>> and payment for order flow is set by the brokerage firm, not the whole seller, right? >> that -- it is ultimately a negotiated number, but it is a number that is set by the brokerage firm, and not by us as the market acre. >> well, as a market maker that provides execution services to retail brokers, you are required to meet best executional requirements is that correct? >> yes, it is. >> and in other words, market makers are required to provide the same or better pricing than the exchanges, correct >> that is correct >> and how can market makers offer that better pricing to mr. sherman's line of questions. >> so there are a number of drivers that permit us to offer better pricing than what is available on exchange. the first is that exchanges have legally mandating minimum text

sizes of a penny if you look at a stock like amc, it trades $5 big, 5.01 offered, it could trade with an increment, 501 offer or vice versa, but the exchanges are limited to a one cent minimum tick size, and we have been clear on the record in prior testimony that exchanges should be permitted to have a smaller and more competitive tick signs. that's number one. >> okay. >> number two is that the average retail order is much smaller in totality than the average order that goes on to an exchange because this order is smaller and i'll share a number with you, the typical robinhood order is ballparked about $2,000 in

size because it's a small order, the amount of risk that we need to assume in managing that order is relatively small as compared to an order that we have to make from our on exchange trading and i'm sure you're well aware, we are the largest trader of stocks on exchanges in the united states. >> let me move to mr. tenev really quickly on that point what impact might greater restrictions on the payment for order flow model have on your ability to offer zero commission trades >> we do believe, congressman, that that's an important question, and payment for order flow helps cover the costs of running our business and offer commission free trading to customers. when we started, people didn't even think that there was enough margin left to make this business work, but we have been fortunate to make it work and to make it work for our customers.

>> let's talk about why robinhood restricted trades. i think your explanation about margin requirements charged by your clearinghouse makes sense is your clearinghouse supervised by the fed and the s.e.c.? >> i believe that. >> are the margin requirements charged by your clearinghouse, in turn approved by federal regulators >> yes and did federal regulators approve the value risk charge that was imposed on robinhood? >> i believe, congressman, the value of risk charge is outlined in general terms in dodd-frank, but i'm not sure who approved the specific implementation of that formula >> so if anyone has a problem with your decision to halt trades, it's fair to say that their frustration should be directed toward federal regulation. >> congressman, you know, i'm not trying to throw anyone under

the bus in direct frustration anywhere all i can say is robinhood securities played this by the books and played it basically the only way we could remain in compliance with our deposit requirements. >> mr. plotkin, i appreciate your testimony that melvin follows law but lost $6 billion in 20 trading days let me ask you about your risk management did your short positions exceed float? >> no, they did not >> well, shorting has an important role to play in the markets allowing legitimate hedging and we are interested in sh shorting and so we would hope you would clarify that, and how it is that you make sure that you're first locating the borrow >> your time has expired mr. cleaver, you're recognized for five minutes >> thank you, madame chair, and

i, too, would like to thank you for this hearing it's a question that a lot of people are asking, probably many of us as we, you know, go throughout our districts let me start with you, mr. tenev. i'm just curious, if you can give it to me in a short period of time, how did you come up with your name for your -- the company? >> absolutely, thank you for that question, congressman robinhood stands for lowering the barriers to entry, and democratizing finance for all so so the same tools that institutions and wealthier high net individuals have had for a long time should be available to the people regardless of their net worth or how much money they have. >> okay. i appreciate the answer, you know, because of something i

would also embrace i have a 23-year-old on the other side of the house who i love dearly. but he has no training, no income, no qualifications. how in the world could he get like a million dollars worth of leverage >> thank you, congressman. so the leverage that we provide to our customers, which less than 3% of our customers actively use, is regulated strictly by requirements so the only way to get that amount of leverage in a margin account through borrowing is to deposit a similarly sized amount of capital. >> or by mistake. >> congressman, i'm not sure what you're referring to

>> well, i mean, there is a record of a young man getting a million dollars worth of leverage he was only 20 caryears old. i'm just saying, you know, if that's not a policy, that was an error. >> congressman, yeah, i appreciate the opportunity to address that really important point. you're referring to mr. kearns. >> i am. >> the man who unfortunately passed last year. >> yes. >> first of all, i'm sorry to the family of mr. kearns for your loss. the passing of mr. kearns was deeply troubling to me and to the entire company, and we have vowed to take a series of steps, very aggressive steps to make our options product safer for our customers, including changing the customer interface, adding more additional options,

education, as well as strengthening and tightening the requirements for people getting options, and adding a live customer support line for acute options cases. so it was a tragedy, and we went into immediate action to make sure that we made not just the most accessible options trading product for our customers, but the safest as well >> okay. in my real life, i'm a united methodist pastor, and so i've read your statement after the tragedy of this young 20-year-old. but, i mean, and i don't think you nor i want to get in to litigate that right here today but, you know, what improvements did you make in the aftermath to your platform, or were there improvements >> thank you, congressman. there were several improvements.

one, we added the ability to instant exercise as well as exercise options, positions, in app. we clarified the display of buying power, specifically negative buying power in situations where one leg of a complex multi-leg options transaction were to be assigned. we also added an options education specialist we also added live phone based customer support for acute options which has gotten very great feedback from customers and is something we're expanding to other use cases such as cases where customers' accounts have had off platform hacking incidents. >> okay. the last one is where i was concentrating on

because this young man was trying to get into your system to find out what was going on. he was confused and scared and so he sent e-mails and so, you know, and to be fair, there was a response, but it was like, you know, hours later. and so as i became more and more familiar with this particular case. >> the gentleman's time has expired. >> thank you, madame chair appreciate it. >> you're so welcome mr. hill, you're recognized for five minutes >> well, thank you, madame chair for holding this hearings and i want to thank the witnesses for their expertise and their patience i have a letter from the american securities association i would like to insert in the record, please. >> without objection, such is the order. >> thank you very much, and mr. tenev, what a treat to see you and congratulations on being part of the american dream

i had the pleasure of working for president bush 41 to try to bring capitalism to bulgaria after the wall fell. i'm glad to see you're an american citizen and innovating here in our country. >> thank you. >> i think you have done a good job talking about i'd say the acknowledged lesson you've learned in terms of these deposits for clearing and the important risk management issue for your firm. so i'd like to turn to follow up on some of the discussions about retail service that you've also touched on today do you have a call center generally for robinhood investors? >> thank you for that question, congressman. and i want to start by saying customer service is fundamental to everything that we do, and it's one of the areas where we're investing the most we have customer service centers in a number of states, colorado,

florida, texas, and arizona. and we're looking to expand aggressively. >> you have a call center that i can call a 1-800 number if i'm having trouble in the middle of the trading day. >> we do offer, congressman, live phone support in app for certain use cases. we're expanding nathat as fast we can we mentioned advance options cases as well as account takeovers which typically happen through a customers' e-mail, personal e-mail who's been compromised and the feedback has been great, and we're looking to expand the live phone channel iu e-mail channel >> thank you, that's helpful and on the subject of margin and options, you've talked about that today, but, you know, i spent 40 years in this business and have been the general securities principle in this firm, and the issue of granting

margin and option approval to retail clients is always an important issue. you've addressed that today. i want to turn to a different topic that has not been raised and that's low dollar stocks as i understand it, your policy and procedure manual simply said that you allow low dollar stocks if they're on an exchange, but many many brokerage firms are reticent to allow retail investors to invest in stocks that are under $5. could you address that issue today? >> yes, i'd be happy to, congressman. so robinhood allows customers to trade in and invest in exchange listed securities, so that's the objective criteria that we use and it actually excludes several types of securities that customers commonly request a trade y. on robinhood, you can't trade over-the-counter bulletin boards, except in limited cases where a listed stock falls to over the counter you can't trade pink sheets and of course you can't short sell or enter undefined risk options

trades so our objective criteria involved whether exchanges list these securities. >> thank you, and i think that probably i'm sure you'll reevaluate that after these effects. let me turn to ms. schulp, thank you for being here the wall street bets reddit platform, i'm curious when you think about the obligation of this s.e.c. pending investigation based on your finra background, do you think the s.e.c. should look at the bulletin board participants under section 9a2 or potentially inducing trading in a certain direction. is that worthy of their review >> thank you for the question, congressman. i think that there's been little evidence to this time that there's been any sort of false or deceptive conduct taking place on the wall street bets forum. that does not mean, though, that i think the s.e.c. should not take a deeper look

because of the anonymity in then people that were engaging in deceptive behavior that's not readily apparent to outside, to the public so i do think the s.e.c. should look but to this point i've seen very little that would meet a test for manipulation which generally involves false or deceptive behavior. >> thank you, i appreciate that. mr. tenev, i thought of another question for you, would a securities transaction tax be beneficial to retail investors in the united states >> thank you, congressman. i don't believe it would >> thank you >> gentleman's time has expired. we will take a short recess. the committee stands in recess for five minutes thank you. so we've been watching there

the house committee on financial services with representatives from reddit, from gamestop, from melvin capital and others talking about what went down with the big rise in game stop's stock, what happened when robinhood shut down trading on it, and how did reddit drive those moves. was there an impact there. for more on game stop hearing, let's bring in kate rooney now what are you hearing in this >> a lot of attention on vlad tenev. he seems to be getting most of the air time here, and most of the questions are being fielded to him a lot of questioning on the motives behind shutting down the trade. he answered that question repeatedly, and so did ken griffin from citadel what were the motives, why did crow shut down trading he continuously pointed lawmakers back to the written statement and said it had nothing to do with the hedge funds, they had no influence from the hedge funds, that was one key point. they talked about their business model. he said this is the reason we

can offer free trades and that people can use this product without paying for it. that came up a couple of times, the same with ken griffin, he did also get a ton of questions on that sort of behind the scenes revenue model, which is important for them also asked about gamification. there was talk about social media and that influence there he said investing is not gamified he said they take it seriously, and they don't liken it to gambling a ton of topics. one new number we got, we have not heard this from robinhood, they have seen $35 billion for gains in customers, trying to make the point there that this product and platform has helped the retail investor. >> all right kate, thank you very much. let's talk a little bit about some of the others who were on the hearing, ken grirffin, the head of reddit, how do you think they came off and what were the pressure points against or on those two particularly, kate

>> ken griffin saw a lot of conversation about payment for order flow he's got two sides of the business he had to answer for, the hedge fund and its relationship to melvin capital there was a lot of tense moments, a sort of snippy moment between ken griffin and a lawmaker there was some tension there the reddit ceo didn't get a lot of questioning, investing is investing, it's not gambling this entire house hearing has not really coveredmy favorite l the day was from roaring kitty or keith gill who said in his opening statement that he wanted to go through what he's not, and he said, i'm not a cat, which is a nod to the viral video of that lawyer that had the zoom screen, so a moment of levity there from roaring kitty. he did say he's not a hedge fund, he's an individual

investor, and he's still bullish on gamestop. he was asked repeatedly if he would still buy that stock he says yes, he's looking at the fundamentals that is another surprising turn there. >> you know, kate, i think one of the things that the lawmakers really are intent at getting to the bottom of is whether this is a fair playing field whether the retail investors coming into this, one, are in need of protection from wall street bets on reddit on one hand, whether they need more protection from a platform like robinhood, and whether they got taken for a ride, and you got that over and over again when you had sort of this grilling. well, if fidelity comes to you with the same trades, and robinhood comes to you with the same trades, which one is going to get preferential treatment. was that answered satisfactorily >> to the lawmakers it didn't seem that way. you know, that answer was a technical question, and i think they were trying to get ken griffin to answer it in a

specific way they seemed to disagree on whether that answer worked, and the idea of best execution, trying to get the customers the best price on a trade, that is a pretty complicated back end system and the sort of apples to apples comparison to fidelity versus robinhood i think would take more time than a house hearing in the five minutes that lawmakers have it did seem very tense on that question in particular we'll see if there are any follow ups here on that for ken griffin or, you know, if we see any action on the senate, i think that question and getting an explanation of sort of this complicated back end system of wall street will be something that they'll really want to dig into. >> it's very esoteric stuff, frankly, and you have to really bear down and wrap your mind around it with the payment for overflow when you're talking about pennies or hundredths of pennies on some of the trades. let's bring in leslie picker to talk about what she saw and heard particularly from the folks from your beat, which is really the large managed money

of hedge funds and we had mr. griffin, we talked about him gabe plotkin of melvin capital as well. >> i'm actually surprised that plotkin did not get more questioning. i expected a bit more populism, and kind of looking at his role as a short seller. he did get some questions, however. he was asked whether or not he believes there should be more transparency and disclosure around short selling he kind of dodged that question noting that if those are the rules, he will abide by them they asked whether he had shorted a stock over 100%. he says he has not done that in the past, so some kind of rudimentary questions surrounding just the practice of short selling as a whole i think they were looking to get to the heart of whether there needed to be any kind of additional regulation on that front. surprisingly, there was no question or there hasn't been any question about the role of a short squeeze in volatilely, specifically, which is basically, you know, part of the title of today's hearing

with regard to griffin, he received pretty much no questions or no commentary surrounding his role as the head of his hedge fund. it was largely related to his business, the citadel securities company he runs, the market making side, and you know, interestingly, we heard a few repeat questions, and kate touched on this as well, about the practice of payment for order flow, the fact that companies like citadel pay brokerages like robinhood to route their orders to execute their orders, and that's part of the business model, so lawmakers really trying to get at the heart of what that does, and how it works but certainly some, you know, bantering back and forth over there as well. >> leslie, thank you very much for more on the hearing, we're waiting to come back from a quick break. we bring in now greg zuckerman, special writer for the "wall street journal," and ina freed,

chief tech nomgs what's your take away? >> there was a lot of finger pointing, a lot of trying to find one person to blame which is how our markets workday in and day out. this was an extreme example. the fact that the system is geared towards the wealthy, and the wealthy have better access than individual investors. >> greg, do you see it that way, and let me probe a little deeper with a second layer and that is as gamestop rose in price. i'm so sorry, greg, they are resuming the hearing we're going to go back to washington chairman waters. >> so back then what was the price of the stock when you started investing in it? >> at the time it was in the ballpark of around $5 per share. >> and in your analysis what did

you think a proper price for the share was because you thought you were getting a good buy? >> sure. at the time i thought that the values of business could be worth up to roughly $2 billion >> okay. but how much is that per share let's bring it back to the -- you bought at 5. you thought it was worth 10, 20? >> i felt as though it could be worth at the time in the range of say 20 to $25 per share >> okay. and you continued to invest on and off through 2019 and 2020, is that true >> yes >> okay. and you also -- you bought long, you bought some shares, but you also did some options trading, did you not? >> correct i did. >> and options trading is not really for the novice investor, is it? >> it is a riskier investment, yes. >> okay. on january 27th, i think the

stock price hit $483 or something like that. is that true >> i believe it was in that area, yes. >> in your analysis back when you started investing in the stock, did you ever see it being valued at $483 per share >> at the time, i thought there was a -- it was possible but a very low probability, i thought. >> okay. thank you. just a couple more questions in terms of the platforms where you visited and discussed this stock with others, one was the reddit, sub reddit wall street bets platform, correct >> correct >> and at any given time, how many people were you talking to on that platform

>> i wasn't so much talking to anyone individually but rather making posts on that public forum. >> that gamestop was an attractive stock. >> yeah, early on i had felt that it was an attractive investment opportunity and i had shared some of my thoughts as to why that was >> did you discuss this on any other platforms? are there any other kinds of reddit or other kinds of platforms that you talked about the stock? >> yes, i have talked about the stock on some other platforms. >> okay. did you ever talk about the short sellers that had bet against this company >> yes, the topic did come up. >> about when did that occur >> oh, since around the time i had begun investing in it. it was as someone else noted an exceptional level of short interest in the stock since the time i started investing in it >> okay. let me turn my attention now to

you mr. plotkin. when did melvin first take a short position in gamestop >> thank you, congressman. that was in 2014 really right at our inception of the fund >> and when you did that, you continued to maintain a short position >> that's correct. >> so you said you analyzed the value of the stock and you, by taking a short position, you, unlike mr. gill, thought that the stock was overpriced he thought it was under priced, you thought it was joefr priced. >> that's a good conclusion, yes. >> okay in your analysis, when you started into the short position, what did you think the stock was worth? >> i don't remember exactly at the time i think when we launched it was probably a 40-dollar stock

i think we believe the company had a lot of, you know, structural challenges. we have seen their earnings go from, i think, north of $3 a share to almost negative $3 a share, so there's been a lot of challenges fundamentally >> last question for you, were you in a naked position in your short position because the stock was oversold >> no, our systems won't even allow that, so that would be impossible for us to do. >> okay. well, thank you, my time's expired. i wanted to get some facts out for mr. mchenry, and i yield back >> thank you very much the for five minutes. >> thank you, madame chair, ranking member mchenry for holding this hearing thank you to the witnesses for being here today 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 different walks of life and industries and having access to cost efficient investing is crucial while there are always ways to make a system work better, our capital markets are the envy of the world with their liquidity and diversity of investment opportunities. innovations in securities trading brought by the private sector have increased access for retail investors, for better or for worse and this situation is a perfect example. for example, one of our witnesses here, mr. gill or should i say roaring kitty, turned $53,000 into almost $50 million and that's what you would call some deep you know what value of course we know that not all of those who invested in e stocks share the same success story. however, i want to highlight a potential vulnerability in these

innovations. 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 user information by tiktok to its parent company bite dance and asked for a review chinese companies are required by law to regulate online behavior that deviates from the political goal of the ccp. obey the ccp censorship directives and participate in china's espionage. these regulate tiktok in the chinese market, and weibo and mumu are subsidiaries of chinese parent companies according to bloomberg, funds affiliated with own at least 14%

of weibo, a company that risks being delisted after the u.s. department of defense put the company on a blacklist on january 14th, 2021, m, umu is owned by futu holdings, entities affiliated with ten cent, with known ties to the ccp. on december 8th, 2020, bloomberg business week ran an argue saying the company has increased its roster of brokerage clients by 10 fold to more than 2 million by offering free stock trades with a slick online interface. on january 29th, 2020, the day after trading activity for long trades on certain stocks discussed on reddit threads were limited, bloomberg ran an article with the headline robinhood rival weeble, see 16 fold jumps in trading accounts the apps have rapidly increased

their user base which has me concerned. ms. schul do you think we should be concerned aboutchinese entities with ties to the ccp, receiving identifiable information or other user data from their broker dealers licensed or registered in the u.s. >> i think it's a potential national security concern which is a bit outside of my area of expertise. what i can say is that the rules that the brokers have to apply and comply with regarding personally identifiable information and other material data should be applied equally to companies that are based offshore and companies that are based on shore and i hope that that's the case with respect to weible or any other competitors that are not domestically owned. >> having a diversity of choice for different trading apps is generally good for market

competition. however, is it good for -- is it a good outcome for millions of americans to flood into trading apps that could be required to share user data to parent companies that have ties to the ccp? >> again, i think choice is key here, as well as understanding from a consumer perspective, what you are -- what companies you are choosing to do business with again, the national security concerns are a bit outside of my area of expertise. >> well, i thank you for being here this is another angle to this issue with these new options that are being provided to average retail investors and we also want these retail investors to have the most amount of information as possible to be set up for success >> thank you very much mr. himes, you are recognized for five minutes >> thank you, madame chair, and a big thank you to our panel today for very interesting

conversation one of the chairwoman's ways of characterizing this hearing was who wins and who loses and i've spent a bunch of time in the last couple of days looking at the various players here i'm convinced that the wholesalers, that citadel is one of the winners they make a lot of money they're the casino in this story, and the casino tends to win over time. robinhood has a valuation of $5.6 billion and makes a lot of money from the casino. so who loses, and i want to spend some time talking about the person who usually loses, and that's the retail investor and while i have supported for many years the democratization of finance as we say, it's not just in washington, d.c., but on wall street. the retail investor is known as dumb money, and there are any number of structures that are set up to take advantage of the retail investor, and i think

it's worth looking at that because as much as we're celebrating mr. gill here, we're not talking about mr. salvador vergara who took out a $20,000 personal loan through robinhood, invested it in gamestop only to see the value of his position go down 80% so mr. vergara is out $16,000 he doesn't have that he owes to somebody else. and as much as i support the democratization of finance, we need to be thoughtful about this mr. tenev, my question is for you, you quoted a $35 billion number as what i interpreted to be profits in excess of deposit funds and securities if you just look at your customers who traded in gamestop over the period of its increase and subsequent decrease, mr. tenev, how did your customers in the aggregate do did they win or did they lose? >> thank you, congressman, for that question.

i don't have that particular cut of the data top of mind. maybe we can get back to you on that one. >> you don't have that you do have a $35 billion figure that figure doesn't mean a lot to me because it's just a dollar number help me convert that to a rate of return. that $35 billion is that gross or net in other words, is that actual profit or does it include margin shares or other forms of leverage that may not belong to the holder. >> it does include unrealized gains. the value of assets both including positions in securities and cryptocurrencies. >> i get that. but again, 35 billion doesn't mean anything to me unless you can convert that einto a rate of return on what asset under management number is that $35 billion realized against. >> the number is not one that

robinhood has publicly shared. >> you can share $35 billion, sorry mr. tenev, i don't have a lot of time. $35 billion is a meaningless number i need to know what that is in return convert into rate of return so i can compare to treasury, compare to the s&p 500 >> congressman, with respect, i think the proper comparison is to customers not investing at all. much of our customers are investing for the first time and are taking money that they otherwise would have spent or consumed. >> mr. tenev, again, i don't want to be rude, but it's my time again, you offered up the $35 billion number, which as you and anyone else schooled in finance knows is meaningless unless you convert it into a rate of return please convert that $35 billion number which to the folks watching at home sounds like a lot of money but what does that convert to in terms of rate of return which is what matters.

>> congressman, $35 billion is indeed a large amount of money, especially for our customers who are mostly small investors it's more than most corporations, nearly all corporations. >> mr. tenev, don't make me be rude here. you and i both know $35 billion of unrealized gains, if that's on a base of $100 billion, that's a 35% of a return if that's under a trillion dollars, it's a radically different rate of return what i'm trying to get at, mr. tenev, here, is you threw out the number of $35 billion. i actually think the right comparison is what if your clients had simply invested in the long run in an s&p index fund, would they have -- would that number be more than $35 billion or less? >> congressman, with respect, i don't believe the right compare southern is investing in an s&p index fund i think the right comparison is not having invested at all, and having spent that money and consumed it.

>> it's most certainly not it's most certainly not, mr. tenev. i'm out of time, but again, you put out the $35 billion number, so i think it's only decent, because you and i both know a hard dollar number is meaningless, unless you can convert it to returns, so i'm going to ask you to convert that obviously i'm out of time into a rate of return for us. >> you're out of time. mr. you're recognized for 5 minutes. >> thank you, madame chair, and i appreciate all the members of the panel being here i think you have seen that there are occasions with some on the committee here that if you're not giving them the answer that they want, that they can use, they're just going to continue to push on you and so i just encourage you to continue speaking the truth and you'll always stand up head and shoulders above everyone not surprisingly, the situation

with gamestop trading has resulted in colleagues to call for legislation to be hastily enacted. it seems to be a trend in washington, d.c. to never let a crisis go to waste some have even spread conspiracy theories and alleged that crimes were committed before knowing what even happened i can even testify to what was just being said as i know numbers of people, personal friends, who have never invested before but because of robinhood and other retail platforms, many of them took the stimulus money that they received during the c.a.r.e.s act, which they were still working. they didn't need, and they actually started an account and started investing, so yes, more and more people who have never invested before are now investing using these platforms. this hearing is a reminder that with complex situations, we should take time to understand what actually did or did not happen especially with this

gamestop situation now, the s.e.c. is the proper authority to determine if any rules were broken. and they are looking into it congress has already given the s.e.c. broad authority to oversee the capital markets and we do not need to rush to enact even more big government regulations that could ultimately harm the investors. a question, mr. tenev, can you remind us, again, why robinhood temporarily paused trading of gamestop and other stocks. >> of course thank you, congressman robinhood paused trading temporarily. i should say paused buying of about 13 securities on thursday so that we could meet our regulatory deposit and collateral requirements. >> okay. so what you're saying is you were paused because you had to comply with regulations. is that true

>> correct >> so it's ironic, the people that are criticizing brokerage firms because they paused trading, which they sometimes have to do to comply with regulations, these same folks are now saying we need to respond to this with more regulations. i would say if people don't like brokers occasionally have to pause trading, i would suggest they look at the regulations that required it at some point we need to recognize that piling on more and more regulations, increases complexity, and does not help investors. a question for ms. schulp, despite the volatility and frenzy of media and social media, it seems the markets functioned as they were supposed to in this situation and that markets are not broken they are working well. do you agree with that >> i agree with that. >> thank you >> i think most reasonable people that are listening to this would agree that there are regulations in place, the s.e.c. has those to pause activities

that could be harmful, not only to the markets but to the individual investors what i'm understanding you saying is that it did work in the way it was supposed to. >> the facts that i know now, it does appear to have worked the way it was supposed to this is not a sign to ne that the market is broken >> thank you mr. griffin. what are some of the issues that policy makers should consider in the t plus 2, t plus 1, t plus 0 debate obviously margin requirements exist to make sure firms have enough capital to settle transactions, but faster settlement and lower margin requirements could be positive for the retail investors, and we need to balance those needs. can you address what some of the issues are in the t 2, t 1, and t 0 issues. >> we started at t 5, we will one day be at realtime settlement and the question is how long

does that journey take from t 2 to t 1, which reduces the amount of capital required by broker dealers to meet the needs of their customers, that reduction in capital would be meaningful, would have been very helpful to robinhood during this period of time reduces risk holistically. as we go to same day settlement, you now bring into question the complexity, and you bring in to play the necessity for all systems to be functioning every moment of every day with no room for error. on a t 1 settlement. >> your time has expired. >> let me remind the members that we're going to have a series of hearings today is the first there will be probably two more. i didn't hear anyone say they were ready to pile on

regulations so let's make sure we know that our statements are accurate you're recognized for five minutes. >> thank you, madame chair and to our witnesses mr. tenev, i would like to follow up a little bit on payment for order flow, and deknock democratization of finances is a noble goal but consumers need transparency and high quality information, not only about fees but order execution quality. your customers don't care directly about who you subcont subcontract order execution, but they need a simple way to compare the execution quality between your app and competing apps or other accounts, and you know, while institutional investors can afford to run their own tests and they do, and i'm sure mr. griffin is normally quite often on the receiving end of those tests and trying to measure up to his competitors to

compete for market share there, the institutional investors have the market power to demand best execution statistics for their prime brokers, and every day investors do not get the same transparency in fact, i believe there's an s.e.c. rule, rule 606 that requires brokers to disclosure at least some order execution data to institutional investors. this does not apply to retail investors. mr. tenev, since robinhood's mission is to democratize finance for all, i ask, what are the mechanisms that you would accept and support to provide transparent order execution quality statistics so your customers can engage in a clean apples to apples comparison between, you know, other brokers, between your app and other people's hands, in terms of the total cost of trading >> thank you, congressman, for that very important question i'm generally in favor of a

greater amount of transparency than what we have typically seen in the financial industry. and recently, robinhood and me personally have engaged publicly on the topic of payment for order flow, short selling, and of course t plus 2 and realtime settlement we do publish 606s, via robinhood securities that detail our payment for order flow arrangements with various market makers, and just in past year, the industry implemented more detailed 606 requirements which we of course conform to. also back in december of 2020, we released a public page on our web site that provided detail about the execution quality including price improvement that our customers received and we're proud to announce in 2020 our customers received in aggregate over a billion dollars of price improvement on their executions.

>> right but that's not a comparison to your competitors you know, there are a lot of questions about the accuracy of the best execution reference price, and independent of whether it should be improved, it seems like if i was a customer of you or one of your competitors, what i would want to see, i just executed a trade of $2,000, and on average, i got x percent better or worse than a reference price. and then over time and see not only the trade that i just executed but perhaps a running average over the last month or two that you can compare to the running average of whether you're exceeding some benchmark for trade execution quality that, really be compared with potential competitors. and is that a workable system? are there difficulties is there a reason why industries should move that way in the name of transparency to customers >> congressman, this is a very

interesting topic to me. i would love to have the conversation i don't know if this is the right forum to necessarily ideate and brainstorm on all the solutions but i just want to say i would be happy to engage in this in a details forum and figure out the right path. >> okay. well, yeah, we do intend to continue to engage with the industry on this subject because, you know, it's very easy to make payment for order flow sound really creepy you're basically selling a list of groups to the sharks. on the other hand, you pmake par of an argument that this can net out positive for consumers but for it to fully net out positive, they have to be able to make the apples to apples comparison, and so that's, you know, i think really an important issue. and i think that probably your reaction to that, if you found your customers were leaving you because of poor execution quality, you would do what large funds do, which is to split your order flow between multiple order execution firms and then

demand of them the best order execution and move your business to whoever does the best for your customers >> congressman, we already do that we have 7 -- >> your time has expired mr. mooney, you're recognized for five minutes. >> thank you, madam chairwoman let me start by saying last congress, 30 of my democrat colleagues four of whom are on this very committee, cosponsored a bill that would impose a financial transaction tax on the purchase of securities and certain derivatives. and just recently after the market volatility surrounded game stop in january, democrats renewed the call -- many democrats, anyway, renewed the call for a financial transaction tax. on just january 28th congresswoman ileana omar tweeted how about this, financial transaction tax now. congressman defazio is the lead

sponsor of the bill. he has already put the bill back in for this session of congress. it's now house resolution 328 of 20 -- so it's called the financial -- wall street tax act of 2021. i actually have a copy of it from the last session here it is in again now he says, congressman defazio says that a financial transaction tax could, quote, help create a more level playing field for main street. with that backgrounds, the robinhood platform has more than 13 million users and most number of small dollar retail investors. if the federal governmentied a .1% transaction tax on the sale of securities -- and i know one of my colleagues mentioned this earlier, but i wanted you to expand more, how with that b

1% transaction tax on the safely securities affect your platform and the retail investors that are your customers >> thank you congressman and we would be happy to engage in this discussion much more in the future a ten basis point financial transaction tax would eat into the returns of our customers, which as you pointed out, are large largely smaller investors n. that sense, it would be a cost to retail investors. of course that would have to be weighed against the potential benefits of this tax and i know it is a more complicated issue than meets the eye at first glance. >> okay. thank you for that answer. my next question is actually for jennifer i know you spent your career specializing in financial regulation in your expert opinion, who a

financial transaction tax directly prevent fraud or market manipulation >> no. i don't think a financial transaction tax would -- would have an effect on fraud or manipulation i also don't think that it ultimately -- financial transaction taxes often fail to raise money, and they distort trading in a way that's not necessarily foreseen initially by the tax and i would like to just add in there as well that financial transaction taxes, while they initially might seem like a small imposition on an individual investor, those taxes often hurt individual investors in their long term retirement goals by -- by affecting the institutions that also do the trading in mutual funds and with retirement money i don't think a financial transaction tax is a good idea >> and a quick follow-up to that, what do you think a

financial transaction tax would have done anything to prevent the market volatility and disruption we saw just this past january? >> no. i don't. i don't think it is related here there has been some discussion that it might have decreased the amount of trading, and thus changed the volatility it is not my opinion that that would have had any effect on this particular circumstance. >> thank you i only have a minute left. let me summarize the financial transaction tax supported by many democrats would do nothing to prevent market manipulation or fraud, would have not prevented the market disruption in january, and most importantly, would hurt retail investors, yet democrats are claiming that the events surrounding gameston and robinhood in january make it imperative to implement this financial transaction tax. it just doesn't ad'd add up. a financial transaction tax would make it more expensive for small retail investors to trade. and so much for looking out for main street. i believe we should be working

to the to find ways to open up markets to retail investors, not close them, instead of making trade more expensive with a burdensome tax let's look for ways to empower retail traders thank you madam chair. i yield back. >> thank you very much ms. beatty, you are recognized for five minutes ms. beatty >> thank you, madam chair person, and thank you to the witnesses. my first question is to the ceo president ken griffin. in the first three quarters of 2020 your company paid online brokerages like robinhood $700 million for their order flow do you believe that brokers like robinhood can service the best interests of their users while selling their order flow to companies like yours and that's yes or no >> congresswoman, i believe that

robinhood actually goes further in best interests of their customers by in fact routing their flow orders to citadel we give a better price, a better execution than the alternative of going to exchanges. >> i am going to take that as a yes, since you said they go further. then can you tell me, why did your company urge the s.e.c. to ban the payment for order flow models in a filing to the s.e.c. >> congressman, that is a terrific question. that filing relates to the u.s. options market it was a filing back in i believe 2004. in the u.s. options market at the time, trades were committed against listed quotes. we were apprehensive about the direction in which the u.s. options market was heading towards the existence of these

price-improvement auctions, which diminished the incentives to aggressively provide bids and offers in the options market we felt that legislative or regulatory efforts to encourage type quoting, to discourage the existence of these auctions and this was being in some sense fueled by a series of payment put forward programs was in the best interest of american institutional and retail investors. regretfully, we did not prevail in our reasoning the rise of price improvement auctions came into, in essence, the day to day model for options trading in the united states and i do believe that this is a setback for our capital markets. >> so, because my clock is ticking, let me ask you this association are you saying that you no longer believe that the model is anti-competitive and distorts order routing

decisions? >> i think it is important to distinguish between a market where you must trade on an exchange. in the options market we must print the trade on an exchange versus a market where you can trade off exchange, which would be the u.s. equities market. so just to be very clear, because your question is very good every single options trade must be executed on an exchange equity trades do not and because of that, i can save robinhood exchange fees and offer a tighter bid ask spread than -- >> we have to have a further discussion let me interrupt you only because my time is ticking and i want to follow up with a question for roob's ceo. several of the brokers -- robinhood robinhood's ceo. several of the brokers offer the

order flows as a sale to the firm like citadel. however the price that robinhood gets for the order flow is much higher than any other brokers -- any other brokers receives i could go on and tell you we have pulled the s.e.c. filings that robinhood receives 17% per 100 shares stock of traded, and 58% to 100 shares, and i could go on. but question is, why do companies like citadel pay a premium for their order flows of robinhood's users? >> thank you, congresswoman, for that very important question there are several reasons that may be the case. one important one is that our model and formula for payment for order flow works a little bit differently. we actually receive payment for order flow as a percentage of the bid ask spread rather than

on a per share basis and we do believe that that's the most optimal way to structure payment for order flow arrangements >> okay. it's not the -- is it not because companies like citadel can make more money off of robinhood users than others? and that's a yes or no, because my clock is going to run out >> no. >> i'm sorry i yield back my time is up. >> thank you very much next, we will have mr. vargas. excuse me. no mr. davidson next. and then mrs. vargas mr. davidson, you are recognized for five minutes >> thank you, madam chairwoman i thank our witnesses. i appreciate the work you have done today i want to share 2345 in may of 2020 the depository trust clearing corporation unveiled a working proof of concept kaupd project ion.

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