The U.S. Senate Banking, Housing and Urban Affairs Committee considered testimony on the recent "tech-induced" stock market volatility involving GameStop.

At the "Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing" hearing, Chair Sherrod Brown (D-OH) highlighted the "gamification" of the Robinhood business model and characterized it as one that "attracted new customers to investing, encouraged them to trade, profited off of them, and then broke their trust." Senator Brown described the stock market as a device set up to "funnel more wealth to the already-wealthy." He further criticized Robinhood as being "founded on a model that exploits small investors by encouraging fast and loose trading, and then sells their trades to big market players" (i.e., the business model of payment for order flow).

Commentary

The run-up in GameStop stock should not be used as a pretext to further legislation or rulemaking that does little to help retail investors or that may even injure them. (See Cadwalader Memorandum, "GameStop: Regulators Should Focus Less on 'Solving the Problem'; More on 'Improving the Situation.") While it may be a legislator's first instinct, new rules are usually not the solution to a high-profile event. More importantly, they often lead to unwanted consequences. For example, regulations governing investment research and the adoption of Regulation Best Interest intended to help retail investors are likely to make it more difficult for retail investors to obtain brokerage services from full-service firms.

In his description of the GameStop events, Senator Brown intended to find wrongdoing even when none exists. For example, it seems reasonably well established that Robinhood temporarily stopped trading in GameStop because it became subject to very high demands for margin from its clearing corporation that it might have been unable to meet had it satisfied all demands for trading. According to Senator Brown, this means that Robinhood "cut off customers to save itself" and "broke [customers'] trust." Does he believe that Robinhood should have continued trading until clearinghouse demands for margin bankrupted the firm? Presumably, he does not believe that.

"GameStop" should be used as a reason to study the investment decisions made by small investors, whether regulations meant to protect them do so, and how regulation might be improved. Instead, it appears that it may be used only as a device to rush into the adoption of more regulation.

Primary Sources

  1. U.S. Senate Banking, Housing and Urban Affairs Committee Hearing: Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing
  2. Congressional Testimony, Sherrod Brown: Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing
  3. Congressional Testimony, Michael S. Piwowar: Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing

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