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Analysis

July 26, 2022

Robinhood/GameStop/Citadel: A Year & Billions of Dollars Later

The frenzied trading in GameStop, AMC, Bed Bath & Beyond, and other “meme stocks” in early 2021 resulted in lots of media coverage, hearings on the Hill, and international attention. The events raised critical questions about the fairness of our markets, the treatment of retail investors, the gamification of trading, the role of certain trading strategies, conflicts of interest, interconnectedness, and something called payment for order flow (PFOF).

At the center of all that was an online retail broker called Robinhood Securities, which had a slick mobile phone app that lots of young, new retail traders were using, almost all trading for the first time.  July 29th marks the one-year anniversary of Robinhood going public at $38 a share. It’s now hovering around $9 a share, down $29 dollars or more than 76% percent – meaning if you invested $1,000 in Robinhood on the day of the IPO, it would only be worth a mere $240 today. In the past year, Robinhood has lost 10% of their monthly users and laid off 9% of their employees. Of course, Robinhood’s retail traders have fared even worse. It is clear that Robinhood and the frenzy associated with it will have long-term implications for the financial industry, policymakers, and investors.

That’s why, from the beginning of the GameStop frenzy, Better Markets has provided insights into how these events occurred, the key players, and many of the topics, terms, and activities relevant to these happenings. Listed and linked below are some of the work and information that Better Markets has compiled since the frenzy burst into public consciousness in January 2021.

A Real Robin Hood on Wall Street is Needed to Democratize Equity Markets Without Exploitation

The Better Markets team authored an article in the Western New England Law Review titled “Democratizing Equity Markets With And Without Exploitation: Robinhood, Gamestop, Hedge Funds, Gamification, High-Frequency Trading, And More.” The authors argue that Wall Street and finance more generally can and should be democratized, but the Robinhood model based on maximizing frequent high-risk trading, prompted by predatory gamified apps to generate as much PFOF as possible, is not how.  These are exploitive practices that enrich Wall Street at the expense of Main Street and, often, those least able to afford the losses.

In a San Francisco Chronicle Op Ed , Better Markets’ President and CEO Dennis Kelleher details financial firm Robinhood’s predatory practices and the need for a “Real Robin Hood” on Wall Street that actually “provides Main Street investors genuine opportunities to affordably trade, invest and build wealth.” The full Op Ed can be found here.

SEC Activities Related to Protecting Retail Investors

To gather information and consider proposing rules to protect retail investors, the SEC issued a request for information (RFI) on so-called digital engagement practices, which are commonly referred to as “gamification.”  Many filed comment letters, including Better Markets (read ours here), and we look forward to the SEC proposing rules informed by this RFI and the SEC’s other work.

In June 2022, SEC Chair Gary Gensler discussed changes the SEC is considering to ensure all investors get the full transparency and best execution as required by law.  These ideas will lower costs while increasing transparency, access, and execution quality for retail traders, as we discussed here:

Listen to Dennis Kelleher explain the SEC’s new proposals

BLOOMBERG TV: Dennis Kelleher discusses the Robinhood IPO Anniversary

Dennis Kelleher joined Bloomberg TV’s The Close with Caroline Hyde, Taylor Riggs and Sonali Basak to discuss the anniversary of Robinhood’s IPO, its predatory practices, & how we can actually democratize #WallStreet.

CNBC APPEARANCE: Dennis Kelleher discusses PFOF on CNBC’s Fast Money on July 7, 2021.

WATCH HBO MAX DOCUMENTARY: GAMING WALL STREET!

On March 3rd, HBO Max released its documentary titled “Gaming Wall Street” – if you subscribe to HBO Max, you can watch it here.  If you want to watch the trailer for the show, click here or on the screenshot below.  It’s a terrific look back at the GameStop trading frenzy, the short-sellers, Robinhood’s action shutting off the buy button, how Wall Street is rigged, and much more. It is insightful, informative, and entertaining.  In full disclosure, we’re somewhat biased: our President and CEO Dennis Kelleher is featured in the film, but we’d strongly recommend it even if he wasn’t in it!

Dennis Kelleher Reddit AMA

Better Markets President and CEO Dennis Kelleher took part in a Reddit AMA on r/GME to answer questions from the community about the GameStop trading frenzy. Dennis addressed questions on topics ranging from short selling, Robinhood and Citadel Securities to dark pools, SEC and payment for order flow.

Dennis recently did an AMA with Superstonk to discuss the frenzy, the questions that still remain, and how the community can get involved to bring about change. You can watch the AMA here.

Core Background Materials

SEC STAFF’S GAMESTOP REPORT and ACADEMIC CRITIQUE: The staff of the SEC conducted an investigation into what it called the “Equity and Options Market Structure Conditions in Early 2021,” which is available here. For some, it raised as many questions as it answered.  Attempting to address some of those open questions, a recent Report by leading academics questioned a number of the SEC’s key conclusions, including the role and impact of short sellers buying to cover due to the short squeeze as well as aspects of the gamma squeeze. You can also find a concise blog post on the academic Report here.

Majority Staff of the House Financial Services Committee: Congresswoman Maxine Waters (D-CA), Chairwoman of the Committee on Financial Services, and Congressman Al Green (D-TX), Chair of the Subcommittee on Oversight and Investigations, released a Majority staff report entitled, “Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Regulatory and Legislative Reform.”

WHITEPAPER: Select Issues Raised by the Speculative Frenzy in GameStop and Other Stocks

FACT SHEET OF THE KEY ISSUES raised by Robinhood, Reddit, Citadel, GameStop, and rigged markets.

CITADEL FACT SHEET: Who is Citadel and why should you care?

SHORT SELLING FACT SHEET: Short Selling: 10 Recommendations for Improving the SEC’s Regulatory Framework

CAT FACT SHEET: Stands for consolidated audit trail, a long overdue, transparency, and accountability measure to protect investors and the integrity of the U.S. securities markets.


Materials by Topic

Payment for Order Flow

What is Payment for Order Flow (PFOF)? Better Markets released a SHORT VERSION Fact Sheet, along with a LONGER VERSION that helps explain PFOF.

CNBC APPEARANCE: Dennis Kelleher discusses PFOF on CNBC’s Fast Money on July 7, 2021.

In the News: CNBC and the NEW YORK TIMES breaks down the SEC’s GME report, saying brokers enticed by payment for order flow are making trading into a game to lure investors


Gamification

PRESENTATION: On Friday, October 29th, 2021, Dennis participated in a panel discussion for a Western New England Law Review virtual symposium where he laid out and explored strategies that online trading platforms and apps use to engage retail investors. Watch Dennis’ segment here.

PANEL DISCUSSION: On Friday, September 10, Better Markets Legal Director and Securities Specialist Steve Hall participated on a panel of the SEC’s Investor Advisory Committee entitled “Reimagining Investor Protection in a Digital World: the Behavioral Design of Online Trading Platforms.”

COMMENT LETTER: Better Markets submits a comment letter urging the SEC to protect investors from predatory trading platforms. Read our press release on this here.


Short Selling

COMMENT LETTER: We supported the SEC’s proposal to increase transparency into the short positions and short selling activity of institutional investment managers.

COMMENT LETTER: In this comment letter, Better Markets urges the SEC to bring Short Selling out of the shadows.

FACT SHEET: Following the GameStop trading frenzy, Better Markets recommended 10 regulatory enhancements on short selling that the SEC should implement to improve transparency, increase market stability and efficiency, reduce operational risk, and prevent abusive trading and manipulation.


Market Structure

BLOG POST: Better Markets Market Structure Through the Years

IN THE NEWS: U.S SEC praises equity market structure, absolves short sellers in the GameStop report

COMMENT LETTER: Better Markets issued a comment letter on proposed amendments to the national market system plan governing the Consolidated Audit Trail (CAT)

BLOG POST: Better Markets supports the SEC’s Fight for Investors over the industry for the Consolidated Audit Trail (CAT)


Documents covering several Topics

COMMENT LETTER: On April 11, 2022. Better Markets filed a comment letter supporting the SEC’s proposal to finally shorten the settlement cycle from two business days after a trade (T+2) to one business day after a trade (T+1).  The proposal will reduce the risks inherent in the delay between trade and settlement, and it will make situations like the Robinhood buying halt less likely.

PRESS RELEASE: Better Markets’ Letter to House Financial Services Committee on Key Issues for the Feb. 18 Hearing on GameStop Trading and the Role of Robinhood, Citadel, Reddit.

LETTER to House Committee on Financial Services identifying key issues including ripping off retail investors; gamification; payment for order flow; conflicts of interest; transparency; short-selling activities; high-frequency trading; best execution; manipulation; capital and liquidity requirements; forced arbitration; and the consolidated audit trail.

MEMO TO INTERESTED PARTIES: This memo was released in advance of the House Financial Services Committee hearing on Thursday, Feb. 18, 2021, and includes information on the key issues that should be discussed at that hearing as well as links to additional materials that provide greater detail.

LETTER to Treasury Secretary Janet Yellen and other financial regulators who met to review and address the issues raised by the frenzied trading in GameStop and other equities.

PRESS RELEASE: Statement on Dennis’ upcoming testimony before the House Financial Services Committee.

OP-ED published in The Financial Times where Dennis outlines the agenda for new SEC Chair Gary Gensler.


Financial Services Committee Hearings – Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide

Part I – Chairwoman Waters kicked off the hearings on February 18, 2021.  The first hearing included the CEOs of Robinhood, Citadel and Melvin Capital Management as witnesses. Better Markets produced a Fact Sheet that highlighted the hearing. Watch the highlights of the hearing here:

Part II – Better Markets’ Dennis Kelleher testified at the second hearing held on March 17, 2021.  He particularly emphasized how retail investors are virtually guaranteed to get worst execution and lose money in payment for order flow schemes. He also addressed the immediate need for tougher regulatory oversight to reform our markets, end predatory and other harmful practices, and stop what too many in the financial industry continue to view as a game, among other topics. Read Dennis’ written testimony here and his five-minute opening statement here. And see a Twitter recap of the conversation and a tick-tock of key moments during his testimony in these video clips. Watch his full testimony below:

Part III – On Thursday, May 6, House Financial Service Committee held the third hearing which examined the market volatility involving GameStop and other stocks. The full virtual hearing, featuring SEC Chairman Gary Gensler, Michael Bodson, and Robert Cook,  can be viewed here.

Dennis recapped this third hearing and discussed GameStop, rigged markets, and other topics on episode 93 of Roll Call’s Fintech Beat podcast. In addition, Better Markets released a fact sheet summarizing the third hearing and capturing SEC Chair Gensler’s views on four key issues, as well as Better Markets’ own assessment on each issue and what we believe should be the next steps.

The House Financial Services Committee also released a Majority staff reportGame Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Regulatory and Legislative Reform.” The report looked into many issues including Robinhood’s troubling business practices.

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