listing. That is a mechanism that allows any investor to participate in the IPO-ish first trade in a way that democratizes access to the capital markets that we think is ultimately going to be a very effective way for companies that are interested in issues of equality to participate in the market. The second is the growth in special purpose acquisition companies, or SPACs. Mr. Auchincloss. Mr. Blaugrund, I apologize for interrupting you, but our time is limited here. The SPACs are not, though, really going to democratize access to the value creation that is happening pre-IPO because these are still private vessels, and the value is still being captured by a small number of investors in the know. You have to explain to me how that is going to democratize it? Mr. Blaugrund. I think there is more work to do, but SPACs offer in some ways a retail-oriented product that offers exposure similar to private equities. Chairwoman Waters. Thank you. The gentleman from Ohio, Mr. Gonzalez, is now recognized for 5 minutes. Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. Thank you for holding this hearing and for all our participants. This hearing is supposed to be about GameStop and Robinhood, and I thought it was supposed to be about preventing a halt in trading that we saw that day. It seems to have morphed into something completely different, where many of the ideas, unfortunately, that I am hearing from my colleagues on the other side of the aisle would actually cut off access to the markets for retail investors. I spend a lot of time thinking about retail investors and how to give them more access, in particular into the highest- performing asset class net of fees, which is private equity. One idea, and this is for Mr. Piwowar, that I have had is to provide that access through closed-end funds. What safeguards exist inside of the closed-end funds that would help in this regard? Mr. Piwowar. Thank you, Congressman, for that question. Closed-end funds are regulated much in the same way that mutual funds and other open-end funds like ETFs are regulated by the SEC and are subject to the investment company and the Investment Advisers Act. It is a well-established regulatory framework that has been around since 1940. I believe that private equity investments, private company investments are particularly--it is particularly appropriate to put them in the closed-end fund structure. The open-end funds, either mutual funds have daily redemption, liquidity, or ETFs have almost instantaneous liquidity. These are less liquid assets, and so the closed-end fund structure, and in particular a subset of them, the interval funds, which allow for periodic redemptions rather than daily redemptions, would provide a nice vehicle for that with all the protections that we just talked about. Mr. Gonzalez of Ohio. Thank you. And moving back to the T+2 versus T+1 debate, so one of the reasons or the reason why Robinhood had to restrict their buys is because they didn't have the capital. We uncovered that last time. They didn't have the capital to make their deposit at the time it came in, and so they stopped the order flow. If we move from T+2 to T+1, what effect would that have had on the amount that would have been required at that time? It would have gone down, correct, Mr. Piwowar? Mr. Piwowar. That is correct. It certainly would have gone down. Now, I don't know the exact formula that DTCC uses, but it is a function of the amount of days. So, it certainly would have gone down. It would have been more than half or less than half--I don't know--but it would have gone down. Mr. Gonzalez of Ohio. But all else being equal, Robinhood would have had a lower deposit number, and so, in theory, may not have been forced to halt the buy side, which, again, I thought was the point of this hearing. So, hopefully, we can coalesce around a T+2 versus T+1 debate. I am in the T+1 camp. Additionally, another way that they could have lowered the risk is if they had stronger capital requirements potentially. Do you have any thoughts on that? Because as you probably know, Schwab did not have to halt buy orders. Robinhood did, and they are under two different capital regimes and have two different business models. So, I am curious if you have any thoughts on the capital side of this requirement as well? Mr. Piwowar. Yes, thank you, Congressman. I believe Mr. Tenev testified that they met all of their SEC net capital requirements and were in compliance all that time. Net capital requirements are one way that the SEC protects customers. The other is the explicit customer protection rule, where they have to segregate the assets and the firms can't use them. The SEC's net capital requirements were established in the 1970s. They have been revised over time. One of the areas of concern for me is that those requirements aren't as transparent as they should be, particularly for new entrants. If you are an established entrant, you can hire broker-dealer lawyers who have been around for a long time and know the intricacies of this. I think one thing the SEC should look at--I don't know whether we have the right levels or whether the right securities are given the proper haircuts and all those sort of things, but at least make it more transparent so that new firms like Robinhood know ahead of time whether they are complying and whether they are safely above the minimum requirements. Mr. Gonzalez of Ohio. Thank you. With my last 30 seconds, what would have happened to Robinhood account holders had Robinhood not been able to make their deposit requirement? What is the downside of this? Mr. Piwowar. Yes, thank you, Congressman. Unlike banks, where failure is basically not an option, built into the SEC's regime for broker-dealers, there is a special bankruptcy provision called the Securities Investor Protection Act (SIPA), and there is a group of people called the Securities Investor Protection Corporation (SIPC), that would take over--effectively, what would happen is they would appoint a trustee and very quickly try to move those customer assets over to another solvent broker-dealer. There would be a disruption in trading. It could take days or weeks. It just depends on whether customer assets were segregated properly, all of those certain things, but there is a regime that would have taken over to support that. Mr. Gonzalez of Ohio. A bankruptcy regime. Thank you, and I yield back. Mr. Sherman. [presiding]. Thank you. I now recognize Mr. Taylor from Texas. Mr. Taylor. Thank you, Mr. Chairman. Good news for everybody, I think I am the last guy. So, I appreciate everybody waiting through this. Mr. Piwowar, I really appreciated your testimony. I enjoyed reading your editorial in the Wall Street Journal talking about T+1 versus T+2. I think you have really shed a lot of light in your perspective on that and I appreciated your input. Mr. Grujic, my understanding is, you seem to be--basically, in your written testimony, you seem to be okay with going to T+0. Is that a fair characterization? Am I reading your testimony correctly? Mr. Grujic. I think what Dr. Piwowar said is fair. We have to take a look at the state of the technology. Mr. Taylor. Okay. Mr. Grujic. I think that the technology has evolved a lot. Blockchain has moved from proof of work to proof of stake, things that make it faster. And we are rapidly accelerating, and I think that very soon, T+0 benefits, in my view, will substantially outweigh the costs. Mr. Taylor. Okay. And then, Mr. Blaugrund, just as the COO of the New York Stock Exchange, based on your written testimony, you seem to be fine with going to a T+0 as well. Is that a fair statement? Am I reading your testimony correctly? Mr. Blaugrund. We are certainly comfortable and supportive of moving to T+1. With respect to anything sort of narrower than that, I think we would be hypersensitive to the operational concerns as well as ensuring that netting is preserved. Mr. Taylor. Okay. Your written testimony kind of led to that. But Ms. Goldstein, I think you had the most important and sort of the deepest thoughts on this particular topic, and I know it has been--we have talked a lot about it. And I am just going to read what you wrote. You wrote, ``Losing the benefit of netting would create significant new operational costs.'' Could you expand on that? Ms. Goldstein. Sure, Congressman. Thank you for the question. If you execute a very large trade, say you trade a million shares and perhaps you send it to some algorithm that tries to break it up into chunks, you might have many, many transactions across the million shares you are trying to trade. And if we lose the ability to net those transactions, operationally, we are going to have to look at every single one of those executions instead of being able to combine them together. And so, I think that this is one of the main challenges to moving to what people call real-time settlement, which would be even faster than T+0, right? I think there is T+0, and then there is real time. I just don't know that the industry is prepared to do that just yet, and I think that is why you hear most folks, I think there is perhaps some consensus about T+1 and some hesitation about anything quicker than that. Mr. Taylor. I appreciate it. Again, I think you, in your written testimony, provided the greatest detail, giving me an insight into what those reservations would be. If I could shift to just your next written statement where you are talking about, and I will just read what you wrote. You wrote, ``The broker capital standards, as they are today, are adequate to withstand periods of extreme market stress.'' And I guess my question is--when I was in the previous hearing, when we were talking to the CEO of Robinhood, it struck me, and I think you have heard a lot of my colleagues talk about where it sort of came up over and over, hey, you didn't have enough capital. There was a capital call and you didn't have the money. You had to then shovel in the money, and it wasn't enough. And so, you had to agree not to--you would only buy--I can't remember. You can only do one action, but not the other action with the securities of GameStop in order to reduce this capital call. I guess my question is, was this statement made with that example in mind? Because at least with that example in mind, I would think this statement is incorrect. But maybe I don't understand it. Ms. Goldstein. My belief is that whether it is the SEC net capital rule and tweaking it, or perhaps it is just making sure that brokerages have more capital preemptively than they need to, I think this instance shows it wasn't just Robinhood who had a little bit of trouble generating their capital. Maybe funds are not modeling their own capital risk adequately and should be holding more capital in the event of another big volatile day like this. That was the spirit in which I made that statement in my written testimony. And to Dr. Piwowar's point, I do think net capital rules by the SEC are important to look at. Are there ways that we need to tweak them? I don't know that he and I would agree with how we should tweak them. But for example, right now firms are able to sort of use their own internal models to determine their haircuts. I would advocate that that might not be the right approach. But again, this is an ongoing conversation. Mr. Taylor. Sure. I appreciate your input, and I thank all of the witnesses for your time and expertise. Mr. Chairman, I yield back. Mr. Sherman. Thank you. And Mr. Taylor, it appears as if you were correct. I do not see any other Members who have not had their chance to question the witnesses, who are to be congratulated for their tenacity and endurance. I would like to thank all of my colleagues who participated, and thank our distinguished witnesses as well. I look forward to exploring with my colleagues, and with experts in the field, how to make our markets fairer for all retail investors. The Chair notes that some Members may have additional questions for this panel, 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. This hearing is now adjourned. [Whereupon, at 2:37 p.m., the hearing was adjourned.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]