Sen. Elizabeth Warren asked Robinhood to explain its connection to market maker Citadel Securities, raising concerns that the broker prioritized institutional relations over its customers.
“The public deserves to know the details of circumstance behind Robinhood’s decision to restrict trading and about other actions that appear to be treating individual investors in an unequal or unfair fashion,” Warren wrote in a letter to Robinhood CEO Vladimir Tenev.
Robinhood’s relationship with Citadel has been scrutinized by members of Congress, Reddit traders, and journalists after the online broker began limiting customers from making trades on GameStop and other stocks last week after retail investors on Reddit created a thousandfold price surge in shares of GameStop.
After Robinhood imposed the restrictions, GameStop’s share price slumped and has yet to recover, trading on Tuesday as much as 200 points below last week’s high with less than a third of the trading volume.
Robinhood made as much as $100 million from Citadel Securities in the first quarter of 2020. Citadel Securities pays Robinhood for the right to handle “order flow” and access certain user data, which allows Citadel Securities “to access real-time information about which stocks its users are buying and selling,” according to Warren’s letter, profiting from bid-ask spreads, the difference between the price someone is will to pay for a stock and the price someone else is willing to sell it for.
In addition to accessing Robinhood’s data, as a market maker, it also handles many of Robinhood’s and other firms’ transactions — as many as 4 out of every 10 shares traded in the United States are covered by Citadel, according to the Financial Times, making Citadel “the number one retail market maker.”
Those financial ties led Warren and others to wonder whether Robinhood “engage[d] in any discussions with any Citadel businesses or affiliates prior to Robinhood reaching its decision to institute restrictions on trading for GameStop and other stocks.” Warren also requested additional information on what user data Robinhood shares with Citadel.
This is not the first time Robinhood has run into trouble for its order flow payments. In December 2020, the company paid the Securities and Exchange Commission $65 million to settle charges that Robinhood failed to satisfy its duty of best execution, which the SEC claimed cost Robinhood customers tens of millions of dollars.
Citadel Securities has denied that any conversations took place leading up to Robinhood’s trading restrictions.
“Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business,” a spokesperson told the Washington Examiner. “Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions.”
Another factor is the connections between Citadel the hedge fund, a separate business also founded by Citadel Securities founder Kenneth Griffin, to short positions against GameStop — and investment firms that had placed bets that GameStop’s share price would continue to decline and, as a result, lost billions of dollars in January.
One firm, Melvin Capital Management, lost more than 50% on its investments in January. Citadel the hedge fund owns an undisclosed stake in MCM, and with Point72, it injected nearly $3 billion into MCM during the worst of the short squeeze, according to the Wall Street Journal.
In the letter, Warren also requested additional information about Robinhood’s cash on hand, following concerns that the broker was having trouble meeting obligations to market clearinghouses. Robinhood has raised more than $3 billion in funds from investors since Thursday — more money than the company has raised since it was established in 2013.
“Reports revealed that potential cash flows issues ‘could have put Robinhood out of compliance with very basic regulatory rules that every brokerage is required to follow,'” Warren wrote, suggesting that Robinhood “may have been exposed to too much risk associated with margin trading.”
Both the House Financial Services Committee and the Senate Banking Committee plan to hold hearings about market manipulation, Robinhood’s and other brokers’ decisions to restrict certain trades, and short selling.
The Washington Examiner reached out to Robinhood for further comment.
