Bloomberg Government subscribers get the stories like this first. Act now and gain unlimited access to everything you need to know. Learn more.
The GameStop Corp. stock price frenzy that’s roiled Robinhood Markets Inc. and pulled other industry players into the mix is spurring the need to improve their images with Congress.
The relationship Robinhood, a retail trading app, has with entities such as hedge funds and high-frequency trading firms raised additional questions about its motives and exposed the high finance industry to heightened attention from Capitol Hill it doesn’t normally receive.
Industry leaders will be forced to respond this month at a House Financial Services Committee hearing on the recent volatility, as well as at one expected to come in the Senate Banking Committee.
Ozzie Palomo, a managing director at Chartwell Strategy Group, has received calls and texts from members of Congress and staff asking whether his clients are involved and who the key players are, illustrating the scramble among offices to understand the issue.
“It’s almost like post-financial crisis all over again,” said Palomo, whose financial clients include mutual funds and asset managers that exist outside the GameStop stock rally.
Robinhood has already pushed back against a bipartisan group of lawmakers who’ve questioned the app’s decision to stop trading on certain stocks that surged, including GameStop and AMC Entertainment Holdings Inc., arguing that it halted trading to comply with federal regulations, including capital requirements.
The company is assembling an advocacy team. It already includes former SEC chief of staff Lucas Moskowitz, who was hired as deputy general counsel of its regulatory, litigation, and government affairs efforts last July.
Around the same time, Robinhood hired four lobbying firms, paying them a total of $275,000 in 2020. It’s also been in search of an in-house lobbyist to deal with Congress, and more than 125 people have applied, according to the LinkedIn posting. Outside lobbying firms retained by Robinhood include two former senior counsels to the House Financial Services Committee, Justin Daly of Daly Consulting Group and Walton Liles, of Blue Ridge Law & Policy, according to lobbying disclosure filings with the Senate. Daly also served as counsel at the SEC and the Senate Banking Committee.
The Managed Funds Association, the primary group for the hedge fund industry, spent about $3.2 million on advocacy last year. That number is poised to increase, as it did during the Obama administration. The association has seven firms on retainer, and shares two with Robinhood, the Williams Group and Blue Ridge Law & Policy, according to disclosures. It didn’t respond to inquiries from Bloomberg Government.
High-frequency trading firms are scattered across industry groups with large portfolios, such as the Managed Funds Association and the Securities Industry and Financial Markets Association, or SIFMA, which also didn’t respond to a request for comment.
Lobbyists for these industries should be engaging in “robust omnipresent communication” with congressional offices, said Dave Oxner, a managing director at Cogent Strategies and former lobbyist at SIFMA.
House Financial Services Chair Maxine Waters (D-Calif.) last week set a Feb. 18 hearing into the GameStop situation to “examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price,” she said in a statement.
Hedge funds, including Melvin Capital Management LP, took short positions on GameStop stock, which drove retail investors — spurred by posts on Reddit — to buy up shares and ratchet up the price more than 400% in one week. Melvin Capital Management lost billions before it cashed out.
Waters called hedge funds’ “predatory conduct” indefensible. Oxner said advocates must be ready with answers.
“Look at the bright side here and take this as an opportunity to explain what you do, the benefits you provide the market, the benefits you provide retail investors,” Oxner said.
Senate Banking Chair Sherrod Brown (D-Ohio) announced his panel would hold a hearing on “the current state of the stock market,” which could place high-frequency trading firm Citadel Securities LLC under the microscope.
Trading firms utilize a practice called “payment for order flow,” in which they pay brokerages for the first access to execute trades. The payments from Citadel Securities make up a large share of Robinhood’s revenues, which critics call a conflict of interest, according to Bloomberg News.
Former Sen. Carl Levin (D-Mich.) wrote a Jan. 11 op-ed in the Financial Times asking the Securities and Exchange Commission to ban the practice, as it is in the U.K. Proponents of the practice argue it allows investors to get a better price on stocks, and the payments allow brokerages to offer commission-free trading.
Sen. Elizabeth Warren (D-Mass.), who sits on the Banking panel, wrote a letter to Robinhood CEO Vladimir Tenev, questioning his company’s relationship with Citadel Securities.
“The public deserves a clear accounting of Robinhood’s relationships with large financial firms and the extent to which those relationships may be undermining its obligations to its customers,” she wrote.
Citadel LLC — the hedge fund with ties to Citadel Securities that’s also facing questions about its role in the GameStop frenzy — has Washington advocates, but the market maker doesn’t.
‘Under the Tent’
Despite the influx of statements from lawmakers, no one has floated clear policy proposals in response.
“If the goal is to avoid potentially damaging headlines and heavy criticism from elected officials and regulators, it’s an impossibly steep hill to climb,” Oxner said. It’s less steep if lobbyists are trying to ward off “disruptive policy,” he added.
However, lawmakers could use this moment “as the nose under the tent” to push for policies that include a wealth tax, a tax on high-frequency trading, or a tax on capital gains, a tax on carried interest, or other financial measures.
“They were looking for an opening, and — up until now — there hasn’t been really anything that they could go after,” Palomo said.
To contact the reporter on this story: Megan R. Wilson in Washington at email@example.com