The VIRAL MOMENTS from Congress's Gamestop hearing

[0:00] Waters, Ranking Member McHenry, members of the committee, my name is Vlad Tenev and I'm the [0:05] Chief Executive Officer and Co-Founder of Robinhood. Thank you for the invitation to speak [0:10] about Robinhood and the millions of people we serve. Almost eight years ago, Beju Bhatt and I [0:17] founded Robinhood. We believed then, as we do now, that the financial system should be built to work [0:23] for everyone, not just a select few. We dreamed of making investing more accessible, especially for [0:30] people without a lot of money. The stock market is a powerful wealth creator, but only half [0:36] of U.S. households participated. Mr. Statt, I would like you to use your limited time to [0:43] talk directly to what happened January 28th and your involvement in it. Certainly. Madam [0:51] Chair, Madam Chair, the witness has the opportunity to give their own testimony. Excuse me, you [0:57] give your time for your questioning. You are not recognized, Mr., please go right [1:05] ahead and speak directly to the question. Mr. McHenry. Mr. McHenry, yes, of course. [1:11] Mr. Demoney. Thank you, Chairwoman Waters, Ranking Member McHenry, members of the committee. [1:19] I'm happy to discuss with the committee my purchases of GameStop shares and my discussions [1:24] of their fair value on social media. It is true that my investment in that company multiplied in value [1:31] many times. For that, I feel enormously fortunate. I also believe the current price of the shares [1:38] demonstrates that I've been right about the company. A few things I am not. I am not a cat. [1:45] I am not an institutional investor, nor am I a hedge fund. I do not have clients, and I do not provide [1:52] personalized investment advice for fees or commissions. I'm just an individual whose investment [1:57] in GameStop and posts on social media were based upon my own research and analysis. I grew up in [2:04] Brockton, Massachusetts. My family was not wealthy. My father was a truck driver, and my mom a registered [2:10] nurse. I was one of three kids and the first in my family to earn a four-year college degree [2:15] when I graduated from Stonehill College in 2009. So it was not a good time to be looking for a job. [2:23] From 2010 to 2017, I worked at a few startup companies, but there were significant periods [2:28] when I was unemployed. I took an interest in the stock market, and even though I had very little money, [2:34] I used those times to educate myself and learn more about investing. In 2019, after nearly two [2:42] years unemployed, I accepted a marketing and financial education job at MassMutual. My wife, [2:48] Caroline, and I were thrilled that I had an income and benefits. My job was to help develop financial [2:55] education classes that advisors could present to prospective clients. I was not a stockbroker [3:01] or a financial advisor. I did not talk to clients, and I did not recommend stocks for them to buy. [3:09] Before and after I joined MassMutual, I studied and followed stocks. One of those was GameStop. [3:16] Early June of 2019, the price of GameStop stock declined below what I thought was its fair value. [3:23] I invested in GameStop in 2019 and 2020 because, as I studied the company, I became more and more [3:28] confident in my analysis. Two important factors based entirely on publicly available information [3:35] gave me confidence that GameStop was undervalued. First, the market was underestimating the prospects [3:41] of GameStop's legacy business and overestimating the likelihood of bankruptcy. I grew up playing video [3:48] games and shopping at GameStop, and I plan to continue shopping there. GameStop stores still provide [3:54] real value to consumers and reliable revenue for GameStop. Second, I believe that GameStop has the [4:01] potential to reinvent itself as the ultimate destination for gamers within the rapidly growing [4:06] $200 billion gaming industry. GameStop has a unique opportunity to pivot toward a technology-driven [4:13] business. By embracing the digital economy, GameStop may be able to find new revenue streams that vastly [4:20] exceed the value of its business. I am hardly the only person who has advocated these points. When I wrote [4:28] and spoke about GameStop in social media with other individual investors, our conversations were no [4:33] different from people in a bar or in a golf course or at home talking or arguing about a stock. Hedge [4:40] funds and other Wall Street firms have teams of analysts working together to compile research and [4:46] analyze shares of companies. Individual investors do not have those resources. Social media platforms like [4:53] Reddit, YouTube, and Twitter are leveling the playing field. The idea that I use social media to promote [5:00] GameStop stock to unwitting investors and influence the market is preposterous. My post did not cause the [5:07] movement of billions of dollars into GameStop shares. It is tragic that some people lost money and my [5:14] heart goes out to them. But what happened in January just demonstrates again that investing in public [5:19] securities is extremely risky. As I said earlier, I consider myself and my family fortunate with our [5:26] investment. When the stock price broke $20 in December, I knew my investment was a success. I was so happy to [5:34] visit my family in Brockton for the holidays. The money will go such a long way for us. We had an incredibly [5:40] difficult 2020. Most difficult was the tragic and unexpected loss of my sister, Sarah, in June. [5:46] I am grateful to be in a position to give back to and support my family. As for what happened in [5:52] January, others will have to explain it. It's alarming how little we know about the inner workings of the [5:58] market. And I am thankful that this committee is examining what happened. I also want to say that [6:04] I support retail investors' right to invest in what they want, when they want. I support the right of [6:10] individuals to send a message based on how they invest. As for me, I like the stock. I'm as bullish [6:17] as I've ever been on a potential turnaround for GameStop, and I remain invested in the company. [6:22] Thank you. Cheers, everyone. [6:25] Thank you. [6:26] Chairwoman. Mr. Tenev, Robinhood has engaged in a track record of outages, design failures, and most [6:35] recently what appears to be a failure to properly account for your own internal risk. You've previously [6:41] tried to blame clearinghouses for your need and scrambled to raise some $3.4 billion in a matter [6:48] of days, but you've also blamed a lack of industry-wide real-time settlement, or rather a lack of that [6:56] settlement of trades. But Robinhood's requirements for margin have long been far more lax than other [7:04] brokers for a long time. In December, just a couple months ago, you bragged about having some of the [7:10] most competitive rates in the industry, and this is evidenced by your recent decision to raise those [7:15] requirements. When Robinhood prohibited its customers from purchasing additional shares of [7:22] several stocks, other brokerages merely adjusted the margin requirements on these stocks. [7:28] So, Mr. Tenev, given Robinhood's track record, isn't it possible that the issue is not clearing [7:35] houses, but the fact that you simply didn't manage your own book or failed to appropriately manage [7:41] your own margin rules or failed to manage your own internal risks? [7:45] Thank you for this question, Congresswoman. Let me address the margin point, because I think [7:51] this is an important one that has been under-discussed. So, in December, when we lowered our margin [7:58] rates to 2.5 percent, one of the details that I think was missed is that most other brokerages [8:05] have tiered margin rates, where the wealthier customers pay much lower margin rates than lower [8:11] net worth customers. So, you'll have someone that has $10,000 paying 9 to 10 percent for margin, [8:18] whereas someone with a million dollars pays 2 percent. So, our approach was give everyone [8:24] a uniform rate so that wealthier customers are not advantaged with lower rates than lower-income [8:31] customers. And I think that's a unique approach in our industry and is representative- [8:36] Thank you. I have to apologize. I have to reclaim my time for questioning. You know, as many of my [8:42] colleagues have also pointed out, Robinhood generates much of its revenue from the payment-for-order [8:47] flow arrangements with market makers like Citadel, as well as Two Sigma and Virtue. And in 2016, [8:54] the SEC highlighted ways that the payment-for-order flow created a, quote, potential conflict of [9:01] interest with a broker's duty of best execution. And then, one of the ideas that the commission [9:06] floated in 2016 for addressing these conflicts of interest was to require that brokers pass on [9:12] the proceeds of the payment-for-order flow. Now, earlier, one of my colleagues, Representative San [9:19] Nicolas, said that Robinhood owes its customers a lot more than an apology. And I happen to agree [9:26] with him. I believe that the decisions made by you and this company have harmed your customers. [9:32] Mr. Tenev, would you be willing to commit today to voluntarily pass on the proceeds of the payment-for-order [9:38] flow to Robinhood customers? Congresswoman, I appreciate that question. When the statement [9:46] you refer to was made, I believe 2015 or 2016, it was before Robinhood forced the entire industry to [9:55] drop commissions and replicate our business model, which made payment- So is that a- I should take that [10:02] as a no. You're not willing to pass on the proceeds of payment-for-order flow to your customers? [10:07] When- when the other brokers dropped- I'm just talking about today, right now. [10:14] Payment-for-order flow, Congresswoman, allows for commission-free trading in the context of trading [10:19] commissions. It's a much larger source of revenue in the past than payment- Mr. Tenev, I apologize, [10:27] and it's- I- I don't want to be rude. I just have limited time. But if removing the revenues that you make [10:32] from a payment-for-order flow would cause the removal of free commissions, doesn't that mean that [10:39] trading on Robinhood isn't actually free to begin with? Because you're just hiding the cost, the cost in [10:45] terms of potentially poor execution, or the cost of lost rebates to your customers? [10:52] So certainly, Congresswoman, Robinhood is a for-profit business and needs to generate some revenue [10:58] revenue to- to pay for the costs of running this business. People were initially skeptical that the [11:05] model, even with payment-for-order flow, would work when you remove commissions. And I think we've [11:12] proven that otherwise by making this the standard model by which brokerages operate now. [11:18] I see. Okay. Mr. Tenev,