Robinhood Wrap: CEOs Grilled by Lawmakers About Payment for Order Flow

Wearing a dark suit and tie, Tenev sat through more than five hours of testimony and questioning, with a majority of lawmakers focusing their attention on him. Representatives took turns accusing Robinhood of transforming the stock market into a casino and failing to protect retail investors, as well as probing the firm’s decision to restrict trading of stocks such as GameStop Corp. during the market mania. Representative Alexandria Ocasio-Cortez questioned the very business model behind the free-trading platform.

Throughout the hearing, Tenev struck a conciliatory tone, underscoring that the company would learn from the experience.

“I’m sorry for what happened,” he said. “I’m not going to say that Robinhood did everything perfect, and that we haven’t made mistakes in the past. What I commit to is making sure that we improve from this, we learn from it and we don’t make the same mistakes.”

Citadel CEO Ken Griffin and Melvin Capital Management’s Gabe Plotkin didn’t field quite as many questions from lawmakers, but made clear they had no role in Robinhood’s decision to halt trading. Reddit Inc. co-founder Steve Huffman and Keith Gill, the trader known as “Roaring Kitty,” spoke only a few times.

Tenev was quizzed on matters including why Robinhood had to put trade restrictions in place after demands from its clearinghouse spiked, whether it exposes investors to undue risk, and how it earns most of its money.

The tone of the hearing was set before the questioning even began. Representative Maxine Waters, the House committee’s chairwoman, interrupted Tenev’s introductory remarks about his immigrant background and demanded that he focus on GameStop. After asking the CEO about Robinhood’s liquidity, she again cut him off when he didn’t directly answer.

“I don’t have time, I just need a yes or no answer,” Waters said, reclaiming her time.

Payment for order flow, a widespread but little-understood revenue generator for Robinhood, came up repeatedly. The brokerage makes most of its money by sending customer trades to firms like Citadel Securities, which carry out the orders and pay Robinhood for the opportunity to do so. Tenev spent much of the day explaining that it’s legal, regulated and disclosed -- and is part of the business model that supports free trading.

But lawmakers wanted more information. Toward the end of the hearing, Ocasio-Cortez asked if Robinhood would be willing, for instance, to immediately commit to share what it earns from payment for order flow with its customers.

“If removing the revenues that you make from a payment for order flow would cause the removal of free commissions, doesn’t that mean that trading on Robinhood isn’t actually free to begin with?” asked Ocasio-Cortez, a Democrat from New York.

“Robinhood is a for-profit business and needs to generate some revenue to pay for the costs of running this business,” Tenev said. “People were initially skeptical that the model even with payment for order flow would work when you remove the commissions, and I think we’ve proven that otherwise by making this the standard model by which brokerages operate now.”

Robinhood took in about $687 million from such payments in 2020, according to data from regulatory filings compiled by Bloomberg Intelligence. The firm has faced a regulatory penalty for its disclosures on the issue. In December, it agreed to pay $65 million to settle Securities and Exchange Commission claims that it failed to adequately inform customers about the practice. Robinhood neither admitted nor denied guilt.

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