During Thursday’s GameStop listening to, Citadel Securities’ Ken Griffin defended a controversial methodology brokerages use to earn money, and mentioned his agency would adapt if new laws prohibited the observe.
Lawmakers lastly acquired an opportunity to press Robinhood, Citadel and Reddit chiefs concerning the GameStop buying and selling controversy.
Members of Congress spent a lot of their time prodding about “payment for order flow,” a observe during which a brokerage receives cost from a market maker, referred to as a vendor, for steering the order to them.
This mannequin is how Robinhood and different brokers are capable of have commission-free buying and selling.
Robinhood made greater than $221 million from cost for order stream within the fourth quarter of 2020. Meanwhile, Citadel Securities is a market maker.
“We simply play by the rules of the road,” mentioned Griffin. “Payment for order flow had been expressly approved by the SEC, it is a customary practice within the industry,” he mentioned, 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 right side, that’s fine with us.”
“I do believe that payment for order flow has been an important source of innovation 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 pressed by Rep. Brad Sherman, D-Calif., concerning the “best execution” observe of the market maker.
Sherman prodded about whether or not Robinhood purchasers obtain worse execution as a result of Robinhood makes use of the zero-commissions income mannequin supported by cost for order stream. Sherman mentioned after talking to business consultants, when brokers are being paid for order stream, clients worsen execution.
Griffin mentioned “the quality of execution varies by the channel of the order” and “size of the order is only one factor.”
The Citadel chief began to say that as a result of the Robinhood order comes from a neighborhood of particular person merchants who are likely to transact in smaller greenback quantities, that might have an effect on the execution. However, he was interrupted by an agitated Sherman.
Robinhood CEO Vlad Tenev echoed Griffin’s sentiment, explaining why Citadel will get a big portion of the agency’s trades.
“Our system routes orders based on who provides the best execution and quality for our customers. The reason Citadel gets a relatively high percentage of our customer order flow is because they provide superior execution quality,” mentioned Tenev.
A change to the cost for order stream legality would pose a serious threat to the pioneer of free buying and selling.
“Payment for order flow enables commission-free trading,” Tenev added. “When we started people didn’t think there was enough margin to make this business work, but we’ve been fortunate to make it work and make it work for our customers.
Representatives repeatedly asked Tenev if the millennial stock trading app restricted trading for any other reason than to meet depository requirements.
Tenev cited increased capital requirements from the Depository Trust 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 days to shore up its balance sheet and drop some of the restrictions.
“That extra capital…was totally to organize for a future, even larger, black swan occasion and to unrestrict on the buying and selling and shopping for of those securities,” said Tenev. “The $3.4 billion we raised I believe goes a good distance in cushioning the agency for future market volatility and different comparable black swan occasions.”
He told the representatives that the GameStop mania was a one in 3.5 million event, which he said was “unmodelable.” Tenev said Robinhood’s risk 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 last month.
“Buying securities will increase our collateral necessities, promoting doesn’t,” said Tenev. “Moreover, stopping clients from promoting is a really troublesome and painful expertise the place clients are unable to entry their cash…I think about it will have been considerably worse if we had prevented clients from promoting.”
Tenev said the majority of Robinhood clients are engaged in buy and hold investing strategies with only about 13% trading in the options market and only about 3% trading on margin.
“We’re additionally a self-directed brokerage, so which means we do not present recommendation and we do not make suggestions for what clients ought to or mustn’t put money into,” said Tenev.
The total value of Robinhood’s customers’ assets exceeds the net amount of money its clients have deposited into Robinhood by over $35 billion, he added.
Tenev also advocated for real-time settlement instead of two-day settlement in order to help combat some of the chaos that occurred during the GameStop saga.
Watch the full testimony right here.
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