Sen. Elizabeth Warren, D-Mass.
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Sen. Elizabeth Warren is pressuring Citadel CEO Ken Griffin about his firm’s relationship with Robinhood after the online broker curbed trading in names like GameStop amid a volatility spike last month.
“Both Robinhood and Citadel have denied that Citadel had any role in this decision – but Congress and the public deserve clarity on the process of and reasons for these decisions by Robinhood, which had a significant impact on many individual investors,” the Massachusetts Democrat said in a letter sent Thursday.
Warren said she is concerned about the potential conflict of interest between the hedge-fund side of Citadel — which invested $2 billion in short-selling firm Melvin Capital for its GameStop losses — and Citadel’s securities division.
The senator also asked Griffin about the controversial, yet legal, way in which Robinhood and other brokers make money through trades despite dropping commissions: “payment for order flow.” Robinhood and other brokers are large beneficiaries of this revenue model and receive payments from market makers such as Citadel Securities.
“The payment for order flow model raises questions about inherent conflicts of interest and whether broker-dealers like Robinhood and market makers like Citadel Securities profit from rapid trading and market churn that has no relationship to the underlying values of the company stocks that are being traded or the profits of individual investors: it is instead a business practice in which ‘[t]he more shares they see, the more bread crumbs they take,'” Warren wrote.
Warren’s letter came hours before Griffin’s scheduled testimony to the U.S. House Financial Services Committee about the GameStop trading frenzy. The hearing is slated to start at noon ET.
The senator sent another letter to the Financial Industry Regulatory Authority on Thursday, asking how FINRA will respond to Robinhood’s role in the recent market volatility and its decision to limit trading of certain stocks during the GameStop mania.
Warren asked FINRA, which licenses and regulates broker-dealers, to review whether Robinhood’s practices complied with existing laws and regulations.
“Given several findings that Robinhood violated rules governing broker-dealers and lacked systems to ensure their compliance with those rules, the public deserves to understand what steps FINRA has taken to ensure future compliance by Robinhood,” Warren wrote to FINRA CEO Robert Cook.
— with reporting from CNBC’s Kate Rooney.
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