Robinhood CEO grilled by lawmakers in Congressional hearing

Yahoo Finance’s Alexis Christoforous and Jesse Fried, Harvard Law School Professor, discuss lawmakers grilling Robinhood’s CEO amid Congress’ probe into the GameStop trading frenzy.

Video Transcript

ALEXIS CHRISTOFOROUS: Someone else who's been listening along with all of us is Professor Jesse Fried. He is a Harvard Law professor. Thank you so much for joining us. There's a lot to digest there. I'm just going to start with the overarching question. You saw Robinhood CEO answer lots of questions, lots of criticism coming from lawmakers on how his firm handled the GameStop trading frenzy. Just, what's your big takeaway from the way Vlad Tenev is conducting himself today?

JESSE FRIED: Well, I think he did a really great job defending himself and Robinhood. He came across as a very sympathetic person, who came here from Bulgaria, built a business, is trying to do the right thing. And look, GameStop was, as he said, an unexpectable event. It's not something that one could anticipate. And so, when things go haywire, when something happens that's not really anticipatable, you know, it's not proper constructive to blame people who didn't anticipate it.

ALEXIS CHRISTOFOROUS: I want to go through what some of the lawmakers had to say to Tenev today, and one of them is a Democrat from New York, Carolyn Maloney. She accused Vlad Tenev of recklessly handling customer money when they stopped also allowing people to be able to buy the shares during the trading frenzy. And she said, quote, "You reserved the right to make up the rules as you go along." Then he responded by saying that he was sorry. He said I'm not going to say that Robinhood did everything perfect.

You know, it's at times like these when lawmakers are dealing with some heavy subjects that they are not necessarily experts in, trying to make sense of it all. Is Robinhood and firms like them making up the rules as they go, or did the markets do what they were supposed to do during those trading frenzied days?

JESSE FRIED: So I think precisely because something like GameStop is not really anticipatable, and other things like GameStop might happen in the future, companies like Robinhood have to be able to stop or limit trading based on their judgment as to what is going to happen. And you can't figure out all the different possible scenarios in advance, where trading is going to be-- needed to be limited. And so you have to have something open ended in your disclosure, which says, if we feel the need to do this, we will limit trading.

ALEXIS CHRISTOFOROUS: So do you think that we're going to see any real change come out of this, what's probably going to be marathon testimony today? Or is it really the Securities and Exchange Commission who's going to be taking a deeper look into what happened? If any change comes, it would come from the SEC versus lawmakers, do you think?

JESSE FRIED: So the SEC is investigating trading in GameStop. And it might be the case that they find that there was manipulation via Reddit. I sort of doubt that they're going to find that. But we can't rule it out. If they find out that there was no manipulation via Reddit, there's really nothing for them to do in terms of limiting how people communicate on these chat boards or trading in these stocks. There are real issues in how the financial system is regulated around settlement times, which probably should be addressed other than that, I'm not really sure what needs to be done at this point, given that there's no evidence so far that there was manipulation.

ALEXIS CHRISTOFOROUS: You know, they also came down pretty hard on payment for order flow, that controversial practice in which stockbrokers get a kickback for essentially selling the ability to execute trades. This was coming from Representative Brad Sherman, the Democrat from California. And we know that Robinhood was fined by FINRA $1 and 1/4 million-- I think it was a couple of years ago-- for this practice. Do you think that we may need to start seeing more transparency or different rules around this controversial payment for order flow because of all of this?

JESSE FRIED: I think more disclosure can't hurt. I'm sort of skeptical that payment for order flow had anything to do with what happened in GameStop. I think that the people that were getting very excited about GameStop would have gotten just as excited if there had been big, bold disclosures throughout the Robinhood platform and other platforms that there was payment for order flow. I just think this is a bit of a side issue.

ALEXIS CHRISTOFOROUS: I actually want to play a sound byte for a moment from Congressman Gregory Meeks from today's testimony. And then we'll have a chat about it.

GREGORY MEEKS: How do you make the determination of individuals who are not the sophisticated investors by allowing them to buy these risky stocks that are on margin?

VLAD TENEV: Thank you, Congressman, for the opportunity to address that. Let me set the stage a little bit by saying that about 2% of our customers borrow on margin. About 13% on a monthly basis perform an options transaction. And a much smaller number, around 3%, perform a multi-leg options transaction. So the vast majority of our customers are engaging in buy and hold activities and long-term investing on our platform.

ALEXIS CHRISTOFOROUS: What do you make of how Tenev answered that question? And do you think that we might see, at the very least, calls for-- seeing calls for more transparency, but do you think we'll end up with some different rules coming out of this for platforms like Robinhood?

JESSE FRIED: So it looks like a lot of people on Robinhood are trading options, which generally is a loser's game. I think that regulators in a sort of a non-politicized system, looking at this, might say, hey, you can't trade options, or you can't buy stocks on margin if you have less than a certain amount of income or your account is smaller than a certain size. I think that might be a reasonable step to take to protect people from themselves. But I think that politically, these types of reforms are not going to really go anywhere because there will be a lot of angry people out there.