Robinhood's CEO defends high-frequency trading after its handling of the GameStop short-squeeze, saying that the practice yields 'better' prices for the everyday investor

Rafael Henrique/SOPA Images/LightRocket via Getty Images, Brendan McDermid/Reuters

  • Robinhood’s CEO defended the practice of high-frequency trading, saying it yields better prices.
  • Vlad Tenev said he’ll start a series of occasional posts to explain the mechanics of market makers.
  • The investing firm was plunged into the spotlight over its handling of the GameStop short-squeeze saga.
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Robinhood CEO Vlad Tenev defended the practice of high-frequency trading in a blog on Tuesday, saying this practice provides “better prices” for the everyday investor.

Tenev said many investors don’t understand the details behind how financial markets work and what exactly high-frequency traders do. To that end, he said he’s started a series of occasional posts to explain those dynamics.

“A handful of large firms now execute the majority of trades in financial markets,” Tenev wrote. “Those so-called market makers can more efficiently process trades at a narrower band of prices. Among those who benefit? The everyday investor. Not only do people now avoid trade commissions, the competition to fill their trade orders often yields them a better price.”

The investing app found itself in the spotlight over its handling of the GameStop short-squeeze when its move to restrict trading in some “meme-stocks” sparked outrage among customers. 

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Many users and big names like Rep. Alexandria Ocasio-Cortez, Mark Cuban, Michael Burry, and Dave Portnoy all publicly criticized the company. 

Firms like Citadel Securities and Virtu Financial are key to Robinhood’s business because they fulfill the trades carried out on its platform. In turn, they pay Robinhood for orders placed and make money on the spread – or the difference between the price to buy and the price to sell.

This process carries lower risk than trading on open exchanges like the Intercontinental Exchange, NASDAQ, and the New York Stock Exchange.

But according to “Big Short” investor Michal Burry, relatively fun and easy-to-use trading platforms like Robinhood are helping Wall Street, rather than upending it. Their process pushes people into day trading instead of long-term investing, making it seem more like a “dangerous casino.”

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Although high-frequency trading is widely prevalent and regulated, the practice is not without controversy. In December, Robinhood paid $65 million to settle SEC charges after it was accused of making “misleading statements and omissions” about how it made money with market makers. Robinhood’s chief legal officer said the settlement related to practices “that do not reflect Robinhood today.”

Cofounders Vlad Tenev and Baiju Bhat aren’t newcomers to the practice of high-frequency trading. Before Robinhood, they ran Chronos Research, aimed at building automated trading strategies, and Celeris, a hedge fund that dabbled in high-frequency trading.

Read More: Short-seller Carson Block says the day-trading revolution that hit GameStop and other stocks is changing the playing field for investors like him. Here’s how his firm is reinventing itself – and what he’s betting against today.

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