Citadel’s Ken Griffin defends the controversial practice on Wall Street, saying the company would adapt if banned
During Thursday’s GameStop hearing, Citadel Securities’s Ken Griffin defended a controversial way brokers make money, saying his firm would adjust if new regulations ban the practice.
Legislators finally got a chance to brief the heads of Robinhood, Citadel, and Reddit on the controversy surrounding the GameStop trade.
Members of Congress spent much of their time thinking about “paying for the flow of orders,” a practice in which a broker receives payment from a market maker, called a dealer, to route the order to them.
This model allows Robinhood and other brokers to trade commission-free.
Robinhood earned more than $ 221 million from paying the flow of orders in the fourth quarter of 2020. Citadel Securities is now a market maker.
“We just obey the street rules,” said Griffin. “Payment for the order flow has been specifically approved by the SEC. This is industry standard,” he said, referring to the Securities and Exchange Commission. “If they want to change the road rules, we have to drive on the left and the right, that’s fine with us.”
“I believe paying for the order flow has been a major source of innovation in the industry. As the Robinhood CEO testified, they drove the industry toward zero dollar commissions. This was a huge win for American investors.” so Griffin added.
Griffin was pressured by Rep. Brad Sherman, D-Calif., On Market Maker’s “Best Execution” practice.
Sherman looked to see if Robinhood customers get worse execution because Robinhood uses the commission-free model that is supported by paying for the order flow. Sherman said after speaking with industry experts, if brokers get paid to flow orders, customers get worse execution.
Griffin said, “The quality of execution varies depending on the channel placing the order” and “the size of the order is only one factor.”
The citadel chief began to say that the Robinhood arrangement came from a community of individual traders who tend to trade in smaller dollar amounts, which could affect execution. However, he was interrupted by an excited Sherman.
Robinhood CEO Vlad Tenev reiterated Griffin’s assessment and explained why Citadel does a large part of the company’s business.
“Our system routes orders based on who gives our customers the best execution and quality. The reason Citadel receives a relatively high percentage of our customer order flow is because they offer superior execution quality,” said Tenev.
Changing the payment for the legality of the order flow would pose a great risk to the free trade pioneer.
“Paying for the flow of orders enables commission-free trading,” added Tenev. “When we first started people didn’t think there was enough wiggle room to get this business up and running, but we were lucky enough to see it work and work for our customers.
Robinhood Trade Restrictions
Representatives repeatedly asked Tenev if the Millennial Stock Trading App restricted trading for any reason other than to meet custody account requirements.
Tenev cited increased capital requirements from the Depository Trust and Clearing Corp., a company responsible for the settlement and clearing of trades, for the trade restrictions. Robinhood raised more than $ 3.4 billion in just a few days to prop up its balance sheet and lift some of the restrictions.
“This additional capital … was used solely to prepare for a future, even bigger, black swan event and unlimited trading and buying opportunities in these securities,” said Tenev. “The $ 3.4 billion we’ve raised is going to go a long way in helping the company cushion future market volatility and other similar black swan events, in my opinion.”
He told representatives that the GameStop mania was a one-in-3.5 million event that he described as “non-modelable”. According to Tenev, Robinhood’s risk management processes started when it was designed.
The Robinhood boss has been pressured into why the trading app was restricted on the GameStop buy page last month.
“Buying securities increases our collateral requirements, but not selling them,” said Tenev. “Additionally, preventing customers from selling when customers cannot access their money is a very difficult and painful experience. I imagine it would have been a lot worse if we had prevented customers from selling.”
According to Tenev, the majority of Robinhood clients are into buy-and-hold investment strategies, with only about 13% trading in the options market and only about 3% trading on margin.
“We’re also a self-directed broker. That means we don’t offer advice or make recommendations on what clients should or shouldn’t invest in,” said Tenev.
The total value of Robinhood’s client assets exceeds the net amount its clients have deposited with Robinhood by over $ 35 billion, he added.
Tenev also advocated a real-time settlement instead of a two-day settlement to combat the chaos during the GameStop saga.
View the full testimonial here.
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