The Capitol Hill showdown came weeks after extraordinary stock market activity observers attributed to a community of amateur traders on Reddit who banded together to support brick-and-mortar chains like GameStop, ubiquitous brands like Bed Bath & Beyond and vintage brands like Nokia. Lawmakers are worried that the dramatic ups-and-downs in GameStop’s stock have left everyday investors holding the bag. And regulators and prosecutors are looking into whether markets were manipulated during the episode.
Here are four takeaways from yesterday’s hearing:
1. The hearing got tense, fast.
Tenev took early heat from lawmakers about Robinhood’s decision to limit users’ ability to buy shares in GameStop and other volatile companies’ for a week beginning late last month.
He apologized and said the company “had limited options.” Tenev explained in written testimony the restrictions were “necessary to allow us to continue to meet the clearinghouse deposit requirements that we pay to support customer trading on our platform.”
But his argument that the restrictions were caused by outside players, however, gave Republicans ammunition to push against increased regulations as a salve to the problem.
Tenev repeatedly defended his company’s conduct and business model. He also apologized to the family of 20-year-old trader Alex Kearns for his suicide, which led to a lawsuit against the company.
But Democrats seized on the app’s business model, with Rep. Brad Sherman (D-Calif.) pressing Tenev on hidden fees paid by the app’s users because of the way Citadel Securities prioritizes some trades over others. Citadel Securities is a significant source of revenue for Robinhood, which routes more than half of its customer orders to the company.
Other Democrats focused on the “gamification” of finance, with Rep. Cindy Axne (D-Iowa) asking Tenev about Robinhood features such as referral bonuses and confetti celebrating transactions.
“We don’t believe in gamification,” Tenev told Axne.
2. Partisan divisions over the future of regulations for trading apps were clear from the start.
Republicans who spoke at the hearing warned that increased regulations would prevent everyday Americans from easily investing in the markets. They also seized on the idea that federal regulations such as the Dodd-Frank banking rules were behind Robinhood’s move to limit trading.
“If anyone has a problem with your decision to halt trades, it’s fair to say that their frustration should be directed toward federal regulation,” Rep. Garland “Andy” Barr (R-Ky.) told Tenev, who replied he didn’t want to “throw anyone under the bus.”
Many Democrats focused on the need for greater transparency and changes to Robinhood’s business model. But some progressives proposed more expansive steps, including Rep. Rashida Tlaib (D-Mich.), who argued a tax on stock market transactions would “discourage risky and high-frequency trading” and pushed back on Citadel Securities founder Kenneth C. Griffin’s argument such a tax would “injure Americans hoping to save for retirement.”
“Just to be clear, let’s not gaslight the American people, y’all be fine with the tax,” Tlaib told Griffin.
3. Reddit largely evaded scrutiny.
The forum, whose WallStreetBets subreddit was at the center of the GameStop trading, defended itself with Reddit co-founder Steve Huffman and Keith Gill, the trader known as Roaring Kitty on YouTube, singing its praises.
“The idea that I use social media to promote GameStop stock to unwitting investors and influence the market is preposterous,” Gill said. “My post did not cause the movement of billions of dollars into GameStop shares.”
The subreddit, which Gill has frequently posted on, is a crude financial forum that has skyrocketed in popularity and now has more than 9.1 million users.
Huffman, one of the site’s founders, noted in a written submission to the committee that the company receives millions of dollars — $2.4 million in 2021 so far — in advertising fees from firms working for the U.S. government.
He said that the site, which allows users to be anonymous, has been “looking especially closely” at r/WallStreetBets and has not found any nefarious behavior. He called the subreddit an “eccentric community” but “well within” the bounds of the site’s content policy.
4. GameStop did not escape unscathed.
The company’s stock tanked during the hearing despite an early boost during Gill’s testimony. Gill, who made a bullish case for the retailer, couldn’t stop the stock from slumping 11 percent by the end of the day.
“As for me, I like the stock,” Gill said early at the hearing. “I’m as bullish as I’ve ever been on a potential turnaround for GameStop and I remain invested in the company.”
Clarification: This story has been updated to clarify that Robinhood has close ties with Citadel Securities and that Kenneth C. Griffin is its founder.
Rant and rave
Lots of commentary on social media about the Gamestop hearing. From Nathaniel Popper of the New York Times:
From TechCrunch’s Alex Wilhelm:
Our top tabs
Uber loses a key labor battle in the United Kingdom.
The country’s top court ruled that a group of former Uber drivers must be classified as workers entitled to a minimum wage and vacation time, the Wall Street Journal’s Sam Schechner reports. It’s a blow to Uber’s global efforts to preserve its current business model and ensure drivers can continue to be classified as independent contractors.
Friday’s decision only applies to the the former drivers involved in the suit, but labor advocates hope it sets a precedent that could be applied throughout the gig economy.
Uber says the decision doesn’t automatically reclassify all of its drivers. The company has also recently expanded benefits for drivers, such as insurance for sickness or injury.
“We are committed to doing more and will now consult with every active driver across the U.K. to understand the changes they want to see,” Jamie Heywood, Uber’s regional chief for Northern and Eastern Europe, told the Journal.
House lawmakers launch a new push to hold Silicon Valley companies accountable.
The House Energy and Commerce Committee will grill the CEOs of Facebook, Google and Twitter at a high-profile hearing on March 25, which will examine the companies’ handling of disinformation and violent rhetoric, Tony Romm reports. Meanwhile, the House Judiciary Committee announced a new series of hearings beginning next week focused on beefing up antitrust laws to address concerns of anti-competitive behavior in the industry.
The Jan. 6 Capitol riots escalated congressional scrutiny of the tech giants. Democrats believe the companies have not taken enough responsibility for harmful content on their services.
“For far too long, big tech has failed to acknowledge the role they’ve played in fomenting and elevating blatantly false information to its online audiences. Industry self-regulation has failed,” said Rep. Frank Pallone Jr. (D-N.J.) and other panel leaders, in a statement about the hearing. “We must begin the work of changing incentives driving social media companies to allow and even promote misinformation and disinformation.”
The Judiciary effort, meanwhile, will build on a 16-month investigation into the tech industry, which found Amazon, Apple, Facebook and Google engaged in anticompetitive tactics to maintain their dominance.
“For too long, the dominance of a handful of gatekeepers online has wreaked havoc on competition, suppressed innovation, and weakened entrepreneurship,” said Rep. David N. Cicilline (D-R.I.), the leader of the House’s top antitrust panel, promising he would try to overhaul competition laws.
Tech industry-backed groups are suing Maryland to stop the first U.S. online advertising tax.
The lobbying groups backed by Facebook, Amazon, Google and other tech companies argued that Maryland’s proposed tax on their online advertising revenue is unconstitutional and violates federal laws preventing state policymakers from creating taxes specifically targeting online services, Tony reports. It’s a significant effort to stop other states from adopting similar measures.
The Internet Association, which represents top tech companies, and the U.S. Chamber of Commerce, backed the lawsuit.
“In light of the current pandemic and economic uncertainty, increasing taxes on services used by small businesses to keep themselves running is a particularly poor and ill-timed policy,” Caroline Harris, the vice president for tax policy at the U.S. Chamber of Commerce, said in a statement.
Stephen P. Kranz, a partner at McDermott Will & Emery, who is representing the lobbying groups, said the lawsuit is also a warning to other governments, who might view the companies’ massive profits during the pandemic and consider similar measures to address their revenue struggles. “We hope that policymakers in those states recognize that following Maryland only leads to the courthouse,” he said.
Misinformation filled the void as Facebook shut off news in Australia.
News, key government pages and even pages for nonprofit organizations were gone. But pages dedicated to aliens, protesting vaccinations and conspiracy theories linking 5G to infertility remained available, Damien Cave reports for the New York Times.
“It’s quite scary when you see it happen,” Elaine Pearson, the Australia director at Human Rights Watch, told the Times. The organization lost its own Facebook posts.
Facebook said the changes were in response to a proposed law that would require it to pay publishers for news.
The Australian public is unified in outrage, but divided over what should happen next. Damien reports there are three camps:
- Some believe Facebook intentionally wiped away more than was necessary to make a point. “What today’s events do confirm for all Australians is the immense market power of these digital giants,” said Josh Frydenberg, Australia’s federal treasurer.
- Others believe the law itself is flawed, and there are better ways to finance journalism. “High-quality news and analysis is a public good, and that’s why we fund NPR and the ABC,” Jim Minifie, an economist with Lateral Economics, a consulting firm that specializes in digital public policy, told the Times. “If you want to do the same with private news providers, fine, do it with tax revenue.”
- Others believe Facebook’s strategy will backfire and could prompt people to cut back their Facebook usage. “There’s little love lost for Facebook among the public, especially after it’s ramped up its bully tactics,” Johan Lindberg, a professor of media, film and journalism at Monash University in Melbourne, told Damien.
Inside the industry
- Ranking Digital Rights launches its 2020 Corporate Accountability Index at a New America event on Feb. 24 at 11 a.m.