Citadel’s Ken Griffin defends controversial Wall Street practice, says firm would adapt if it were outlawed

Citadel’s Ken Griffin defends controversial Wall Street practice, says firm would adapt if it were outlawed

During Thursday’s GameStop hearing, Citadel Securities’ Ken Griffin protected a controversial technique brokerage firms make use of to earn money, and also stated his firm would adapt if brand-new guidelines forbade the practice.

Lawmakers lastly obtained a possibility to press Robinhood, Citadel and also Reddit principals regarding the GameStop trading debate.

Members of Congress invested a lot of their time pushing regarding “payment for order flow,” a practice in which a broker agent gets settlement from a market manufacturer, referred to as a supplier, for guiding the order to them.

This design is exactly how Robinhood and also various other brokers have the ability to have commission-free trading.

Robinhood made greater than $221 million from settlement for order circulation in the 4th quarter of 2020. Meanwhile, Citadel Securities is a market manufacturer.

“We simply play by the rules of the road,” statedGriffin “Payment for order flow had been expressly approved by the SEC, it is a customary practice within the industry,” he stated, describing the Securities and alsoExchange Commission “If they choose to change the rules of the road, we need to drive on the left side versus the right side, that’s fine with us.”

“I do believe that payment for order flow has been an important source of innovation in the industry. As the CEO of Robinhood has testified, they drove the industry toward zero-dollar commissions. This has been a big win for American investors,” Griffin included.

Griffin was pushed byRep Brad Sherman, D-Calif, regarding the “best execution” practice of the marketplace manufacturer.

Sherman pushed regarding whether Robinhood customers obtain even worse implementation due to the fact that Robinhood utilizes the zero-commissions earnings design sustained by settlement for order circulation. Sherman stated after speaking with sector professionals, when brokers are being spent for order circulation, clients worsen implementation.

Griffin stated “the quality of execution varies by the channel of the order” and also “size of the order is only one factor.”

The Citadel principal began to claim that due to the fact that the Robinhood order originates from an area of private investors that have a tendency to negotiate in smaller sized buck quantities, that might impact the implementation. However, he was disrupted by an upset Sherman.

Robinhood Chief Executive Officer Vlad Tenev resembled Griffin’s belief, describing why Citadel obtains a huge part of the firm’s professions.

“Our system routes orders based on who provides the best execution and quality for our customers. The reason Citadel gets a relatively high percentage of our customer order flow is because they provide superior execution quality,” stated Tenev.

A modification to the settlement for order circulation validity would present a significant danger to the leader of totally free trading.

“Payment for order flow enables commission-free trading,” Tenev included. “When we started people didn’t think there was enough margin to make this business work, but we’ve been fortunate to make it work and make it work for our customers.

Robinhood’s trading restrictions

Representatives repeatedly asked Tenev if the millennial stock trading app restricted trading for any other reason than to meet depository requirements.

Tenev cited increased capital requirements from the Depository Trust and Clearing Corp., an entity responsible for settling and clearing trades, for the trading restrictions. Robinhood raised more than $3.4 billion in a few days to shore up its balance sheet and drop some of the restrictions.

“That added resources … was completely to get ready for a future, also better, black swan occasion and also to unrestrict on the trading and also acquiring of these safeties,” said Tenev. “The $3.4 billion we elevated I believe goes a lengthy method in supporting the firm for future market volatility and also various other comparable black swan occasions.”

He told the representatives that the GameStop mania was a one in 3.5 million event, which he said was ” unmodelable.” Tenev said Robinhood’s risk management processes kicked in as they were designed.

The Robinhood chief was pressed about why the trading app restricted on the buy side of GameStop last month.

“Buying safeties enhances our security demands, marketing does not,” said Tenev. “Moreover, protecting against clients from marketing is a really challenging and also uncomfortable experience where clients are not able to access their cash … I picture it would have actually been dramatically even worse if we had actually protected against clients from marketing.”

Tenev said the majority of Robinhood clients are engaged in buy and hold investing strategies with only about 13% trading in the options market and only about 3% trading on margin.

“We’re additionally a self-directed brokerage firm, to ensure that indicates we do not supply suggestions and also we do not make suggestions wherefore clients ought to or ought to not purchase,” stated Tenev.

The complete worth of Robinhood’s clients’ properties goes beyond the web quantity of cash its customers have actually transferred right into Robinhood by over $35 billion, he included.

Tenev additionally supported for real-time negotiation as opposed to two-day negotiation in order to assist battle several of the mayhem that took place throughout the GameStop legend.

Watch the complete statement right here.

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