As the House Financial Services Committee prepares for its first of three hearings to investigate the Robinhood/GameStop/Reddit odyssey additional information continues to be distributed. Yesterday, Senator Elizabeth Warren, who sits on the Senate Banking Committee, posted a comment regarding a letter she sent to Robinhood inquiring about its decision to curtail trading in Gamestop and other shares. The letter was sent on February 2, 2021, and was addressed to Robinhood CEO Vlad Tenev. Yesterday, Senator Warren shared the response from Robinhood.
In the letter, Robinhood Deputy General Counsel and Head of Government Affairs, Lucas Moskowitz, explained the net capital obligations it must adhere to and how “trading activity in a small number of stocks triggered massive volatility that prompted clearinghouses to take swift action to increase deposit requirements.”
“These deposits are the collateral RHS posts to ensure access to clearinghouse services on behalf of Robinhood’s customers. In a matter of days, RHS’s clearinghouse-mandated deposit requirements related to stocks increased ten- fold. This led us to put temporary buying restrictions on a small number of securities, including GameStop, which accounted for hundreds of millions of dollars in deposit requirements. Consistent with our customer agreement, we took steps to limit buying in those securities to ensure we could meet our deposit requirements. We met and have continued to meet these requirements.”
The letter also responded to a question about its relationship with Citadel, a firm that clears trades, as well as the payments for order flows.
“This payment for order flow practice is regulated by the SEC, and RHS complies with its disclosure obligations under SEC Rule 606. Citadel Execution Services is one of seven market makers to which RHS routes customer orders. No Citadel entity including, but not limited to, Citadel Execution Services, holds any ownership stake directly, or to Robinhood’s knowledge indirectly, in Robinhood.”
Senator Warren’s response slammed the Robinhood letter:
“Robinhood’s response to my letter reveals that the company did not have enough cash on hand to manage a surge in trading and buried important information about consumers’ rights. Robinhood promised to democratize trading, but hid information about its prerogative to change the rules by cutting off trades without notice — and about customers’ inability to access the courts if they believe they’ve been cheated — behind dozens of pages of legalese. While I hope Robinhood follows through on its statement that it is open to reviewing its use of forced arbitration, the SEC should ban these harmful and exploitative clauses outright. What’s still not clear from Robinhood’s response to my questions is the full extent of Robinhood’s ties to giant hedge funds and market makers. I’m going to keep pushing regulators to use the full range of their regulatory tools to ensure the fair operation of our markets, particularly for small investors.”
At some point, the Senate Banking Committee will hold a hearing pertaining to Robinhood’s activity and trading fueled by social media.
The letter from Robinhood is embedded below.
Robinhood Response to Feb 2 Letter