March 09, 2021

At Banking Hearing, Senator Warren Urges SEC To Provide Transparency About Citadel and Robinhood's Market Tactics and Protect Individual Investors and Working Families

Video of Hearing Exchange (Youtube)

Washington, DC - In a Senate Banking, Housing, and Urban Affairs Committee hearing today, United States Senator Elizabeth Warren (D-Mass.) emphasized the importance of transparency in the wake of the market volatility surrounding GameStop's share prices and the need for the SEC to investigate potential conflicts of interest that may harm retail investors. 

In response to Senator Warren's questioning, Professor Gina-Gail Fletcher, Professor of Law at Duke University School of Law, agreed that the information that Citadel failed to provide to Senator Warren about its relationship with Robinhood is important for understanding the role that Citadel played during the recent GameStop volatility and that information advantages could hurt investors. 

Professor Fletcher also agreed with Senator Warren that when share prices for GameStop or any other company undergo extreme swings, Citadel and Robinhood both stand to make more money, while investors pay more to trade.

Senator Warren's questioning follows responses she received from the SEC, FINRA, Robinhood and Citadel to her oversight letters raising questions about market volatility and its consequences for individual investors.

Transcript: Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing
U.S. Senate Committee on Banking, Housing and Urban Affairs
Tuesday, March 9, 2021

Chairman Sherrod Brown: Senator Warren from Massachusetts is recognized for five minutes. 

Senator Elizabeth Warren: Thank you, Mr. Chairman. 

So in recent weeks, I've sent letters asking questions from those at the center of the GameStop market chaos. And I've received responses from the SEC, FINRA, Robinhood, and Citadel, the giant hedge fund.

I ask that those responses, or lack of responses, Mr. Chairman, be entered into the record without objection.

Mr. Chairman?

Chairman Brown: Sorry. I'm trying to unmute. I didn't see that coming. Senator Warren, without objection. So ordered.

Senator Warren: Neither side advertised it publicly, but Citadel Securities was Robinhood's go-to partner for handling retail trades. At the height of the GameStop trading mania, Citadel alone was handling more volume than all of Nasdaq. And while Citadel was raking in cash from executing GameStop trades with one hand, its hedge fund affiliate was bailing out another fund on bad GameStop bets with the other hand.

So I asked questions about Citadel and its relationship with Robinhood because this gets at the heart of what's wrong with Wall Street: it's riddled with conflicts of interest that allow the giants to win every single time.

Here's some of the information that Citadel would not provide: How much money Citadel made from GameStop trades; What information on trades Citadel receives from Robinhood, about GameStop and about millions of other trades; And then, how Citadel uses that information it gets-whether it passes it along to its affiliates to make even more money.

Professor Fletcher, is this information important for understanding the role that Citadel played during the recent GameStop volatility? If, say, Citadel had executed the overwhelming majority of GameStop trades during the turmoil, or had been receiving an information advantage from executing Robinhood orders, could that potentially hurt retail investors?

Professor Gina-Gail Fletcher: Thank you Senator Warren for the question. Yes. So to just go right to your question, yes. This information about Robinhood and other retail brokers, customers, trading is definitely essential to our understanding of these recent market events.

One of the things that we know is that Citadel does receive a lot of information about customers' orders from Robinhood, but it would also be important to know whether and how that information is being used by Citadel and others in order to have a clearer understanding of the recent volatility and any role that they may play in the swings-- in the price swings that the stock price experienced.

Senator Warren: So, thank you. Robinhood gets more than half of its revenue from collecting fees for pushing its customers' orders to outfits like Citadel.

And Citadel makes its money off the spread-they pocket the small difference between the buy and sell price of a trade. And-this is important-Robinhood also receives a percentage of the spread on each trade.

So, Professor Fletcher, both the number of transactions goes up and the spread tends to widen during periods of market turmoil. So am I understanding correctly that when share prices for GameStop or any other company undergo extreme swings, Citadel and Robinhood both stand to make more money, while investors pay more to trade?

Professor Fletcher: Yes, Senator Warren. This is generally what happens in times of stress. And so, it's also important to keep in mind that market-makers, like Citadel, are both in the exchange trading markets and executing huge volumes of orders off the exchanges. So, while pension funds and other institutional investors generally can't interact with retail customers and retail customers are siphoned off -- prevented from interacting with institutional investors -- Citadel sits in the middle and is able to interact with all of them and this benefits Citadel by being able to segment the markets in this way which dilutes the number and quality of orders that we see on the exchanges. And the profitability is there for Citadel for doing so.

Senator Warren: Right. And this is why the SEC needs to investigate the GameStop run up. The stock market is supposed to be about capital formation-creating long-term value for companies so they can grow and create jobs. This is good for the American economy and for American families. But when big sharks like Citadel and Robinhood come out ahead no matter what happens, and when the information they gather isn't disclosed, and when it's secret how that information is used-it is easier for these giants to skim off the top at the expense of small investors and working families.

The SEC's job is to provide transparency about these companies' market tactics and make sure they don't rip off customers. They could start by following up on my questions to Citadel and Robinhood. 

Thank you, Mr. Chairman.