Catch up on our previous GameStop coverage here.

The US House Committee on Financial Services questioned Robinhood CEO Vlad Tenev; Reddit CEO Steve Huffman; Citadel’s Ken Griffin; Melvin Capital’s Gabe Plotkin; Jennifer Schulp of the Cato Institute; and Keith Gill, a trader known as “Roaring Kitty” who helped set off the stock frenzy over the GameStop saga on 18 February 2021.

It quickly became obvious that the Committee was mainly concerned with Mr Tenev and Robinhood’s role in the GameStop saga, and Robinhood’s operations in general. Whilst apologising for Robinhood’s performance, Mr Tenev found himself on the defensive throughout most of the five-hour long hearing, as US legislators focused on Robinhood’s business model and decision-making process regarding halting purchases of GameStop stock in early February 2021.

A key area of concern for the Committee appeared to be Robinhood’s practice of selling users’ trades to market-making firms such as Citadel Securities to execute them, a practice known as ‘payment for order flow’ or ‘PFOF’, which also contributes to the majority of Robinhood’s revenue. Many, including Rep. Cindy Axne (“D-Iowa”), claimed the arrangement was a conflict of interest which impeded the very users Robinhood claimed to empower and bring democracy of trading to. Rep. Axne said to Mr Tenev that the app’s users “aren’t your customers, they’re your product” – an allegation which has previously been heard in relation to social media platforms in recent years.

What became apparent is that whilst the financial world has undergone a seismic change, the regulatory system has not kept pace. The financial system was created and regulated for a pre-internet world, before the prevalence of social media platforms and mobile trading apps made the ability to trade information on stocks exponentially faster. Considering this landscape, legislators are faced with a challenge to address this new facet of the financial world and update regulations.

The Committee also remarked that it hoped representatives of the Securities and Exchange Commission and the Department of Treasury who were not present at the initial hearing would participate in subsequent discussions around the transpiring regulatory issues.

Some of the regulations potentially needed would concern the likes of Robinhood and Reddit, but what was also criticised at the hearing was the transparency of shorting stocks (as well as the moral and ethical implications that it raises), and the rules governing the process, such as the two-day rule settlement (for most stock trades, settlement occurs two business days after the day the order executes). Without this rule, Robinhood may not have been able to halt trading for so long.

And so the GameStop saga continues.

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