During Thursday’s GameStop discovering, Citadel Securities’ Ken Griffin defended a controversial method brokerages use to make money, and said his firm would acclimatize if new regulations prohibited the practice.
Lawmakers finally got a chance to press Robinhood, Citadel and Reddit chiefs about the GameStop job controversy.
Members of Congress spent much of their time prodding about “payment for order flow,” a rusty in which a brokerage receives payment from a market maker, known as a dealer, for directing the order to them.
This fashion is how Robinhood and other brokers are able to have commission-free trading.
Robinhood made more than $221 million from payment for command flow in the fourth quarter of 2020. Meanwhile, Citadel Securities is a market maker.
“We simply play by the rules of the entre,” said Griffin. “Payment for order flow had been expressly approved by the SEC, it is a customary practice within the industry,” he alleged, referring to the Securities and Exchange Commission. “If they choose to change the rules of the road, we need to drive on the left side versus the precisely side, that’s fine with us.”
“I do believe that payment for order flow has been an important source of alteration in the industry. As the CEO of Robinhood has testified, they drove the industry toward zero-dollar commissions. This has been a big win for American investors,” Griffin added.
Griffin was packed by Rep. Brad Sherman, D-Calif., about the “best execution” practice of the market maker.
Sherman prodded about whether Robinhood customers receive worse execution because Robinhood uses the zero-commissions revenue model supported by payment for order spread. Sherman said after speaking to industry experts, when brokers are being paid for order flow, fellows get worse execution.
Griffin said “the quality of execution varies by the channel of the order” and “size of the order is only one financier.”
The Citadel chief started to say that because the Robinhood order comes from a community of individual traders who be liable to transact in smaller dollar amounts, that could affect the execution. However, he was interrupted by an agitated Sherman.
Robinhood CEO Vlad Tenev echoed Griffin’s thought, explaining why Citadel gets a large portion of the firm’s trades.
“Our system routes orders based on who provides the most desirable execution and quality for our customers. The reason Citadel gets a relatively high percentage of our customer order flow is because they supply superior execution quality,” said Tenev.
A change to the payment for order flow legality would pose a pre-eminent risk to the pioneer of free trading.
“Payment for order flow enables commission-free trading,” Tenev added. “When we started people didn’t have in mind there was enough margin to make this business work, but we’ve been fortunate to make it work and make it accomplishment for our customers.
Robinhood’s trading restrictions
Representatives repeatedly asked Tenev if the millennial stock trading app restricted job for any other reason than to meet depository requirements.
Tenev cited increased capital requirements from the Depository Conglomerate and Clearing Corp., an entity responsible for settling and clearing trades, for the trading restrictions. Robinhood raised more than $3.4 billion in a few periods to shore up its balance sheet and drop some of the restrictions.
“That additional capital…was entirely to prepare for a future, on a par greater, black swan event and to unrestrict on the trading and buying of these securities,” said Tenev. “The $3.4 billion we raised I over recall goes a long way in cushioning the firm for future market volatility and other similar black swan events.”
He told the agents that the GameStop mania was a one in 3.5 million event, which he said was “unmodelable.” Tenev said Robinhood’s danger management processes kicked in as they were designed.
The Robinhood chief was pressed about why the trading app restricted on the buy side of GameStop closing month.
“Buying securities increases our collateral requirements, selling does not,” said Tenev. “Moreover, preventing people from selling is a very difficult and painful experience where customers are unable to access their money…I dream up it would have been significantly worse if we had prevented customers from selling.”
Tenev said the majority of Robinhood shoppers are engaged in buy and hold investing strategies with only about 13% trading in the options market and only thither 3% trading on margin.
“We’re also a self-directed brokerage, so that means we don’t provide advice and we don’t make recommendations for what people should or should not invest in,” said Tenev.
The total value of Robinhood’s customers’ assets exceeds the net amount of profit its clients have deposited into Robinhood by over $35 billion, he added.
Tenev also advocated for real-time arrangement instead of two-day settlement in order to help combat some of the chaos that occurred during the GameStop adventure.
Watch the full testimony here.