Robinhood CEO backs SEC chief’s push to modernize the stock market and ‘level the playing field’ for retail investors

Vlad Tenev
  • Robinhood CEO Vlad Tenev endorsed an SEC push to refine stock pricing, writing that the move would “level the playing field” for retail investors.
  • SEC chair Gary Gensler has suggested the agency might waive a rule requiring exchanges to price stocks in pennies.
  • Allowing sub-penny pricing would put exchanges like Robinhood on equal footing with market makers like Citadel and Virtu Financial, Tenev wrote.
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Robinhood CEO Vlad Tenev endorsed an SEC push to refine how stocks are priced, writing in a blog post that the move would “level the playing field” for retail investors.

Tenev backed a suggestion by SEC Chair Gary Gensler that the agency might waive a rule requiring exchanges to price stocks in pennies. Allowing sub-penny pricing would put exchanges like Robinhood on equal footing with non-exchange market makers like Citadel and Virtu Financial, he argued.

Earlier this month, Gensler acknowledged that the rule banning sub-penny pricing on exchanges could constitute an unearned advantage for non-exchange market makers. He said the SEC would consider changes to the rule, though no formal proposal has yet been offered.

Tenev called for all stock quotes to be given to four decimal places, or a hundredth of a penny.

Such a change – once considered too insignificant to matter – could smooth trades on low-price, high-volume shares with minuscule bid-ask spreads. In these trades, non-exchange market makers can benefit by undercutting exchanges’ bids by a fraction of a penny.

“If the sub-penny limitation is removed, and exchanges reduce fees for retail orders, we could see tighter [bid-ask spreads], even better execution quality for retail investors, more transparency and perhaps more retail order flow executed on lit markets,” Tenev wrote.

Robinhood routes its order book to non-exchange market makers in exchange for compensation, a model known as payment for order flow. Gensler has questioned the setup, noting it is non-transparent and banned in the UK and Canada.

Market makers contend that their profits come only when they succeed in cutting prices for clients – or retail investors, in the case of Robinhood.

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Legendary investor Bill Gurley rejected Robinhood’s pitch because it made him feel ’emotionally bad’ and he thought the app mislead users

Bill Gurley
Legendary tech investor Bill Gurley

  • Bill Gurley did not invest in Robinhood because it made him feel “emotionally bad.”
  • Gurley told The New Yorker he thought the commission-free trading app was “misleading to people.”
  • Gurley has called to ban payment for order flow, a model Robinhood relies on to make money.
  • See more stories on Insider’s business page.

Venture capitalist Bill Gurley reportedly did not invest in Robinhood because it made him feel “emotionally bad.”

Gurley, a general partner at Benchmark who has invested in Uber, Zillow, and Stitch Fix, told The New Yorker’s Sheelah Kolhatkar he did not invest in Robinhood because of oppositions to the app’s business model. Robinhood gets money by using a third party to carry out individual buy or sell orders, called a “payment for order flow.”

“It made me feel bad. Emotionally bad. Because I think it is misleading to people.” Gurley told The New Yorker. “My issue with Robinhood is, I think their mission and what they say they stand for is not actually true.”

Robinhood is a commission-free trading app popular among first-time investors. The firm’s website said it’s aim is to “democratize finance for all.”

Read more: SCOOP: Boston fintech Capchase is in talks for new funding at about a $150 million valuation

But the app has high profile critics like Warren Buffett and Charlie Munger, and some markets experts recently told Insider the app “gamifies” trading through flashy animation and incentivizes risky betting.

Gurley called for the US Securities and Exchange Commission to ban payment for order flow models during the height of GameStop’s short squeeze. In early 2021, many retail investors, including those in the Reddit group WallStreetBets, pushed the price of GameStop up. Some said it was to burn hedge funds that bet against the stock.

Gurley, in the past, has said the payment for order flow practice “smells bad” and is already outlawed in the UK and Canada.

“If the SEC/government wants to “fix the plumbing” the number one thing they should do is ban Payment for Order Flow,” Gurley tweeted in January.

Gurley gained fame through backing Uber in 2011 with $10 million, which brought Benchmark $8 billion. Gurley did not participate in Benchmark’s latest fund, but will remain at the VC firm that he joined in 1999, Insider’s Bani Sapra reported.

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Robinhood says people are tired of Warren Buffett and Charlie Munger acting like they’re the only oracles of investing

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Robinhood co-founder Vlad Tenev, Warren Buffett, and Charlie Munger.

Robinhood on Monday hit back at statements made by Warren Buffett and Charlie Munger at Berkshire Hathaway’s annual general meet held on Saturday.

Both veteran investors had called out the trading app for conditioning retail traders to treat the stock market like a casino and enabling speculation among them.

The brokerage said two iconic investors have insulted a new generation.

“If the last year has taught us anything, it is that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they are the only oracles of investing,” Jacqueline Ortiz Ramsay, Robinhood’s head of public policy communications, wrote in a blog post. “And at Robinhood, we’re not going to sit back while they disparage everyday people for taking control of their financial lives.”

Robinhood

Millions of amateur traders downloaded the Robinhood app in the first quarter of 2021, dashing in to experience the “financial democratization” it promises.

But Buffett referred to Robinhood traders who entered the stock market over the last year and a half as “casino participants.” He criticized the trading app for taking advantage of gambling instincts, offering commission-free trades, and routing its orders to high-speed traders.

Meanwhile, Munger said it’s “godawful that something like that would draw investment from civilized man and decent citizens.”

The brokerage isn’t taking these statements lightly as it believes its platform opens up investing to a whole new class of investors that don’t need huge sums of money to make stock trades.

“It is clear that the elites benefited from a stock market that kept many families sidelined from participating while they amassed huge wealth from decades of investing – driving a deep wedge between the haves and have-nots,” Ortiz Ramsay wrote in the blog.

“Suddenly, Robinhood and other online trading platforms have opened the doors of financial markets to everyday people, deeply unsettling the old guard who will fight to keep things the same.”

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Robinhood traders boosted the value of the stock market in the depths of the pandemic, but the rise of retail traders also means ‘extraordinary volatility’ may be the new normal, study says

Robinhood on cellphone
Robinhood app

Robinhood traders boosted the market’s recovery by adding 1% to the aggregate US stock market valuation in the second quarter of 2020, a study by the Swiss Finance Institute found. Traders also added 20% to the value of small-cap stocks.

The study, first reported by Bloomberg, also revealed that Robinhood traders had an impact five times the size of their assets in the second quarter. Retail traders on the platform, according to researchers Philippe van der Beck and Coralie Jaunin, also alleviated the stock market crash during the first quarter of last year by 0.6%. The paper was published in SSRN, a publisher of scholarly and academic research, in January 2021.

“The price impact of Robinhood traders is concentrated towards small-cap stocks and the consumer staples industry.” the pair wrote. “However, they are able to affect the price of some large companies, which are being held primarily by passive investors.”

The pair concluded that individual retail investors react more strongly to price changes.

“We show that when institutions react sluggishly to non-fundamental price changes, the mechanism stifles and retail demand shocks can have substantial impacts on stock prices,” the pair wrote.

Moving forward, the researchers found that if the role of Robinhood, “facilitated by novel fintech solutions,” continues to grow, the “extraordinary volatility observed during the pandemic may turn out to be the new normal.”

“The prominent role of Robinhood traders in driving returns evokes concerns about the future role of retail trading in equity markets,” the pair said.

The rapid rise of retail investors has been a powerful force in the stock market, enabled by a range of factors including commission-free trading, distribution of government stimulus checks, and heightened pandemic boredom as many people continue to work from home.

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Robinhood CEO says investing ‘should be as ubiquitous as shopping online’ and should not be viewed as gambling

Vlad Tenev Robinhood

Robinhood Markets CEO Vlad Tenev defended the mission of his trading platform, which seeks to “democratize finance for all” amid backlash from lawmakers, regulators, and Wall Street firms blaming the mobile app for luring inexperienced investors and “gamifying” the stock market.

“Investing should be as ubiquitous as shopping online,” Tenev told Bloomberg. “It should just be something that people do.”

The Menlo Park, California-based company has faced scrutiny for its role at the center of the GameStop frenzy in January. This includes complaints that the mobile app used “aggressive” tactics to lure young and inexperienced investors with commission-free trades.

A five-hour congressional hearing in front of the House Financial Services Committee was held on February 18, scrutinizing the role the company played.

“This is what I signed up for,” Tenev said. “Any time you’re causing change in society and kind of upending the status quo, it’s probably not going to be the most comfortable process.”

The 34-year-old founder also rebuffed comments from various experts on the addictive nature of trading apps like Robinhood. The app has attracted over 13 million users since 2013, many of whom are younger retail traders.

“I reject the idea that investing in the US capital markets is gambling,” Tenev said. “We’d be happy to have the conversation, but of course we understand that investing is a serious thing.”

“The facts will come out and it will bear out that Robinhood is a customer-focused company that’s operating with the highest standards of integrity,” Tenev said.

In the February hearing, Tenev maintained that Robinhood has created opportunities for a new generation of investors. The CEO told lawmakers that the assets of his platform’s users have collectively grown by more than $35 billion, a claim challenged by some, including Rep. Jim Himes.

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Payment for order flow models “undermine the relationship between the broker and their client,” Duke Law professor tells Congress

Vlad Tenev, co-founder and co-CEO of investing app Robinhood.
Vlad Tenev, co-founder and co-CEO of investing app Robinhood.

  • Duke Law Professor Gina-Gail S. Fletcher appeared in a hearing with the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday.
  • In the hearing the professor said payment for order flow models pit brokers profits against their clients’.
  • Other experts on the panel even called for the payment for order flow model to be banned altogether.
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In a Tuesday hearing held by the United States Senate Committee on Banking, Housing, and Urban Affairs, Senators sat down with five experts to discuss “Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing.”

In the hearing, Duke Law Professor Gina-Gail S. Fletcher was asked by Sen. Sherrod Brown (D-OH) about stock brokerages using the payment for order flow business model.

Payment for order flow (PFOF) entails brokerages selling customers’ buy and sell orders to market-makers like Citadel Securities, Virtu, or Two Sigma. This allows the firms to generate revenue without charging commissions for trades.

When asked about the PFOF model, Duke law professor Gina Fletcher said that payment for order flow models “undermine the relationship between the broker and their client.”

The testimony was a rebuke of brokers like Robinhood, which rely on payment for order flow for the majority of their revenue.

Fletcher said that payment for order flow “pits the broker’s primary revenue source directly against the clients to whom they owe a duty of best execution.”

She also noted that it allows brokers to “say that they are offering zero-commission trading to retail investors when commissions are being subsidized by wholesalers.”

Professor Fletcher continued: “Under the payment for order flow model, brokers are incentivized to put their own profit-seeking interest above their clients’ in deciding where to route orders.”

Other experts on the panel included Rachel J. Robasciotti, the founder & CEO of Adasina Social Capital, who said that payment for order flow allows brokerages to profit while they give clients trading execution prices that are well below market value.

Robasciotti argued that the practice should be banned altogether due to the lack of disclosure adding, “if you don’t see what you are paying you are probably paying more than you would be comfortable with.”

Other experts weren’t as quick to call for a ban on the practice, but the group all agreed that the Securities and Exchange Commission should look into the payment for order flow model to decide if it should be allowed to continue.

To find out if a broker is getting paid for order flow, check out this article to learn more.

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Robinhood is adding more customer service representatives after Congress grilled its CEO about a lack of support lines

robinhood vlad tenev
Co-founder and co-CEO of Robinhood Vladimir Tenev in 2016.

  • Trading app Robinhood is expanding its live customer support following a heated Congressional hearing this month. 
  • The company said it will double the number of full-time representatives this year and expand to new areas.
  • Representatives grilled Robinhood CEO Vladimir Tenev last week after a GameStop stock trading frenzy in January.
  • Visit the Business section of Insider for more stories.

Stock-trading app Robinhood is expanding its live phone support and doubling the number of representatives after the company’s lack of customer assistance came under fire at a Congressional hearing last week.

In a blog post Monday, Robinhood said users will have access to “a registered financial representative” by phone to help with a broader range of issues, including account security and open or recently expired options positions. It plans to expand to more situations as well, such as trading and transfer issues. 

In doubling the number of full-time registered representatives this year, the company said it will expand to new regions to support the goal. 

“We want to make sure we’re there for customers,” the company said, “especially in time-sensitive situations.”

During a Congressional hearing on February 18, Rep. Sean Casten called the Robinhood helpline and played the company’s 12-second message that ends in a hang-up to give people a sense of the support Robinhood users receive from the company. Casten also referenced a 20-year-old trader who died by suicide after the app mistakenly showed a negative balance of $730,000. He didn’t receive an answer from the company about the canceled options on the phone or via email and died by the time the company responded, his family said. 

Representatives questioned Robinhood and CEO Vladimir Tenev for five hours regarding the company’s role in a trading frenzy focused on GameStop and other “meme stocks” in January. Tenev apologized to the Kearns family during the hearing. The company, based in Menlo Park, California, was founded to make the stock market more accessible to retail investors, but Casten claimed it takes advantage of inexperienced traders.

A company spokesperson declined to comment on the reasoning behind the expansion. 

“Millions of people are making their voices heard through the markets,” Robinhood said in its blog post. “We’re investing heavily in customer support and remain committed to improving to serve you.”

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Robinhood CEO says customers on the platform have reaped $35 billion in gains

Vlad Tenev
Vlad Tenev, co-founder and co-CEO of investing app Robinhood.

  • Robinhood CEO Vlad Tenev said the assets of his platform’s users have collectively grown by more than $35 billion.
  • Tenev was challenged on this point by lawmakers, who asked how that would compare if users invested their money differently. 
  • The CEO on Thursday defended the platform he founded in 2013 from lawmakers in a five-hour congressional hearing.
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Robinhood Markets CEO Vlad Tenev said in his testimony before Congress this week that the assets of his platform’s users have collectively grown by more than $35 billion. 

Tenev on Thursday defended the platform he founded in 2013 from lawmakers during the five-hour hearing in front of the House Financial Services Committee. It was the first of three planned hearings, which aim to investigate the main players at the center of the GameStop drama in January.

Rep. Jim Himes, a former Goldman Sachs banker, was not so convinced with Tenev’s claim. He argued that if Robinhood would not reveal how much its clients invested on the trading platform, then it would not be possible to calculate the return on their investments.

“You threw out the number of $35 billion,” Himes said. “I actually think the right comparison is: What if your clients had simply invested in an S&P 500 index fund? Would that number be more than $35 billion, or less?”

But Tenev said that the representative was making the wrong comparison.

“Congressman, with respect, I don’t think the right comparison is investing in an S&P 500 index fund,” the Robinhood CEO said. “I think the right comparison is not having invested at all and having instead spent that money.”

When pressed, this time, by Rep. David Kustoff, on the company’s controversial payment for order flow model, wherein customers’ trades are directed to third parties for execution, Tenev admitted that it was indeed Robinhood’s largest source of revenue.

Rep. Maxine Waters followed up with the same question on whether whose best interest it was that Robinhood was selling customers’ trades, which Tenev mostly avoided. Robinhood in December paid a $65 million penalty in December 2020 for “misleading” communications with customers around its payment for order flow practices.

The hearing scrutinized events that took place in January, when day traders organizing on Reddit drove up the share price of GameStop, initiating a “short-squeeze” on hedge funds that had been betting against the video game retailer. 

The stock went on a dizzying climb, only for it to come crashing back down following restrictions on the stock by Robinhood and other brokerages. The episode has drawn the attention of the Securities and Exchange Commission and other regulators. 

Others summoned to Washington to testify included Citadel chief executive Ken Griffin, Melvin Capital hedge-fund manager Gabe Plotkin, and Keith Gill, also known as Roaring Kitty, among others. However, most of the attention was directed at Tenev, who received intense questioning mainly regarding Robinhood’s business model.

Representatives blamed Robinhood for failing to protect retail investors. Some questioned whether the commission-free feature levels the playing field or leads to unsound market practices.

“There is an innate tension in your business model between democratizing finance, which is a noble calling, and being a conduit to feed fish to sharks,” Rep. Sean Casten said.

Representatives from both parties agreed that short selling should be more tightly regulated, or at least more transparent.

“If we’ve learned anything from the past few weeks, it’s that these average, everyday investors are pretty darn sophisticated,” Mr. McHenry said.

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