How Robinhood ended up in Washington’s crosshairs
Here’s the big picture: The audience is driven by concerns in Washington about the fundamental fairness of the modern marketplace. The GameStop trading frenzy has shed light on the free trading boom triggered by Robinhood, the role of high-speed trading firms like Griffin’s Citadel Securities, and the populist angst at the heart of the Reddit crowd.
“The markets are moving faster than Congress,” said Ed Mills, Washington policy analyst at Raymond James. “It’s Congress trying to hit the pause button to consider regulatory and legislative updates as the market evolves.”
Trying not to be Wells Fargo
“It was death by a thousand cuts,” Mills said of the Wells Fargo episode.
Robinhood has one big advantage, however: The Wells Fargo fake accounts scandal was relatively straightforward. It’s not.
Thursday’s hearing, officially titled “Game Stopped? Who Wins and Who Loses When Short Sellers, Social Media, and Retail Investors Collide,” looks at complex market structure issues that casual observers and politicians may not fully grasp. Instead of focusing on a single CEO, this hearing will feature testimonials from five people with different backgrounds and interests. And the 56 House panel members will have five minutes to ask questions and make statements.
In other words, all bets are off.
“Congressional hearings rarely encourage ambitious debate and are generally allergic to political nuances,” wrote Isaac Boltansky, chief policy analyst at Compass Point Research & Trading, in a note to clients.
And given that these issues are very complex, Boltansky said the audience “will be little more than a political theater that fails to alter the political conversation.”
Ties to the Griffin Empire
And then there’s Robinhood’s relationship with Griffin.
Like other brokerages, Robinhood is paid to route orders to market makers, a controversial practice known as payment for order flow. Disclosure forms say that in December alone, Robinhood made around $ 12.4 million by routing orders to Citadel Securities, the high-speed trading company owned by Griffin.
The citadel in the spotlight
The hearing will be a test for Griffin, whose companies typically avoid the limelight.
“In our admittedly limited experience with billionaire investors, they are generally not used to accusatory tones, political postures, and points of confusion,” Boltansky wrote. “This is important because Congressional hearings are mostly made up of accusatory tones, political postures and mixed points.”
Griffin and Tenev will face questions about the payment of order flow, which they say benefits retail investors by making them free to trade and giving them access to deep markets.
But critics say order flow payment creates a conflict of interest that allows market makers to trade before retail investors. And that this practice ultimately helped fuel the GameStop mania as it paved the way for free trade and prompts brokerages to get people to trade frequently. (More trade orders on Robinhood means more payout for this order flow).
Still, Nathan Dean, senior policy analyst at Bloomberg Intelligence, doubts that order flow payment will be banned by Congress or the SEC anytime soon, as it would be politically unpopular to increase trading costs.
“The likelihood of this happening in the short term is almost zero,” Dean said.
A new sheriff in town
“The threat of a financial transaction tax is increasing,” said Mills, Raymond James analyst.
While Thursday’s hearing may feature fireworks, the real action could take place behind the scenes at the SEC.
Regulators are often reluctant to make radical changes to the structure of the market because they fear doing more harm than good.
“Gary Gensler isn’t that kind of guy,” Mills said. “He’s going to do whatever he thinks is the right thing to do.”