House Financial Services Committee Hearing on GameStop Part II

House Financial Services Committee

Game Stopped? Who Wins and Loses When Short Sellers, Social Media,

and Retail Investors Collide, Part II

Wednesday, March 17, 2021


  • Sal Arnuk, Partner/Co-Founder, Themis Trading LLC
  • Michael Blaugrund, COO, New York Stock Exchange
  • Dr. Vicki Bogan, Associate Professor, Cornell University
  • Alexis Goldstein, Senior Policy Analyst, Americans for Financial Reform
  • Dennis Kelleher, Co-Founder, President and CEO of Better Markets
  • Alan Grujic, CEO, All of Us Financial
  • Michael Piwowar, Executive Director, Milken Institute

Opening Statements

Chairman Maxine Waters (D-Calif.)
In her opening statement, Waters explained that the goal of the initial hearing was to get the facts, and she reiterated her concern that Robinhood’s retail investors are treated as a “product” and that Citadel poses systemic risks to the financial system. Waters said that part II of this hearing series is intended to allow the Committee to hear from capital markets experts on the issues and any possible reforms or necessary legislative steps. She outlined her desire to hold a third hearing where members can hear the perspectives of the relevant regulators who oversee these markets. Waters concluded that all three hearings are to ensure the capital markets are fair and transparent, that investors have strong protections, and that Wall Street is accountable and beneficial to the American economy.

Ranking Member Patrick McHenry (R-N.C.)
In his opening statement, McHenry said that regardless of the facts and data, Democrats are going to use every opportunity to justify advancing an extreme progressive agenda. He said that the Democrats are using the events surrounding GameStop to justify more regulations, greater restrictions, and increase costs on businesses and everyday investors. McHenry argued that the Democrats’ agenda creates perverse incentives, bad policy outcomes, and rampant inequality. He argued that, because of Democratic policies, it is easier to buy a lottery ticket than to invest in the “next Google,” and that the accredited investor definition ensures that only the rich get to invest in the things that make you rich. McHenry concluded by emphasizing the need to work together to harness the power of financial innovation that benefits everyday Americans.

Rep. Brad Sherman (D-Calif.)
In his opening statement, Sherman said this is a hearing on important technical issues that affect investors that both parties should be trying to protect. He argued the Committee should be looking at short selling, the fact that we disclose far less in the United States than in Europe, conflicts of interest in payment for order flow (PFOF), as well as the gamification and glorification of high frequency trading. He concluded that none of those topics are partisan or ideological.

Rep. Bill Huizenga (R-Mich.)
In his opening statement, Huizenga said technological advancements have improved access to the capital markets and created new opportunities for countless Americans to participate in such markets. He said Democrats are falsely claiming that the increase in market participation has caused gamification of the trading experience and that the markets are rigged. He concluded that there needs to be bipartisan efforts to better understand how innovation and tech can improve access to capital markets.

Rep. Al Greene (D-Tex.)
In his opening statement, Greene questioned whether we should continue to allow a “middle man,” or a market maker, who is a high-speed, high-frequency trader, to execute trades for himself and his clients. He said if the answer is yes, we need to further question if there are sufficient penalties to deter self-dealing and unlawful trading, mainly buying or selling ahead of one’s clients when the trades of the clients are known. 


Sal Arnuk, Partner/Co-Founder, Themis Trading LLC
In his testimony, Arnuk said that the most damaging elements of the meme stock craze are playing out because of extremely poor investor education, conflicts of interest in the form of order routing inducements referred to as payment for order flow (PFOF), lack of accountability for poor investor education, and misaligned incentives. Arnuk argued that PFOF presents an undeniable conflict of interest because, while it enables free commissions, there are implied costs. He questioned how a broker, charged with the duty of getting its clients the best available prices, does so by selling the clients orders to sophisticated high-frequency trading firms, who will make billions of dollars as a result. Arnuk said these retail brokers and market-making firms claim to provide price improvement (PI), but use a flawed calculation which is based off a slower price feed, called the Securities Information Processor (SIP), do not consider odd lots and mid-point exchange order flow, and that the National Best Bid and Offer (NBBO) reference price they use is largely set by the market-making firms bestowing this PI in the off-exchange market. He said PFOF increases overall costs for all investors, including pension funds. Arnuk further said that market-makers are rewarded with sales that are only made possible for displayed limit orders. He argued that maker-takers rebates created rushed conditions to be first in line to get a rebate every time the quote changes, and that market-makers, not investor orders, dominate these rebates. Arnuk said maker-takers has taken fixed exchange costs “to the moon,” which has resulted in less diverse public markets which, in turn, hurts price discovery.

Michael Blaugrund, COO, New York Stock Exchange
In his testimony, Blaugrund said the purpose of the New York Stock Exchange (NYSE) is to help companies raise capital to change the world and provide an opportunity for investors to share in such growth. He argued that public policy should build investor confidence. Blaugrund said that an area for potential reform includes disclosures to shareholders under SEC Form 13F , arguing the Securities and Exchange Commission (SEC) should consider shortening the delay for 13F reporting and consider mechanisms that enable direct disclosures to corporate issuers when a reportable position is established or fully divested. He further discussed securities lending, saying that short selling is an essential practice for liquidity, price discovery, and risk management, but the securities lending market on which it depends is opaque and inefficient and therefore the SEC should consider establishing a consolidated tape for securities lending. Blaugrund said the SEC should eliminate the competitive barriers for public investors. He said it is time to “level the playing field” for on- and off- exchange price increments. Blaugrund further argued the settlement cycle period should be shortened from two days to one day after the trade. Blaugrund concluded that smarter regulation of the equity market structure will improve investor confidence, encourage entrepreneurs to access the capital markets, and allow the United States to extend its global leadership.

Dr. Vicki Bogan, Associate Professor, Cornell University
In her testimony, Bogan said that participating in the financial markets is a path to economic mobility and wealth mobility. Therefore, she stated that it is important to remove barriers to prevent individuals from safely accessing markets. She said research demonstrates it is important to reduce market frictions like transaction and information costs, which PFOF does to an extent, but said PFOF has some other transaction costs, the exact amount of which is not transparent. She said she would focus her testimony on gamification. Bogan said that while Robinhood’s interface is to facilitate ease of use for retail investors, it also employs powerful behavioral science-based techniques to influence investor behavior in a particular direction. She argued that prompts, push notifications, and other nudges are meant to elicit specific behavior such as increased trading by the investor. Bogan argued that given the PFOF model, it is in the firms’ best interest to have more trading volume, which in turn increases firm profits. Bogan concluded that retail investors need more protection through regulation, including consumer safeguards governing online broker app user interfaces and enhanced regulation around fee transparency.

Alexis Goldstein, Senior Policy Analyst, Americans for Financial Reform
In her testimony, Goldstein argued that institutional players have structural advantages over retail traders and that their biggest profit days coincide with the most volatile trading days. Goldstein said policymakers should focus on examining the footprint of institutional players in terms of volatility, investigating whether hedge funds are creating undue risks and regulatory blind spots, improving hedge fund trading disclosures, scrutinizing payment for order flow (PFOF), and considering changes to capital requirements at brokerages. Goldstein argued that the way to truly rebalance the economy is not to democratize the Wall Street “casino,” but instead to invest in rebuilding public institutions. This reinvestment, she said, includes cancelling student loan debt, a modest wealth tax, and a very small financial transaction tax. Goldstein concluded that the country needs transformational policies that tackle the deep inequalities the pandemic has exasperated.

Dennis Kelleher, Co-Founder, President and CEO of Better Markets
In his testimony, Kelleher said the purpose of the financial system and markets is supposed to be wealth creation for the many, not wealth extraction for the few. He said that while American markets may be the envy of the world today, this is not preordained, guaranteed, or destined to always be the case. He argued that people believe the markets are transparent, well-regulated, and policed, but if that confidence is lost, the markets will not function and the economy will be hurt. The function of the markets, he said, is to provide for a growing, thriving economy with capital allocation and formation to fuel economic growth, increased living standards, and decreased inequality. He said this requires a level playing field, full and fair price discovery, as well as serious investor protection. Kelleher argued PFOF and other wealth extraction activities and conflicts of interest “have to go.” Kelleher said Congress needs to also remain deeply skeptical of disingenuous arguments that retail investors have “never had it so good,” because, while arguably true, he said it is not attributable to PFOF, but rather to technological innovations, cost reductions, the introduction of electronic trading, the implementation of decimalization, and other elements of the Regulation NMS framework. Kelleher concluded that without PFOF and other intentionally created complexities used to disguise wealth extraction, retail investors would have more confidence which would lead to more people investing, more capital available, more businesses formed and funded, more jobs created, as well as increased and broad economic growth.

Alan Grujic, CEO, All of Us Financial
In his testimony, Grujic said that retail investors do not have the same tools and underperform markets over time. He argued that the narrative that markets are rigged is largely incorrect and that the markets are well-structured, highly competitive, and expertly regulated. Grujic argued there is need for improvement, such as delivering institutional grade capabilities to retail investors including in the areas of data, knowledge, access, and influence. Grujic acknowledged his firm does not use PFOF, but said PFOF, while not necessary, is an effective way for markets to operate and should not be banned without careful consideration of its costs and benefits. He said market-makers and exchanges provide services and need to be paid for providing liquidity, price discovery, and customer service, as well as order matching and settlement services. He further said market-makers are indifferent between PFOF and price improvement, but brokers care because they also need to be paid for their services. He said if we prohibit PFOF, commissions will likely increase and valuable retail innovations, such as fractional shares, may become uneconomical. Grujic said that if we force retail flow and institutional flow into the same market structure, the average price will be worse for retail orders and better for institutional orders. Grujic concluded that gamification can encourage good behavior, including financial literacy, investor, education as well as regular saving and investing.

Michael Piwowar, Executive Director, Milken Institute
In his testimony, Piwowar said the Securities and Exchange Commission (SEC) is examining broker-dealers to assess whether they are meeting their legal and compliance obligations when providing retail customers access to complex strategies, such as options trading, as well as examining whether abusive or manipulative trading occurred throughout this period of volatility. Piwowar said he was focusing his testimony on regulatory policy issues. He argued that a priority should be achieving more equitable access to investing in private companies. He said the current SEC rules effectively prohibit low-income investors from investing in this high-growth sector of the economy and therefore the SEC should revisit the “accredited investor” definition, should solicit public feedback on achieving more equitable access to investing in private companies across all income levels, and should engage in rulemaking to open investment opportunities to all Americans. He concluded that the SEC should also focus on four areas of market structure: 1) evaluate whether and how to move to shorter trade settlement cycle; 2) study how PFOF works in a zero-commission environment; 3) examine order routing and best execution requirements; and 4) look into various alternatives to increase regulatory reporting and public transparency in securities lending.

Question & Answer

Settlement Cycle

Throughout the hearing, many members asked the witnesses about transitioning to a shorter settlement cycle. Reps. Steve Stivers (R-Ohio), David Kustoff (R-Tenn.), and Anthony Gonzalez (R-Ohio) posed questions about investor access and if Robinhood would have needed less capital if there were a shorter settlement cycle. Piwowar said yes, that doing so would have taken additional risks out of the system, and that there would have been a lower likelihood of Robinhood having to deny access. However, Piwowar cautioned that shortening the cycle too much might lead to operational risks. Reps. Lee Zeldin (R-N.Y.) and Kustoff asked questions about the advantages and disadvantages of shortening the settlement cycle. Piwowar noted that some disadvantages are the cost to the industry and potential operational risks, but some advantages are faster access to cash and the reduction of risks within the system.

Reps. Warren Davidson (R-Ohio), Bryan Steil (R-Wisc.), and Kustoff asked about the feasibility of moving to a shorter settlement cycle. Regarding timeframe and potential obstacles, Piwowar stated that the SEC must work with bank regulators because cash payments must align, and that Secretary Yellen should work with Financial Stability Oversight Council (FSOC) to help shorten the settlement cycle by getting the relevant regulators to move in the same direction.

Responding to Rep. Ted Budd’s (R-N.C.) question regarding the possibility of clearinghouses continuing to exist while pursuing a T+1 or T+0 settlement cycle, Piwowar said that real time settlement is further off, but the SEC could take a dual-track approach to move to T+1 while signaling an intent to move to T+0. Rep. Van Taylor (R-Texas) asked Grujic and Blaugrund to confirm that they support moving to T+0 according to their testimony. Grujic stated that the state of technology must be considered, technology has evolved and blockchain is faster, and that soon T+0 benefits will outweigh the costs. Blaugrund stated that he’s comfortable with T+1 but would by hypersensitive to anything narrower due to operational concerns and ensuring that netting is preserved.

Rep. William Timmons (R-S.C.) asked if there would be roadblocks to market-makers in the transition from T+2 to T+1 and if the transition could be done with little to no government involvement. Piwowar stated that there are no market-maker roadblocks. Regarding government involvement, Piwowar said the SEC could do it, but the government can help to address the collective action problem as well as examine the costs and benefits. He concluded by reiterating that the bank regulators must be involved.

Gamification and User Interface

Rep. Nydia Velazquez (D-N.Y.) and Jake Auchincloss (D-Mass.) asked the witnesses if they are also concerned by gamification of the Robinhood app and what types of reforms should be considered. Kelleher said we should all be concerned because it does not incentivize people to invest, it causes people to engage in more thoughtless trading, allowing Robinhood to collect more money through payment for order flow. Kelleher said the whole thrust of these apps needs to shift away from compelling frequent mindless trades and focus more on wealth building.

Reps. Cindy Axne (D-Iowa) and Ayanna Pressley (D-Mass.) asked if app design has the power to influence behavior to trade in riskier options and what implication targeted advertisements have on users. Bogan said yes, some features of the app’s platform illicit behaviors like more trades. Goldstein said using advertisements show that Robinhood is solely concerned with getting new users and more trades, as opposed to customer turnover. Ted Budd asked if SEC is equipped to make judgements on what constitutes a good or bad game-like feature and if gamification is a grave systemic danger. Piwowar said the SEC is well equipped to see if certain features violate existing standards but added that gamification is not always negative and is sometimes very useful for business or cybersecurity classes.

Huizenga said gamification is to blame in many ways, but there is a need to distinguish between eye candy and malicious intent. He asked Piwowar if the SEC has ever regulated on advertising style or product delivery platform. Piwowar said there are advertising rules but nothing on platforms itself. Rep. Andy Barr (R-Ky.) added that poorly tailored regulations on financial technology and app platforms might slow the expansion of retail investor participation in the capital markets. Piwowar said slowing down any access for retail investors impacts equity growth and the impact on low-income households must be examined.

Wealth Inequality / Retail vs Accredited Investors

Reps. Ann Wagner (R-Mo.), McHenry, Pressley, and Auchincloss asked about impacts on wealth inequality. McHenry and Wagner mentioned the accredited investors rule, asking if this exacerbates inequality between investors and what other regulatory barriers could be removed to help facilitate increased access. Piwowar said limiting retail investors to a smaller portfolio of securities causes growth opportunities to go by the wayside because accredited investors have access to certain higher return securities that retail investors do not. He said the accredited investor rules are very outdated and the ability to invest should be equal for all individuals based on their financial literacy, not their current wealth. Grujic supported removing the accredited investor rule and noted that the expansion of private markets will give greater opportunities than the public markets. Piwowar said there are benefits to Rep. Anthony Gonzalez’s bill to open the ability of closed end funds to invest in private funds because if people are uncomfortable investing in private companies, this legislation will give them assurance and protection through a regulated investment advisor.

Rep. Jim Himes (D-Conn.) emphasized the point that when retail investors trade a lot, in this kind of scenario, they are not saving and building wealth, but gambling. Kelleher said there is no ambiguity that they lose, and they lose consistently. He said the fact that institutions have the maximum sophistication in terms of information just further extracts wealth from retail investors.

Auchincloss raised his concerns over the growing scarcity of IPOs, arguing that when there are fewer private companies going public, there are in turn fewer Americans getting access to wealth. Auchincloss asked what the NYSE has done to make IPOs easier. Blaugrund said the NYSE is keenly interested in bringing younger, faster growing companies to the public market and lately, that has been through direct listings and SPACs. Auchincloss argued that SPACs are not going to democratize access to value creation pre-IPOs because the value is being captured by a small number of investors “in the know.”

Increased Disclosures

Many witnesses made the case for increased disclosure requirements. Rep. Velazquez noted the inadequacy of current disclosure requirements for short selling positions. Rep. Ed Perlmutter (D-Colo) asked why there were shares that failed to deliver and how to address this problem. Kelleher was in support of increased disclosure in terms of frequency and content. Kelleher said public information indicates there was abusive use of short selling and that the nature of rehypothecation in securities lending means there is a need for disclosures at a more granular level of what is happening behind the scenes.

Rep. Madeline Dean (D-Penn.) asked what failures can be observed on Robinhood’s end and what new best practices should be considered going forward. Goldstein said they have not done a good job disclosing information to their customers and that there is a need for regulators to investigate further, make sure there are no gaps in the data, and get a footprint of the institutional players involved.

Role of Market Makers

Rep. Al Green (D-Texas) raised concerns over marketmakers handling and seeing unfulfilled orders. Green said this information gives them the opportunity to defraud their clients. Goldstein agreed completely that marketmakers have enormous amounts of data and if Citadel was in fact found to be trading ahead of their customers, they should continue to face scrutiny. She said regulators could eliminate no fault, no penalty settlements. She said we should go after not just firms, but individuals and create an attestation that if there is some wrongdoing, they are responsible for it. She suggested implementing Sections 954 or 956 of the Dodd Frank Act..

Rep. Al Lawson (D-Fla.) posed a question to all witnesses on their concerns over market-makers posing a risk to our system. Piwowar said he does not believe Citadel poses systemic risk to the system. Goldstein said no one is looking at the holistic risk across all of Citadels firms and thinks there are risks of interconnection that should be investigated. Grujic argued that the removal of Citadel would have little impact to execution quality and liquidity. Kelleher on the other hand, said Citadel should be considered a systemically important financial institution (SIFI) noting that if they were to shut down today, 26 percent of all U.S. equities volume would stop.

Rep. French Hill (R-Ark.) asked Piwowar his views on Citadel’s separation of businesses, and if they can use the information they have and trade on it, noting that this is against the law. Piwowar said this would absolutely be against the law and Citadel’s divisions must operate separately and they will be scrutinized if found guilty. Rep. Ritchie Torres (D-N.Y.) also asked about the sharing of this information, if a market making arm can legally converse with its trading arm. Goldstein emphasized that this is not allowed.

Rep. Chuy Garcia (D-Ill.) asked what FSOC and Congress should do to keep the volatility in January from infecting the whole financial system. Goldstein said they could restart FSOC’s hedge fund working group. She said Citadel deserves close attention and Congress should consider more legislation on who is deemed to be a SIFI and identify systemic risks in the system.

Payment for Order Flow (PFOF)

Many members asked questions about PFOF and if it should be restricted or fully banned. Rep. Juan Vargas (D-Calif.) said PFOF is a wealth extractor and there are many conflicts of interest surrounding it. Rep. Waters asked if these conflicts of interest can be mitigated and ensure best interest to customers. Rep. Barr asked what impacts we might see from banning PFOF. Arnuk said we should ban PFOF as it distorts order routing and best execution. Kelleher said the SEC should take this stance now as PFOF violates best execution duty. Goldstein noted that Robinhood made most of their revenue from PFOF and hid that information from their customers. She said the SEC should revisit the topic and said if we do keep PFOF, we should allow customers to opt out. Piwowar said with a ban we would return to commission-based trading and see a different conflict of interest in the churning of accounts to generate commissions.

Hill asked if competition among marketmakers with PFOF improves spreads and lowers cost to retail investors. Piwowar said the SEC requires each market maker to file execution quality reports. He said with Citadel, we can see their speed of execution across various order type and price improvement measured against others.

Wagner asked how banning PFOF would affect commission-free trading. Grujic responded that he expects commissions would return. He noted that fixed commissions do not reflect the underlying value of the trade, and billing a large and small trade the same fee is not an economically sound approach. He also noted the importance of fractional shares to retail investors. Rep. Brad Sherman (D-Calif.) also asked if PFOF should be banned, to which Kelleher replied it should, saying that intermediaries will still be well-compensated. He added that banning PFOF will drive more trading to public markets. Rep. Wagner asked if it is possible for PFOF to be aligned with the SEC’s best execution requirements. Piwowar said absolutely and interested parties should examine the unintended consequences of banning PFOF.

Rep. Frank Lucas (R-Okla.) asked what factors the SEC would weigh in determining what changes should be made to PFOF. Piwowar explained that the SEC would ask for public comment, lay out all of the alternatives, examine the costs and benefits, and then choose the appropriate path forward. He noted the SEC has not done a deep dive on this issue since we have entered a zero-commission environment.

Lucas also asked Grujic to elaborate on the ways retail investors would be “worse off” if both retail investors and institutional investors received the same average price. Grujic explained the differences between retail and institutional order flows and that if they are combined, the average price will get worse for retail investors and better for institutional investors.

Garcia said the current system of retail trading does not democratize finance and asked if the PFOF model entrenches “big players against the little guy”. Kelleher said it does, and the problem is that market- makers are a big part of “shadow banking” and that the entire model enables secret wealth extraction. He was in support of greater transparency to create a level playing field for retail investors.

Investor Protection

Many members asked for suggestions that would focus on improving investor protection. Rep. Emanuel Cleaver (D-Mo.) said there must be a legislative cure to prevent this becoming an unfair financial system, trading system. Witnesses unanimously agreed in support of more investor protections. Grujic said we need a framework and regulations that protect society and individuals, but we have to be careful about frictions we put into markets, noting that even if they achieve certain positive results, they can decrease information signaling of other items within the system. Grujic said to look into ways technology can deliver information, analysis, and empowerment for retail investors to level the playing field against institutions.

Rep. David Scott (D-Ga.) said there is a huge hole in our regulatory structure, arguing for some sort of standard of care around questioning the source of funds investors use for trades, or holding social media sites to a standard when investment advice is posted on their platforms. Bogan said there is a need for consumer protections, and the primary issue today is the utilization of behavioral science techniques that encourage users to behave in a particular direction, arguing that we need to regulate user interfaces.

Financial Transaction Tax (FTT)

Rep. Bill Huizenga (R-Mich.) asked what effect an FTT would have. Grujic replied that it would increase the cost of transactions, thereby decreasing liquidity and the number of transactions. He continued that it would also result in the loss of signaling of optimal prices as there would be price points at which people would not participate because the tax would price them out. He concluded that the size of the tax matters. Asked by Huizenga if the SEC has studied this, Piwowar said that it has not but due to the reasons outlined by Grujic, the Obama Administration decided not to pursue an FTT.

Market Structure Reform

Reps. Blaine Luetkemeyer (R-Mo.) and Alma Adams (D-N.C.) asked if the current market system appeared to work, remain resilient, and self-correct in January or if fundamental vulnerabilities were exposed. Blaugrund and Piwowar both said the market infrastructure performed in a resilient, stable, predictable fashion which is critical for investor confidence. Blaugrund said there were no systemic issues, but that the fascination with what happened with these stocks is a cause for concern if it erodes investor confidence. They said there is still room to further perfect the markets, pointing to the fact that retail investor experience was uneven across retail brokerages, leaving people confused on how our modern market structure can be so volatile.

Reps. Roger Williams (R-Texas) and Tedd Budd asked what changes to market structures should be made, and if Congress should step in now or wait for the SEC. Bill Posey reminded members that too much regulation can lead to diminishing returns or turn out more costly than beneficial. Piwowar said since markets and technology change all the time, the SEC is better positioned to revisit their rules and put PFOF and the settlement debate through cost benefit analysis. Grujic said we need to innovate in the regulatory environment because social media has an effect not only on finance, but our news and politics too. She said there is a tremendous potential of data benefit for people, but this also poses problems like market volatility and manipulation. Both members added that they would like to see continued effort to empower retail investors and help them make informed decisions, asking what the NYSE is doing to ensure this. Blaugrund said this is done through the consolidated tape and proprietary market data products. He said market data is now consolidated in a matter of microseconds and then rebroadcasted to the retail community. Piwowar said the SEC just enhanced regulation best interest to be higher than the fiduciary standard on the investment advisor side.

Lucas asked how a system for publishing terms for each stock loan would benefit the securities lending market. Blaugrund said due to concerns raised around short selling, transparency would benefit investors a lot, so we need to go further and understand that short positions are established with a stock loan which is currently an entirely opaque part of the ecosystem.

Torres asked how to address conflicts of interest without losing gains that appeared to have been made with market access. Goldstein said adequately funding the SEC to ensure they can take all enforcement actions and pursue these investigations around hedge funds and private equity funds, particularly to see the amount of stock they are shorting.

Rep. Barry Loudermilk (R-Ga.) mentioned that regulation is what paused trading with Robinhood in the first place, arguing to tread cautiously in trying to make a risk-free environment with high returns just will not work. Loudermilk said calls for regulation are premature and asked for detail on how options trading and short selling are already regulated. Piwowar said the SEC has prohibited illegal short selling, but the initial rule made 17 years ago should be revisited. He said options trading is also highly regulated to monitor non-compliance. The SEC also has regulations and best execution obligations around PFOF but should address the transparency rather than throw them out completely.

Trading Restrictions

Torres asked if there should be legal limits on brokers restricting, as they seem to hold all the power in the ability to halt trading. Goldstein said it is a question to consider when brokers like Robinhood facing a circumstance where they did not manage internal risk sufficiently, and their only choice is either prohibiting trade in a stock or going under.

Trading On and Off Exchanges

Reps. Trey Hollingsworth (R-Ind.) and Steil touched on unequal footing for trades on and off exchanges. Hollingsworth asked specifically about volumes shifting to dark pools and if there are hidden prices. Blaugrund said on-exchange trading is at its lowest proportion and most trading happened in dark or off exchanges. He said we need to ensure that price discovery process is efficient with good benchmarks for measuring, and encourage a broadest set of investors to interact. Regarding hidden prices in dark pools, Blaugrund said two regulatory regimes exist; one with dark pools that does not have fair access, regulation systems compliance and integrity (SCI), or stability regulation. He said he is not asking for those regulatory burdens to be shifted to dark pools, but simply hoping for level playing fields in terms of price increments and price discovery for the public.

Capital Requirements

Rep. Van Taylor (R-Texas) mentioned broker capital standards as they are today, asking if they are adequate to withstand periods of market stress and noted that Robinhood was an example of not having enough capital. Goldstein had called for an action to reduce the capital call and followed up to say net capital rules by the SEC are important to look at and tweak since firms like Robinhood did not have enough capital preemptively nor did they properly model their own capital risks.


Adams said there is a problematic use of forced arbitration, asking if the SEC should use their authority under Dodd Frank to step in and revise the current process. Goldstein said the SEC should take long overdue action to restore investor choice and prohibit forced arbitration and class action bans. She said to think about forced arbitration as cancel culture for companies to silence victims of crimes, or a secretive process that tries to cancel their own customers. Goldstein said arbitration can work for some, but is not a guarantee, and people should not be forced into it.

Short Selling

Luetkemeyer asked whether short selling should be limited, either by limiting the number of shares that can be shorted or the number of times a share can be lent. Piwowar responded that before looking to limit short selling, the SEC should examine the data and address opacity issues in the securities lending market.

Rep. Michael San Nicholas (D-Guam) said he believes short selling inhibits businesses from raising equity capital at a rate more reflective of the fair market value of stock and asked how the opacity of the short selling influences this. Blaugrund said with respect to short positions, that data is now reported twice a month and provides a lens into relative activity, but it is not actionable as it does not allow market participants or regulators to understand if risk is developing. The NYSE position is that we need to go one step up upstream and look at the securities lending market itself, which he said is relatively anachronistic. Blaugrund said there is opportunity for SEC to promulgate rules under Dodd Frank to bring transparency to this marketplace. Kelleher agreed that an upstream disclosure increase for the securities lending part of these activities needs to be addressed. He said we need increased disclosure of the short activity that we currently have – increased disclosure on timing and frequency, expanding firms that are subject to disclosures (hedge funds and broker deals), and expanding to cover all the products being used.

For more information on this hearing, please click here.