[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.]



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