Capitol Report: Before Congress, Robinhood CEO Vlad Tenev to reject accusation that app encourages reckless trading

“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,” Tenev plans to tell the committee on Thursday, according to prepared testimony for a hearing meant to investigate recent market volatility in meme stocks.

The Depository Trust and Clearing Co. and its subsidiaries operate as the single clearinghouse and guarantor of all public stock trades in the U.S. It is the institution that actually performs the exchange of stocks for cash, where securities are deposited for safekeeping as trades are being executed, and it enables instantaneous buying and selling of stocks even when the actual settlement of the trade takes up to two days.

In order to manage the risk inherent in guaranteeing a trade before it actually settles, the DTCC requires brokers to post collateral. As Robinhood customers piled into a one-way bet on GameStop GME, -7.21% and other stocks’ rise, the firm’s collateral requirements skyrocketed, forcing the company to halt buy orders and raise billions in cash from investors, according to Tenev.

The Robinhood executive will argue that while these deposit requirements were designed to mitigate risk, they “can have unintended consequences that introduce risk,” and he will call for regulators to push for a system of real-time settlement.

Tenev will also address accusations that the Robinhood smartphone app has features that encourage investors to trade too frequently and using risky instruments. “Even though we have made investing easier, we recognize it is not a game,” he will say. “While I am not aware of any agreed-upon definition of gamification, I do know that Robinhood designed its app to appeal to a new generation of investors who are more comfortable trading on smartphones than speaking with a broker.”

Gabriel Plotkin, founder and chief investment officer of the hedge fund Melvin Capital Management, will also appear before the committee Thursday to discuss his role in the January events as a short seller of GameStop stock. Plotkin will argue that the act of short selling a company’s stock does not “artificially depress or manipulate the price of the stock,” and that “nothing about our short position prevents a company from achieving it’s objectives.”

One factor that drove investors to GameStop, as well as other meme stocks such as AMC Entertainment Holdings AMC, -1.77% and Express Inc. EXPR, -7.25%, was the unusual amount of short interest in those stocks, with some investors describing their purchase of shares in these companies as an act of protest against Wall Street insiders who sell companies short, and in their view, hurt those companies’ chance of survival.

Plotkin will tell Congress that some these investors, many of whom organized on social-media platforms such as Reddit, YouTube and Twitter, began to harass him with “profane and racists text messages,” that referenced his Jewish faith.

“In the frenzy during January, GameStop’s stock rose from $ 17 to a peak of $ 483. I do not think anyone would claim that that price had any relationship to the intrinsic value of the company,” Plotkin will say. “The unfortunate part of this episode is that ordinary investors who were convinced by a misleading frenzy to buy GameStop at $ 100, $ 200, or even $ 483 have now lost significant amounts.”