No commission trading means ‘you’re the product,’ lawmaker says in Robinhood-GameStop hearing

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The major players in the GameStock saga faced tough questions from members of the House Financial Services Committee Thursday, as the rapid rise and collapse of the video-game retailer stock has shined a spotlight on some of the more obscure, and some would argue troubling, aspects of equities market structure in the U.S.

Robinhood executive Vlad Tenev defended his company’s decision  in late January to temporarily restrict trading in so-called meme stocks, including GameStop Inc. GME, -4.19%, as necessary for meeting collateral requirements at its clearinghouse.

“Any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric,” he said.

Ken Griffin, founder of Citadel Securities, a major source of revenue for Robinhood, also denied that he had any influence on this decision. Griffin’s hedge fund recently made a large investment in GameStop short-seller Melvin Capital, and this arrangement led to allegations that Robinhood was influenced by its relationship with Griffin.

The practice of payment for order flow, whereby market makers like Citadel Securities pay stock brokers like Robinhood to route customer orders their way, was a major focus on the hearing.

Rep. Brad Sherman, a California Democrat attacked these arrangements, saying “Everybody I’ve talked to in this industry says when you’re broker is being paid for order flow you get a worse execution.” He added that a zero-commission trading model creates a system where “you’re the product,” while market makers are the true customer.

Griffin countered by pointing out that trading costs in terms of both bid-ask spreads and broker commissions have steadily come down in recent decades. “It has allowed the American retail investor to have the lowest execution cost they’ve ever had in the history of U.S. financial markets,” he said.

See also: We were ‘dangerously close’ to collapse of ‘entire system,’ says Interactive Brokers founder ahead of GameStop hearing