How Robinhood ended up in Washington’s crosshairs
5 min readHere’s the bigger picture: The hearing is being driven by concerns in Washington about the fundamental fairness of the modern market. The GameStop trading frenzy shined a bright light on the free trading boom set off by Robinhood, the role of high-speed trading firms like Griffin’s Citadel Securities and the populist angst at the heart of the Reddit mob.
“Markets advance faster than Congress,” said Ed Mills, Washington policy analyst at Raymond James. “This is Congress trying to hit the pause button to consider updates to regulation and legislation to match where the market has moved.”
Trying not to be Wells Fargo
“It was death by a thousand cuts,” Mills said of the Wells Fargo episode.
Robinhood has a big advantage though: The Wells Fargo fake-accounts scandal was relatively straightforward. This is not.
Thursday’s hearing, officially titled “Game Stopped? Who wins and loses when short sellers, social media and retail investors collide,” is delving into complex market structure issues that casual observers and politicians may not fully grasp. Instead of focusing on one CEO, this hearing will feature testimony from five individuals with distinct backgrounds and interests. And all 56 members of the House panel will get five minutes to ask questions and make statements.
In other words, all bets are off.
“Congressional hearings rarely foster high-minded debate and are generally allergic to policy nuance,” Isaac Boltansky, chief policy analyst at Compass Point Research & Trading, wrote in a note to clients.
And given that these issues are very complex, Boltansky said the hearing “will be little more than political theater that fails to alter the policy conversation.”
Ties to Griffin’s empire
And then there’s Robinhood’s relationship with Griffin.
Like other brokerages, Robinhood gets paid to route orders to market makers, a controversial practice known as payment for order flow. Disclosure forms indicate that in December alone Robinhood generated about $12.4 million by routing orders to Citadel Securities, the high-speed trading firm owned by Griffin.
Citadel in the spotlight
The hearing will pose a test for Griffin, whose businesses typically shun the spotlight.
“In our admittedly limited experience with billionaire investors, they are generally not accustomed to accusatory tones, political posturing, and conflated points,” Boltansky wrote. “This is significant because Congressional hearings are primarily composed of accusatory tones, political posturing, and conflated points.”
Griffin and Tenev will face questions over payment for order flow, which they will argue benefits retail investors by making it free to trade and giving them access to deep markets.
But critics say payment for order flow creates a conflict of interest that allows market makers to trade ahead of retail investors. And that this practice ultimately helped fuel GameStop mania because it paved the way to free trading and incentivizes brokerages to get people to trade frequently. (More trade orders on Robinhood means more payment for that order flow).
Still, Nathan Dean, senior policy analyst at Bloomberg Intelligence, doubts payment for order flow gets banned by Congress or the SEC anytime soon because it would be politically unpopular to raise trading costs.
“The likelihood of that happening in the short term is almost nil,” Dean said.
A new sheriff in town
“The threat of a financial transaction tax is rising,” said Mills, the Raymond James analyst.
Although Thursday’s hearing may feature fireworks, the real action could take place behind the scenes at the SEC.
Often regulators shy away from making sweeping changes to market structure because they fear doing more harm than good.
“Gary Gensler is not that type of guy,” Mills said. “He’s going to do whatever he thinks is the right thing to do.”
