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Sen. Elizabeth Warren (D-Mass.) is pressuring Citadel CEO Ken Griffin about the financial giant’s relationship with Robinhood, how Citadel benefits from their relationship and how to protect retail investors.
In a letter sent Thursday, Warren said she is particularly interested in the potential conflict of interest between the hedge fund side of Citadel, which invested $2 billion in short-selling firm Melvin Capital for its GameStop losses, and Citadel Securities, a practitioner of “payment for order flow” for Robinhood.
“Both Robinhood and Citadel have denied that Citadel had any role in this decision – but Congress and the public deserve clarity on the process of and reasons for these decisions by Robinhood, which had a significant impact on many individual investors,” Warren said in a six page letter.
Warren also asked Griffin about the controversial, yet legal way that Robinhood and other brokers make money through trades despite dropping commissions: payment for order flow. Robinhood and other brokers are large beneficiaries of this revenue model and receive payments from market makers like Citadel Securities.
“The payment for order flow model raises questions about inherent conflicts of interest and whether broker-dealers like Robinhood and market makers like Citadel Securities profit from rapid trading and market churn that has no relationship to the underlying values of the company stocks that are being traded or the profits of individual investors: it is instead a business practice in which ‘[t]he more shares they see, the more bread crumbs they take,'” wrote Senator Warren.
Warren’s letter comes hours before Griffin will testify to the U.S. House Financial Services Committee testimony about the GameStop controversy on Thursday at 12 p.m. ET.
Warren sent another letter to the Financial Industry Regulatory Authority (FINRA) on Thursday, asking about how the organization will respond to Robinhood’s role in market volatility and its decision to limit trading of certain stocks during the GameStop mania.
Warren asked FINRA, which licenses and regulates broker deals, to conduct a review into whether Robinhood’s practices were in compliance with existing laws and regulations governing broker-dealers.
“Given several findings that Robinhood violated rules governing broker-dealers and lacked systems to ensure their compliance with those rules, the public deserves to understand what steps FINRA has taken to ensure future compliance by Robinhood, whether Robinhood improved its systems and compliance in response to the many complaints filed by regulators and lawmakers, and whether continued violations of market rules may have contributed to the company’s role in recent market swings,” Warren wrote to Robert Cook, FINRA President and CEO, in her 12-page letter.
— with reporting from CNBC’s Kate Rooney.
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