Casten Grills Robinhood CEO, Vlad Tenev, in Financial Services Committee Hearing on GameStop, Seeking Answers on How Their Business Profits off Its Users -Not Protects Them
Washington, DC –U.S. Representative Sean Casten (IL-06) questioned Robinhood CEO, Vlad Tenev before the House Committee on Financial Services ?Committee(FSC) hearing entitled, "Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide." In his questioning, Casten exposed the ?conflict in Robinhood's business model and its failures ?to protect its users including the death of Alexander Kearns. Both are symptoms that Robinhood's business model puts its profit motives ahead of protecting and providing for its users.
Casten opened his remarks with the story of Alexander Kearns, the 20-year-old Robinhood user from Naperville, Illinois who took his life after his Robinhood account erroneously showed a negative cash balance of $730,000 and Robinhood failed to respond to his repeated inquiries. At that time, Robinhood did not have a customer support phone number for Alex to call.
Casten demonstrated that Robinhood still does not have adequate phone support—capping his remarks by calling the phone number and playing on speaker for Mr. Tenev the 10-second recording on the other end directing users to email inquiries before it hung up.
Through his scathing questioning, Casten exposed how Robinhood has prioritized aggressive marketing to increase its users and then its app design to push users to trade more and trade more complex financial instruments like options. Why? Because Robinhood makes more money based on the volume and the complexity of trades through payment for order flow. They get paid more, so Robinhood may not take into account whether it is in the best financial interests for Robinhood's relatively new and young users to be trading complex financial interests. This is all while Robinhood appears to lack even the most basic customer service available to users. To protect investors, we must get to the bottom of whether Robinhood's receipt for payment for order flow keeps Robinhood from its legal duty to its investors of "best execution."
Casten offered a blistering indictment of Robinhood's failure to protect investors and a strong case for Congressional action to protect consumers from the incentives driving commission-free trading apps to harvest and monetize investors' order flow. To watch Casten's questions to Robinhood CEO, Vlad Tenev, click the image below or click
Casten has been the Congressional leader against Robinhood's failure to protect investors since last summer, when he led members of Congress in urging federal regulators at SEC and FINRA to take action to protect investors and in calling on Robinhood directly to improve transparency and user safety.
After meeting with the Kearns' family back in June, Casten grilled SEC chair Jay Clayton on his failure to protect investors, despite having the authority to implement even common-sense measures included in the SEC Disclosure Effectiveness Testing Act , the first bill Casten introduced to pass the House. Now, Casten is focused on what Congress can do to protect consumers investors on from the perverse incentives driving commission-free trading apps to harvest and monetize investors' order flow.
Full transcript of Rep. Casten's questions to Robinhood's Vlad Tenev below:
CASTEN: Thank you, Madam Chair. Thank you so much to our witnesses. I want to - there's a whole bunch of themes in today's hearing, and I want to, if I can, just tie a couple threads together that I think are relevant that we've had corners of.
June 2020, Alex Kearns who was 20 years old at the time from Naperville, Illinois, killed himself largely thanks to a bug in the Robinhood system. The bug was that he turned on the app, it said he owned $730,000 that he did not have because of options positions (ph) that he thought canceled out but didn't appear to.
He called the help line, the help like of course was not manned as we've discussed. He sent several panicked e-mails, three to be precise. Did not receive a response. Ultimately there was a response from the e-mail saying that in fact his positions were covered, but by that point it was too late because he had taken his own life.
The - this is a gentleman who is 20 years old. Under Illinois law he was not allowed to buy a beer, but he was allowed to take on $730,000 in positions and exposure that he did not have the liquidity to cover.
Your mission, Mr. Tenev, is to democratize finance but the history of financial regulation is to protect people like Alex Kearns from the system. As the old joke goes, if you're playing poker and you can't see - figure out who the fish is at the table you should leave the table because you're probably the fish.
And there is innate tension in your business model between democratizing finance, which is a noble calling - and being a conduit to feed fish to sharks. I want to cover a little bit of a timeline. December 2019, Robinhood was assessed a $1.25 million fund by FINRA for failing to disclose (inaudible) to your customers.
Six months after that, Alex Kearns committed suicide. Six months after that December '20, Robinhood paid a $65 million fine to the SEC for, among other things, failing to disclose payment through order flow (ph) agreements to your customers. There's a tension in your model.
Now, along with that, according to your 606s as has (ph) been reported by CNBC you attract a higher rate through equity transfer and payment (inaudible) competitors - excuse me, 17 cents per hundred trades versus about 11 cents for your competitors. Even more over 50 cents per hundred trades were (ph) options.
But I ask unanimous consent to enter the CNBC article in to the record?
WATERS: Without object, such is the order.
CASTEN: The question for you, Mr. Tenev, when did you start offering options on your platform?
TENEV: Thank you, Congressman Casten. And first let me say ...
CASTEN: I'm really - I'm just looking for a - we're tight on time, when did you start offering options?
TENEV: Options trading was offered starting in Q1 of 2018.
CASTEN: OK, thank you. That's relevant because prior to 2018 your revenue grew basically linearly with user growth. Your revenue any year (inaudible) is about $10 per user, per year. 2020 it got to $50 per user, per year.
So your revenue model went from growing revenue by growing users, to growing revenue by growing revenue earned on the back of each user - consistent with taking on options.
How many firms do you route options (inaudible), Mr. Tenev?
TENEV: Congressman, we have seven market makers. I can get back to you with the precise number for options under seven.
CASTEN: Well, according to your 606 disclosures you only list four Citadel, Susquehanna, Wolverine, and Morgan Stanley. Are there any others besides the ones listed in your 606 disclosures?
TENEV: If that's in the 606, Congressman, I'm sure it's accurate.
CASTEN: OK. So do you route options trades to anyone, but you do not have a (inaudible) agreement with?
TENEV: Currently we have, Congressman, uniform payment for order flow arrangements with all of our market makers, so they would all be under the same arrangements.
CASTEN: OK. So you have - so how do you ensure that you're getting best pricing if every single firm - you're ruling out anybody who is not paying you for the privilege to trade?
TENEV: Congressman, we believe having uniform payment for order flow arrangements with all market makers ensures structurally that there is no conflict of interest because it prevents payment for order flow from being an input in decision making for where to route orders.
CASTEN: OK. I'm almost out of time but there is an innate conflict in your model. Let's imagine right now that we are today's version of Alex Kearns. I'm nervous because I've got (ph) an exposure, and I call your help line now. Let's call and let's listen in the time we have remaining to what I'm going to hear on the other end of the phone.
UNKNOWN: Thanks for calling Robinhood. Please visit us at robinhood.com or on our app for support. If you have an urgent (inaudible) need, please make sure to include details of your order when reaching out. Thanks, and have a great day.