Robinhood targeted by Democrats at GameStop Congressional Hearing

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The SEC is being asked to regulate rewards elements of investing apps in the face of unprecedented retail investment.

The hearing is interestingly timed as millions of Americans receive their stimulus check today, Wednesday March 17th 2021.

Democrats have spent today’s congressional hearing dubbed “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II,” by the official Congressional live channel, firing shots at Robinhood’s business model. They are calling on regulations around zero-commission brokers such as Robinhood to ban payment order flow and to halt the addictive rewards features of the app which Democrats say encourage users to trade more frequently. The belief is in general high volume day trading goes against the advice of financial advisors and is counter to the strategy of institutional and high volume investors.

“Zero commissions does not mean zero costs to investors, it just means zero disclosed costs. The main cost is the spread: the difference between the bid and the ask. The gamification drives you to this, but also the illusion that Robinhood is able to create that there’s no cost to you because there’s no commission.”

Democratic Rep. Brad Sherman of California.

The hearing is live using expert witnesses to debate whether changes should be made to trading following the extreme volatility in popular reddit stocks like GameStop and AMC Entertainment Holdings Inc.  The “short squeeze” in those stocks earlier this year has raised regulator eyebrows and is changing the way retail investors get involved in trading.

Robinhood allows new traders to trade options, which are considered the domain of much more seasoned investors who are more risk tolerant and create a potential for retail investors to go underwater quickly while learning about stock trading. Republicans are adamantly opposed to new regulations on trading apps or payment order flow saying Democrats, like Senator Elizabeth Warren, are using GameStop and other “meme stocks” to bully more regulations into the system.

Either way retail investing has fundamentally changed as individuals have self aligned to create a frenzy on places like Discord and reddit. While volatile, the education curve of trading and investing has risen as sharply as GameStop stock in an area once reserved for wealthy insiders.

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