Vlad Tenev appears in Washington over video stream
Robin Hood famously took from the rich to give to the poor, but Vlad Tenev, the chief executive of the trading app of the same name, has failed to convince critics that “little guy” retail investors are the company’s priority.
In a hearing on the GameStop saga on Thursday, Congresswoman Cindy Axne of Iowa recalled how her nephew and his friend stayed up “until 4am” to try and make some money on Robinhood one evening in late January. Thanks to encouragement from traders on social media the stock rose 530pc between January 25 and 28 but crashed when Robinhood restricted purchases of the stock.
“Folks like my nephew aren’t your customers,” she told Tenev. “They are your product. Your customer is sitting right next to you, Kenneth Griffin of Citadel”.
Griffin, who also gave evidence at the hearing, is chief executive of Citadel Securities. Citadel pays Robinhood for customer orders and executes the trades along with orders it receives from other companies. Appearing calm and collected, Tenev admitted that “more than 50pc” of Robinhood’s revenue is generated by the payments it receives from market makers, mostly Citadel Securities.
These payments are legal, but controversial. The Securities and Exchange Commission fined Robinhood $65m for failing to make clear that payments from market makers like Citadel are what enables it to take no commission from its customers.
Critics also suspect market makers of sometimes “trading ahead”, looking at what customers are ordering and selling or buying their own stock first.
Citadel paid $700,000 to settle allegations by the US Financial Industry Regulatory Authority (Finra) last year for trading ahead, without admitting culpability. Finra said it found 559 instances in just one month.
GameStop | How the trading frenzy started
In 2017, the SEC accused Citadel of misleading clients by failing to get them the best prices. Again, Citadel did not admit responsibility, but agreed to pay $22.6m (£16m) in penalties. Robinhood says it now makes clear that it receives payments from Citadel and others.
Griffin, Tenev and several of the Senators making their inquiries were adamant that Robinhood had made a positive change. The Bulgarian-born Robinhood founder, who started the company with a former Stanford University roommate six years ago, repeated the company’s slogan to “democratise finance” several times throughout the festivities.
And while Robinhood cannot be faulted for its cause, its execution has left financial experts, politicians and regulators concerned. Unlike financial advisers, Robinhood does not make it entirely clear what a safe, diversified and long holding portfolio looks like. The markets are now open to the masses, but should people with lower incomes be so easily tempted to gamble it away?
Amateur investors are using the cash they might have saved thanks to the pandemic to speculate, under the impression that they are investing like the slickest traders on Wall Street. One example is the app’s promotion of Hertz as a must buy stock after the car rental company announced its bankruptcy last year.
Vlad Tenev, chief executive officer and co-founder of Robinhood, came under pressure over the company's claims it wants to democratise trading
Credit: Daniel Acker /Bloomberg
“Your app to me shows that you are just trying to encourage more trades, which puts more money in your pocket and is not helping people gain equity with smarter investing,” Axne said. “So I would ask you, Mr Tenev, who exactly do you believe you are democratising finance for?”
Tenev said that Robinhood did not believe in “gamification” and knew the stock market was serious business, but admitted to investing in behavioural research to make the app as appealing as possible.
“I believe in my business model,” he said.
He also kept mum on whether Robinhood customers had made money from trading GameStop. Rival eToro, a trading app that offers its services in the UK, warns on its website that 67pc of retail trader accounts lose money.
The big question was whether Citadel had forced Robinhood’s hand, asking it to restrict trades to further its interests. Furious social media traders who woke up without being able to buy GameStop spread rumours that Citadel, which bailed out a hedge fund who had shorted the stock as the share price soared, had been in cahoots with the app.
"Let me be perfectly clear," Mr Griffin said. "Absolutely not".
Tenev admitted the company had to to curb trading of the stock on January 28 when it was unable to cough up a $3bn deposit from its equities clearing house, despite previously claiming in interviews that there were no liquidity issues.
Now that conspiracy theory has dissipated, the more challenging problem is now clear: how to safely offer the benefits of the financial markets to all.
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