February 18, 2021

Senator Warren Questions Citadel's Relationship With Robinhood Amid GameStop Controversy

Citadel Securities Pays Robinhood Millions in "Payment for Order Flow" Arrangement; Payments Raise Questions About Conflicts of Interest and Profits Based on Market Churn

Text of Letter to Citadel (PDF)

Washington, DC - United States Senator Elizabeth Warren (D-Mass.), a member of the Senate Banking, Housing, and Urban Affairs Committee and the Senate Finance Committee, sent a letter to Kenneth Griffin, Founder and Chief Executive Officer at Citadel, raising questions about the relationship between Citadel and Robinhood, how Citadel profits from their arrangements, and whether these kinds of relationships create an uneven playing field that harms individual investors.

Citadel Securities, a Citadel affiliate, is one of largest practitioners of this "payment for order flow" business model in which "firms make money by selling shares for slightly more than they are willing to buy them, and pocketing the price difference."

"The payment for order flow model raises questions about inherent conflicts of interest and whether broker-dealers like Robinhood and market makers like Citadel Securities profit from rapid trading and market churn that has no relationship to the underlying values of the company stocks that are being traded or the profits of individual investors: it is instead a business practice in which '(t)he more shares they see, the more bread crumbs they take,'" wrote Senator Warren.

The payment for order flow agreements between Citadel Securities and Robinhood are not the only area where Citadel has been involved in the GameStop-related controversy. The hedge fund side of the business, which is separately managed but affiliated with Citadel Securities, invested $2 billion in Melvin Capital, an investment fund that lost more than half its value in January after it lost billions in bets on GameStop -- meaning that "Citadel, the hedge-fund firm, was propping up a fund that had bet against GameStop stock, while Citadel Securities had been profiting from the order flow of small investors placing bullish bets on GameStop."

"Both Robinhood and Citadel have denied that Citadel had any role in this decision - but Congress and the public deserve clarity on the process of and reasons for these decisions by Robinhood, which had a significant impact on many individual investors," Senator Warren concluded in her letter. 

Senator Warren requested a response from Citadel no later than February 22, 2021. Senator Warren also sent a copy of this letter to the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and Robinhood. Senate Banking Committee Chair Sherrod Brown (D-Ohio) has announced that the Senate Banking Committee will be holding hearings on this matter.

Earlier today, Senator Warren released a statement on Robinhood's response to her letter dated February 2, 2021, in which she raised questions about Robinhood's adherence to regulatory requirements and its contractual obligations to its retail investors. 

In another letter she sent today, Senator Warren called on FINRA to review Robinhood's role in destabilizing the market and questioned the organization on how it will protect individual investors from actions that result in an uneven playing field.

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