Congressionally Mandated Reports ............................................................... 133 (dated 2022-07-12)

Summary

Exhibit A (Document 495-3) in Case 1:21-md-02989-CMA, entered on the FLSD docket July 12, 2022, is a 139-page staff report of the House Financial Services Committee on the Meme Stock Market Event of January 2021. Its key findings state that Robinhood exhibited troubling business practices, inadequate risk management and a culture that prioritized growth above stability, that broker-dealers facing the greatest operational and liquidity concerns took the most expansive trading restrictions, that most firms have no explicit plans to change how they meet collateral requirements in extreme volatility, and that the Depository Trust & Clearing Corporation (DTCC) waived $9.7 billion of collateral deposit requirements on January 28, 2021. The executive summary reports that the gross market value of GME cleared on January 28, 2021 was 21,318% greater than on January 4, 2021.

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Date: 2022-07-12

Cite this document

“Congressionally Mandated Reports ............................................................... 133.” Original at archive.org, dated 2022-07-12. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2022-07-12-covid-era-misc-dcbbfe0d-1/, SHA-256 dcbbfe0d905b278ba0d0fb2223452820f757acd4b7900dc70946577f4e489c25.

Full text

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Exhibit A
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Table of Contents
I. EXECUTIVE SUMMARY ................................................................................................... 3
1. Overview ............................................................................................................................. 3

2. Summary of Committee Staff Findings ........................................................................... 4

3. Broader Implications ......................................................................................................... 5

d. Recommendations ............................................................................................................ 11

II. COMMITTEE RESPONSE TO MEME STOCK MARKET EVENT .......................... 14

III. COMMITTEE STAFF FINDINGS ................................................................................... 15
Key Finding #1: Robinhood exhibited troubling business practices, inadequate risk
management, and a culture that prioritized growth above stability during the Meme Stock
Market Event. ............................................................................................................................ 15

Key Finding #2: Broker-dealers facing the greatest operational and liquidity concerns took the
most expansive trading restrictions, although multiple broker-dealers introduced trading
restrictions for a variety of risk management reasons during the Meme Stock Market Event. 70

IV. POLICY RECOMMENDATIONS .................................................................................. 108
1. Understanding the Influx of Retail Traders ................................................................ 109

2. Enhancing Supervision of Retail Facing “Superbrokers” ......................................... 110

3. Strengthening Capital and Liquidity Requirements and Oversight ......................... 114

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APPENDIX I: GLOSSARY ..................................................................................................... 118

APPENDIX II: HEARINGS AND LEGISLATION IN RESPONSE TO MEME STOCK
MARKET EVENT .................................................................................................................... 121
1. Introduction .................................................................................................................... 121

2. Hearing Series Overview ............................................................................................... 121

3. Key Issues ....................................................................................................................... 124

4. Proposed Legislation...................................................................................................... 130

APPENDIX III: THE U.S. GOVERNMENT ACCOUNTABILITY ORGANIZATION
(GAO) FOUND SIGNIFICANT GAPS IN THE SEC’S OVERSIGHT OF FINRA IN
CONGRESSIONALLY MANDATED REPORTS ............................................................... 133

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I. EXECUTIVE SUMMARY
1. Overview
GameStop Corporation (GME), AMC Entertainment Holdings, Inc. (AMC), and other
“meme stocks” became extraordinarily popular on social media leading into January 2021.
Institutional investors bet against these stocks, predicting they would fall in price, while retail
traders took the other side of that bet, purchasing the stocks en masse. 1 This trading frenzy,
collectively referred to in this report as the “Meme Stock Market Event,” drove historic market
volatility, which reached a crescendo on January 28, 2021, when the gross market value of GME
cleared in the stock market was 21,318% greater as compared to January 4, 2021. 2

At the height of the Meme Stock Market Event, several stock trading platforms restricted
trading on meme stocks as an emergency risk management tactic. Others suffered outages in their
technology systems due to the order volume in their trading systems. These restrictions and outages
placed downward pressure on meme stocks. The total dollar amount of GME held by Robinhood
Markets, Inc. (Robinhood) 3 customers decreased from a peak of $2.6 billion before the firm
enacted trading restrictions on January 28, 2021, down to $1.2 billion the next day. The total dollar
amount of AMC held by Robinhood customers decreased from $1.3 billion to $411 million in the
same time frame. 4 Ultimately, these trading restrictions and outages limited market access for
ordinary retail investors and undermined confidence in market integrity.

The House Financial Services Committee (Committee) held a full Committee hearing
shortly after the Meme Stock Market Event with key industry players, including the CEOs of
Robinhood and Citadel Securities, and followed up with two more full Committee hearings,
multiple pieces of legislation, and a full investigation of the Meme Stock Market Event. 5 The
Committee’s thorough response to the Meme Stock Market Event uncovered structural

1
As used in this report, the term “meme stocks” refers to several stocks that surged in popularity due to social media
discourse (See Appendix I: Glossary for terms highlighted in this report).
2
In this report, we refer to the volatility experienced in the pricing and trading of meme stocks during January and
February of 2021, and the related actions taken by various broker-dealers, as the “Meme Stock Market Event.” DTCC,
NSCC Equity Clearing & Settlement Overview: Presentation to House Staff, at slide 7 (Jun. 17, 2021) (on file with
the Committee).
3
Robinhood Markets is the parent company of Robinhood Financial, Robinhood Securities, and Robinhood Crypto.
As used in this report, “Robinhood” most often refers to Robinhood Markets. Occasionally, taken in context,
“Robinhood” refers to Robinhood Markets and / or its affiliates in a collective sense.
4
Email and attachments to email from Counsel for Robinhood to Committee staff (May 20, 2021) (on file with the
Committee).
5
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short Sellers,
Social Media, and Retail Investors Collide (Feb. 18, 2021); House Committee on Financial Services, Virtual Hearing
– Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II (Mar.
17, 2021); House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When
Short Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).

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deficiencies exploited by a new generation of “superbroker” retail trading platforms that have
grown in popularity amidst a surge in retail trading.

The stock market has changed significantly in recent years. Robinhood pioneered a new
business model marked by commission-free trading supported by payment for order flow (PFOF),
in which trading platforms route their customers’ orders to market making firms like Citadel
Securities for a fee. 6 In this business model, brokers can profit from volatility in the stock market
as increased trading activity generates more PFOF rebates. Accordingly, Robinhood and other
retail-oriented brokers are incentivized to push their customers to make as many trades as possible
through digital engagement features that include “game-like features and celebratory animations,”
lenient extension of margin trading to their customers, and increased access to fractional shares,
enabling retail traders to purchase dollar increments of expensive stocks like Amazon and
Berkshire Hathaway. 7 This “superbroker” business model has proliferated quickly.

The Meme Stock Market Event raises questions about how retail trading market
infrastructure currently operates and whether it is appropriately designed and regulated to
accommodate new developments. The events of January 28, 2021 exposed inadequacies in the risk
management practices of broker-dealers, concerns about the ways in which PFOF increases
complexity and potential fragility in the securities markets, and the ability of the regulators charged
by Congress to oversee financial markets to assess and correct for liquidity and operational risks.

2. Summary of Committee Staff Findings
Key Finding #1: Robinhood exhibited troubling business practices, inadequate risk management,
and a culture that prioritized growth above stability during the Meme Stock Market Event.
Examples of the firm’s problematic response to the Meme Stock Market Event include:
• Robinhood’s disproportionately high order flow and unique formula for calculating PFOF
rebates strained several market makers and introduced risk to the stock market.
Robinhood’s PFOF formula became a point of contention between Robinhood and Citadel
Securities during the Meme Stock Market Event.

• Robinhood asserted to the public and testified to the Committee that the company was
“always comfortable with [its] liquidity” leading up to its historic trading restrictions,
despite the actions undertaken by Robinhood’s executive leadership to respond to liquidity
issues it faced in the days leading up to the Meme Stock Market Event.

• Robinhood relied on incomplete statistical models for calculating its collateral obligations
leading into the Meme Stock Market Event. The company did not incorporate “best
practices” observations from the Financial Industry Regulatory Authority (FINRA) for

6
In this report, unless otherwise specified, references to “Robinhood” are to Robinhood Markets, Inc., and its
consolidated subsidiaries.
7
SEC, Staff Report on Equity and Options Market Structure Conditions in Early 2021 (Oct. 14, 2021).
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improving its stress tests nor did it utilize publicly available guidance from the Depository
Trust and Clearing Corporation (DTCC) for calculating collateral obligations.

• Robinhood received a waiver of the largest component of its deposit requirement from the
DTCC. Without this waiver, which Robinhood had no control over, the company would
have defaulted on its regulatory collateral obligations. Robinhood’s Chief Legal Officer
notified senior officials at the DTCC that Robinhood could not meet its collateral
obligations before the market opened on January 28, 2021.

Key Finding #2: Broker-dealers facing the greatest operational and liquidity concerns took the
most extensive trading restrictions, although multiple broker-dealers introduced trading
restrictions for a variety of risk management reasons during the Meme Stock Market Event.
Key Finding #3: Most of the firms the Committee spoke to do not have explicit plans to change
their policies for how they will meet their collateral requirements during extreme market volatility
or adopt trading restrictions when market volatility may warrant their introduction.
Key Finding #4: The Depository Trust & Clearing Corporation (DTCC) waived $9.7 billion of
collateral deposit requirements on January 28, 2021. The DTCC lacks detailed, written policies
and procedures for waiver or modification of a "disincentive” charge it calculates for brokers that
are deemed to be undercapitalized and has regularly waived such charges during periods of acute
volatility in the two years before the Meme Stock Market Event.
3. Broader Implications
a. The Meme Stock Market Event revealed how rapid growth and innovation in
retail trading presents novel issues for market stability and orderliness that
neither the industry nor regulators have satisfactorily anticipated or addressed.

By some estimates, retail investors accounted for roughly 20% of stock market activity on
average through the first half of 2021 and up to 25% on peak trading volume days, up from 10%
over the prior year. 8 A significant proportion of this market activity was generated by first-time
investors. 9 In recent years, the number of total trading accounts has risen sharply at retail trading
focused trading platforms such as Robinhood and Apex Clearing Corporation.

8
Bloomberg Markets: European Open, Citadel Securities’ Mecane Says Volatility Behind Rise in Retail
Investing, Bloomberg (July 9, 2021).
9
Between January 1, 2015 and March 31, 2021, over half of the customers who funded accounts on Robinhood said
that it was their first broker-dealers account. A June 2021 survey from Charles Schwab found that 15% of all retail
investors who were active in 2021 began trading in 2020. A February 2021 FINRA report found that new investors–
—those who did not own a taxable investment account prior to 2020–—were younger, more racially diverse, and had
lower incomes than the established stock market investors. FINRA reported that nearly two-thirds of the new investors
were under 45, and approximately one-third of this same group held account balances of $500 or less. Among the top

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Figure 1: Total Open Accounts for Select Clearing Brokers 10

Total Open Accounts for Select Clearing Brokers (millions)
45

3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21

reasons new investors cited for opening investor accounts in 2020 were to save for retirement and the ability to invest
with a small amount of money. SEC, Form S-1 for Robinhood Markets Inc. (July 01, 2021); Charles Schwab, The
Rise of the Investor Generation:15% of U.S. Stock Market Investors got their start in 2020, Schwab Study shows
(accessed Jun. 30, 2021); FINRA, Investing 2020: New Accounts and the People Who Opened Them (Feb. 2021);
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Sept. 20, 2021). According to
Robinhood as of September 20, 2021 27% of its customers are “racially and ethnically diverse”; FINRA, Investing
2020: New Accounts and the People Who Opened Them (Feb. 2021).
10
Total open account information compiled from email correspondence and various attachment with counsels for
Apex Clearing Corporation, E*TRADE, Charles Schwab / TD Ameritrade, and Robinhood Markets. Data is non-
public information compiled specifically for the Committee and is not kept in the ordinary course of business. In this
instance, the Committee uses total open accounts rather than active accounts because different companies use different
methodologies to calculate the number of “active accounts” they list publicly. Charles Schwab and TD Ameritrade
merged in October 2020 and began integrating their customer base shortly thereafter. The number of accounts shown
here reflect the pro forma combined number of total open accounts for these companies for the periods shown. Apex
Clearing Corporation clears for hundreds of firms, primarily stock trading apps which focus on retail investors. The

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This surge in retail trading has provided retail investors with greater access to the market.
But it also carries risks. The “superbroker” business model pioneered by Robinhood—marked by
commission-free trading, fractional investing, 11 gamification, 12 and the ability to create an account
and start trading within minutes—makes it easier than ever to participate in the stock market for
entertainment value, akin to a “high-stakes multiplayer game.” 13 The trends developing with new
generations of investors will most likely continue. Apex Clearing estimates that within the next 25
years, $70 trillion of wealth is expected
to transfer from Baby Boomers to
younger generations, including
Millennials and Generation Z, who are
more likely to favor stocks that are
popular on social media. 14

When asked about the Meme
AND SO, IF THE QUESTION IS, DO I THINK
Stock Market Event in early 2021, Apex IT’S GOING TO HAPPEN AGAIN, THE
Clearing Corporation’s CEO, Bill ANSWER IS, YES, FOR SURE. NO DOUBT
Capuzzi commented to Committee staff, ABOUT IT. HOW IT’S GOING TO MANIFEST
“We’ve lowered the barriers to entry.
ITSELF, I’M NOT SURE, BUT FOR SURE
There’s great content. We’re helping
people invest in their future. And we see IT’S GOING TO HAPPEN AGAIN.
it. There’s millions more people that are
able to invest that never had a chance to - BILL CAPUZZI,
before. That is great. And that’s going to
continue and, frankly, accelerate, right? I CEO, APEX CLEARING CORPORATION
think the impact of social media, I think,
is going to continue to evolve. And so, if
the question is, do I think it’s going to
happen again, the answer is, yes, for

dip in Apex Clearing accounts shown beginning in early 2019 occurred after Robinhood Securities came online and
began migrating customer accounts from Apex to its own clearing broker subsidiary. Robinhood had previously
contracted with Apex to clear its trades. Total open account numbers for Charles Schwab dropped in 4Q 2021 when
its subsidiary, TD Ameritrade closed approximately 1 million accounts deemed to be inactive based upon having a $0
account balance and no transfers for 12 months prior to closing (briefing with counsel for Schwab/TDA (Feb. 14,
2022)).
11
Modern stock trading platforms have popularized the ability of retail investors to portion a fractional share. A
fractional share is any portion of a stock less than a complete share. Offering investing in fractional shares has allowed
retail investors to purchase a modest dollar figure in stocks like Berkshire Hathaway and Amazon, which can cost
thousands of dollars per share.
12
Many modern stock trading platforms such as Robinhood, Webull, and others use app designs intended to increase
consumer engagement, time spent on an investment platform, and number of trades through gamification. The
amalgamation of these features has led to criticism that gamified online trading platforms promote user engagement
by encouraging trading behavior similar to a gambling addiction. Cyrus Farivar, Gambling addiction experts see
familiar aspects in Robinhood app, NBC (Jan. 30, 2021).
13
Farhad Manjoo, Can We Please Stop Talking About Stocks, Please?, The New York Times (Feb. 3, 2021).
14
Apex Clearing, Apex Next Investor Outlook: Q2 2021 Top 100 Stocks (accessed on Jun. 21, 2022).
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sure. No doubt about it. How it’s going to manifest itself, I’m not sure, but for sure it’s going to
happen again.” 15

Retail investor trends, like stocks gaining popularity on social media, increasingly affect
the price and trading volume of securities. 16 This has implications for market activity, trading
infrastructure, and regulation. The full range of market participants, infrastructure providers, and
regulators that Committee staff spoke with during its investigation acknowledged this new reality.

Financial services companies that introduce new practices and innovations must carefully
assess and prepare for the potential impact and risk that such innovations pose to market integrity
and stability. Specifically, firms must rigorously evaluate how innovations will affect their ability
to meet existing regulatory requirements before introducing them and be mindful of new problems
that such innovations may cause so that they can engage in adequate and proactive risk
management.

Moreover, regulators must ensure broker-dealers properly assess and prepare for the full
implications of such new innovations. The Meme Stock Market Event demonstrated the need for
the modernization of our retail market regulatory architecture and the ways in which it anticipates,
detects, and corrects for capital, liquidity, and operational risks associated with the rapid growth
of retail trading and the technological and business model innovations facilitating such growth.
This report highlights some of these shortcomings to ensure that regulators and market participants
can address regulatory gaps and better hold individual firms to account.

b. The Meme Stock Market Event demonstrates the need for modernization of
certain key aspects of the self-regulatory framework for retail facing
“superbrokers.”

The regime of Self-Regulatory Organizations (SROs), overseen by the Securities and
Exchange Commission (SEC), will need to further evolve to fully address the risks generated by a
new generation of retail-facing, self-directed broker-dealers referred to throughout this report as
“superbrokers.” Based on the Committee’s investigation, FINRA could more adequately respond
to current market dynamics with a modernized liquidity rule. In addition, the Committee’s
investigation revealed that DTCC’s subsidiary, the National Securities Clearing Corporation
(NSCC)—which sets and enforces rules for clearing equities—engaged in insufficient monitoring
of its membership and has regularly waived certain clearing fund obligations prior to the Meme
Stock Market Event. Collectively, these regulatory shortcomings may have contributed to the lack

15
Interview with W. Capuzzi (Apex Clearing Corporation), at 31 (Jun. 24, 2021) (emphasis added).
16
Erin Gobler, What Is a Meme Stock?, The Balance (Oct. 13, 2021).
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of preparedness that certain retail broker-dealers exhibited in their ability to navigate the capital
and liquidity challenges of the Meme Stock Market Event. 17

The Committee’s investigation found that FINRA and the SEC have limited rules focused
on liquidity management practices of retail customer-focused broker-dealers. While FINRA has
previously issued guidance on this topic, its guidance is non-binding and does not require
systematic liquidity reviews of broker-dealers. Liquidity and capitalization issues are assessed
regularly by FINRA for broker-dealers through risk monitoring policies and procedures that
inform exam planning. However, FINRA’s routine cycle examinations review capitalization and
liquidity on a case-by-case basis for individual broker-dealers and are not mandatory.

Neither FINRA nor the SEC have a standalone liquidity rule. FINRA can only require
compliance with the SEC’s net capital rule during cycle examinations, which many industry
experts whom the Committee spoke to during its investigation considered outdated. Outside of
requiring compliance with SEC rules, FINRA issues nonbinding observations relating to liquidity
during examinations. Without an updated liquidity rule from the SEC, and because FINRA does
not have its own capital and liquidity rule, FINRA lacks an adequate foundation to more fully
police the liquidity of its member firms.

Similarly, there are opportunities for the NSCC to modernize and improve how it oversees
member firms. While the NSCC maintains a system to assess the credit risk posed by its members,
including both a “Watch List” and an “Enhanced Surveillance List,” the latter category is not
clearly defined and member firms that are placed on Enhanced Surveillance are not notified of

17
FINRA has recognized shortcomings in this regard, including in testimony provided to the Committee by FINRA’s
CEO and President. FINRA has made preliminary efforts to address such liquidity risk management concerns by
proposing new liquidity related reporting and has indicated to Committee staff that it is considering further potential
reforms. FINRA, Proposed Rule Change to Adopt a Supplemental Liquidity Schedule, and Instructions Thereto,
Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information) (accessed on Jan. 27, 2020); FINRA briefing with
the Committee (Jan. 26, 2021); House Committee on Financial Services, Testimony of Robert W. Cook, Game
Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III, 117th Cong.
(May 06, 2021).
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their inclusion on the list. 18 This lack of transparency misses an opportunity for the NSCC to
communicate to relevant member firms the need to adopt remedial measures. 19

Furthermore, the Committee’s investigation revealed how the NSCC has regularly waived
certain clearing fund requirements in the two years before the Meme Stock Market Event. The
NSCC regularly waives or reduces its Excess Capital Premium charges, which are the component
of a broker’s collateral charge intended to incentivize member firms to maintain an adequate
capital cushion. Excess Capital Premium charges rise exponentially the less capitalized a broker is
relative to how risky its uncleared portfolio is. The NSCC’s regular waiver and/or modification of
Excess Capital Premium charges most often benefit member firms that regularly attract these
charges. 20 The apparent repeated failure of Excess Capital Premium charges from deterring such
firms from accumulating excessive risk is concerning.

Furthermore, based on the Committee’s review of NSCC data, over the two years prior to
the Meme Stock Market Event, the higher the aggregate Excess Capital Premium charges assessed,
the more likely the NSCC was to waive them. While NSCC rules permit discretion in waiving or
reducing Excess Capital Premium charges, the rules contain only limited guidance detailing how
or when it is appropriate to waive or modify such charges. 21 This lack of detailed guidance
undermines the predictability of NSCC decision-making during exigent market circumstances,
such as during the Meme Stock Market Event, which, in turn, leads to confusion and uncertainty
amongst NSCC member firms.

18
Member firms are placed on the “Watch List” if their credit rating, as measured by a credit rating system specified
in NSCC rules, is assessed at a 5, 6 or 7 or if the NSCC otherwise considers that other relevant factors make a particular
member firm pose a heightened risk to the clearinghouse. See NSCC, Rules and Procedures – Rule 1, at 21 (Jan. 24,
2022). NSCC’s credit rating system considers both “(i) quantitative factors, such as capital, assets, earnings and
liquidity and (ii) qualitative factors, such as management quality, market position/environment, and capital and
liquidity risk management.” See Id. at 5 (Jan. 24, 2022). Members placed on the Watch List may also be required to
maintain a clearing fund deposit over and above the amounts otherwise determined by NSCC procedures to safeguard
the clearinghouse from excessive risk posed by such member to the NSCC itself See Rule 2(B)€ of Id.€at 38 (Jan. 24,
2022). The Enhanced Surveillance List consists of a smaller subset of firms that are on the Watch List. See DTCC
briefing with the Committee (Sept. 14, 2022). With respect to both the Watch List and the Enhanced Surveillance List,
NSCC rules state that: “a Member or Limited Member being subject to enhanced surveillance or being placed on the
Watch List shall result in a more thorough monitoring of the Member’s or Limited Member’s financial condition
and/or operational capability, which could include, for example, on-site visits or additional due diligence information
requests from the Corporation [i.e., NSCC]. In addition, the Corporation may require a Member or Limited Member
placed on the Watch List and/or subject to enhanced surveillance to make more frequent financial disclosures,
including, without limitation, interim and/or pro forma reports. Members and Limited Members that are subject to
enhanced surveillance are also reported to the Corporation’s management committees and regularly reviewed by a
cross-functional team comprised of senior management of the Corporation. The Corporation may also take such
additional actions with regard to any Member or Limited Member (including a Member or Limited Member placed
on the Watch List and/or subject to enhanced surveillance) as are permitted by the Rules and Procedures. See NSCC,
Rules and Procedures – Rule 2(B)(e), at 38 (Jan. 24, 2022).
19
Committee staff recognize that NSCC has proposed rule changes to address certain redundancies in the Watch List
and Enhanced Surveillance List system.
20
DTCC briefing with the Committee (Jun. 17, 2021).
21
NSCC briefing with the Committee (Jan. 21, 2022); NSCC, NSCC Rules and Procedures - Procedure XV I.(B)(2)
(Jan. 01, 2021). Footnote 7 to Section I.(B)(2) of Procedure XV (Clearing Fund Formula and Other Matters).
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c. The Meme Stock Market Event exposed weaknesses in capital and liquidity
planning and in the robustness of the technology platforms of financial services
institutions upon which the orderly functioning of the stock market relies.

Over the course of the Committee’s investigation, interviews with multiple broker-dealers
revealed considerable confusion, inconsistency, and lack of awareness amongst retail-oriented
broker-dealers as to how the NSCC collateral requirements are calculated. Many member firms
lack a full understanding of how the NSCC’s Excess Capital Premium charges are assessed.
Prominent firms, such as Robinhood, did not model for Excess Capital Premium charges as part
of their capital and collateral planning processes prior to the Meme Stock Market Event, and there
are no industry-wide best practices on how firms can ensure that they have adequate capital and
liquidity to meet NSCC margin requirements.

More worrisome, according to the NSCC, certain broker-dealers that are familiar with
Excess Capital Premium charges have decided to remain thinly capitalized and consciously risk
attracting these charges on a regular basis. 22 Given that the NSCC often waives these charges,
these firms may feel that they are unlikely to be seriously penalized for such risky behavior.

Finally, the Committee’s investigation discovered evidence of multiple broker-dealers,
third party clearing operations, market makers, public stock exchanges, and others suffering
technology outages during the Meme Stock Market Event. Outages are particularly concerning
among market makers, who are, by many accounts, lightly regulated and play an increasingly
significant role in executing retail trades. 23 There is currently no FINRA or SEC requirement for
broker-dealers to be active members of a public exchange, and on January 28, 2021, Robinhood
was not connected to the New York Stock Exchange, Nasdaq, or any other public exchange where
it could have routed customer trades for execution. Instead, Robinhood was solely reliant on its
market maker firms to execute trades, most of whom were struggling under significant operational
stress in the face of historic volume and volatility. Had the market makers Robinhood routinely
routed orders to been unable to accept its order flow, the company would have been unable to
execute trades for its customers.

d. Recommendations
Pursuant to its oversight authority, the Committee has provided a list of recommendations
for possible regulatory reforms at the SEC, FINRA, and the DTCC to increase resiliency,
transparency, oversight of, and access to, the equity markets. These recommendations reflect
recent developments in the stock market, including the influx of retail investors and the rise of
prominent “superbrokers” with millions of retail customer accounts. These potential reforms
include greater attention to the identification of potential problems that may be caused by

22
DTCC briefing with the Committee (Jul. 06, 2021).
23
Members of Congress, consumer advocates, and regulators discussed the risks associated with the concentration of
retail trading in market making firms during the Committee’s three hearings on the meme stock market event. SEC
Chair Gary Gensler raised concerns that such concentration could lead to market fragility. For additional detail, see
Appendix II: Hearings and Legislation in Response to Meme Stock Market Event.
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technological or other changes to market entry that lead to broader participation by individual
investors. Potential reforms also include alternatives to how the NSCC assesses and applies margin
charges, enhanced risk management, liquidity management and reporting requirements for
clearing brokers, and other similar measures. In summary, these recommendations include the
following:

Understanding the Influx of Retail Traders

 Congress should adopt legislation mandating key regulators, including the SEC and
FINRA, to study how existing market rules and supervision will need to evolve to
address new technological developments, including the possibility of social media
driven market activity.

 The SEC should consider ways to implement trading halts tailored to respond to
concentrated volatility in a limited number of stocks.

Enhancing Supervision of Retail Facing “Superbrokers”

 Congress should adopt legislation requiring broker-dealers that execute above a
pre-determined threshold of customer orders to establish and maintain a connection
to a public market.

 Congress should adopt legislation requiring broker-dealers that make markets and
provide liquidity to other broker-dealers, which process above a pre-determined
threshold of order flow, to be subject to Regulation SCI.

 The SEC and FINRA should enhance large, retail facing broker-dealer
examinations and mandate stress tests that focus on liquidity management,
including to account for the prospect of social media driven market volatility.

 The SEC and FINRA should introduce a requirement for clearing brokers to
establish written contingency plans to address extreme market volatility and fully
disclose both the contingency plans and any trading restrictions to the market in
real time. Such written contingency plans should be reviewed regularly by the SEC
and FINRA.

 Congress should adopt legislation that directs FINRA to conduct more thorough
supervision of the broker-dealer industry, and the SEC should conduct more
thorough oversight of FINRA’s activities and any corrective actions FINRA may
propose.

 When individual firms introduce trading restrictions, they should be required to
notify the SEC and FINRA. Once introduced, FINRA should engage in enhanced

12
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monitoring to ensure that such trading restrictions are appropriate, tailored, and in
place no longer than necessary.

Strengthening Capital and Liquidity Requirements and Oversight

 The SEC should introduce capitalization requirements for clearing brokers.

 The SEC should introduce a liquidity rule for clearing brokers. FINRA should
establish a rules-based framework governing liquidity planning for clearing
brokers.

 The DTCC and its subsidiary, the NSCC, should revisit how it conducts
surveillance of member firms that may pose a greater risk, and FINRA should also
focus more systematically on assessing the sufficiency of clearing brokers’ liquidity
planning.

 The DTCC and its subsidiary, the NSCC, should introduce clear written policies
and procedures and establish transparency around the circumstances under which
the DTCC may waive an Excess Capital Premium charge; such decisions should be
subject to review by the SEC.

 The DTCC, its subsidiary the NSCC, the SEC, and Congress should introduce an
emergency backstop funding facility for NSCC member firms that provide
emergency liquidity to the NSCC.

13
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II. COMMITTEE RESPONSE TO MEME STOCK MARKET
EVENT
In the week after the Meme Stock Market Event, the Committee sent document request
letters to several broker-dealers on February 4, 2021, for records and communications related to
trading restrictions, as well as each firm’s policies and procedures to respond to market volatility. 24
On February 18, 2021, the Committee held the first in a series of three full Committee hearings to
gather information on the Meme Stock Market Event. The first hearing featured testimony from
the CEOs of major financial services institutions involved in the Meme Stock Market Event,
including Robinhood, Citadel Securities, and Melvin Capital. The second hearing, held on March
17, 2021, featured testimony from market experts and advocacy organizations. The final full
Committee hearing on May 6, 2021, featured testimony from the SEC Chair, the CEO of FINRA,
and the CEO of the DTCC.

In addition to the three full Committee hearings on the Meme Stock Market Event, the
Committee engaged on market oversight with hearings on credit rating agencies on May 11, 2022,
and July 16, 2021, and oversight of public exchanges, including the New York Stock Exchange
and Nasdaq on March 30, 2022.

The Committee investigated the Meme Stock Market Event over the course of
approximately 18 months, conducting more than 50 interviews with 20 institutions and reviewing
more than 95,000 pages of responsive material received from stock trading platforms, clearing
brokers, regulators, social media companies, and other related parties in response to our numerous
information requests. This report comprises one part of the Committee’s response to the Meme
Stock Market Event, which included hearings and consideration of legislation addressing issues
such as gamification, short sale disclosure, payment for order flow, and other related issues (See
Appendix II: Hearings and Legislation in Response to Meme Stock Market Event).

Committee staff prepared this report to highlight the structural issues that the Meme Stock
Market Event exposed. Experts that Committee staff spoke to agreed that while aspects of the
Meme Stock Market Event were idiosyncratic, they expect market volatility driven by retail
investors empowered by technology to be a recurrent trend. 25

24
Letter from Chairwoman Waters to Walter W. Bettinger, II, CEO of The Charles Schwab Corporation (Feb. 04,
2021); Letter from Chairwoman Waters to Karl A. Roessner, CEO of E*TRADE Financial Corporation (Feb. 04,
2021); Letter from Chairwoman Waters to Milan Galik, CEO of Interactive Brokers LLC (Feb. 04, 2021); Letter from
Chairwoman Waters to Vladimir Tenev, CEO of Robinhood Markets, Inc. (Feb. 04, 2021); Letter from Chairwoman
Waters to Steve Boyle, CEO of TD Ameritrade (Feb. 04, 2021); Letter from Chairwoman Waters to Anthony Denier,
CEO of Webull Financial LLC (Feb. 04, 2021).
25
See Section III(3); Robinhood briefing with the Committee (Sept. 14, 2021); Letter from counsel for Robinhood to
Chairwoman Waters and Chairman Green (Sept. 20, 2021); Interview with W. Capuzzi (Apex Clearing Corporation),
at 31 (Jun. 24, 2021).
14
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III. COMMITTEE STAFF FINDINGS
Key Finding #1: Robinhood exhibited troubling business practices, inadequate
risk management, and a culture that prioritized growth above stability during
the Meme Stock Market Event.
a. Robinhood experienced conditions that limited its customers’ ability to access the
stock market prior to the Meme Stock Market Event.

Robinhood’s unpreparedness to meet its regulatory capital obligations and the ensuing
trading restrictions on January 28, 2021,
was not the first time the company Robinhood exhibited troubling
experienced conditions that limited its business practices, inadequate
customers’ ability to participate in the
stock market. Robinhood suffered several risk management, and a culture
technological outages through 2018 and that prioritized growth above
2019 affecting millions of its stability during the Meme Stock
customers. 26 Most notably, on March 2– Market Event.
3, 2020 Robinhood’s website and mobile
app shut down, locking its entire
customer base out of their accounts
during a time of historic market volatility amidst the onset of the COVID-19 pandemic. 27 On June
30, 2021, FINRA issued the largest fine in its history to Robinhood for the company’s March 2020
outages and for systemic supervisory failures (the “March 2020 Fine”). 28 Among FINRA’s
findings in the June 2021 settlement, FINRA found that Robinhood failed to supervise technology
critical to providing its customers with “core” broker-dealer services and failed to create a
reasonably designed business continuity plan. 29
b. Prior to the Meme Stock Market Event, Robinhood did not update its stress test used
to predict collateral obligations to clearing agencies after FINRA made an
observation to Robinhood Securities’ Chief Financial Officer that the company may
want to take a more conservative “best practices” approach to conducting stress tests.

Prior to the COVID-19 pandemic, FINRA conducted a 2019 Cycle examination of
Robinhood Securities. 30 FINRA’s examination program conducts periodic firm examinations,
often referred to as “cycle exams,” to ensure compliance with FINRA rules and federal securities
laws and regulations. FINRA’s cycle exams are risk-based and can vary in focus, and thus tailored

26
FINRA, Letter of Acceptance, Waiver, and Consent (No. 202006971201) (Jun. 30, 2021).
27
Id.
28
Maggie Fitzgerald, Robinhood to pay $70 million for outages and misleading customers, the largest-ever FINRA
penalty, CNBC (Jun. 30, 2021); Email from FINRA to Committee staff (Mar. 03, 2022).
29
FINRA, Letter of Acceptance, Waiver, and Consent (No. 202006971201) (Jun. 30, 2021).
30
Email from FINRA to Committee staff (Mar. 03, 2022).
15
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to the individual broker-dealer that is the subject of the examination. These examinations are
designed in coordination with the risk monitoring analysts assigned to the broker-dealer. 31 Risk
analysts review liquidity and capital issues as a matter of regular practice, however there is no
mandatory liquidity or capitalization review as part of routine cycle examinations; rather, such
areas may be subject to closer scrutiny if related business or financial practices, characteristics,
history, or other factors unique to the broker-dealer are identified as a source of concern. 32

As part of FINRA’s 2019 cycle examination of Robinhood, FINRA evaluated Robinhood
Securities’ stress tests as part of its review of the firm’s liquidity management practices. Stress
tests are simulations that broker-dealers run to approximate how they might respond in a crisis
considering any difficulty the firm might have meeting its financial obligations during periods of
severe stress. FINRA encourages firms to make use of stress tests to prevent failure of the firm
and guard against widespread systemic failure of the stock market during market turbulence.
FINRA provides limited guidance on how firms should conduct stress tests. 33

In April 2020, shortly after the onset of the COVID-19 pandemic, FINRA concluded its
2019 cycle examination of Robinhood Securities and communicated deficiencies and observations
to the firm. Based upon FINRA’s internal review, FINRA records show on-site and pre-exit
meetings related to the 2019 cycle exam where FINRA officials shared an observation with
Robinhood Securities regarding the company’s stress test. 34

Specifically, FINRA examiners made an observation regarding Robinhood’s methodology
for calculating its required collateral deposits for clearing agencies like the NSCC, the Options
Clearing Corporation (OCC), and the Depository Trust Company (DTC) used in its stress tests. 35
At the time, Robinhood’s stress tests used a “day zero” assumption for the firm’s collateral charges
with its clearing agencies, using whatever firm’s collateral charge from the last day of the previous
quarter and doubling that number. FINRA examiners communicated an oral observation that from
a conservative “best practices” standpoint, the company would be better served by using the peak
collateral charges and doubling that number instead. 36 According to FINRA’s records, Robinhood
Securities officials, including the Chief Financial Officer and the Regulatory Inquiries Manager
for Robinhood Securities, were present for discussions of Robinhood Securities incorporating their
peak clearing deposits for stress tests. 37 Robinhood had difficulty finding any evidence of feedback
that FINRA may have provided regarding collateral charge assumptions the company used in their

31
Id.
32
In contrast, risk monitoring analysts generally review liquidity and capital issues as a matter of regular practice.
Email from FINRA to Committee staff (Mar. 03, 2022).
33
FINRA, Guidance on Liquidity Risk Management Practices (Sept. 2015).
34
Email from FINRA to Committee staff (Jun. 21, 2022).
35
Email and attachments to email from representatives for FINRA to Committee staff (Jun. 20, 2022).
36
Email and attachments to email from Counsel for Robinhood to Committee staff (Jun. 20, 2022).
37
Email from FINRA to Committee staff (Jun. 19, 2022).
16
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stress test, and commented to Committee staff that it cannot corroborate FINRA’s documentation
of these discussions. 38

In any event, Robinhood did not update its stress tests according to FINRA’s observation
before the Meme Stock Market Event. 39 In fact, Robinhood conducted a quarterly stress test
exercise in mid-January of 2021, prior to the Meme Stock Market Event using its collateral charges
from the prior quarter end rather than the peak collateral charges as FINRA staff had suggested.
FINRA’s observation would have led Robinhood to adapt a more conservative method for
conducting a stress test than the standard FINRA guidance on this matter. Taking the approach
outlined in FINRA’s observation would have been a more accurate measure of the actual highest
collateral charges the firm would be likely to be charged during periods of heightened volatility.
As a result, the stress test that Robinhood ran in January 2021, mere days before the Meme Stock
Market Event, did not more fully reflect the collateral charges with clearing agencies the firm
should have anticipated.
Any increase in Robinhood’s capital position could have had a significant impact. For
example, Robinhood’s NSCC collateral charges on December 31, 2020, the most recent quarter
end before January 28, 2021, which the firm actually used in its January 2021 stress test, was as
follows:
Figure 2: Robinhood’s NSCC collateral charges (Dec. 31, 2020)

Date Deposit Requirement (Start of Day)

12/31/2020 $72,774,074.93 40

The company’s top NSCC collateral charge for 2020, a level more than four times higher,
which FINRA observed would be a more “best practices,” conservative approach 41 for modeling
Robinhood’s stress test, was as follows:

Figure 3: Robinhood’s highest NSCC collateral charges (2020)

Date Deposit Requirement (Start of Day)

6/10/2020 $299,855,653.27

38
FINRA conducted an accuracy review of this sub-finding and confirmed that the Committee’s descriptions of events
are correct. Email from FINRA to Committee staff (Jun. 21, 2022); Briefing with counsel for Robinhood (Jun. 21,
2022); Robinhood briefing with the Committee (Nov. 03, 2021).
39
Email from Robinhood to Committee staff (Feb. 08, 2022)
40
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Dec. 15, 2021).
41
Email and attachments to email from Counsel for Robinhood to Committee staff (Jun. 20, 2022).
17
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The difference between the two numbers when doubled in a stress test is nearly half a
billion dollars (approximately $140 million versus $600 million). Consider the fact that Excess
Capital Premium charges (the main contributor to Robinhood’s NSCC clearing fund requirement
on January 28, 2021) rise exponentially the less well capitalized a broker-dealer is relative to the
volatility in their unsettled portfolio. When Committee staff inquired why FINRA would
communicate its observations regarding Robinhood’s stress tests orally without making an official
written finding, FINRA responded that its practice is to only memorialize deficiencies in writing
to the firm. In this case, there was no liquidity rule, no rule violation, and the firm was in
compliance with the SEC’s net capital rule (which many experts the Committee spoke with during
its investigation considered to be outdated). 42
This rule framework illustrates a gap in the current supervision of liquidity planning
practices and a need to modernize the supervisory framework that applies to a new generation of
retail broker-dealers, particularly at the time of the Meme Stock Market Event. 43 Lacking a more
updated rule framework governing liquidity, a more conservative approach to the assumptions
used to model their clearing fund obligations at the NSCC and other clearing agencies in
Robinhood’s stress tests could have alerted the company to the need to raise additional capital
prior to January 28, 2021.
c. Robinhood relied on incomplete internal models without fully utilizing the NSCC’s
publicly available resources for modeling collateral charges, leaving Robinhood
unprepared to accurately calculate its collateral charges on January 28, 2021.

Robinhood’s CEO, Vlad Tenev, represented in Congressional testimony before this
Committee that January 28, 2021, was an “unmodellable,” “Black Swan event.” 44 While it is
impossible to know how the company could have reacted to the Meme Stock Market Event with
different internal processes and controls, the Committee’s investigation found that Robinhood’s
models used for calculating its clearinghouse collateral obligations in the days before the Meme
Stock Market Event were incomplete, and therefore grossly underestimated how much the
company would owe in collateral obligations on January 28, 2021.
The DTCC and the National Securities Clearing Corporation (NSCC)—the DTCC’s
subsidiary for clearing equities—serve as a central counterparty clearinghouse for the stock
42
FINRA has taken several actions to respond to both the volatility from the onset of COVID-19 and the Meme Stock
Market event, which includes new and revised protocols and procedures including the adoption of a Supplemental
Liquidity Schedule. However, the Committee’s investigation has also identified multiple areas in which FINRA could
conduct more thorough oversight of broker-dealers. For instance, during the course of the investigation, Committee
staff learned that the SEC and FINRA do not require firms to notify them of trading restrictions, to maintain written
plans for emergency capital raisings or liquidity arrangements, or to conduct stress tests to specifically determine
broker-dealers’ ability to offer market access to customers during periods of peak volatility.42
43
The SEC reviewed 69 FINRA examinations from fiscal year 2021 and found numerous. Related reports have
demonstrated the SEC has been slow to implement programs that might increase the effectiveness of FINRA
supervision. For further discussion of various shortcomings with the SEC’s oversight of FINRA, see Appendix III:
The U.S Government Accountability Organization (GAO) Found Significant Gaps in the SEC’s Oversight of FINRA
in Congressionally Mandated Reports.
44
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
18
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market. 45 As a central counterparty, the NSCC is at the heart of processing trades in the U.S.
equities market and reduces settlement risk for both buying broker-dealers and selling broker-
dealers, each of which are NSCC member firms. 46 Customers execute trades through their broker,
and those brokers match trades through a public exchange like Nasdaq, a market making firm like
Citadel Securities, or another trading venue, but those venues ultimately direct all securities trades
through the NSCC for clearing. 47
If an NSCC member firm defaults on its obligations, the NSCC stands in the defaulted
firm’s place and delivers cash and securities to the non-defaulting members. 48 The NSCC requires
individual member firms to deposit collateral, or margin, to protect against the risk of a member
firm’s default. 49
Following the outages that occurred on Robinhood’s platform in March of 2020 (which
ultimately led to FINRA levying the March 2020 fine), Robinhood was placed on the NSCC’s
Enhanced Surveillance List. 50 However, in keeping with existing NSCC practices, the NSCC did
not notify Robinhood that it had been placed on this list and was now subject to greater scrutiny.
Moreover, Robinhood’s incomplete liquidity planning practices were neither detected by the
clearinghouse nor remedied despite the company being subject to enhanced surveillance.
Specifically, in addition to the problematic assumptions that Robinhood used in its stress
tests in mid-January 2021, Robinhood’s internal models used to predict its NSCC collateral
charges leading into the week of January 28, 2021, did not account for the prospect of Excess
Capital Premium charges—a significant component of the NSCC’s collateral charge regime that
applies when a broker-dealer is deemed to be undercapitalized. 51 As the market becomes more
volatile, and particularly as an individual broker-dealer’s uncleared portfolio becomes riskier, the
NSCC collateral deposit requirements for that individual broker-dealer increases. 52 In particular,
45
Wyatt Wells, Certificates and Computers: The Remaking of Wall Street, 1967 to 1971, Business History Review,
74 (2): 193–235 (Jan. 1, 2000); House Committee on Financial Services, Testimony of Michael C. Bodson, Game
Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III, 117th Cong.
(May 06, 2021).
46
“Clearing brokers,” who are responsible for executing and processing trades, are members firms of clearinghouses.
“Introducing brokers,” who interface with individual clients and assist them in opening accounts, are not themselves
members of clearinghouses. Certain brokers only act as introducing brokers and contract with a third-party clearing
broker to provide clearing services. Webull is an example of a broker-dealers that acts as only an introducing broker
and, in its case, relies on a contractual arrangement with Apex to clear and process trades initiated by Webull’s
customers on its platform.
47
DTCC briefing with the Committee (Jun. 17, 2021).
48
Id.
49
DTCC briefing with the Committee (Jun. 17, 2021). This is also referred to as a member firm’s “clearing fund
requirement.”
50
DTCC briefing with the Committee (Jul. 22, 2021).
51
See Appendix I: Glossary for definition of “Excess Capital Premium charge”; SEC, Self-Regulatory Organizations;
Fixed Income Clearing Corporation and National Securities Clearing Corporation; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Changes to Institute a Clearing Fund Premium Based Upon a
Member’s Clearing Fund Requirement to Excess Regulatory Capital Ratio (Sept. 15, 2006) (Release No. 34-54457);
House Committee on Financial Services, Testimony of Michael C. Bodson, Game Stopped? Who Wins and Loses
When Short Sellers, Social Media, and Retail Investors Collide, Part III, 117th Cong. (May 06, 2021); DTCC briefing
with the Committee (Jul. 06, 2021).
52
DTCC briefing with the Committee (Jun. 17, 2021); DTCC briefing with the Committee (Oct. 28, 2021).
19
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the Excess Capital Premium charge Increases exponentially based upon how risky a broker-
dealer’s uncleared portfolio is deemed to be relative to its capitalization. 53
The NSCC assessed a $3.7 billion collateral charge to Robinhood on January 28, 2021,
based on the risk in Robinhood’s uncleared portfolio relative to the company’s capitalization. This
charge, which ultimately prompted Robinhood’s trading restrictions, had several components. The
two largest components were the Value-at-Risk charge, which totaled $1.3 billion, and the Excess
Capital Premium charge, which totaled $2.2 billion. 54 During interviews with Committee staff,
Robinhood officials confirmed that the company was only modeling for its potential Value-at-Risk
charge for the week of January 25, 2021. 55 In other words, Robinhood had no visibility into the
possibility of, much less the precise level of, Excess Premium Capital charges that it could be
required to pay during the Meme Stock Market Event.
On January 28, 2021, after learning of its collateral charge for the day, Robinhood
operational staff first accessed and utilized the publicly available formula that the NSCC uses to
calculate Excess Capital Premium charges. 56 Three weeks after the Meme Stock Market Event, on
February 18, 2021, the company first incorporated the Excess Capital Premium charge into a
mathematical model used to estimate when such a charge could be assessed. 57 Then, on May 27,
2021, four months after the Meme Stock Market Event, the firm began regularly modeling what
its Excess Capital Premium charge would be if it exceeded its net capital. 58 Robinhood’s Head of
Data Science confirmed that updating the models is relatively straightforward as the company uses
Excel spreadsheets to model its NSCC collateral charge rather than more sophisticated machine
learning algorithms. 59
Despite the acknowledged simplicity of its model and the NSCC’s public release of its
formula for calculating collateral charges, Robinhood’s Head of Data Science commented
internally that Robinhood’s collateral charges were a “black box” to him the day before Robinhood
received its historical collateral charge. 60 Furthermore, the NSCC neither notified Robinhood that
the firm was under Enhanced Surveillance, nor conducted any form of supervision that would have
uncovered the incompleteness of Robinhood’s calculations for modeling collateral obligations.
d. On Sunday, January 24, 2021, Robinhood leadership hesitated to model volatility
before the start of the trading week

On January 24, 2021, the Sunday before Robinhood experienced a liquidity crisis and had
difficulty in meeting its NSCC collateral requirements, a senior manager in Robinhood’s treasury
department advocated modelling the company’s collateral obligations in an abundance of

53
DTCC briefing with the Committee (Jul. 06, 2021).
54
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Sept. 20, 2021).
55
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Dec. 15, 2021).
56
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Dec. 15, 2021).
57
Id.
58
Id.
59
Robinhood briefing with the Committee (Nov. 03, 2021).
60
RH_HFSC_00029119 (on file with the Committee).
20
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caution. 61 Note that even with this cautious approach, its models did not account for Excess Capital
Premium charges. However, David Dusseault, President and Chief Operating of Robinhood
Financial, the subsidiary of Robinhood that operates the company’s brokerage through its app and
website, suggested that “triggers” that would make the firm react more fully to the surging
volatility going into the trading week would be “inbound from… regulators.” 62

Figure 4: RH_HFSC_00020687 63

The senior manager in Robinhood’s treasury department sent an internal message, urging
the company to not wait to run the models until trading opened the next day. 64 She also responded
to Dusseault, saying that she was “thinking about this from a risk perspective though you guys are
balancing many other concerns.” 65
e. On Monday, January 25, 2021, Robinhood focused its efforts on accommodating
rapid growth, even as it faced severe operational strain in its internal systems and
nearly missed a deadline to its options clearinghouse that would have prompted a
liquidity crisis within Robinhood.

The next day, Monday, January 25, 2021, Robinhood executives observed a sharp increase in
meme stock activity. 66 Gretchen Howard, Robinhood’s Chief Operating Officer commented,
“VERY high volume coming in today… Possibly Gamestop trending on twitter and wall street
bets.” Robinhood CEO, Vlad Tenev and Robinhood’s Head of Data Science agreed. 67

61
RH_HFSC_00020687 (on file with the Committee).
62
Id.
63
RH_HFSC_00020687 (on file with the Committee).
64
Id.
65
Id.
66
RH_HFSC_00006682 (on file with the Committee).
67
Id.
21
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At the same time, Robinhood employees noticed operational concerns within the company
relative to the sharp rise in volume and warned that volume would most likely increase. 68 The
company’s Head of Data Science commented that the “success of GME short squeeze and people
knowing more about other short squeezes WSB (wallstreetbets) is talking about may lead to a ton
of volume in the next few weeks.” 69 In response, a Robinhood engineering manager responded,
“today was a huge day. There are internal things that are starting to buckle under pressure.” 70
As market activity increased, the company faced challenges as various systems became
overwhelmed. For example, the firm’s Automated Customer Account Transfer Service (ACATS),
which is used to transfer securities from one trading account to another, and various files and
reports, such as Robinhood’s Automated Clearing House (ACH) file, faced operational strain. 71
Robinhood’s Head of Data Science and his team worked throughout the week to make sure the
company’s systems remained operational. 72 As Jim Swartwout, President and Chief Operating
Officer for Robinhood’s clearing operation commented to his employees, the increasing volume,
to the extent it created longer delays in processing for internal systems, was unsustainable. 73

Figure 5: RH_HFSC_00006803 74

Robinhood employees were particularly worried about submitting a critical file to the
Options Clearing Corporation (OCC) on a timely basis. The OCC is a clearinghouse that provides
central counterparty clearing and settlement services for the securities derivates market. 75 The
OCC serves a similar role for the derivatives market as the NSCC serves in the equities market.
When calculating daily broker-dealer dealer margin requirements, the OCC permits broker-dealers

68
RH_HFSC_00005965 (on file with the Committee).
69
RH_HFSC_00005965 (on file with the Committee).
70
Id.
71
RH_HFSC_00006803 (on file with the Committee)
72
Robinhood briefing with the Committee (Nov. 03, 2021).
73
RH_HFSC_00006803 (on file with the Committee).
74
RH_HFSC_00006803 (on file with the Committee).
75
OCC, What is OCC? (accessed Jan. 27, 2021).
22
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to offset long and short positions in the same security so as to lessen the total margin owed for the
day. 76 To obtain such an offset, broker-dealers must submit a file to the OCC that includes all of
its long and short positions by 9:00 p.m. EST each day. 77 If the broker-dealer does not submit a
request to offset securities, the OCC assumes there is no offset for each security and charges the
maximum margin. In other words, rather than long positions offsetting short positions in
calculating margin requirements, the OCC charges the full margin obligations for all the securities
in a broker-dealer’s uncleared portfolio. 78
On January 25, 2021, Robinhood faced operational strain on its systems used to calculate
its OCC spread file. 79 Given the historic volume and volatility in the markets, the OCC extended
the deadline for all broker-dealers to submit their spread file on January 25, 2021. Robinhood ran
various models to estimate its OCC obligations if it missed the extended deadline to submit its file
to the OCC. 80 On the night of January 25, 2021, Robinhood Securities’ Senior Director of Clearing
Operations estimated the OCC’s requirement to be approximately $1.6 to $1.9 billion if the
company was unable to submit its spread file by the deadline. He also advised that missing the
OCC deadline would almost certainly prompt a regulatory investigation of the firm. 81

Figure 6: RH_HFSC_00029036 82

Robinhood employees continued to work throughout the day to address the delays in its
systems used to calculate its OCC spread files. The company’s executive leadership, including Jim

76
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
77
Id.
78
OCC, OCC Rules - Rule 1306 (accessed Jan. 27, 2022).
79
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
80
Id.
81
RH_HFSC_00029036 (on file with the Committee).
82
The original chat message was edited by its author to change the word “shorts” to “spreads” in the second sentence
of the message. Id.
23
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Swartwout and Gretchen Howard, expressed concerns about the impact of missing the OCC
deadline for submitting the spread file would have on the firm’s liquidity. 83

Figure 7: RH_HFSC_00006804 84

As Robinhood operational staff raced to meet the OCC’s deadline to avoid a liquidity crisis,
Robinhood’s executive leadership held an all-hands meeting and asked operational staff to discuss
ways to handle Robinhood’s rapid growth during the rising volatility, which many in the company
saw as a commercial opportunity. 85 Prior to the meeting, Jim Swartwout commented to a Clearing
Operations Manager at Robinhood Securities that perhaps instead of discussing ways to facilitate
the company’s rapid growth at the upcoming meeting, he should instead discuss all of the things
his team was doing to “keep the lights on” amidst the week’s spiking volatility. 86

Figure 8: RH_HFSC_00006669 87

83
RH_HFSC_00006804 (on file with the Committee).
84
Id.; RH_HFSC_00007056-57 (on file with the Committee).
85
RH_HFSC_00006669 (on file with the Committee); RH_HFSC_00028837 (on file with the Committee);
RH_HFSC_00029126 (on file with the Committee).
86
RH_HFSC_00006669 (on file with the Committee).
87
Id.
24
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In response, the Clearing Operations Manager commented that Robinhood doesn’t handle
scale well, to which Jim Swartwout responded, “That is probably the biggest understatement of
the day….” 88
Figure 9: RH_HFSC_00006669 89

The Clearing Operations Manager further commented that she was struggling to understand
why the company should be discussing how to absorb further growth when “things are barely being
held together. Is there a focus I’m missing here?” She felt the company’s product team might be
better able to put a positive spin on the situation, but from an operational perspective, Robinhood
had failed its obligation to fully service its customers by struggling to complete its operational
obligations. 90

Figure 10: RH_HFSC_00006669 91

88
Id.
89
Id.
90
Id.
91
Id.
25
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The OCC extended its deadline on the night of Monday, January 25, 2021 for Robinhood
and others, and extended the deadline by 60 to 90 minutes every other night of that week due to
the heightened volatility. 92 Robinhood was ultimately able to work through its system issues and
submitted its spread file to the OCC shortly before the extended deadline. 93 In communication
with Robinhood’s Head of Engineering after the company successfully submitted its file to the
OCC, Gretchen Howard commented, “Made it with 1 minute to spare!!!”. 94

Robinhood’s OCC collateral requirement was $92 million on January 25, 2021, rather than
the estimated $1.6 to $1.9 billion charge. 95 Robinhood employees ended the day aware that further
market volatility was likely, 96 Throughout the evening and into the night, Jim Swartwout remained
wary of regulatory scrutiny. 97 While Robinhood employees were relieved to have submitted their
OCC spread file on time, Swartwout remained cognizant of other operational difficulties that might
concern regulators and communicated such concerns to Gretchen Howard, including FINRA’s
concerns with Robinhood’s ability to continue processing fractional shares. 98 On the evening of
January 25, 2021, the company’s Head of Data Science warned that the company should not rule
out higher volume days for the rest of the week and suggested considering contingencies if
Robinhood missed the OCC’s deadlines in the future. 99
f. On Tuesday, January 26, 2021, Robinhood employees observed a historic spike in
trading activity on their platform following a tweet about GameStop posted by Tesla
CEO Elon Musk.

On Tuesday, January 26, 2021, employees at Robinhood continued to monitor market
activity and observe volume and volatility. 100 Popular momentum behind meme stocks continued
to increase, and at 4:08 p.m. EST, Tesla CEO Elon Musk tweeted “Gamestonk!!” with a link to
the wallstreetbets subreddit. 101

92
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
93
RH_HFSC_00007056-57 (on file with the Committee).
94
Id.
95
Letter from counsel for Robinhood to Committee staff (Nov. 04, 2021).
96
RH_HFSC_00005969 (on file with the Committee).
97
RH_HFSC_00011695 (on file with the Committee).
98
Id.
99
RH_HFSC_00005969 (on file with the Committee).
100
Id.
101
Elon Musk (@elonmusk), Twitter post (Jan. 26, 2021, 4:08 p.m.) (accessed Jan. 27, 2022).
26
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Figure 11: Twitter post from Elon Musk (@elonmusk) 102

As Robinhood employees monitored the number of customers applying to open an account
on their trading platform, they observed a historical spike directly following Mr. Musk’s tweet.103
A product manager flagged the acute increase in activity internally. 104

102
Id.
103
RH_HFSC_00028836 (on file with the Committee); RH_HFSC_00028837 (on file with the Committee).
104
RH_HFSC_00028836 (on file with the Committee).
27
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Figure 12: RH_HFSC_00028836 105

The same product manager commented, “we could probably interact with this movement
to promote RH growth,” to Robinhood’s Head of Data Science as they considered interacting with
the market activity to promote firm growth and reminding Robinhood customers that GME was
one of the stocks the company gave away as a free referral stock earlier in the company’s history. 106

105
Id.
106
RH_HFSC_00028837 (on file with the Committee).
28
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Figure 13: RH_HFSC_00028837 107

On Tuesday, January 26, 2021, Robinhood once again faced system delays that threatened
its ability to submit its OCC spread file before the deadline. As Robinhood employees implored
the OCC for another extension of the deadline, senior leadership grew increasingly worried about
the impression the company’s recurring systems delay would leave with the clearinghouse. Jim
Swartwout texted Gretchen Howard on the afternoon of January 26, 2021, to say that if OCC
granted Robinhood another extension on submitting its spread file, the clearinghouse “may follow
up with why we needed it though. Which would not be good.” 108

107
Id.
108
RH_HFSC_00011697 (on file with the Committee).
29
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g. On Wednesday, January 27, 2021, as Robinhood employees began to create trading
restrictions to slow volatility on their platform, they also sought to conceal the reasons
for implementing such restrictions from their customers and the public, even as they
feared restrictions could cause the market to crash.

On the morning of January 27, 2021, Robinhood employees continued to monitor market
activity and observe volume and volatility. 109 Vlad Tenev was concerned going into Wednesday,
January 27, 2021, about the company’s ability to maintain adequate liquidity as expressed to the
company’s Chief Financial Officer, Jason Warnick. 110

Figure 14: RH_HFSC_00007154 111

In interviews with Committee staff, Robinhood executives could not recall with specificity
when the idea of creating position limits for certain volatile stocks first arose. 112 Robinhood
employees worked to slow the velocity of trading within their platform. 113 Several different ideas
were discussed, but at first, position limits became the favored method to slow trading velocity.

109
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
110
RH_HFSC_00007154 (on file with the Committee).
111
Id.
112
Interview with J. Swartwout (Robinhood) (May 05, 2021); Interview with G. Howard (Robinhood) (May 11, 2021).
113
RH_HFSC_00015755-69 (on file with the Committee).
30
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Position limits limit the total number of stocks each customer can own in certain volatile stocks,
as compared to position closing only (PCO) restrictions, which prohibit customers from purchasing
certain stocks altogether. 114 Robinhood’s Head of Data Science expressed concerns that PCO
restrictions would look bad for the company, and also raised concerns that given the size of the
company, Robinhood placing PCO restrictions on specific symbols could trigger a market crash
in certain stocks. 115 Robinhood’s Head of Market Operations also expressed concern that PCO
restrictions could move the market given that Robinhood customers accounted for more than 10%
of the market. 116

Figure 15: RH_HFSC_00029118 117

As Robinhood employees worked through Wednesday, January 27, 2021, to code position
limits for meme stocks, they struggled with how to frame the trading restrictions to the public and
seemed to want to avoid giving their own clients the real reasons for imposing restrictions. 118 A
product manager at Robinhood Financial asked, “Do we have a customer facing rational we can

114
RH_HFSC_00015755-69 (on file with the Committee)
115
RH_HFSC_00029118 (on file with the Committee).
116
RH_HFSC_00041948 (on file with the Committee).
117
RH_HFSC_00029118 (on file with the Committee).
118
RH_HFSC_00015750 (on file with the Committee); RH_HFSC_00015751 (on file with the Committee).
31
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provide?” 119 In response, a manager in Robinhood’s brokerage responded, “The real reason is firm
risk and us needing to control the velocity of trading. …But we shouldn’t expose that.” 120 The
product manager agreed. 121
In a discussion between Robinhood’s Head of Data Science and the manager in the firm’s
brokerage, the two employees considered ways to reduce trade volume on the night of Wednesday,
January 27, 2021, and weighed concerns about growth versus risk management, and seemingly
placed increasing growth above prudential concerns. 122

119
RH_HFSC_00015750 (on file with the Committee).
120
RH_HFSC_00015751 (on file with the Committee).
121
Id.
122
RH_HFSC_00029126 (on file with the Committee).
32
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139

Figure 16: RH_HFSC_00029126-7 123

123
RH_HFSC_00029126-7 (on file with the Committee).
33
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h. Robinhood operational employees exhibited a general lack of awareness of the NSCC’s
collateral charge formula during the Meme Stock Market Event.

Despite years of operating their own clearing operation, during this period Robinhood
employees remained unaware of how the NSCC calculated its collateral charges and the
implications for the company’s operations. As employees contemplated ways to mitigate risks with
the rising market activity on the night of January 27, 2021, the Head of Data Science commented
to other Robinhood employees that the NSCC’s collateral charges seemed like a “black box” as
the company worked to understand the implications of the volume and volatility in the markets. 124

Figure 17: RH_HFSC_00029119-20 125

The company’s Head of Data Science was not the only senior Robinhood employee with
limited knowledge of how the NSCC calculated its collateral charges. The night before the January
28, 2021, trading restrictions, Robinhood’s Head of Market Operations and Robinhood’s Director
of Account Operations discussed efforts to create position limits to reduce the number of shares in
volatile stocks Robinhood customers could purchase. 126 While discussing the need to reduce
trading activity on the platform, the two senior Robinhood Financial employees expressed surprise
about the existence of what they referred to as NSCC “risk fees.” 127

124
RH_HFSC_00029119 (on file with the Committee).
125
RH_HFSC_00029119-20 (on file with the Committee).
126
RH_HFSC_00041943 (on file with the Committee).
127
RH_HFSC_00041945 (on file with the Committee).
34
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Figure 18: RH_HFSC_00041945 128

128
Id.
35
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Robinhood employees ended January 27, 2021, aware of historic volume and volatility in
meme stocks and commented on the irony of the difference in public perception of the company
relative to the operational concerns within the company. Despite the operational and liquidity
concerns Robinhood had been facing all week under larger volumes than during the volatility
caused by the onset of the COVID-19 pandemic, public perception was fine even though the
company was “on the edge.” 129

Figure 19: RH_HFSC_00041952-4 130

129
RH_HFSC_00041953-54 (on file with the Committee).
130
RH_HFSC_00041952-4 (on file with the Committee).
36
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i. Robinhood’s disproportionately high order flow and unique formula for calculating
PFOF rebates strained several market makers and introduced risk to the stock
market.

Commission-free trading, which Robinhood popularized, relies heavily on market making
firms such as Citadel Securities and others. Market maker firms are firms that stand ready to buy
or sell securities from broker-dealers at publicly quoted prices. 131 Market makers are usually able
to profit by selling orders for more than they purchased them. Market makers benefit from high
volume and usually pay broker-dealers rebates for customer orders as a way to attract orders, a
practice referred to as payment for order flow (PFOF). 132 The Meme Stock Market Event
demonstrated the critical role that market makers play in retail trading, and exposed a lack of

131
SEC, Executing an Order, Investor.gov (accessed Feb. 1, 2022).
132
Id. See Appendix I: Glossary for definition of “market makers.”
37
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regulatory controls related to critical operations resulting in inconsistencies in how various
organizations planned for, reacted to, and were ultimately impacted by the Meme Stock Market
Event.

While virtually all commission-free retail trades are routed through market makers,
Robinhood’s relationship with its market makers leading up to January 28, 2021, was distinct in
several ways. One way Robinhood stands out is the number of trades that its customers make on a
regular basis. Robinhood generates revenue on every customer trade and is incentivized to push
their customers to trade as much as possible. To this end, the company popularized commission-
free trading to reduce barriers to entry for the stock market. Furthermore, the company has
historically had a lax policy for allowing young traders to trade on margin (buying stocks with
borrowed money) and famously employs digital engagement tactics, such as celebratory
animations and game-like features, to increase customer activity on its platform. 133

In the first quarter of 2020, Robinhood users “traded nine times as many shares as
E*TRADE customers, and 40 times as many shares as Charles Schwab customers, per dollar in
the average customer account.” 134 Despite several major broker-dealers, such as Charles Schwab
and E*TRADE, eliminating trading commissions in recent years, Robinhood still generated
significantly more total orders relative to others in the industry leading up to the Meme Stock
Market Event. 135

Virtu Financial (Virtu), a market maker firm that provides liquidity in stocks and exchange
traded products for over 240 broker-dealer clients, commented to Committee staff that it received
more customer orders per day from Robinhood leading up to the Meme Stock Market Event than
the rest of its clients combined. 136 Virtu told Committee staff that during the week of the Meme
Stock Market Event, the order volume it received from Robinhood increased six times from the
prior week in GME, AMC, BlackBerry Ltd. (BB), Koss Corp. (KOSS), Bed Bath & Beyond Inc.
(BBBY), and Nokia Corp. (NOK). 137

133
Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results, The New York
Times (July 8, 2020).
134
Id.
135
Kyle Woodley, Schwab, TD Ameritrade, E*Trade, Fidelity Go Commission-Free (Oct. 10, 2019).
136
Virtu briefing with the Committee (Jan. 18, 2022).
137
Id.
38
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Another way that Robinhood stands out from other broker-dealers is the way in which it
calculates PFOF rebate rates that it receives from market makers. Most other broker-dealers
calculate PFOF rebates as a flat fee per share, whereas Robinhood calculates PFOF rebate rates
based on the spread between the
purchase and sale price of each
security at the time of executing a
trade on behalf of a customer. 138,
139
During periods of acute
volatility, such as during the Meme
Stock Market Event, when
CITADEL SECURITIES EMPLOYEES significantly more market
ESTIMATED THAT THE PFOF REBATES IT participants were buying meme
OWED ROBINHOOD FOR GME THE WEEK OF stocks than selling them,
JANUARY 28, 2021 WERE APPROXIMATELY Robinhood’s formula results in
disproportionately higher rebate
60 TIMES GREATER THAN THE WEEK rates. Citadel Securities employees
BEFORE. AN EMPLOYEE FOR CITADEL estimated that the PFOF rebates it
DESCRIBED ROBINHOOD’S PFOF REBATES owed Robinhood for GME the
AS A RUNAWAY FREIGHT TRAIN IN THE DAYS week of January 28, 2021, were
approximately 60 times greater
LEADING UP TO JANUARY 28, 2021.
than the week before. 140 An
employee for Citadel Securities
described Robinhood’s PFOF
rebates as a runaway freight train
in the days leading up to January
28, 2021. 141

Citadel Securities provided equities execution services for approximately 160 broker-
dealers on January 27, 2021—of those, only Robinhood calculated its PFOF rebate rates using a
formula based upon the bid-ask spread of each stock. 142 Analysts speculate that Robinhood relies
on a spread-based formula to maximize the revenue it generates from PFOF rebates. 143 As
discussed further in this section, Robinhood’s proprietary formula for calculating PFOF became a

138
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
139
Morningstar, Bid-Ask Spread (accessed on Mar. 11, 2022). The bid-ask spread of a security is commonly used to
measure how much liquidity is available for that security. The bid is the price a buyer is willing to buy a stock for,
and the ask is the price at which a seller is willing to sell the stock for. In order to meet in the middle and achieve an
agreement on price, the seller receives the lower price, and the buyer receives the higher price. When a stock is widely
available and most market participants agree on the price, the spread is negligible.
140
Citadel Securities briefing with the Committee (Nov. 03, 2021).
141
Id.
142
Email from counsel for Citadel Securities to Committee staff (Nov. 30, 2021).
143
Tomio Geron, Data shows how Robinhood makes more money from its users than other brokers, Protocol (Jul. 15,
2021).
39
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point of contention between Robinhood and Citadel Securities the night before Robinhood’s
historic trading restrictions on January 28, 2021. 144

Another significant factor affecting Robinhood during the Meme Stock Market Event was
the limitation on its ability to access the shares needed to fulfill the purchase orders of its
customers. Robinhood relied upon only six market makers to fulfill its equities orders and did not
belong to any public exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq
Stock Market, where it could fetch from a deeper, more liquid source. 145 Exchanges have
significantly more market participants from whom to obtain stocks than market making firms.
Most broker-dealers are connected to at least one if not more public exchanges. For example, Apex
Clearing Corporation, a similarly situated clearing broker, was connected to NYSE, Nasdaq, the
Miami International Securities Exchange (MIAX), the Chicago Board Options Exchange (CBOE),
and other public exchanges during the Meme Stock Market Event. 146

In Robinhood’s business model, market makers pay broker-dealers PFOF. Public
exchanges charge broker-dealers a membership fee and an access fee for consuming liquidity from
the exchange; they pay rebates for brokers who provide liquidity to the exchange. 147 One of
Robinhood’s primary marketing points is that it does not charge its customers a commission on
trades. To make up for lost revenue, Robinhood relies on PFOF, which has become a primary
source of its revenue. 148 As a result, Robinhood did not initially become a member of a public
exchange, relying instead on market makers to fill its orders.

Due to its business model, Robinhood was unable to route trades directly to any public
exchange and had fewer options than other similarly situated broker-dealers for executing trades
for their customers and was limited to transacting with six market makers during the Meme Stock
Market Event. Robinhood needed at least one of the six to remain fully operational, so that it could
execute trades on behalf of their customers. In April 2021, four months after the Meme Stock
Market Event and after three years of operating a clearing subsidiary, Robinhood became a
member of Nasdaq.

When Committee staff inquired about Robinhood’s business decision to operate a clearing
subsidiary for three years without connecting it to a public exchange, representatives for
Robinhood replied, “(h)aving a public exchange connection is not a regulatory requirement.” 149
Furthermore, according to the company, both FINRA and the SEC have been aware for years that

144
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021); Citadel Securities briefing with the Committee (Nov.
03, 2021).
145
Id.
146
FINRA, Apex Clearing Corporation, BrokerCheck (2022); SEC, Market Centers: Buying and Selling Stock (Oct.
15, 2012).
147
17 C.F.R §242 (2005).
148
Tomio Geron, Data shows how Robinhood makes more money from its users than other brokers, Protocol (Jul. 15,
2021).
149
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Feb. 4, 2022).
40
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Robinhood did not connect to an exchange and did not raise any potential concerns during any
examinations or investigations. 150

In comparing their clearing operation to their competitors, many of whom maintain
numerous connections to public exchanges, Robinhood told Committee staff that competing
clearing brokers “typically would have been established many years ago before the recent, rapid
evolution of securities trading in the U.S. markets,” and added that Robinhood Securities was
“proud to be the only clearing system … built from scratch on modern technology in the past
decade.” 151

As a result, during the Meme Stock Market Event, when multiple market makers were
facing severe operational constraints, Robinhood was wholly reliant on its market makers to
execute trades for their customers. The NYSE commented to Committee staff that while it is
common practice for broker-dealers to route primarily to market makers rather than public
markets, 152 many institutions prefer to route trades to public exchanges during periods of acute
volatility and erratic price fluctuations in the market. 153

On the evening of January 27, 2021, Jim Swartwout and his team were in frequent contact
with the market makers the company routinely routed orders to. 154 While Swartwout’s direct
reports led most of the conversations, they provided Robinhood executives critical updates. 155
Gretchen Howard, Robinhood’s Chief Operating Officer, who described her role to Committee
staff as being like a “train conductor” across the entire company, alleged to Committee staff that
the morning of January 28, 2021 was a blur and she could not recall with specificity any updates
she received on various market makers the company interacted with during the Meme Stock
Market Event. 156
On January 28, 2021, Robinhood routed orders to six market makers for equities: Citadel
Securities, G1 Execution Services, Morgan Stanley & Co., Two Sigma Securities, Virtu, and
Wolverine. 157 Robinhood uses a smart order router, which is unique among broker-dealers.
Robinhood’s smart order router estimates the likely execution quality offered by each venue for
specific stocks and order sizes on an order-by-order basis and based on historical performance. 158
The company can manually adjust who it routes orders to and made several manual adjustments
during the Meme Stock Market Event to provide relief to its market makers who were having
trouble fulfilling all its orders. 159

150
For discussion of concerns regarding FINRA’s supervision of the securities industry, see Appendix III.
151
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Feb. 4, 2022).
152
Virtu briefing with the Committee (Jan. 18, 2022).
153
The New York Stock Exchange briefing with the Committee (Oct. 19, 2021). See Appendix I: Glossary for
definition of “lit exchange”.
154
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
155
Interview with G. Howard (Robinhood) (Robinhood) (Jan. 07, 2022).
156
Id.
157
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021); Letter from counsel for Robinhood to Chairwoman
Waters and Chairman Green (Feb. 4, 2022).
158
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Feb. 4, 2022).
159
Id.
41
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Throughout January 27 and 28, 2021, several of the market makers Robinhood routinely
routed orders to struggled with operational constraints. Routing trading information generates vast
quantities of data, especially during periods of volatility. Given the extraordinary volatility of
meme stocks, NYSE and other exchanges imposed trading halts numerous times throughout
January 28, 2021. 160 When an exchange halts a stock, no one is allowed quote the stock, including
market makers and broker-dealers that internalize trades. The operational and data constraints of
imposing and lifting continuous trading halts throughout the day and otherwise handling
exceptional volumes of volatile securities generated more activity at various market maker firms
than their computer systems could safely handle. 161
Robinhood’s market makers had been struggling to accommodate the acute market
volatility prior to January 28, 2021. On January 27, 2021, Virtu sent an email to all its broker-
dealer clients asking Robinhood and others to route away all equities that began with the letter “A”
except for AAPL, AMD, and AMZN.

Figure 20: RH_HFSC_00043395 162

Virtu partitions certain of its systems used to process orders into 26 ranges or stripes, which
serve as a kind of virtual servers. 163 The range used to process “A” trades suffered operational
160
RH_HFSC_00012456 (on file with the Committee); RH_HFSC_00017639 (on file with the Committee).
161
Id.
162
RH_HFSC_00043395 (on file with the Committee).
163
Virtu briefing with the Committee (Jan. 18, 2022); RH_HFSC_00045005 (on file with the Committee).
42
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strain and delays in its system on January 27, 2021, in the face of “significantly increased order
flows and trading halts” required under the Regulation NMS Limit Up Limit Down Plan by various
venues such as the NYSE in AMC for brief stretches in the morning and afternoon. 164 Virtu
employees decided to close the “A” range at approximately 3:40 p.m. EST for all of its clients on
the afternoon of January 27, 2021. 165 Virtu represented to Committee staff that the company closed
its “A” to “ensure clients’ orders would not be impacted in the event Virtu experienced additional
system delays going into the close of trading for the day.” 166
Virtu’s request to route trades away was far from the only operational concern presented
to Robinhood Securities during the Meme Stock Market Event. Many venues requested Robinhood
route certain orders away on January 27 and 28, 2021 and at certain points, market makers
requested Robinhood route away all orders. Jim Swartwout commented to Committee staff that
during certain periods of the Meme Stock Market Event, only two of Robinhood’s market makers
for equities were accepting orders. 167 On January 27, 2021, Robinhood Securities temporarily
stopped routing certain equity orders to Two Sigma and Virtu and temporarily stopped routing
certain options orders to Morgan Stanley & Co. 168 The next day, on January 28, 2021, Robinhood
Securities temporarily stopped routing equity orders to Wolverine and reduced equities order flow
to G1 Execution Services; temporarily stopped certain equity orders to Two Sigma Securities and
Virtu; and temporarily stopped routing certain options orders to Morgan Stanley & Co. 169

164
While Virtu’s “A” range was experiencing operational strain, AAPL, AMD, and AMZN all have their own server
partitions. RH_HFSC_00045005 (on file with the Committee).
165
Virtu briefing with the Committee (Jan. 18, 2022).
166
Email from representative for Virtu Financial to Committee staff (Jun. 19, 2022).
167
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
168
On January 27, 2021, Robinhood Securities (RHS) stopped routing NLSP equity orders to Citadel Securities; RHS
stopped routing AAL, AAPL, AMC, AMD, ARKK, BA, BB, BNGO, CCIV, and CTRM equity orders to G1X
Execution Services and KSTR option orders to Global Execution Services before temporarily turning off equity order
routing to G1X; RHS stopped routing AMC, GME, and NOK option orders to Morgan Stanley & Co.; RHS
temporarily stopped routing equity orders to Two Sigma Securities; RHS temporarily stopped routing AMC equity
orders to Virtu Americas (Virtu). Thereafter RHS again stopped routing AMC equity orders to Virtu before turning
off equity order routing to Virtu. RHS also stopped routing “A” (except AAPL, AMD, and AMZN) equity orders to
Virtu. Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Feb. 4, 2022).
169
On January 28, 2021, RHS stopped routing OPTT option orders to Citadel; RHS stopped routing equity orders to
G1X. That evening RHS restored routing equity orders to G1X with reduced equity flow by 50%; RHS temporarily
stopped routing option orders and thereafter stopped routing BBBY and EXPR option orders to Morgan Stanley; RHS
temporarily stopped routing equity orders to Two Sigma on two different occasions; RHS restored equity order routing
to Virtu (which had been turned off on January 27, 2021, as noted above) and stopped routing NAKD, NOK, and
NSLP equity orders to Virtu; RHS stopped routing ACST, AMC, ATOS, AVGR, AZRX, BB, BIOL, BNGO, BRK.A,
CCIV, EXPR, GME, GRTS, GSAT, JAGX, KOSS, LLIT, NAKD, NLSP, NOK, OCGN, OXBR, SENS, SYN, and
ZOM equity orders to Wolverine. RHS also temporarily stopped routing equity orders to Wolverine before ultimately
turning off routing equity orders to Wolverine. Letter from counsel for Robinhood to Chairwoman Waters and
Chairman Green (Feb. 4, 2022).
43
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j. Robinhood threatened to terminate their business relationship with a market maker
that wanted to limit order flow during the Meme Stock Market Event due to
“regulatory and financial risk.”

Wolverine Execution Services (Wolverine), a market making firm headquartered in
Chicago, Illinois, emailed Robinhood on Monday, January 25, 2021, to notify Robinhood of issues
executing trades and “an extremely high number for quoted spread” on GME based upon
Robinhood’s unique formula for calculating PFOF. 170 Employees at Robinhood and Wolverine
continued to communicate throughout the week regarding the acute volatility, and at one point
Wolverine communicated to Robinhood that it considered Robinhood to be “a regulatory and
financial risk to their business.” 171 Early in the morning of January 28, 2021, an employee for
Wolverine emailed Jim Swartwout at Robinhood Securities to state that Wolverine was “on the
cusp of disaster,” and the firm wanted to “stay in the business with Robinhood on the equity side
but the pressure on sustained losses is not good.” 172
Wolverine, like other market makers, faced both financial and operational challenges
during the Meme Stock Market Event. Financially, Robinhood’s unique formula for calculating
PFOF rebate rates created extraordinarily high quoted rates Wolverine would be required to pay
Robinhood relative to periods of less volatility. In addition to Robinhood’s disproportionate PFOF
rebate rates, Wolverine faced operational concerns from the inbound order flow. Like Virtu, the
firm’s IT systems were placed at risk due to the extraordinary order flow in meme stocks.
Throughout January 28, 2021, as Robinhood’s other market makers stopped taking order flow,
Robinhood had to disproportionately increase the amount of order flow it routed to Wolverine.
This additional order flow went far beyond what Robinhood typically sent to Wolverine, which
greatly exacerbated the stress on Wolverine’s systems. 173 Wolverine employees requested that
Robinhood route away all equities trades. 174 As the two firms communicated throughout the night
of January 27, 2021 and throughout the day of January 28, 2021, Robinhood employees, including
Jim Swartwout, grew increasingly frustrated with Wolverine’s requests to route equities away.175
Robinhood Securities begrudgingly routed equities orders away from Wolverine, which
Robinhood thought Wolverine (referred to as “WEX” in the communication below) had requested
based on concerns from their compliance team regarding the movement of speculative meme
stocks.

170
RH_HFSC_00009944 (on file with the Committee).
171
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021); RH_HFSC_00011870 (on file with the Committee).
172
RH_HFSC_00012324 (on file with the Committee).
173
Wolverine Execution Services briefing with the Committee (Dec. 16, 2021).
174
RH_HFSC_00017640-1 (on file with the Committee).
175
Id.
44
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Figure 21: RH_HFSC_00017640-41 176

Although Wolverine’s operational staff was concerned about the ability of their systems to
accommodate the volume and volatility of the trading in meme stocks, 177 Wolverine had initially
chosen to turn equities off based on a sole individual’s intuition and experience working in the
industry, fearing that it was on the brink of a total breakdown of their systems. 178
Wolverine’s Chief Compliance Officer monitored the firm’s liquidity during the Meme
Stock Market Event but had not expressed concerns regarding the firm’s capacity to continue
executing equities. 179 Wolverine employees did not consult with their compliance department on
the operational concerns they faced, nor did the firm have any written policies or procedures to
determine when to limit trade execution for risk management reasons. There were no regulations
requiring market makers to develop written policies and procedures for such events. 180
Wolverine employees expressed concerns regarding their equities business in the days
leading up to the Meme Stock Market Event, which was a newer, less developed, and significantly
less lucrative business than their options business. 181 Robinhood employees grew increasingly
frustrated with Wolverine and considered ending their entire business relationship with the market
maker—both equities and options—even though Wolverine cleared approximately 20% of
Robinhood’s options orders. 182

176
Id.
177
Id.
178
Wolverine Execution Services briefing with the Committee (Dec. 16, 2021).
179
Id.
180
Id.
181
Email and attachment from General Counsel and Chief Compliance Officer of Wolverine Trading, LLC to
Committee staff (Jan. 18, 2022).
182
RH_HFSC_00017641 (on file with the Committee).
45
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Figure 22: RH_HFSC_00017641 183

Jim Swartwout placed a call to operational staff at Wolverine on January 28, 2021, in
response to Wolverine’s request to route equities away. Swartwout told Wolverine’s staff that if
Wolverine would no longer accept equities for Robinhood, then Robinhood would also no longer
route options through Wolverine either. 184 The Wolverine employee who manages the firm’s
relationship with Robinhood commented to Committee staff that he understood this to mean that
Robinhood would route all options trades away from Wolverine indefinitely if Wolverine did not
continue to accept equities order flow on January 28, 2021. 185
The Wolverine employee relayed Swartwout’s message to Rob Bellick, the Managing
Partner of Wolverine Trading, LLC, Wolverine’s parent company. 186 Rob Bellick made an
executive decision to continue offering equities market making services to Robinhood. 187
Jim Swarwout, President and Chief Operating Officer of Robinhood Securities, directed
his team to turn Wolverine back on after convincing Bellick to override the risk management
concerns of Wolverine’s operational staff. 188 After Wolverine continued trading in equities, Jim
Swartwout commented to a Robinhood Securities trading operations senior manager who reported
to him that, “Rob Bellick came to his senses when I made it clear what our reaction was going to
be,” making it clear that Swartwout believed that Wolverine reacted to Robinhood’s threat to
terminate the business relationship regarding options if Wolverine didn’t continue clearing equities
as well. 189

183
Id.
184
Wolverine Execution Services briefing with the Committee (Dec. 16, 2021).
185
Id.
186
Id.
187
Id.
188
RH_HFSC_00017643 (on file with the Committee).
189
Id.; Wolverine Execution Services briefing with the Committee (Dec. 16, 2021).
46
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Figure 23: RH_HFSC_00017643 190

Wolverine was a small company, (its equities business employed only two employees, a
trader, and an IT professional), and was struggling to accept the increasingly large equities order
flow Robinhood sent their way as certain other market makers that Robinhood routinely routed
orders to ceased accepting order flow. When Wolverine asked Robinhood to reduce the equities
order flow, Robinhood threatened to indefinitely cease routing both options and equities to
Wolverine. 191 As a result, Wolverine continued accepting equities order flow despite the concerns
raised by Wolverine’s operational staff that the increasing order flow could result in a system
failure. 192 Wolverine wound down its equities market making business subsequent to the Meme
Stock Market Event. 193 When Rob Bellick spoke with Committee staff, he could not recall the
specific time or subject matter of any discussion with Jim Swartwout or what was discussed. 194
k. Robinhood and Citadel Securities engaged in “blunt” negotiations the night before
the trading restrictions to lower the PFOF rates Robinhood was charging Citadel
Securities.

While Virtu, G1 Execution Services, Wolverine, and other market makers struggled with
operational constraints, Citadel Securities commented to Committee staff that the firm had
upgraded its system’s capacity significantly since the onset of COVID-19 market volatility. 195

190
RH_HFSC_00017643 (on file with the Committee).
191
Wolverine Execution Services briefing with the Committee (Dec. 16, 2021).
192
Id.
193
Id.
194
Interview with R. Bellick (Wolverine Trading, LLC) (Dec. 08, 2021).
195
Citadel Securities briefing with the Committee (Nov. 03, 2021).
47
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Unlike other market makers, Citadel Securities did not face operational capacity constraints. 196
Citadel Securities employees represented to the Committee that they felt confident their systems
were able to perform during this period of extraordinary volatility and volume.
Citadel Securities and other market makers expressed frustrations with Robinhood’s
calculated PFOF rebate rates on meme stocks throughout January 27, 2021. In response,
Robinhood employees held internal discussions about how to limit PFOF rebate rates to maintain
the relationships with market makers with the primary objective of ensuring Robinhood Securities
had venues available to execute customer orders. 197 Such discussions reached the top of the firm,
with Robinhood’s C-Suite executives, like Robinhood’s CEO Vlad Tenev, Chief Operating Officer
Gretchen Howard, Chief Legal Officer Dan Gallagher, and Robinhood Securities President and
Chief Operating Officer Jim Swartwout remaining highly aware of the potential unwillingness of
Citadel Securities and others to provide for PFOF in line with past commercial practices.

Figure 24: RH_HFSC_00017655 198

196
Id.
197
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
198
RH_HFSC_00017655 (on file with the Committee).
48
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Like many other market makers, Citadel Securities grew increasingly concerned about the
magnitude of the PFOF rebates it might be required to pay Robinhood associated with GME and
AMC given Robinhood’s unique PFOF rate structure in an unprecedented trading environment. 199
Neither Citadel Securities employees nor Robinhood employees who spoke with the Committee
could pinpoint precisely when the two firms began negotiating PFOF rebates on January 27,
2021. 200 However, it is clear that by early in the evening of January 27, 2021, Citadel Securities
employees communicated their concerns regarding PFOF rebates to Robinhood, particularly
regarding the skyrocketing PFOF rebates being calculated for GME and AMC.

Figure 25: RH_HFSC_00017631 201

Robinhood and Citadel Securities discussed ways to limit PFOF for one or both symbols. 202
Citadel Securities wanted to make sure that Robinhood understood that the PFOF rebate rates
being calculated based upon Robinhood’s unique spread-based formula were untenable, especially
in the context of the unprecedented volatility and volume. As Citadel employees broached the
subject of limiting PFOF rebates within Robinhood, Jim Swartwout expressed frustration with the
concerns being relayed by the Citadel employee who managed the relationship with Robinhood.

Figure 26: RH_HFSC_00017632 203

199
Citadel Securities briefing with the Committee (Nov. 03, 2021).
200
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021); Citadel Securities briefing with the Committee (Nov.
03, 2021).
201
RH_HFSC_00017631 (on file with the Committee).
202
Id.; RH_HFSC_00017632 (on file with the Committee).
203
RH_HFSC_00017632 (on file with the Committee).
49
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As Robinhood employees discussed ways to limit their PFOF rebate rates, they wanted to
make sure that all market makers were treated equally. 204 Given the volatility of GME, Swartwout
developed a plan to suspend the company’s formula for calculating PFOF rebates and cap PFOF
rebate rates for GME to $0.003 per share retroactively to January 25, 2021, at all of their market
maker venues. 205 Jim Swartwout came up with the new proposal based on a rough average of
Robinhood’s PFOF calculation typically derived from the formula that had been applied to all of
their previous orders. 206 Jim Swartwout expressed willingness internally to route away from
Citadel Securities if Citadel Securities’ relationship manager didn’t “like the new pricing model.
The others will be happy to take it at normal rates.” 207

Figure 27: RH_HFSC_00017632 208

A Senior Vice President at Citadel Securities who managed the relationship with
Robinhood contacted Swartwout’s team on January 27, 2021 to schedule a call to discuss PFOF. 209
At approximately 6:45 p.m. EST on January 27, 2021, Robinhood and Citadel Securities agreed
to have a call to discuss PFOF rebates. 210 At 7:03 p.m. EST, Robinhood emailed its proposal for a
$0.003 per share PFOF rebate rate on GME, retroactive to Monday, January 25, 2021. 211
Simultaneously, Citadel Securities developed a plan suggesting Robinhood place a monetary cap
on PFOF fees per symbol per day, for all symbols, going forward. 212 At 8 p.m. EST, Citadel

204
Id.
205
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
206
Id.
207
RH_HFSC_00017632 (on file with the Committee).
208
Id.
209
RH_HFSC_00017631 (on file with the Committee).
210
CIT-HFSC_0000001 (on file with the Committee).
211
Id.
212
Id.
50
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Securities and Robinhood spoke together by telephone during which Citadel Securities suggested
its plan of placing a monetary cap on volatile securities. 213
Citadel Securities employees described this telephone conversation as blunt and indicated
in the call that if Robinhood was unwilling to take actions to limit PFOF rebates being generated,
Robinhood would need to look elsewhere to route trades. 214 Jim Swartwout described the
conversations between Robinhood and Citadel as tense that day. 215
According to Citadel Securities’ representations to the Committee, Citadel Securities
employees did not see Robinhood’s email proposal to cap PFOF rates prior to their 8 p.m. EST
call. 216 Citadel Securities told the Committee that it did not realize it had received Robinhood’s
proposal until after the 8 p.m. call. As a result, Citadel Securities employees described the
conversation as “two ships passing in the night” because Citadel Securities did not realize that
Robinhood had made a proposal – likely not realizing what Citadel Securities had described as not
being aware of Robinhood’s proposal. Later that evening, senior members of Citadel Securities
and Robinhood spoke, and Citadel Securities understood the confusion. Shortly after this evening
call, Citadel Securities accepted Robinhood’s proposal.
Jim Swartwout emailed the Senior Vice President at Citadel Securities who managed the
relationship with Robinhood to tell her, “I am beyond disappointed in how this went down. It’s
difficult to have a partnership when these kind of things go down this way.” 217 Robinhood
employees left the conversation frustrated that Citadel Securities had generated their own plan to
limit PFOF rebates without considering Robinhood’s proposal. 218 On January 30, 2021, the day
after widespread trading restrictions, Robinhood emailed out a similar price cap on AMC, limiting
PFOF rebate rates to $0.003 retroactively to January 19, 2021, in addition to the price cap it had
placed on GME. Citadel Securities accepted. 219
l. Robinhood received a waiver of the largest component of its deposit requirement
from DTCC. Without this waiver, over which Robinhood had no control, the
company would have defaulted on its regulatory collateral obligations.

Before the market opened on the morning of January 28, 2021, at approximately 5:11
a.m. EST, Robinhood Securities, Robinhood’s clearing broker, received its daily automated
notice from the NSCC setting out the firm’s daily collateral deposit requirement of
approximately $3.7 billion. 220 Given the fact that Robinhood already had approximately $700
million on deposit with the NSCC from the day before, this automated notice outlined a

213
Id.; Citadel Securities briefing with the Committee (Nov. 03, 2021).
214
CIT-HFSC_0000001 (on file with the Committee); Citadel Securities briefing with the Committee (Nov. 03, 2021).
215
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
216
Citadel Securities briefing with the Committee (Nov. 03, 2021).
217
RH_HFSC_00014317 (on file with the Committee).
218
CIT-HFSC_0000001 (on file with the Committee); Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
219
Email from counsel for Citadel Securities to Committee staff (Nov. 30, 2021); RH_HFSC_00017636 (on file with
the Committee).
220
RH_HFSC_00000652 (on file with the Committee).
51
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requirement for Robinhood Securities to deposit an additional $3 billion in its NSCC account by
10 a.m. EST. 221

Figure 28: RH_HFSC_00000652 222

As further detailed in the information that the NSCC provided to Robinhood through an
automated portal, the largest components of the company’s collateral deposit requirement was a
Value-at-Risk charge of approximately $1.3 billion, as well as an Excess Capital Premium charge
of $2.2 billion, which Robinhood had not calculated. 223 Robinhood calculated that of the $1.3
billion Value-at-Risk charge, approximately $850 million was attributable to AMC and
approximately $250 million was attributable to GME. 224

When Robinhood Securities’ operational staff first saw the collateral charge, they reached
out to members of Robinhood’s executive team at approximately 5:11 am EST (2:11 am PST in
California where several Robinhood executives reside). The Robinhood employees also attempted
to reach NSCC staff to verify the accuracy of the charge, which they were unsuccessful at doing
upon their first attempt. 225

221
Id.
222
RH_HFSC_00000652 (on file with the Committee).
223
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Sept. 20, 2021).
224
Id.
225
Id.RH_HFSC_00029626 (on file with the Committee); RH_HFSC_00042079-80 (on file with the Committee).
52
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A clearing operations manager based in Orlando, Florida—one of the first Robinhood
Securities employees to learn of the company’s NSCC collateral charge on January 28, 2021—
reached out to Chuck Tennant, the former head of Robinhood’s clearing operation, to better
understand what could happen if a broker-dealer was unable to meet its NSCC collateral
obligations. 226 The Robinhood employee asked Tennant at 6:07 a.m. EST “Hypothetically what
happens if a firm can’t meet their morning NSCC margin settlement?... Hypothetically there isn’t
enough in LOC [i.e., line of credit].” 227

Figure 29: RH_HFSC_00042079-80 228

226
RH_HFSC_00042079 (on file with the Committee).
227
RH_HFSC_00042079-80 (on file with the Committee)
228
Please note, the timestamp for this production is for GMT time. EST is (GMT+5), i.e., the Clearing Operation
Manager’s initial text message was sent at 6:07 a.m. EST. Id.
53
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Chuck Tennant suggested the Robinhood employee should call the NSCC as “they are at
work already.” The Robinhood employee replied that they had been unsuccessfully attempting to
contact the clearinghouse. 229 Tennant further implored the Robinhood employee to “wake up your
senior leaders. Time for a cash infusion.” 230

Figure 30: RH_HFSC_00042079-80 231

On the morning of January 28, 2021, Robinhood had approximately $696 million in
collateral already on deposit with the NSCC, leaving it with a collateral deficit of approximately
$3 billion, which it was required to post to satisfy the NSCC’s clearing fund requirement or risk
being in violation of the NSCC’s rules and potentially losing the ability to clear trades for their
customers altogether. 232 Swartwout confirmed that this amount came as a surprise to Robinhood
and explained to Committee staff that they had anticipated and prepared for the $1.4 billion of
collateral deposit requirements that represent “core” charges, but because they did not model for
Excess Capital Premium charges, Robinhood therefore did not expect and had not arranged
adequate funding for the additional $2.2 billion Excess Capital Premium charge. 233 On the morning
of January 28, 2021, Jim Swartwout texted Gretchen Howard at 6:29 a.m. EST, writing “Huge
liquidity issue.” 234

When Committee staff asked Jim Swartwout what he meant to convey by this early
morning message, Swartwout commented that liquidity can mean different things in different
contexts. In this case, he commented that he was concerned with Robinhood’s ability to meet its
collateral requirement at DTCC. 235

Shortly after learning about Robinhood’s liquidity concerns, Gretchen Howard reached out
to notify Vlad Tenev of the situation. 236 Gretchen Howard also communicated her concerns
229
Id.
230
Id.
231
Id.
232
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
233
Interview with J. Swartwout (Robinhood) (May 05, 2021); please see Finding 1(d) for further detail regarding
Robinhood’s failure to address the possibility of Excess Capital Premium charges in its collateral planning processes
and the deficiencies in the models used to calculate its NSCC collateral obligations prior to January 28, 2021.
234
RH_HFSC_00011657 (on file with the Committee).
235
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
236
Email and attachment to email from Counsel for Vladimir Tenev to Committee staff (Nov. 10, 2021) (on file with
the Committee).
54
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regarding the company’s liquidity position to the company’s Chief Marketing & Communications
Officer, giving her a “heads-up” in case the company’s liquidity issues leaked. Up until that
morning, the company had faced operational and liquidity concerns all week without suffering
adverse publicity. 237

Figure 31: RH_HFSC_00042085 238

Gretchen Howard also communicated her concerns regarding the company’s liquidity
position to Jason Warnick, Robinhood’s Chief Financial Officer, “Huge liquidity issue with
nscc.” 239

Figure 32: RH_HFSC_00042082 240

Robinhood Securities operations personnel and senior Robinhood Markets executives—
including CFO Jason Warnick, COO Gretchen Howard, and CLO Dan Gallagher—first convened
internally between approximately 6:30 a.m. and 7:15 a.m. EST of that day to determine how best
to address the NSCC’s deposit requirement and manage the situation. 241 During this and several
other conversations early that morning, the Robinhood team determined that they would need to
impose PCO restrictions on certain volatile securities. 242

237
RH_HFSC_00041953 (on file with the Committee).
238
RH_HFSC_00042085 (on file with the Committee).
239
RH_HFSC_00042082 (on file with the Committee). See also RH_HFSC_00042083 and RH_HFSC_00042081 (on
file with the Committee).
240
RH_HFSC_00042082 (on file with the Committee).
241
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
242
Id.
55
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m. In addition to restricting stocks, Robinhood leadership throttled new account
creation on their platform to limit volatility and hopefully address liquidity concerns.

In addition to imposing PCO restrictions on top of the existing position limits that the
company had implemented the night before, Gretchen Howard inquired about how to turn off
automatic approvals on new accounts in an effort to reduce volume on Robinhood’s platform. 243
After hesitating to reduce marketing all week, Robinhood leadership was forced to take more
restrictive actions to reduce marketing to slow activity on their trading platform. 244 As Howard
discussed the technical aspects of “throttling,” or slowing the pace of new account openings, she
sought to maximize the reduction of new account creation to ameliorate volatility and mitigate
Robinhood’s liquidity risk. 245

Figure 33: RH_HFSC_00006807 246

243
RH_HFSC_00006807 (on file with the Committee).
244
RH_HFSC_00006803 (on file with the Committee).
245
RH_HFSC_00006807 (on file with the Committee).
246
Id.
56
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According to Robinhood operations staff, turning off auto approval meant that Robinhood
was still “accepting applications, but approval is turned off. This means a large number of
customers (were) still applying but (wouldn’t) be approved immediately,” delaying their ability to
transact on the platform. 247 The decision to throttle new account creation arose spontaneously on
the morning of January 28, 2021. 248 During the afternoon of January 28, 2021, Robinhood Director
of Account Operations estimated that approximately 300,000 customer applications were waiting
in the queue to be approved. 249 Robinhood employees discussed when to turn auto approval back
on throughout the day on January 28, 2021 but decided to keep the auto approvals turned off for
the remainder of the day due to risk concerns associated with increased load on their platform. 250
As a Robinhood employee said in a chat discussing when to resume approving accounts, “any
additional load takes us to the bottom faster.” 251

247
RH_HFSC_00028605-06 (on file with the Committee).
248
RH_HFSC_00006807 (on file with the Committee).
249
RH_HFSC_00053795 (on file with the Committee).
250
RH_HFSC_00006639 (on file with the Committee).
251
Id.
57
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Figure 34: RH_HFSC_00006639 252

Ultimately Robinhood’s decision to turn off auto approval had a significant impact on the
number of new accounts on its platform. On the morning of January 29, 2021, the next day,
Robinhood Financial’s Director of Brokerage Risk estimated that the number of customers waiting
in the queue for their accounts to be approved had increased to approximately 730,000. 253

In addition to slowing volume on the platform, the Robinhood team felt the need to raise
additional capital early on the morning of January 28, 2021. 254 More capital would be needed to
ensure that Robinhood could meet deposit requirements going forward and bolster its capital base,
so that the firm could resume normal trading operations for its customers as soon as possible. 255

At the time, company executives, including Robinhood CFO Jason Warnick understood
that raising additional capital would allow customers to trade on an unrestricted basis. 256 Warnick
252
Id.
253
RH_HFSC_00055051 (on file with the Committee).
254
Interview with J. Warnick (Robinhood) (Jun. 10, 2021).
255
Id.
256
Id.
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began organizing the capital raising and placing calls to key investors. 257 Robinhood chose to raise
additional capital by issuing convertible notes in two tranches to participating investors. 258 At the
outset of the capital raising, Robinhood sought $1 billion in new investment, a target it increased
to $3.5 billion by Saturday, January 30, 2021. 259 The company’s financial modeling predicted the
company would need $2.5 billion in additional capital to return to a normal, unrestricted trading
environment and handle potential spikes in collateral deposit requests driven by continued market
instability. 260 Robinhood’s $3.5 billion fundraising target therefore included an additional $1
billion beyond this amount as a prudential measure. 261

n. Robinhood’s Chief Legal Officer notified senior officials at the DTCC that
Robinhood could not meet its collateral obligations before the market opened on
January 28, 2021.

Robinhood Securities’ operations personnel worked to contact the DTCC on the morning
of January 28, 2021 to seek confirmation that the amount of their NSCC collateral deposit
requirement, as communicated in that morning’s automated notice, was accurate and to seek an
understanding of the nature of the charges. 262 At approximately 6:30 a.m. EST, a market risk
manager at DTCC spoke with the Head of Securities Processing of Robinhood Securities for
approximately 15 minutes, with the conversation focused on the manner in which the Excess
Capital Premium charge and volatility charge components of Robinhood Securities’ daily clearing
fund requirement had been calculated. Robinhood would have been able to estimate its volatility
charge using a calculator tool in NSCC’s member portal or using the methodology guide that
NSCC makes available to members. NSCC’s Excess Capital Premium charge formula was also
publicly available prior to the Meme Stock Market Event. 263 During this call, Robinhood also
conveyed to DTCC that it believed that the NSCC’s calculation of Robinhood’s Value-at-Risk
charge for the day was unreasonable. 264

At approximately 7:15 a.m. EST, Dan Gallagher, Robinhood’s Chief Legal Officer and
former Republican Commissioner of the SEC, placed a phone call to a Deputy General Counsel at
DTCC with whom Gallagher was professionally acquainted (the two men had previously worked
at the same law firm). 265 The Deputy General Counsel was not immediately available, but returned
Mr. Gallagher’s call soon thereafter. 266 On this call, Gallagher indicated that the NSCC’s clearing
fund requirement for Robinhood for the day was problematic and requested that the matter be
escalated within DTCC’s risk department, which is ultimately responsible for the calculation,

257
Id.
258
Id. Committee staff have reviewed the funding documents associated with this capital raising and obtained detailed
information on the timing of the receipt of funds that constituted the capital raising by Robinhood.
259
Id.
260
Id.
261
Id.
262
Interview with J. Swartwout (Robinhood) (May 05, 2021).
263
Email from General Counsel for DTCC to Committee staff (Aug. 4, 2021).
264
DTCC briefing with the Committee (Sept. 10, 2021).
265
Interview with D. Gallagher (Sept. 13, 2021).
266
Id.
59
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assessment, and waiver of collateral charges. 267 The Deputy General Counsel indicated that
Gallagher affirmatively raised the prospect of reducing the amount of Robinhood’s daily clearing
fund requirement and was interested in connecting with more senior DTCC officials to discuss
how to obtain relief, waiver, or an exemption. 268

The Deputy General Counsel conveyed that he would attempt to alert the relevant people
internally at the DTCC who were responsible for these matters, but also explained that NSCC rules
limited the circumstances in which extensions or other modifications to clearing fund requirements
can be made. 269 In interviews with Committee staff, the Deputy General Counsel also explained
that he understood that Gallagher placed a call to him because Robinhood officials were concerned
that the DTCC operational employee that was previously serving as their point of contact was too
junior with respect to Robinhood’s challenges relating to its daily clearing fund requirement and
may not have had the authority to provide relief in terms of exemptions or other forbearance.270
Upon concluding the call, the Deputy General Counsel sent an internal email to senior DTCC
officials, including to Timothy Cuddihy, DTCC’s Managing Director of Financial Risk
Management, alerting them to Robinhood’s issue. 271 When asked about the specific concerns that
Gallagher relayed to the NSCC during his call with the DTCC Deputy General Counsel, Gallagher
told Committee staff he did not recall the conversation with specificity. 272

Figure 35: Email from DTCC Deputy General Counsel to T. Cuddihy and others in
DTCC’s Risk and Legal Departments (7:38am EST) 273

267
DTCC briefing with the Committee (Jul 29, 2021).
268
Id.
269
Id.
270
Id.
271
Id.; DTCC_CONG_00000001(on file with the Committee).
272
Interview with D. Gallagher (Robinhood) (Sept. 13, 2021).
273
DTCC_CONG_00000001 (on file with the Committee).
60
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Also, at approximately 7:15 a.m. EST on January 28, 2021, other DTCC personnel
confirmed the accuracy of the approximately $3.7 billion collateral deposit requirement to the
Robinhood Securities employee who had initiated the outreach to them earlier that morning.274
Robinhood Securities personnel then requested a larger group call for later that morning to be
attended by senior DTCC personnel along with senior Robinhood Securities and Robinhood
Markets executives. 275 At approximately 7:45 a.m. EST, the DTCC’s Market Risk Director spoke
with the Head of Securities Processing of Robinhood Securities about the NSCC’s Excess Capital
Premium charge to Robinhood for the day. The DTCC’s Market Risk Director conveyed that
Robinhood’s Excess Capital Premium charge was being reviewed for downward adjustment
without commenting on why it was being reviewed or what would qualify Robinhood for a
downward adjustment. 276

At approximately 8:15 a.m. EST, senior personnel from DTCC, Robinhood Securities, and
Robinhood Markets spoke about the deposit requirements. 277 Specifically, the conversation
addressed the Excess Capital Premium charge and Value-at-Risk components of Robinhood’s
daily clearing fund requirement, and the impact that the clearing fund requirement would have on
Robinhood’s liquidity for that day. 278 During that call, Robert Crain, an equity market risk
executive at DTCC, stated that the DTCC was prepared to reduce the Excess Capital Premium
charge from approximately $2.3 billion to approximately $835 million. Crain notified Robinhood
that the DTCC was evaluating a further reduction or waiver of the Excess Capital Premium
charge. 279 According to Robinhood officials, the DTCC did not provide a specific basis for
reducing Robinhood’s Excess Capital Premium charge. Upon being informed that the Excess
Capital Premium charge would be reduced, the senior Robinhood personnel on the call expressed
that even such a reduced amount would present an operational strain on the firm’s liquidity. 280

According to DTCC officials, Gretchen Howard also asked the DTCC if Robinhood could
negotiate its Value-at-Risk charge down to a lower amount, which DTCC officials refused. 281 In
addition, according to DTCC officials, Robinhood Securities personnel explained the mitigation
efforts that were being taken in response to the unanticipated spike in collateral requirements
during this call, specifically conveying that Robinhood had increased margin requirements for its
clients to 100% on GME and certain other volatile equities and had decided to impose PCO

274
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
275
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
276
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021); DTCC briefing with the Committee
(Sept. 10, 2021); Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021);
DTCC briefing with the Committee (Sept. 17, 2021).
277
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021); Email from
General Counsel for DTCC to Committee staff (Aug. 03, 2021). The Robinhood participants on this call included
Gretchen Howard (Chief Operating Officer of Robinhood Markets, Inc.), Daniel Gallagher (Chief Legal Officer of
Robinhood Markets, Inc.), Director of Financial Operations and Chief Financial Officer of Robinhood Securities, and
Clearing Operations Manager (Securities Processing) for Robinhood Securities.
278
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021).
279
Id.
280
DTCC briefing with the Committee (Sept. 10, 2021).
281
Id.
61
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restrictions on certain volatile symbols. 282 In speaking with the Committee, Gretchen Howard
could not recall the specific details of any conversations with DTCC officials on the morning of
January 28, 2021. 283

Upon concluding the call, DTCC officials requested that Robinhood provide detailed
liquidity and other financial information to DTCC and participate in one or more follow-up calls
later that day. 284 At some time between 8:00 a.m. EST and 8:15 a.m. EST, a DTCC official
separately notified a Robinhood Securities employee that Robinhood Securities’ Excess Capital
Premium charge had been reduced to approximately $876 million from the original approximately
$2.2 billion. 285

At approximately 8:35 a.m. EST, the Deputy General Counsel of the DTCC and Robinhood
CLO Dan Gallagher spoke again by telephone for approximately 10 minutes. 286 During the phone
call, the two discussed Robinhood’s Value-at-Risk charges, as well as actions that Robinhood was
undertaking to improve its current liquidity position. 287 Gallagher stated that Robinhood believed
that its Value-at-Risk charge of $1.3 billion would be sufficient, that additional charges were not
necessary, and this was an appropriate circumstance for the DTCC to exercise its discretion to
reduce or waive Robinhood’s Excess Capital Premium charge. 288 According to the Deputy General
Counsel, Gallagher also indicated that if the NSCC charged amounts in excess of the Value-at-
Risk charge, this would stress Robinhood’s liquidity. 289 The Deputy General Counsel responded
that he understood Robinhood’s position on the matter, but that the NSCC was subject to rules and
oversight that did not allow it to waive nondiscretionary charges. 290 Gallagher indicated that he
accepted that, but implored the Deputy General Counsel for further relief, arguing that the Excess
Capital Premium charge could be further reduced or waived entirely consistent with NSCC
rules. 291

282
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021). See Finding 1(c) for further detail on
trading restrictions imposed.
283
Interview with G. Howard (Robinhood) (Jan. 07, 2022).
284
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021). At approximately 9:45 a.m., Tim
Hulse (Risk Management Executive at DTCC) had a follow up conversation with Dan Gallagher and Gretchen Howard
to further discuss DTCC’s request for additional information concerning Robinhood’s liquidity and capital. Robinhood
and DTCC officials also had a call at approximately 1:30 p.m. to discuss clearing fund requirements applicable to
Robinhood as well as Robinhood’s available liquidity lines and plans to raise additional capital. DTCC officials on
this call included members of the Risk Committee. Robinhood officials on this call included Gretchen Howard, Dan
Gallagher, and Jim Swartwout. The call lasted approximately 20 minutes.
285
The approximately $876 million amount that was established as the modified ECP charge was determined in
accordance with a methodology that the NSCC had used in certain prior cases where it had modified an assessed
charge.
286
Email from General Counsel for DTCC General Counsel for DTCC to Committee staff (Aug. 03, 2021).
287
Id.
288
Id.; DTCC briefing with the Committee (Sept. 15, 2021).
289
DTCC briefing with the Committee (Sept. 15, 2021); Email from General Counsel for DTCC to Committee staff
(Aug. 03, 2021).
290
DTCC briefing with the Committee (Sept. 15, 2021).
291
Id.; Mr. Gallagher expressed that he did not recall all of the details of this particular conversation.
62
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At 9:11 a.m. EST, 19 minutes before the market opened, Robinhood Securities received
an updated deposit requirement notice from the NSCC that outlined a total deposit requirement of
approximately $1.4 billion with a reduction in the Excess Capital Premium charge to $0. 292 This
left Robinhood needing to meet an overall collateral deficit at the NSCC of approximately $734
million by NSCC’s 10:00am
deadline. Subsequent to receiving
this updated deposit requirement
notice, Robinhood wired the
approximately $734 million
remaining balance and satisfied the
reduced aggregate deposit
AT 9:11 A.M. EST, 19 MINUTES BEFORE requirement of approximately $1.4
THE MARKET OPENED, ROBINHOOD billion. 293 According to Robinhood
SECURITIES RECEIVED AN UPDATED executives, at no time during the
course of its conversations about
DEPOSIT REQUIREMENT NOTICE FROM THE
Excess Capital Premium charges
NSCC THAT OUTLINED A TOTAL DEPOSIT did DTCC personnel explain to
REQUIREMENT OF APPROXIMATELY $1.4 Robinhood Securities their precise
BILLION WITH A REDUCTION IN THE EXCESS rationale for ultimately waiving the
Excess Capital Premium charge
CAPITAL PREMIUM CHARGE TO $0. and whether this waiver was
connected to the various remedial
measures that Robinhood informed
them that it would be taking. 294 In
addition, Robinhood did not
subsequently obtain, or seek, a
further confirmation from DTCC
295
about what prompted the issuance of the waiver. In interviews with Committee staff,
Robinhood’s executives expressed relief at having received the benefit of this waiver, but could
not draw conclusions as to why the NSCC ultimately decided to exercise its discretionary authority
to issue it. 296

Six NSCC member firms generated Excess Capital Premium charges on the morning of
January 28, 2021. NSCC officials explained to Committee staff that they ultimately decided to
issue an across-the-board waiver of Excess Capital Premium charges to all member firms that were
assessed such a charge on January 28, 2021, due to concerns that applying the charge as assessed

292
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
293
Id.
294
Interview with J. Swartwout (Robinhood) (May 05, 2021); Interview with J. Swartwout (Robinhood) (May 21,
2021); Interview with G. Howard (Robinhood) (Jun. 11, 2021).
295
Interview with J. Swartwout (Robinhood) (May 21, 2021).
296
Id.; Interview with G. Howard (Robinhood) (Jun. 11, 2021); NSCC, NSCC Rules and Procedures – Procedure XV
I(B)(2) (Jan. 01, 2021). NSCC is granted broad discretion to waive Excess Capital Premium charges pursuant to
existing NSCC rules and, thus, was acting within its regular authority when it made the determination to waive these
charges.
63
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could have created systemic risk to the market. NSCC explained that extraordinary spike in market
volatility, particularly in meme stocks, was a material contributor to the elevated clearing fund
requirements for several firms, including most of those that were subject to Excess Capital
Premium Charges that day. Therefore, it determined that it would not be appropriate to apply the
charge. 297

Without the NSCC’s waiver of Robinhood’s Excess Capital Premium charge, Robinhood’s
nonpayment would have constituted a “serious rule violation” according to the NSCC’s rules. 298
When a clearing-broker cannot deposit the required collateral, the member is in default to the
clearinghouse and NSCC may “cease to act” for that member under its rules, as the NSCC did for
Lehman Brothers on September 24, 2008 and MF Global on October 31, 2011. 299 When NSCC
ceases to act, the clearinghouse assumes control of the defaulted member’s portfolio and liquidates
it. 300 This is done to limit the risk that the defaulted member poses to NSCC and to other non-
defaulting NSCC members, who can be subject to mutualized losses if the collateral already held
by NSCC is insufficient to cover losses on the defaulter’s portfolio. 301 Robinhood leadership
remained aware during the morning of January 28, 2021 that the NSCC could effectively eliminate
the company’s ability to clear their client’s trades and liquidate the firm’s holdings. 302

While Robinhood’s senior staff engaged in extensive crisis management on the morning of
January 28, 2021, to avoid such a possibility, Robinhood Financial President and COO David
Dusseault, whose communications from earlier in the week emphasized that among his main
priorities was avoiding negative press, expressed doubt that DTCC would “shut (Robinhood)
down” as a result of its collateral obligations. 303

297
Testimony of Michael C. Bodson, Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide, Part III, 117th Cong. (May 06, 2021).
298
DTCC briefing with the Committee (Jun. 17, 2021).
299
National Securities Clearing Corporation, Lehman Brothers, Inc. Closeout – Deadline for Submission of Member
Closeout Details to NSCC for Security Balance Orders including CNS Receive and Deliver Orders (Oct. 31, 2008);
National Securities Clearing Corporation, NSCC CEASES TO ACT – MF GLOBAL INC. (MEMBER NOS. 120
AND 650) (Oct. 31, 2011).
300
Ceasing to act requires board of directors’ approval under NSCC’s rules. A recommendation to cease to act would
originate with the Risk team which, time permitting, would convene the Management Risk Committee to approve the
recommendation to the Board.
301
DTCC briefing with the Committee (Jun. 17, 2021).
302
Interview with G. Howard (Robinhood) (May 11, 2021).
303
RH_HFSC_00007111 (on file with the Committee).
64
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Figure 36: RH_HFSC_00007111 304

Dusseault commented to Committee staff that he made this comment to give other
employees comfort while the firm was navigating the early morning of January 28, 2021, before
the DTCC granted its waiver. 305 When discussing the matter with other Robinhood employees
later in the day on January 28, 2021, Dusseault stated that the DTCC had a reputation for asking
for large amounts of collateral. Dusseault commented to Committee staff that he made this
statement based on his decades of experience working for other broker-dealers. 306

Figure 37: RH_HFSC_00043294 307

304
Id.
305
Interview with D. Dusseault (Robinhood) (Jan. 05, 2022).
306
Id.
307
RH_HFSC_00043294 (on file with the Committee).
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o. Robinhood asserted to the public and testified to the Committee that the company
was “always comfortable with [its] liquidity” leading up to its historic trading
restrictions, despite the actions undertaken by Robinhood’s executive leadership to
respond to liquidity issues it faced in the days leading up to the Meme Stock Market
Event.

The NSCC waived Robinhood’s Excess Capital Premium charge at approximately 9:11 am
EST. After the conclusion of the trading day, at 7:00 p.m. EST, Robinhood CEO Vlad Tenev
appeared on CNBC and stated that, “there’s no liquidity problem.” 308 Furthermore, on February
18, 2021, Vlad Tenev testified before this Committee and stated that, “we were always comfortable
with our liquidity.” 309

CHAIRWOMAN WATERS: … Mr. Tenev, you explained that Robinhood restricted
transactions in certain securities to meet demands coming from your clearinghouse, and
yet, on January 28th, you represented to the media that there was no liquidity problem.
Isn’t it true that being concerned about having enough capital to meet deposit
requirements—isn’t that a liquidity problem? Could you just answer yes or no?

MR. TENEV: Chairwoman Waters, I appreciate the opportunity to address that.

CHAIRWOMAN WATERS: Just yes or no.

MR. TENEV: We always felt comfortable with our liquidity and the additional
capital that Robinhood raised—

CHAIRWOMAN WATERS: Please answer yes or no.

MR. TENEV: We always felt—

CHAIRWOMAN WATERS: Reclaiming my time, I don’t have time, I just need a yes-
or- no answer.

MR. TENEV: I stand by my statement. The additional capital we raised wasn’t to meet
capital requirements or deposit requirements—

308
Kevin Stankiewicz, Robinhood CEO: Tapping credit lines is proactive, not a sign of cash crunch in GameStop
frenzy, CNBC (Jan. 29, 2021).
309
House Committee on Financial Services, Game Stopped? Who Wins and Loses When Short Sellers, Social Media,
and Retail Investors Collide, Part III, 117th Cong. (May 06, 2021).
66
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Although Tenev claimed that Robinhood “was always comfortable with our liquidity,”
Tenev was aware of the need to manage the firm’s liquidity relative to the volatility in meme stock
trading leading up to the Meme Stock Market Event. 310

Figure 38: RH_HFSC_00007154 311

Robinhood Markets Chief Operating Officer, Gretchen Howard, described her role to
Committee staff as a “train conductor” who works to place “the right leaders with the right skill
sets in the right environments so that they can run those businesses effectively. 312 After receiving
a text from Jim Swartwout, the head of Robinhood’s clearing operation, on the morning of January
28, 2021 that Robinhood was experiencing a “Huge liquidity issue,” 313Howard sent numerous
communications to Robinhood’s Chief Financial Officer, Chief Marketing & Communications
Officer, and other leaders at the company representing her belief that the firm was experiencing a
“huge liquidity issue with nscc.” 314

Committee staff asked Gretchen Howard about the disconnect between how the company
communicated regarding the issues with meeting its NSCC collateral obligations inside the firm

310
RH_HFSC_00007154 (on file with the Committee).
311
Id.
312
Interview with G. Howard (Robinhood) (Jan. 07, 2022).
313
RH_HFSC_00011657 (on file with the Committee).
314
RH_HFSC_00042082 (on file with the Committee).
67
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and outside the firm. 315 Howard commented to Committee staff that her internal statements about
liquidity were a first reaction after being woken up so early and first learning of the situation, but
after the NSCC issued a waiver, Robinhood was comfortable with its liquidity and staff moved on
to handle other operational concerns. 316 Yet the Committee’s investigation demonstrates that
Robinhood was concerned about its liquidity position and had been in the days leading up to
January 28, 2021. It was only the DTCC’s willingness to waive the largest component of
Robinhood’s January 28, 2021 collateral obligations that gave Robinhood’s leadership the
breathing room to focus on other matters.

In fact, after the NSCC waived the Excess Capital Premium charge on January 28, 2021
Robinhood continued to seek reductions to its “core” NSCC deposit requirements, as reflected in
its Value-at-Risk charge, beyond the initial request by Gretchen Howard. 317 Specifically, at
approximately 11:00 a.m. EST, Robert Crain, Executive Director, and another colleague in
DTCC’s Risk Department spoke with Robinhood’s Head of Securities Processing by phone. 318
During that call, Robinhood requested a reduction in its Value-at-Risk charge for that day. 319
DTCC officials indicated that a reduction in the Value-at-Risk charge was not available. 320

During a subsequent 12:00 p.m. call, Robinhood Securities’ Director of Financial
Operations, a senior manager in Robinhood’s treasury department, and Robinhood Securities’
Head of Securities Processing spoke with Robert Crain, and discussed Robinhood’s request for
additional information about the calculation of the Value-at-Risk charge with Robinhood again
requesting a reduction of its Value-at-Risk charge for the day. 321 DTCC officials once again
indicated to Robinhood that a reduction in the Value-at-Risk charge was neither available nor
permitted by the publicly available NSCC rules. 322

To meet NSCC collateral deposit requirements, clearing brokers such as Robinhood
Securities typically access their own balance sheet. Many also have access to parent company
funding. They typically also arrange for the availability of credit facilities with lending institutions
that can be drawn down from as needed. Accounting for its various funding sources, Robinhood
Securities’ maximum cash balance prior to remitting its NSCC collateral deposit on the morning
of January 28, 2021, was approximately $1.44 billion. While $1.44 billion represents Robinhood’s
peak available liquidity on the morning of January 28, 2021, Robinhood senior leadership

315
Interview with G. Howard (Robinhood) (Jan. 07, 2022).
316
Id.
317
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021). Interview with R. Crain (DTCC) (Sept.
17, 2021); DTCC briefing with the Committee (Sept. 17, 2021).
318
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021); Interview with R. Crain (DTCC) (Sept.
17, 2021); DTCC briefing with the Committee (Sept. 17, 2021).
319
Interview with R. Crain (DTCC) (Sept. 17, 2021); DTCC briefing with the Committee (Sept. 17, 2021).
320
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021).
321
Id.; Interview with R. Crain (DTCC) (Sept. 17, 2021); DTCC briefing with the Committee (Sept. 17, 2021).
322
Interview with R. Crain (DTCC) (Sept. 17, 2021); DTCC briefing with the Committee (Sept. 17, 2021).
68
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understood they had approximately $600 million available cash, as represented to the NSCC and
memorialized in an email by a Deputy General Counsel at the DTCC. 323

Further complicating matters, throughout the day of January 28, 2021, a number of
Robinhood’s credit counterparties, including Barclays, US Bank, and Bank of Montreal, reached
out expressing concerns about the company’s liquidity arrangements. 324 For instance, Robinhood’s
circumstances “caught the attention of folks at the top of (the) firm,” at Barclays, one of
Robinhood’s credit counterparties. 325 As a Managing Director at Barclays communicated to
Robinhood’s Treasurer on January 28, 2021, when asking for more information to better
understand Robinhood’s liquidity position, “the ask comes from a very high level of our firm.” 326

Even accounting for the approximately $700 million of collateral already on deposit with
the NSCC on the morning of January 28, 2021, Robinhood would not have had the resources to
post an aggregate of approximately $3.7 billion of collateral. 327 Jim Swartwout acknowledged this
during interviews with Committee staff and Vlad Tenev also testified before this Committee that
Robinhood did not have sufficient capital on hand when the company first received deposit notice
from the NSCC at 5:11 a.m. EST on January 28, 2021, 328 stating “at that moment, we would not
have been able to post the $3 billion in collateral.”

The Committee’s investigation further revealed that, even after exhausting all its available
liquidity sources, Robinhood would have been unable to meet the collateral requirements by the
10:00 a.m. EST deadline. In other words, but for the NSCC’s decision to waive the Excess Capital
Premium charge, Robinhood Securities would have defaulted on its daily collateral deposit
requirement upon the 10:00 a.m. deadline, which seems at odds with statements made by the
company’s executive leadership regarding the firm’s liquidity.

The consequences when a broker-dealer defaults can be severe for the firm, its customers,
other clearing firm members, and the stock market. Indeed, FINRA monitored Robinhood and
other broker-dealers closely throughout the day on January 28, 2021, considering such
contingencies as whether troubled companies could potentially default, which could lead to them
liquidating their positions and requiring the Securities Investor Protection Corporation (SIPC) to
step in to protect investors. 329 Had Robinhood been forced to extend all of its available capital to
323
As of January 28, 2021, Robinhood Securities had access to a parent company line of credit of $550 million, of
which it had previously drawn $300 million, leaving an additional $250 million available to meet the 10:00 a.m.
collateral deposit deadline. Robinhood Securities also had access to a secured credit line of $550 million that remained
unutilized during the weeks of January 25, 2021 and February 1, 2021. Robinhood Markets also had access to a $600
million credit line, which it drew from January 27, 2021, in the amount of $500 million and a further amount of $100
million on January 28, 2021, as part of its normal procedures, and it therefore was depleted and unavailable. Email
from Counsel for Robinhood to Committee staff (May 20, 2021).
324
RH_HFSC_00022140 (on file with the Committee); RH_HFSC_00022058 and RH_HFSC_00022049 (on file with
the Committee).
325
RH_HFSC_00022140 (on file with the Committee).
326
Id.
327
RH_HFSC_00000862 (on file with the Committee).
328
House Committee on Financial Services, Testimony of Vlad Tenev, Game Stopped? Who Wins and Loses When
Short Sellers, Social Media, and Retail Investors Collide, Part III, 117th Cong. (May 06, 2021).
329
FINRA briefing with the Committee (Sept. 29, 2021).
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meet its unanticipated regulatory clearing obligations, effectively defaulting on its obligations, the
company would have faced a threat to its ability to operate as a clearing broker altogether.

Gretchen Howard acknowledged in interviews with Committee staff that the company
understood that if it defaulted on this obligation, the NSCC would have had the right to effectively
shut down Robinhood’s ability to clear trades for its clients. 330 Although Vlad Tenev testified to
the Committee that Robinhood‘s “risk management processes worked appropriately to keep
[Robinhood] in compliance with all of our deposit requirements and collateral requirements,” the
Committee staff‘s investigation has revealed that Robinhood was unprepared to meet its collateral
deposit requirements on January 28, 2021, both from a liquidity as well as a risk planning
perspective. 331

The company was only saved from defaulting on its daily collateral deposit requirement
by a discretionary and unexplained waiver issued by the NSCC over which Robinhood had no
control. In other words, Robinhood’s risk management processes did not work well to predict and
avert the risk of default that materialized. Rather, Robinhood’s risk management processes failed
and wider risk to Robinhood’s customers was only averted due to the NSCC’s exercise of
discretion.

This was not simply a mistake of operational balance sheet management by Robinhood,
but a more fundamental failure to adequately capitalize the firm, maintain adequate liquidity
arrangements relative to the firm’s business model and risk profile, and accurately predict and
prepare for NSCC deposit requirements as set forth in publicly available rules and based on
customer trading activity. Instead of making appropriate arrangements to be prepared for the spike
in collateral deposit requirements experienced on January 28, 2021, as would be called for by
effective risk management processes, Robinhood’s failure to do so required the firm to focus on
remedial measures after the fact.

p. Robinhood adopted more extensive trading restrictions for a longer period of time
relative to other broker-dealers that imposed comparable restrictions.

Robinhood’s trading restrictions consisted of a blanket prohibition on the purchase of
certain highly volatile stocks followed by strict limits on 50 securities that individual customers
could purchase on its platform. The public, including many of Robinhood’s own customers,
received such severe restrictions poorly. 332

Prior to January 28, 2021, Robinhood adopted a number of trading restrictions that were
consistent with what was occurring in the wider industry, including gradually increasing margin

330
Interview with G. Howard (Robinhood) (Jun. 11, 2021).
331
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part I (Feb. 18, 2021).
332
Robinhood Markets CEO, Vlad Tenev’s personal information was somehow released to the public and he received
numerous threatening and vulgar messages on his personal cellphone targeting himself and his family throughout the
day of January 28, 2021. Email and attachment to email from counsel for Vladimir Tenev to Committee staff (Nov.
10, 2021) (on file with the Committee).
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requirements for its customers purchasing GME. 333 On January 26, 2021, for instance, Robinhood
Securities, Robinhood’s clearing broker, increased initial and maintenance margin requirements
for GME to 80% and, later in the day, increased initial margin requirements for GME to 100%. 334
Margin requirements on GME were later increased to 100% on January 27, 2021 which made
GME non-marginable. 335 As market volatility continued throughout the week of January 25, 2021,
Robinhood gradually extended such requirements and on January 27 and 28, 2021 and increased
the initial and maintenance margins requirements for 11 other volatile equities to 100%. 336
Robinhood also reduced the total amount of GME options contracts each customer could purchase
from 5,000 to 3,000 on January 26, 2021, meaning each customer could only purchase option
contracts on 3,000 GME stocks. 337

On January 27, 2021, Robinhood further reduced these position limits for GME options
from 3,000 to 300, and then from 300 to 100. 338 That same day, approximately 604,000 new
customers downloaded the company’s app for the first time, and Robinhood recorded one of its
then-highest daily active user numbers of approximately 9.4 million. 339 In addition, due to its
heightened exposure to volatile securities, on January 27, 2021, the NSCC notified Robinhood of
an intraday charge of approximately $411 million, which brought the total end of day deposit
requirement to approximately $693 million, as more fully described previously in this section.
Thereafter, Robinhood personnel anticipated implementing more restrictive measures, such as
position limits on equities, which would restrict the total number of stocks a customer could own,
and PCO restrictions on certain volatile stocks, which would prohibit customers from purchasing
those stocks altogether for the duration of the PCO restriction. 340, 341

After the market closed on the night of January 27, 2021, Robinhood Securities imposed
$10,000 position limits for all customer accounts on six stocks, including GME, AMC, BB,
Express, Inc. (EXPR), KOSS, and NOK, meaning that for the duration of the position limit,
customers could not make new purchases of the restricted stocks if such purchase would result in
the customer owning more than $10,000 total as a result. 342 Robinhood also formulated a plan to
impose PCO restrictions for January 28 and January 29, 2021 for GME options contracts expiring

333
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
334
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
335
Id.
336
These included Dillard’s, Inc. (DDS), Ligand Pharmaceuticals (LGND), Bed Bath & Beyond Inc. (BBBY),
National Beverage Corp. (FIZZ), AMC Networks Inc. (AMCX), Macerich (MAC), Academy Sports and Outdoors
Inc (ASO), SunPower Corp. (SPWR), Tanger Factory Outlet Centers Inc. (SKT), Accelerate Diagnostics Inc. (AXDX)
and BlackBerry Ltd. (BB). Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman
Green (Mar. 29, 2021).
337
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
338
Id.
339
Id.
340
Id.; Interview with J. Swartwout (Robinhood) (May 05, 2021).
341
As used in this report, “position-closing only” or “PCO” refers to the practice of only permitting sales of a subject
security while prohibiting purchases of that same security.
342
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
71
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on January 29, 2021. 343 PCO restrictions were ultimately placed on options contracts expiring on
January 29, 2021 for each of GME, American Airlines (AAL), AMC, BB, BBBY, NOK and
Sundial Growers (SNDL). 344

Faced with an extremely
large deposit requirement on the
morning of January 28, 2021, as
discussed previously in this section,
and which Robinhood would have
been unable to satisfy, the company
attempted to mitigate the volatility
that it believed was driving its FINRA COMMENTED TO COMMITTEE STAFF
collateral deposit requirements. 345 THAT THEY CONSIDER USING PCO
Throughout the morning of January RESTRICTIONS AS A RISK MITIGATION
28, 2021, specifically between 6:30 TACTIC TO BE EXTRAORDINARY.
a.m. EST and 7:30 a.m. EST,
Robinhood Securities employees
began to impose position closing
only (PCO) restrictions on certain
highly volatile symbols (and
corresponding options contracts)
which would prohibit customers
from purchasing these stocks altogether. 346 Broker-dealers rarely introduce position closing only
(PCO) restrictions. Usually, broker-dealers will only introduce PCO restrictions to comply with
regulatory obligations, e.g., a stock has been delisted or the stock was offered by a company which
has been banned from the U.S. equities market. 347 FINRA commented to Committee staff that
they consider using PCO restrictions as a risk mitigation tactic to be extraordinary. 348 Robinhood

343
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
Robinhood Financial (RHF) and Robinhood Securities (RHS) decided to commence their standard option closeout
procedure earlier in the afternoon on Friday, January 29, 2021, and would also close out riskier positions with the
intended aim of reducing potential losses to customers. Because RHS was anticipating these steps on January 29, 2021
for GameStop (GME) and AMC Entertainment Holdings (AMC) options contracts expiring on January 29, 2021, it
believed it suitable to also prohibit customers from buying these options contracts on January 28 or 29, 2021 (given
that it would be closed on the same day or the following day).
344
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
The PCO restrictions on these options contracts remained in place when PCO restrictions were otherwise lifted on
January 29, 2021.
345
Interview with J. Swartwout (Robinhood) (May 05, 2021).
346
Restricted stocks included: American Airlines (AAL), AMC Entertainment Holdings (AMC), BlackBerry Ltd.
(BB), Bed Bath & Beyond Inc. (BBBY), Castor Maritime Inc. (CTRM), Express, Inc. (EXPR), GameStop (GME),
Koss Corp. (KOSS), Naked Brand Group Ltd. (NKD), Nokia Corp. (NOK), Sundial Growers (SNDL), Tootsie Roll
Industries Inc. (TR), and Trivago N.V. (TRVG).Appendix A to Letter from counsel for Robinhood to Chairwoman
Waters and Chairman Green (Mar. 29, 2021); House Committee on Financial Services, Testimony of Vlad Tenev,
Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III, 117th
Cong. (May 06, 2021).
347
FINRA briefing with the Committee (Jul. 09, 2021).
348
Id.
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Securities ultimately lifted these PCO restrictions prior to market open on January 29, 2021,
relying instead on strict limits on the numbers of equity shares that its customers could purchase
in these and other symbols commencing on January 29, 2021 and PCO restrictions on fractional
purchases of 13 stocks. 349

On January 29, 2021, Robinhood Securities imposed position limits on the top 50 symbols
that the company assessed were driving its heightened Value-at-Risk charge, with only one equity
share per customer in aggregate permitted to be purchased for 35 symbols, and a maximum of five
for the rest. 350 In addition, for the entire duration that trade restrictions were in place for each of
these stocks, customers were prohibited from purchasing shares entirely if they already held more
than the total number of shares permitted to be purchased in accordance with each position limit.

By restricting the purchasing of meme stocks in this manner, Robinhood avoided extending
its PCO restrictions in name only, while virtually eliminating its customers’ ability to meaningfully
purchase meme stocks through extremely strict position limits. Indeed, for most customers who
had more than a de minimis existing position in these stocks (i.e., who owned a single share, or
five shares in the case of the far lesser number of stocks subject to a 5-share limit), the position
limits operated as de facto PCO restrictions, as such customers could not purchase any new shares
of these stocks and could only sell them.

By the time of market open on February 1, 2021, equity position limits remained in place
for AMC, BB, EXPR, GME, Genius Brands International, Inc. (GNUS), KOSS, Naked Brand
Group Ltd. (NAKD), and NOK, but had been removed for the other symbols. 351 During the
morning of February 2, 2021, equity position limits remained in place on AMC, EXPR, GME,
NAKD, and NOK, but had been lifted on BB, GNUS, and KOSS. 352 By market open on February
3, 2021, equity position limits had been removed on EXPR, NAKD, and NOK, but remained in
place on AMC and GME, which remained in place until February 4, 2021 after market hours, after
which all trading in these symbols was also reopened and unrestricted. 353 Robinhood also
maintained PCO restrictions on fractional shares for 13 stocks through February 10, 2021.

According to representatives for Robinhood, throughout the time that the company had
equity position limits in place, it regularly monitored and reviewed such equity position limits and,
as a general matter, modified its position limits on specific securities when it believed that it could

349
In addition, RHS had also introduced PCO restrictions on the purchase of fractional shares in American Airlines
Group Inc. (AAL), AMC Entertainment Holdings (AMC), BlackBerry Ltd. (BB), Bed Bath & Beyond Inc. (BBBY),
Castor Maritime Inc. (CTRM), Express, Inc. (EXPR), GameStop (GME), Koss Corp. (KOSS), Naked Brand Group
Ltd. (NAKD), Nokia Corp. (NOK), Sundial Growers, Inc. (SNDL), Tootsie Roll Industries, Inc. (TR) and Trivago
N.V. (TRVG). The last such restriction was removed on February 10. Appendix A to Letter from counsel for
Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
350
Appendix A to Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Mar. 29, 2021).
351
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Jul. 09, 2021).
352
Id.
353
Id. RHS also imposed limits on option contact purchases during this same time period, and all such restrictions
which were lifted by the evening of February 4. Options contacts purchases were limited with respect to: AAL, AMC
Entertainment Holdings (AMC), BlackBerry Ltd. (BB), Bed Bath & Beyond Inc. (BBBY), Express, Inc. (EXPR),
GameStop (GME), and Genius Brands International, Inc. (GNUS).
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stay within pre-established internal risk limits after modifying or eliminating the relevant
restrictions and notified its customers through blog posts, emails, and cards in their mobile app. 354
Robinhood executives have acknowledged to Committee staff that these measures were
specifically designed to drive down the volatility in Robinhood’s trading book which resulted in
heightened Value-at-Risk charges and an Excess Capital Premium charge. 355 Robinhood
executives hoped that these restrictions would encourage the NSCC to reduce its collateral deposit
requirement. 356

In addition to implementing trading restrictions, Robinhood leadership immediately began
raising money on the morning of January 28, 2021. Robinhood successfully completed an
emergency capital raising and by the end of the day on January 29, 2021, and raised and received
approximately $1.5 billion of new funding in exchange for the issuance of convertible notes to
participating investors. 357 By the end of the day on February 1, 2021, Robinhood raised and
received a cumulative amount of approximately $2.2 billion in new funding. By the close of
February 2, 2021, it raised and received a cumulative amount of approximately $3.05 billion in
additional funding. 358 According to Robinhood’s internal models, the firm required approximately
$2.5 billion in additional capital in order to remove all trading restrictions, return to an unrestricted
trading environment, and maintain an additional capital cushion to be adequately prepared for
potential collateral deposit spikes driven by continued market volatility. 359 This amount of capital
was described by Robinhood’s CFO as sufficient to handle future shock scenarios and extreme
edge cases. 360

Additionally, by January 29, 2021, Robinhood’s start of day NSCC collateral deposit
requirement had declined to approximately $354 million, leaving Robinhood with a collateral
deposit surplus with the NSCC of approximately $1.08 billion. 361 The dramatic decline in
Robinhood’s collateral deposit requirement as compared to the prior day’s opening requirement of
$3.7 billion was likely due to the impact of the PCO restrictions that had been adopted on January
28, 2021. Because only sell orders were permitted, the overall net buy position of Robinhood’s
trading book had declined and the Value-at-Risk charge had decreased.

While the opening day NSCC collateral deposit requirement for Robinhood increased to
approximately $753 million on February 1, 2021, Robinhood continued to have an approximately

354
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Jul. 09, 2021).
355
Interview with J. Swartwout (Robinhood) (May 05, 2021).
356
Id.
357
Convertible notes are debt instruments that convert into equity securities under specified conditions as set forth in
the instrument creating the convertible notes. See Finding 1(n) for further details about the Robinhood capital raising.
358
An additional amount of approximately $424.5 million in new funding came in during the remainder of that week,
and another $70 million was received on 16th February, which amounts to a total amount of new funding from the
Tranche I and Tranche II notes offering of approximately $3.55. billion. See Letter from counsel for Robinhood to
Chairwoman Waters and Chairman Green (Jun. 02, 2021).
359
Interview with J. Warnick (Robinhood) (Jun. 10, 2021).
360
Id.
361
Email and attachments to email from Counsel for Robinhood to Committee staff (May 20, 2021) (on file with the
Committee); RH_HFSC_00000866 (on file with the Committee).
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$109.9 million surplus on deposit with the NSCC. 362 For the period from February 2, 2021, through
February 5, 2021, Robinhood’s start of day and end of day collateral deposit requirements ranged
between approximately $211 million and $314 million, which were well within the levels of capital
available to the firm. In fact, apart from Friday, February 5, 2021, when Robinhood had a collateral
deposit deficit of approximately $57.4 million, Robinhood maintained a surplus in its collateral
deposit account with the NSCC for the week of February 1, 2021. 363

Given that Robinhood’s collateral deposit requirements were well within manageable
levels by January 29, 2021, and the company had raised the capital that its models suggested was
sufficient to handle shock scenarios by the end of the day on February 2, 2021, it is unclear why
the company prohibited purchasing fractional shares of certain meme stocks, with the last
fractional share trading restriction being lifted on February 10, 2021, and maintained position
limits in GME and AMC securities until February 5, 2021. While Robinhood told Committee staff
that it maintained these restrictions for prudential reasons, by Robinhood’s own estimations, the
firm should have been able to return to an unrestricted trading environment by February 2, 2021,
at the latest. 364

Robinhood’s trading restrictions were most likely a direct consequence of inadequate
liquidity at Robinhood. Robinhood’s inability to anticipate and plan for the spike in its NSCC
collateral deposit requirements meant that it did not arrange for sufficient liquidity ahead of time
and thereafter did not meet its normal operating requirements to act as a clearing broker. This
meant that Robinhood had to adopt stringent trading restrictions to lower volatility within
parameters that it had the resources to fund. Even though Robinhood was subject to the DTCC’s
Enhanced Surveillance at the time, which theoretically entails the clearinghouse conducting more
thorough due diligence of the firm on a more regular basis, DTCC remained largely unaware that
Robinhood’s internal procedures for calculating collateral charges did not calculate the Excess
Capital Premium charge. 365 When asked whether Robinhood communicated any liquidity concerns
Robinhood may have had to the DTCC on the morning of January 28, 2021, Robinhood Chief
Legal Officer Dan Gallagher could not recall with specificity. 366

Ultimately, given a confusing collateral charge regime by the DTCC and incomplete
models within Robinhood, Robinhood did not have a sufficient capital cushion to support an
unrestricted trading environment for its customers during the Meme Stock Market Event and for
days afterwards. As a result, Robinhood had to adopt the most stringent and longest lasting trading
restrictions of any broker-dealer during the Meme Stock Market Event. Had Robinhood more
adequately anticipated heightened collateral deposit requirements or maintained an adequate
capital cushion ahead of time, it likely would have been able to adopt more modest restrictions.
With reduced or lighter restrictions, ordinary retail customers who use the Robinhood platform to

362
RH_HFSC_00000870 (on file with the Committee).
363
RH_HFSC_00000872 – 78 (on file with the Committee).
364
Interview with J. Swartwout (Robinhood) (Oct. 22, 2021).
365
DTCC briefing with the Committee (Jul. 06, 2021); DTCC briefing with the Committee (Jul. 22, 2021).
366
Interview with D. Gallagher (Robinhood) (Sept. 13, 2021).
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access public markets might not have been frozen out of the restricted stocks for as long as they
were.

Key Finding #2: Broker-dealers facing the greatest operational and liquidity
concerns took the most expansive trading restrictions, although multiple
broker-dealers introduced trading restrictions for a variety of risk
management reasons during the Meme Stock Market Event.

The restrictions that
Robinhood implemented were Broker-dealers facing the greatest
the most stringent and longest operational and liquidity concerns took
lasting that any clearing broker the most expansive trading restrictions,
imposed during the Meme
Stock Market Event. This was
although multiple broker-dealers
in line with a trend that introduced trading restrictions for a
occurred throughout the variety of risk management reasons
industry—namely that, with during the Meme Stock Market Event.
one exception, firms that
confronted the most serious
liquidity problems imposed the most stringent restrictions.

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Figure 39: Approximate Duration of Formal Trading Restrictions Placed on Equities 367

Jan 28 -
Jan 28 Jan 29-30 Feb 1 Feb 2 Feb 3-4
Feb 10
Placed Prohibited
Placed Placed
Placed PCO restrictions position fractional
position position Placed position
Robinhood 368 on 13 stocks from market limits on shares
limits 369 on limits on limits on 5 stocks
open to close AMC and purchases for
50 stocks 8 stocks
GME 13 stocks

Placed PCO restrictions
Interactive
on 22 stocks from about 8 X 371 X X X X
Brokers 370 a.m. through 10 p.m.

Placed PCO restrictions
Apex 372* on AMC, GME, and X X X X X
NOK from 11 am to 2 pm

Placed PCO
restrictions on
Axos Clearing 373* X X X AMC, BB, GME, X X
and NOK from
market open to 3 pm

Placed PCO restrictions
E*TRADE 374 on AMC and GME from X X X X X
3 pm through close

Charles Schwab /
X X X X X X
TD Ameritrade 375

367
This chart summarizes in simplified form trading restrictions for those clearing brokers within the scope of the
Committee’s investigation. This chart does not include steps that broker-dealers took to limit the extension of credit
to customers, including increased margin requirements, short sale restrictions or restrictions placed on options trading,
some combination of which all the clearing brokers within the scope of its investigation adopted to some degree.
368
For further detail, see Finding 1.; The limits on GME and AMC were lifted on the evening of February 4, 2021,
after market hours. Only one symbol, not all 13 symbols, had a fractional PCO in place through February 10, 2021;
the remaining symbols had theirs lifted through February 3, 2021.
369
In this report, “position limits” refers to the practice by broker-dealers of imposing strict numerical limits on the
number of subject securities that customers can purchase on that broker-dealer’s trading platform.
370
According to representatives for Interactive Brokers, the firm restricted trading as a risk management measure to
protect the firm and customers from outsize losses during abnormal market behavior and not due to capital and
liquidity concerns. For further detail, see Finding 2(d).
371
“X” indicates that no action was taken to formally prohibit trading activity in equities.
372
For further detail, see Finding 2(b).
373
For further detail, see Finding 2(c).
374
E*TRADE’s trade restrictions stemmed from a technology outage on its platform rather than liquidity concerns or
difficulty meeting collateral requirements and therefore were involuntary. For further detail, see Finding 2(e).
375
For further details, see Finding 2(d).
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In addition to the regulatory halts, numerous broker-dealers voluntarily adopted trading
restrictions during the period of the Meme Stock Market Event as partially illustrated by the above
chart. Some firms devised restrictions tailored to the risk profile of their business, while clearing
brokers required other stock trading platforms to implement restrictions.

Larger and older broker-dealers were more likely to be robustly capitalized and therefore
better able to navigate market volatility by adopting more limited trading restrictions, both in terms
of the time that such restrictions were in effect for as well as in terms of the severity of the
restrictions. 376 Certain newer clearing brokers had more limited financial resources and available
liquidity, and in some cases were forced to adopt more restrictive measures.

Interactive Brokers represents a notable outlier to this general trend. Interactive Brokers
maintained sizeable net capital reserves during the Meme Stock Market Event, but nonetheless
stated that it voluntarily enacted trading restrictions to protect its customers and its firm during a
period of acute volatility. 377 Interactive Brokers specifically characterized the market during this
time as “a volatile and unstable marketplace”, which affected its risk management approach during
the Meme Stock Market Event. 378

Several broker-dealers voluntarily placed trading restrictions on meme stocks amid the
heightened activity. Individual broker-dealers decide to impose trading restrictions according to
their own risk management calculus with limited oversight and review of such decisions by
applicable regulators. As part of their risk management practices, clearing brokers sometimes
implement various trading restrictions to manage the amount of risk in their book of business to
safeguard against the risk of absorbing losses from failed settlement by individual traders and
customers. Such measures include increasing margin requirements for purchasing options,
restricting options purchases, and limiting short sales. Position limits, or a restriction placed by the
broker-dealer on the number of shares a customer can buy or sell are rarer. 379 PCO restrictions,
whereby investors are only allowed to close or reduce existing positions, are considered
extraordinary. 380

Many broker-dealers adopted a range of relatively routine trading restrictions to mitigate
the adverse effects of market volatility during the Meme Stock Market Event. However, a subset
of clearing brokers—those that experienced actual or potential liquidity challenges due to the
magnitude of unanticipated NSCC collateral deposit requirements—generally took significantly
more stringent countermeasures.

376
In this regard, it should be noted that trade restrictions implemented by E*TRADE were the result of information
technology problems rather than liquidity and financial soundness concerns.
377
Interactive Brokers, FAQs: Securities subject to Special Requirements, Interactive Brokers (accessed Sept. 17,
2021).
378
Id.
379
FINRA briefing with the Committee (Jul. 09, 2021).
380
Id.
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a. Apex directed Webull, Ally Invest, SoFi, and hundreds of other firms that
clear their trades through Apex to prohibit purchases of certain highly
volatile stocks.

Webull operates as an introducing broker. 381 In such capacity, it does not clear its own
trades and entered into a Clearing Agreement with Apex pursuant to which Apex opens and
maintains accounts and executes, clears, and settles securities transactions that are initiated by
Webull’s customers using Webull’s trading platform. 382 Apex provides these same clearing
services to many other introducing brokers, including Ally Invest, Betterment Securities, M1
Finance, Marcus by Goldman Sachs & Co., SoFi Securities, Stash Capital, Tastyworks Inc.,
TradeZero America Inc, and hundreds more. 383 Webull and the other introducing brokers that clear
through Apex are reliant on Apex to process, clear, and settle customer trades and would be unable
to function without Apex, or another external services provider, performing these functions on
their behalf. 384 Apex, as a clearing broker, is an NSCC member firm and is responsible for
maintaining sufficient collateral deposits with the NSCC in order to meet its clearing fund
requirements and support the trading activities of the customers of all of its introducing broker
clients. Webull’s Clearing Agreement with Apex permits Apex to mandate that Webull impose
trading restrictions at Apex’s discretion. Apex has such contractual arrangements in place with the
other introducing brokers that are its customers as well. 385

On January 28, 2021, at 10:30 a.m. EST, Webull received an emergency notice via email
from Apex expressly instructing it that GME, AMC, and KOSS securities be placed into
“liquidation only” statuses on their trading systems (i.e., a PCO restriction). 386 The restriction was
stated to apply to “both equities and all options series, most importantly January 29, 2021
expiration.” 387 These restrictions effectively prohibited Webull from accepting new purchase
positions in AMC, GME, and KOSS stocks and options. 388 Apex employees confirmed to
Committee staff that the email notice mandating liquidation only settings for GME, AMC, and
KOSS was transmitted to each of the introducing brokers to which Apex provides clearing
services. 389 Webull complied with this instruction and at 11:30 a.m. EST announced the imposition

381
Webull briefing with the Committee (May 12, 2021).
382
Interview with A. Denier. (Webull) (May 20, 2021).
383
APEX-HFS000018-19 (on file with the Committee).
384
Webull briefing with the Committee (May 12, 2021); Interview with Chief Compliance Officer (Apex Clearing
Corporation) and Chief Corporate Development and Legal Officer (Peak 6 Investments), at 10 (May 20, 2021).
385
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 20, 45-46 (Jun. 16, 2021).
386
APEX-HFS000001 (on file with the Committee); Interview with Chief Compliance Officer (Apex Clearing
Corporation) and Chief Corporate Development and Legal Officer (Peak 6 Investments), at 21 (May 20, 2021).
387
APEX-HFS000001 (on file with the Committee). Positions in these same stocks had been previously set to 100%
margin and Apex.
388
Id.
389
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 21 (May 20, 2021).
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of these instructions via posts on social media, specifically on Webull’s Facebook page and via its
Twitter account. 390 Webull did not distribute notice of these restrictions in any other manner. 391

Figure 40: Twitter post from Webull on January 28, 2021 392

390
Exhibit A to Letter from General Counsel for Webull to Chairwoman Waters and Chairman Green (Feb. 09, 2021).
391
Id.
392
Letter and produced Exhibit A from General Counsel for Webull to Chairwoman Waters and Chairman Green
(Feb. 09, 2021).
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At approximately 1:54 p.m. EST, Apex distributed an emergency update to each of its
introducing brokers, including Webull, confirming that it was removing the liquidation only
restriction for GME, AMC, and KOSS, with the exception of short sells and options that had a
January 29, 2021 expiration. 393 Webull thereafter removed the trading restrictions, which lasted
for approximately 193 minutes in total. 394 At approximately 2:42 p.m. EST, Webull posted an
update to its Twitter and Facebook posts announcing the lifting of the restrictions which stated “!!
Update GME, AMC and KOSS are no longer restricted!!”. 395 Except for TradeZero America Inc.,
Apex confirmed that all the other introducing brokers that are its clients complied with its order to
cease accepting orders for the restricted securities. 396

b. Apex instructed its broker-dealer clients to restrict trading because the
company was concerned about the magnitude of a potential collateral deposit
request from the NSCC.

Apex sent instructions to the introducing brokers it works with to restrict GME, AMC, and
KOSS after receiving notice of a large collateral deposit requirement from the NSCC on the
morning of January 28, 2021. 397 Prior to market open on each trading day, each NSCC member
firm receives an automated deposit notice outlining that member firm’s clearing fund deposit
requirement for the trading day. 398 In addition to this morning clearing fund requirement notice,
NSCC makes estimated margin requirements available throughout the day in 15-minute intervals
outlining the total potential deposit requirement applicable to that member firm based on changes
in the relevant firm’s portfolio. 399 These updated estimates are referred to in the industry as

393
APEX-HFS000003 (on file with the Committee).
394
Exhibit A to Letter from General Counsel for Webull to Chairwoman Waters and Chairman Green (Feb. 09, 2021).
Functionally, it is the introducing broker that can permit or restrict trading for individual trading clients and, therefore,
once Apex communicated its directives to restrict trading and then lift trading restrictions on the relevant stocks, each
introducing broker would have implemented such instructions in accordance with its own practices. As a result, each
introducing broker would have imposed and lifted restrictions at different times. From a retail or end-customer
perspective, the precise length of the trading restrictions that impacted them would therefore be determined by which
introducing broker they held their accounts with.
395
Id. Webull’s original Twitter post announcing the restrictions was deleted between 4:25 p.m. EST and 4:26 p.m.
EST.
396
Letter from counsel for Apex Clearing Corporation to Committee staff (Aug. 31, 2021). Although TradeZero Inc.
refused to voluntarily comply with Apex’s directive, had it been necessary to do so, Apex would have had the technical
ability, had it been necessary to do so, to cease processing trades in the restricted securities originating from that
introducing broker.
397
APEX-HFS000005 (on file with the Committee).
398
DTCC, NSCC Equity Clearing & Settlement Overview: Presentation to House Staff, at slide 6 (Jun. 17, 2021).
399
DTCC briefing with the Committee (Jun. 17, 2021). Under NSCC rules, the clearinghouse has discretionary
authority to issue an intraday margin call to any of its members, demanding a member firm deposit additional collateral
to adequately manage the overall risk of the member firm’s cleared portfolio, but it is not required to do so. Slices
therefore preview potential requirements in this regard. If an intraday margin call is issued, member firms are obligated
to deposit additional collateral with the NSCC within one hour of the demand.
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“slices.” 400 The “slices” are the updates to the calculator in the NSCC’s member portal. Slices are
not sent to members but is accessed by most members’ risk management departments throughout
the day. The calculator covers core clearing fund component charges: those that are based only on
the portfolio and are designed to cover portfolio risk. The calculator does not cover non-core
charges, such as the ECP charge. 401
On the morning of January 28, 2021, prior to market open, Apex received its daily
automated NSCC deposit requirement notice which showed a collateral deficit of approximately
$68.2 million, well within the means of Apex to satisfy and, accordingly, this deposit notice did
not elicit any non-routine reaction from Apex personnel. 402 At 10 a.m. EST, however, Apex
accessed the NSCC’s portal and viewed a slice (the “10 AM Slice”) that showed a total potential
collateral deposit requirement that had increased exponentially from approximately $68.2 million
to approximately $1 billion, with a Value-at-Risk charge of $434.9 million. While the Slice did
not include information on a potential Excess Capital Premium charge, Apex calculated that it
would owe an Excess Capital Premium charge of $562.4 million based upon the Value-at-Risk
charge contained in their 10 AM Slice. 403

Under NSCC rules, the clearinghouse has discretionary authority to issue an intraday
margin call to any of its members, demanding a member firm deposit additional collateral to
adequately manage the overall risk of the member firm’s trading book. 404 If an intraday margin
call is issued, member firms are obligated to deposit additional collateral with the NSCC within
one hour of the demand. 405 Thus, Apex officials were on notice once they reviewed the 10 AM
Slice that the NSCC could demand the deposit of additional collateral. 406

400
DTCC briefing with the Committee (Jun. 17, 2021). Typically, the largest component of such charges during
ordinary trading days is the VaR charge, which represents risk associated with unsettled trades in a member firm’s
cleared portfolio. In addition, NSCC rules provide for the assessment of an Excess Capital Premium charge when
“core” margin charges for a member firm are greater than such firm’s “excess net capital” (as specified in FINRA
FOCUS Reports). In such instances, the NSCC calculates an Excess Capital Premium charge, which it requires in
addition to its baseline clearing fund requirement. Because the Excess Capital Premium charge is based on a ratio that
compares the amount by which “core” charges exceed excess net capital, it can increase sharply if a firm’s “core”
charges greatly exceed excess net capital. The purpose of the Excess Capital Premium charge is to penalize, and
therefore attempt to deter, member firms from accumulating excessive amounts of risk in their cleared portfolio as
represented by the VaR charge and other “core” charges.
401
Email and produced attachment from General Counsel for DTCC to Committee staff (Jun. 19, 2022).
402
APEX-HFS000005 (on file with the Committee).
403
APEX-HFS000009 (on file with the Committee); Interview with Chief Compliance Officer (Apex Clearing
Corporation) and Chief Corporate Development and Legal Officer (Peak 6 Investments), at 14 and 16 (Jun. 16, 2021).
Interviews with Committee staff have revealed that margin requirements had been increased by the NSCC to 118%
of notional value for AMC and 80% of notional value for GameStop (GME) by the morning of January 28, 2021.
Ordinarily, margin requirements are a fraction of the overall notional value of a trade, but due to increased margin
requirements for these stocks that were precipitated by the extreme market volatility, this would mean that for AMC,
for every dollar that a customer purchased in that symbol, clearing firm members would be required to deposit $1.18.
For GameStop (GME), every dollar that a customer purchased would necessitate an $0.80 deposit to be maintained
by the member firm.
404
DTCC briefing with the Committee (Jun. 17, 2021).
405
Id.
406
APEX-HFS000009 (on file with the Committee); DTCC briefing with the Committee (Jun. 17, 2021).
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Apex grew concerned that they may be required to meet their full collateral deposit
requirement, both the $434.9 million Value-at-Risk charge from their portal and the additional
Excess Capital Premium charge of $562.4 Apex had calculated internally at any moment, and they
would have a maximum of one hour to meet the margin call once issued. 407 At 10:15 a.m. EST
and 10:30 a.m. EST, Apex reviewed additional slices that continued to show a total potential
deposit requirement of more than $1 billion. 408 At 10:45 a.m. EST, Apex reviewed a slice
indicating a potential requirement of approximately $1.06 billion, largely consisting of a Value-
at-Risk charge of approximately $325 million and what Apex calculated to be an Excess Capital
Premium charge that had increased to approximately $607.9 million. 409

Upon receiving the 10 AM Slice, Apex personnel felt that it would be challenging for them
to meet a discretionary intraday margin call in the vicinity of $1 billion within the normal one-
hour time frame. 410 Upon receiving what appeared to be anomalous slice data, it quickly reached
out to NSCC to and confirmed that the numbers provided in Apex’s portal were accurate (which
did not include the Excess Capital Premium charge calculated internally by Apex). 411 Senior Apex
personnel, expecting trading activity to increase throughout the day and drive the requirements
even higher, decided to impose the trading restrictions on AMC, GME, and KOSS. 412 Apex
reviewed the detailed NSCC files outlining its collateral charges and estimated that at the time that
it imposed its restrictions, pending settlements for these three symbols accounted for
approximately 90% of Apex’s total potential NSCC deposit requirement. 413 Apex’s CEO, Bill
Capuzzi, approved of the decision to impose trading restrictions prior to the distribution of the
emergency notice via email that was sent to Apex’s clients. 414

407
Email from counsel for Apex to Committee staff (Jun. 20, 2022).
408
APEX-HFS000009-11 (on file with the Committee),
409
APEX-HFS000012 (on file with the Committee),
410
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 20-21 (May 20, 2021).
411
Id.
412
Id.
413
Id. at 21.
414
Id. at 44-45.
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Figure 41: Emergency notice Apex sent to customers 415

Around the same time, senior Apex personnel began considering how to inject additional
capital into the firm given that Apex could have been the recipient of an intraday margin call from
the NSCC at any moment. 416 Apex personnel were concerned that if they were not able to meet
such a prospective intraday margin call within an hour, the application of existing NSCC rules
could have resulted in the cessation of Apex’s clearing activities by the NSCC. 417 In other words,
were the intraday margin call to materialize and were Apex unable to meet it, Apex may have been
restricted from continuing its clearing operations, which in turn, could have prevented customers
of each of the introducing brokers that Apex clears for from executing trades. Apex personnel
reached out to the firm’s primary shareholder, Peak6 Investments LLC, which ultimately infused
additional capital into Apex in the amount of $100 million on January 29, 2021 and another $50
million on February 2, 2021. 418 However, Apex’s capital raising activities became less pressing

415
APEX-HFS000001 (on file with the Committee).
416
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 20-21 (May 20, 2021).
417
Id. at 21.
418
APEX-HFS000013 (on file with the Committee).
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after they received another slice at 11 a.m. EST (the “11 AM Slice”), which outlined a dramatically
lower collateral requirement. 419 Based on the information in the 11AM slice, Apex calculated that
it would not be subject to an Excess Capital Premium charge. Apex subsequently confirmed with
the NSCC on a phone call that the lower amount was accurate. 420
Apex officials represented to Committee staff that between a capital infusion from their
parent company and the use of unsecured bank credit facilities, the company would have
ultimately been successful in raising the necessary capital to meet the peak potential intraday
margin call of over $1 billion within the one-hour time frame imposed by the NSCC. 421 Peak6
ultimately injected $150 million of additional capital into Apex to bolster Apex’s ability to meet
the NSCC collateral requirements, given Apex’s expectation that extreme market volatility
would continue for the foreseeable future. 422 Once Apex confirmed that there would be no
Excess Capital Premium charge, the firm distributed an update to its introducing broker clients
confirming removal of the liquidation only policy to its introducing brokers. 423 Once these
restrictions had been removed, Apex did not reimpose them at a later stage and did not introduce
any limits on any customer’s initiation of new long positions in any security. 424

419
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 22 (May 20, 2021).
420
Id.
421
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 38-40, 55 (Jun. 16, 2021).
422
Id. at 25 (Jun. 16, 2021); Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief
Corporate Development and Legal Officer (Peak 6 Investments), at 55 (May 20, 2021). Apex also eventually increased
the aggregate amount of its available credit facilities by $250 million to better prepare for the prospect of large NSCC
collateral requirements in the future.
423
APEX-HFS000003-4 (on file with the Committee); Interview with Chief Compliance Officer (Apex Clearing
Corporation) and Chief Corporate Development and Legal Officer (Peak 6 Investments), at 18-19 (Jun. 16, 2021).
424
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 18-19 (Jun. 16, 2021).
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Figure 42: Notice sent to Apex clients informing them of the removed restrictions 425

The 11 AM Slice showed a dramatically reduced total potential deposit requirement of
approximately $164.8 million. It consisted of a Value-at-Risk charge of approximately $112.2
million and other miscellaneous charges, 426 and based on the information in the 11AM slice, Apex
calculated that it would not be subject to an Excess Capital Premium charge. $0. 427

Apex later conducted an internal investigation and discovered what led to the elimination
of its Excess Capital Premium charge, as communicated in the 11 AM Slice. 428 Its internal review
revealed an imbalance of trading activity in Apex’s trading book from January 27, 2021, the day
before, caused by a single large one sided trade when a proprietary trading firm both sold and

425
APEX-HFS000003-4 (on file with the Committee).
426
APEX-HFS000012 (on file with the Committee)
427
Id.
428
Letter from counsel for Apex Clearing Corporation to Committee (Jul. 9, 2021); Interview with Chief Compliance
Officer (Apex Clearing Corporation) and Chief Corporate Development and Legal Officer (Peak 6 Investments), at
11 and 23 (May 20, 2021).
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purchased approximately $385 million of AMC. 429 The two trades occurred within less than a
second of one another, but given the extreme volatility in AMC, the buy order went through but
the sell side of the trade required manual intervention because the price of the stock had changed
so considerably in the fraction of a second between the buy and the sell order. 430 Apex’s overnight
process for clearing trades require manual verification for trades that involve both a buy order and
sell order in rapid succession if the spread between the buy and sell order is greater than $10 net. 431

This created a temporary imbalance in trading activity, i.e., a net buy position, which
represents greater risk in a trading book and resulted in the NSCC assessing a heightened Value-
at-Risk charge to Apex. 432 Once Apex’s operations team became aware of the need to manually
acknowledge the sell-side of the trade, they promptly approved the trade. 433 The acknowledgement
eliminated the imbalance in trading activity, greatly lowering the company’s Value-at-Risk charge,
and eliminated the Excess Capital Premium charge in the firm’s internal calculations. 434

According to Apex’s representations to the Committee, the firm restricted trading in meme
stocks for a period of time on January 28, 2021 after receiving an anomalous slice and based upon
an understanding that the firm may be required to pay an intraday charge in aggregate of over $1
billion, including a calculated Excess Capital Premium charge of $562.4. 435 However, according
to the DTCC, the clearinghouse would not have been permitted to include an Excess Capital
Premium charge in any intraday margin call to Apex – any increased Excess Capital Premium
charge would have been collected the following morning. 436 At the time, Apex did not know
whether the DTCC would have the discretion to assess the Excess Capital Premium charge on the
intraday charge or not. Regardless, Apex commented to the Committee that whether the Excess
Capital Premium charge was assessed during an intraday charge or applied the next morning it
would not have changed their actions – company leadership still believed they were going to have
to come up with more capital. 437

429
Letter from counsel for Apex Clearing Corporation to Committee (Jul. 9, 2021); Interview with Chief Compliance
Officer (Apex Clearing Corporation) and Chief Corporate Development and Legal Officer (Peak 6 Investments), at
11 and 23 (May 20, 2021). This particular trade was from a proprietary trading firm engaging in market-making
activity who initiated a near simultaneous buy order and sell order of an equivalent amount, i.e., approximately 23
million shares of AMC Entertainment Holdings (AMC) long and 23 million shares of AMC Entertainment Holdings
(AMC) short.
430
Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 11-13 (Jun. 16, 2021).
431
Id. at 23.
432
Id.
433
Id.
434
This report refers to Excess Capital Premium charge “as assessed” Excess Capital Premium charge to indicate that
an Excess Capital Premium charge was notified to the relevant member-firm consistent with NSCC rules. Apex was
assessed an Excess Capital Premium charge of approximately $30.5 million on January 29, 2021, but this charge was
subject to the across-the-board NSCC waiver described in detail in this report.
435
Email from counsel for Apex to Committee staff (Jun. 20, 2022).
436
Email and attachment from General Counsel for DTCC to Committee staff (Jun. 20, 2022).
437
Email from counsel for Apex to Committee staff (Jun. 21, 2022).
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c. Axos prohibited new opening transactions in certain meme stocks on
February 2, 2021, due to liquidity concerns, and feared that without taking
such measures it would likely exhaust its available funding sources.

Axos Clearing LLC (Axos), a subsidiary of Axos Financial, Inc. is a clearing broker that
serves retail-oriented introducing brokers, some of whom are rapidly growing online trading
firms. 438 Most customer trades initiated through Cash App Investing, LLC and others were cleared
and settled through Axos in January and February 2021. 439 Starting at approximately 9:30 a.m.
EST on February 2, 2021, nearly a week after Robinhood and others implemented their trading
restrictions, Axos prohibited the opening of new positions, whether long buys or short sales, in
AMC, GME, BB, and NOK. 440 These restrictions were lifted at approximately 3:00 p.m. EST of
the same day. 441

Axos, like Robinhood, was also at the time subject to Enhanced Surveillance by the NSCC,
and acted to limit trading in these securities because the NSCC indicated to Axos that it would
issue the firm an Excess Capital Premium charge as of February 2, 2021. 442 Beginning January 29,
2021, the NSCC raised Axos’s collateral deposit requirements due to increased trading volume in
the relevant securities that was being originated by Axos’s introducing firms. 443 On January 29,
2021, Axos’s NSCC collateral deposit requirement peaked at approximately $95 million and on
February 1, 2021, peaked at approximately $153 million. 444 While Axos had been assessed an
Excess Capital Premium charge on January 28, 2021, this charge was ultimately waived by the
NSCC. 445,446 On February 1, 2021, however, Axos was informed by the NSCC that the
clearinghouse intended to apply an Excess Capital Premium charge to the firm the next day, as
Axos’s collateral deposit requirements still exceeded Axos’s excess net capital. 447

The NSCC conveyed to Axos that it would not apply the full amount of the Excess Capital
Premium charge that could be levied on the firm, but the NSCC would exercise its discretion to
apply some amount of these charges. 448 In response, Axos informed the NSCC that should any

438
Axos Clearing, What We Do (accessed Feb. 03, 2022). Axos also serves institutional trading firms and proprietary
trading firms.
439
Cash App Investing briefing with the Committee (Jul. 30, 2021). In Cash App Investing’s case, it has engaged
DriveWealth to provide various trade processing services, which entered into a clearing agreement with Axos to clear
and settle trades that it processes.
440
Letter from Chief Compliance Officer of Axos Clearing LLC to Sr. Director of Risk Monitoring at FINRA (Feb.
22, 2021).
441
Id.
442
Id. Axos briefing with the Committee (Sept. 20, 2021); DTCC briefing with the Committee (Jul. 22, 2022).
443
Letter from Chief Compliance Officer of Axos Clearing LLC to Sr. Director of Risk Monitoring at FINRA (Feb.
22, 2021).
444
Id.
445
Email and attachment from counsel for Axos Clearing LLC to the Committee (Nov. 05, 2021); DTCC briefing
with the Committee (Jul. 22, 2022).
446
See Finding 4(a) for further details regarding NSCC’s across the board waiver of Excess Capital Premium charges,
which it decided to maintain in place through February 1, 2021.
447
Email and attachment from counsel for Axos Clearing LLC to the Committee (Nov. 05, 2021).
448
Id.
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amount of Excess Capital Premium charge be applied to the firm, Axos would likely exceed its
available funding sources. 449 Axos conveyed to the NSCC that the firm would impose PCO
restrictions on its introducing firms (and ultimately the customers of its introducing brokers) in
securities that contributed disproportionately to the firm’s Value-at-Risk charges if any Excess
Capital Premium charges were assessed, in this case AMC, GME, BB, and NOK. 450,451 Axos and
the NSCC concluded the call and scheduled a second call for 8:00AM EST on the following
morning to continue discussions, by which time the NSCC could provide more specifics on the
contemplated Excess Capital Premium charge. 452

On the evening of February 1, 2021, Axos had separate dialogues with both FINRA and
the SEC regarding Axos’s liquidity and its ability to fund its margin requirements at the NSCC. 453
Axos informed the SEC and FINRA that it planned to manage any risks to its liquidity by
restricting introducing brokers and their customers from opening new positions in the most volatile
securities that were driving its margin requirements. 454 According to Axos, neither FINRA nor the
SEC provided any specific guidance on this plan. 455 At approximately 8:00 AM EST on February
2, 2021, the NSCC proceeded to apply an Excess Capital Premium charge to Axos, resulting in a
total margin requirement of $247,041,600. 456 Axos informed the NSCC that while it was able to
meet the $247 million requirement, the company was not certain about its ability to meet additional
increases from the NSCC, which is why it implemented new position restrictions. 457

d. Larger and older broker-dealers adopted a range of trading restrictions
during the Meme Stock Market Event, but such restrictions were generally
less severe than those of smaller or newer firms due to limited concerns about
broker-dealer liquidity and capitalization.

Charles Schwab & Co. Inc. (Schwab) and TD Ameritrade Inc. and TD Ameritrade
Clearing, Inc. (both registered broker-dealers that are collectively referred to herein as “TDA”),
which are each under common ownership and control and are part of the publicly listed Charles
Schwab Corporation, responded to market events during the Meme Stock Market Event by
designating nineteen (19) securities that experienced increased trading volume (Schwab/TDA

449
Id.
450
Letter from Chief Compliance Officer of Axos Clearing LLC to Sr. Director of Risk Monitoring at FINRA (Feb.
22, 2021).
451
Email and attachment from counsel for Axos Clearing LLC to the Committee (Nov. 05, 2021).
452
Id.
453
Id.
454
Id.
455
Id. Axos briefing with the Committee (Sept. 20, 2021).
456
Letter from Chief Compliance Officer of Axos Clearing LLC to Sr. Director of Risk Monitoring at FINRA (Feb.
22, 2021).
457
Email and attachment from counsel for Axos Clearing LLC to the Committee (Nov. 05, 2021).
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Restricted Securities 458) as non-marginable. 459 This meant that a 100% margin requirement was in
place in order for customers to purchase the relevant Schwab/TDA Restricted Securities. 460 In
other words, the Schwab/TDA Restricted Securities were prohibited from being purchased on
margin and could not be used as collateral for a margin loan. 461

Schwab first changed the margin requirement for GameStop from 70% to 100% on January
13, 2021 and raised the margin requirements for the other eighteen (18) Schwab/TDA Restricted
Securities during the week of January 25, 2021. 462 TDA similarly began raising the margin
requirement for GME on January 13, 2021 and raised margin requirements on the Schwab/TDA
Restricted Securities during the week of January 25, 2021. 463 Schwab and TDA also ceased
accepting short sale orders with respect to most of the Schwab/TDA Restricted Securities and
limited certain advanced options strategies with respect to the Schwab/TDA Restricted Securities
that involved leverage. 464 Schwab and TDA believed that under the circumstances these orders
could expose their customers and respective firms to significant potential losses. 465 For instance,
both firms prohibited clients from selling naked call options on certain securities during the
Relevant Period. 466

Importantly, neither firm restricted customers from either purchasing an equity security or
from selling an equity security already owned by customers during the Meme Stock Market Event

458
The Schwab Restricted Securities included: AMC Entertainment Holdings, Inc. (AMC); Bed Bath & Beyond Inc.
(BBBY); Blackberry Limited (BB); Cel-Sci Corp. (CVM); Dillard’s Inc. (DDS); Express, Inc. (EXPR); Fossil Group,
Inc. (FOSL); GameStop Corp. (GME); GSX Techedu Inc. (GSX); iRobot Corp. (IRBT); Koss Corp. (KOSS); Naked
Brand Group Ltd. (NAKD); National Beverage Corp. (FIZZ); National CineMedia Inc. (NCMI); Nokia Corp. ADR
(NOK); Northern Dynasty Minerals Ltd. (NAK); Tootsie Roll Industries Inc. (TR); Urban One, Inc. (UONE); VIR
Biotechnology Inc. (VIR).
459
Letter from counsel for Schwab/TDA to Chairwoman Waters (Mar. 03, 2021). The Charles Schwab Corporation
is the indirect parent of Schwab. TD Ameritrade Holding Corporation is the indirect parent of both TD Ameritrade
Inc. and TD Ameritrade Clearing, Inc.
460
Id.
461
Charles Schwab, Schwab Issues Statement About Recent Trading Activity (Jan. 29, 2021).
462
Letter from counsel for Schwab/TDA to Chairwoman Waters (Apr. 23, 2021).
463
Id.
464
Charles Schwab, Schwab Issues Statement About Recent Trading Activity (Jan. 29, 2021); Letter from counsel for
Schwab/TDA to Chairwoman Waters and Chairman Green (Mar. 03, 2021).
465
Charles Schwab, Schwab Issues Statement About Recent Trading Activity (Jan. 29, 2021); Letter from counsel for
Schwab/TDA to Chairwoman Waters and Chairman Green (Mar. 03, 2021).
466
Charles Schwab, Schwab Issues Statement About Recent Trading Activity (Jan. 29, 2021). Increasing margin
requirements when necessary is consistent with existing FINRA guidance and rules relating to member-firm risk
management procedures. Indeed, member firms are required to have procedures in place to formulate their own
“house” margin requirements and where appropriate institute higher margin requirements for individual securities or
customer accounts.26 See FINRA, FINRA Reminds Member Firms of Their Obligations Regarding Customer Order
Handling, Margin Requirements and Effective Liquidity Management Practices During Extreme Market Conditions
(Mar. 18, 2021) (Regulatory Notice 21-12).
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and did not place limitations on the purchase or sale of basic options contracts. 467 The restrictions
adopted for Schwab/TDA Restricted Securities were applied equally to all of their customers. 468

Schwab and TDA lifted certain risk management controls on their restricted securities
during the week of February 8, 2021. 469 On February 8, 2021, Schwab and TDA permitted short
sales of restricted securities if shares were available for loan pursuant to Regulation SHO and
removed the restrictions on advanced options strategies for the following securities: BBBY,
National Beverage Corp. (FIZZ), Fossil Group Inc. (FOSL), iRobot Corp. (IRBT), KOSS, NAKD,
NOK, Tootsie Roll Industries, Inc. (TR) and Urban One, Inc. (UONE). 470 The restrictions on
advanced options strategies for the remaining restricted securities were removed as of February
22, 2021. As of April 19, 2021, Schwab and TDA still had a 100% margin requirement In place to
purchase GME and AMC. 471

Interactive Brokers LLC (Interactive Brokers) is an SEC-registered broker-dealer that
provides execution and clearing services for markets in the United States and elsewhere.
Interactive Brokers is a group company of Interactive Brokers Group Inc., a large, public company
listed on NASDAQ, which, through various operating subsidiaries around the world, operates a
global brokerage business. 472 In response to the meme stock volatility, Interactive Brokers
imposed a range of trading restrictions on select symbols. However, according to Interactive
Brokers, these measures were not precipitated by capital or liquidity requirements. In particular,
as of mid-day on January 27, 2021, Interactive Brokers put AMC, BB, EXPR, GME, and KOSS
options trading into liquidation only, meaning that new options positions could no longer be
opened. 473 It also increased margin requirements on both long and short positions in these same
symbols requiring 100% margin for long stock positions and 300% margin for short stock
positions. 474

Interactive Brokers lifted trading restrictions on these options, as well as other options, on
January 29, 2021. 475 However, Interactive Brokers reimposed liquidation only restrictions on
options trading in AMC, BB, EXPR, and GME from 12:34 a.m. EST on January 30, 2021 until
8:35 p.m. EST on January 31, 2021. 476 For general risk management, the firm also prohibited short
sales in FOSL, BB, NOK, KOSS, AMC, and BBBY from 8:51 a.m. EST on January 28, 2021 until
12:16 p.m. EST on February 3, 2021; in AeroCentury Corp. (ACY), Janone Inc. (JAN), and,

467
Letters from counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Mar. 03, 2021).
468
Letters from counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Mar. 03, 2021); Letter from
counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Sept. 03, 2021). The limitation on advanced
option strategies was not implemented with respect to independent registered investment advisors that utilize
Schwab’s custody platform to manage accounts held by Schwab clients.
469
Letters from counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Apr. 23, 2021).
470
Letters from counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Apr. 23, 2021).
471
Letters from counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Apr. 23, 2021).
472
Interactive Brokers, About the Interactive Brokers Group (Jan 01, 2022).
473
Interactive Brokers, Interactive Brokers Takes Action on Actively Traded Symbols (Jan. 28, 2021).
474
Interactive Brokers, Interactive Brokers Takes Action on Actively Traded Symbols (Jan. 28, 2021).
475
Interactive Brokers, Interactive Brokers Lifts All Trading Restrictions on Options (Jan. 30, 2021).
476
Appendix A to Letter from Chief Counsel of Investigations and Enforcement at Interactive Brokers, to Chairwoman
Waters and Chairman Green (Feb. 19, 2021).
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Monopar Therapeutics Inc. (MNPR) from 8:12 a.m. EST on January 28, 2021 until 12:16 p.m.
EST on February 3, 2021; and GME from 9:29 a.m. EST on January 25, 2021 until 8:20 a.m. EST
on January 26, 2021 and again from 8:51 a.m. EST until 12:16 p.m. EST on February 3, 2021. 477

Interactive Brokers also placed several symbols into PCO for approximately nine hours. 478
With exceptions, these PCO restrictions were introduced by Interactive Brokers at 10:50 a.m. EST
on January 28, 2021, and were removed by 8:23 p.m. EST the same day. 479

Interactive Brokers explained to Committee staff that the company’s PCO restrictions on
January 28, 2021 were motivated by general risk management concerns rather than liquidity or
capitalization concerns. 480 On January 28, 2021, Interactive Brokers’ daily NSCC collateral
deposit requirement was approximately $1.3 billion, and the firm had reported excess capital of
approximately $4.4 billion. 481 Interactive Brokers stated that it restricted trading “to protect the
firm and its customers from incurring outsized losses due to wild swings in price in a volatile and
unstable marketplace.” 482 Interactive Brokers expressed concern about the effect of the high
volatility on the clearinghouses, broker-dealers, and market participants. 483

477
Id. Short sale restrictions at Interactive Brokers generally did not apply to execution only customers, who are
customers that only execute orders through Interactive Brokers but do not clear and settle their trades through the firm.
Interactive Brokers’ execution only customers are generally either buy-side institutions, such as mutual funds, hedge
funds and other investment vehicles that rely on a broker-dealers other than Interactive Brokers as their prime broker-
dealer or custodian or, alternatively, other broker-dealers (whether US or foreign) that submit orders for their own
account or for their customers (whether they are retail or non-retail).
478
Appendix A to Letter from Chief Counsel of Investigations and Enforcement at Interactive Brokers, to Chairwoman
Waters and Chairman Green (Feb. 19, 2021). The symbols subject to position closing only limitations were: Fossil
Group Inc. (FOSL), BlackBerry Ltd. (BB), Nokia Corp. (NOK), Nokia Oyj (NOKN), Nokia Oyj (NOAA), Nokia
(NOKIASEK), Nokia (NOKIA), Express, Inc. (EXPR), Express, Inc. (02Z), Koss Corp. (KOSS), AMC Entertainment
Holdings Inc. (AMC), Bed Bath & Beyond Inc. (BBBY), Bed Bath & Beyond Inc. (BBY), GameStop (GME),
GameStop Corp. (GS2C), AeroCentury Corp. (ACY), Janone Inc. (JAN), Janone Inc. (5AR1), Monopar Therapeutics
Inc. (MNPR), New Concept Energy, Inc. (GBR), Lianluo Smart Ltd. (LLIT), and Lianluo Smart Ltd. (J8D1).
479
Appendix A to Letter from Chief Counsel of Investigations and Enforcement at Interactive Brokers, to Chairwoman
Waters and Chairman Green (Feb. 19, 2021). The position closing only restrictions on certain symbols were introduced
and lifted at different times on January 28, 2021. Specifically, for Bed Bath & Beyond, Inc. (BBY) and 02Z, the
restriction was introduced at 1:51 p.m. EST and lifted at 8:23 p.m. EST; for GameStop (GME) and Koss Corp.
(KOSS), the restriction was introduced at 7:56 a.m. EST and lifted at 8:23 p.m. EST; for GS2C, the restriction was
introduced at 11:46 a.m. EST and lifted at 8:23 p.m. EST; for ACY, JAN and MNPR, the restriction was introduced
at 7:56 a.m. EST and lifted at 9:00 p.m. EST; for 5AR1, the restriction was introduced at 13:51 p.m. EST and lifted at
9:42 p.m. EST; for GBR, the restriction was introduced at 12:32 p.m. EST and lifted at 9:42 p.m. EST; for LLI, the
restriction was introduced at 11:41 a.m. EST and lifted at 9:42 p.m. EST; and for J8D1, the restriction was introduced
at 1:51 p.m. EST and lifted at 9:42 p.m. EST. In some instances, these restrictions took thirty minutes or more to be
applied across the Interactive Brokers platform from the time that risk personnel introduced them.
480
Interactive Brokers briefing with the Committee (Jun. 14, 2021).
481
Id. The approximately $4.4 billion excess net capital figure is based on data from the firm’s Financial and
Operational Combined Uniform Single Report (FINRA FOCUS Report) filed on January 27, 2021, and which would
have been referred to by the NSCC on January 28, 2021. Interactive Brokers’ FINRA FOCUS Report for the period
ending January 31, 2021 reflected excess net capital of approximately $3.8 billion.
482
Interactive Brokers, FAQs: Securities subject to Special Requirements, Interactive Brokers (last accessed Sept. 17,
2021).
483
Id.
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E*TRADE Securities LLC (E*TRADE) also implemented risk management measures
during the Meme Stock Market Event. E*TRADE increased margin requirements for various
symbols, including GME and AMC, over the course of January 22, 2021, to January 29, 2021. 484
E*TRADE also prohibited customers from opening new short equity positions in AMC and GME
stock after the market closed on January 27, 2021. 485 As a result of this prohibition, E*TRADE
customers were unable to open new short equity positions, or increase existing short equity
positions, in GME and AMC stock for the duration of January 28, 2021. 486 While E*TRADE also
temporarily prohibited the purchase of GME and AMC stock during part of this period (other than
to close an open short position), such restrictions were caused by a technology outage rather than
concerns relating to the ability to fund the NSCC collateral deposit requirements or liquidity
concerns generally. 487

e. E*TRADE, Cash App Investing, TD Ameritrade, and other broker-dealers
experienced IT system outages and other difficulties due to the volume of
trading activity experienced during the Meme Stock Market Event.

E*TRADE experienced a significant increase in order volume during the Meme Stock
Market Event, driven by exceptionally high levels of retail customer interest in GME and AMC. 488
On January 27, 2021, E*TRADE customers made more than 2.6 million trades, representing a
77% increase from one week prior, when E*TRADE customers made 1.47 million trades on
January 20, 2021. For context, E*TRADE had approximately 652,000 Daily Average Revenue
Trades in the first quarter of 2020. 489 The unanticipated and rapid growth in order volume during
this period overwhelmed one of E*TRADE’s trading technology systems, limiting the overall
number of customer orders that E*TRADE was able to process for a period of time. 490

Specifically, after market close on January 27, 2021, E*TRADE discovered that their order
routing system, Routex, had exhausted the allotted unique order sequence identification (Order
ID) numbers that it assigns to orders Routex sends to market centers (for example, to stock
exchanges or market makers) for execution. 491 The exhaustion of Order IDs led to two specific
types of problems for affected customers: certain customer orders became suspended in Routex
and were unable to be transmitted to the market for execution, while some other orders were
assigned duplicate Order IDs before execution and were matched with the incorrect account,

484
Letter from counsel for E*TRADE to Chairwoman Waters and Chairman Green (Apr. 16, 2021).
485
Id.
486
E*TRADE briefing with the Committee (Mar. 24, 2021); Letter from counsel for E*TRADE to Chairwoman
Waters and Chairman Green (Apr. 16, 2021).
487
E*TRADE briefing with the Committee (Mar. 24, 2021); Letter from counsel for E*TRADE to Chairwoman
Waters and Chairman Green (Apr. 16, 2021).
488
E*TRADE briefing with the Committee (Feb. 10, 2021).
489
Letter from counsel for E*TRADE to Chairwoman Waters (Apr. 16, 2021); SEC, Form 10-Q for E*TRADE
Financial Corporation (May 06, 2020).
490
E*TRADE briefing with the Committee (Feb. 10, 2021); Letter from counsel for E*TRADE to Chairwoman Waters
(Apr. 16, 2021).
491
Letter from counsel for E*TRADE to Chairwoman Waters (Apr. 16, 2021).
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symbol, or quantity of shares. 492 E*TRADE began taking remedial measures to address both the
suspended orders and the mismatched orders upon discovering these problems. 493

Despite these efforts, E*TRADE technology personnel did not have sufficient time before
market open on the following day, January 28, 2021, to implement a technology solution that
would avert the possibility of the Routex Order ID issue occurring again. 494 Instead, E*TRADE
personnel anticipated that order volumes might once again trigger an exhaustion of Order IDs and
therefore monitored order volume throughout that day. 495 E*TRADE personnel were concerned
that the issue could recur, and determined that the firm must reduce the volume of orders it received
in order to protect the integrity of its trading platform. 496 E*TRADE personnel determined that
this could be accomplished by restricting activity in GME and AMC, which were the two securities
generating the largest volume of activity at E*TRADE during this time (and which collectively
represented approximately 15% of E*TRADE’s order volume on January 28, 2021). 497

As a result, shortly before 3:00 p.m. EST on January 28, 2021, E*TRADE restricted
customers from making new purchases of GME and AMC stock or opening options positions in
them (the short sale of these stocks had already been restricted by this time). 498 These restrictions
did not prevent customers from closing positions in either GME or AMC. Customers could
continue to sell stock they owned or purchase stock to cover pre-existing short positions. 499 These
restrictions sufficiently reduced total order volume such that the Routex Order IDs were not again
exhausted on January 28, 2021. 500 E*TRADE technology personnel were able to implement a
technology solution after market close on January 28, 2021, and these restrictions were lifted
before the market opened on the morning of January 29, 2021. The technology outage did not
recur. 501

Other broker-dealers also experienced technology outages due to extreme market volatility
during this period. For instance, TDA experienced functionality issues due to unprecedented
trading volume on January 28, 2021. 502 Specifically, access to TDA’s mobile application was in
some cases unavailable for users. 503 TDA encouraged customers to use its website or other
platforms in lieu of using the mobile application during this time. 504 Customers continued to be
able to access their accounts and place trades on TDA’s website and its “thinkorswim” web,
mobile, and desktop platforms, which are other trading platforms available to TDA customers.
None of these alternative platforms experienced significant functionality issues that would inhibit

492
Id. E*TRADE notified FINRA and the SEC of these issues on January 27, 2021.
493
Id.
494
Id. E*TRADE notified FINRA and the SEC of these issues on January 27, 2021.
495
Id.
496
Id.
497
Id.
498
Id.
499
Id.
500
Id.
501
Id.
502
Letter from counsel for Schwab/TDA to the Committee (Sept. 03, 2021).
503
Id.
504
TD Ameritrade (@TDameritrade), Twitter post (Jan. 27, 2021 10:14AM) (accessed Feb. 03, 2021).
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customer trading during the relevant period. 505 Similarly, with respect to Robinhood, some
customers were unable to access Robinhood’s web application on the morning of January 27,
2021. 506 However, at the same time Robinhood customers were generally able to trade securities
through Robinhood’s iOS and Android apps. 507

Cash App Investing LLC (Cash App Investing) is an indirect subsidiary of Block, Inc.
(formerly Square Inc.), which is a publicly listed global technology company with a focus on
financial services. Cash App Investing also experienced technical challenges relating to its stock
trading platform on January 28, 2021. Cash App Investing experienced a disruption to its
proprietary back-end system that facilitates trading activity for approximately one hour on the
morning of January 28, 2021. 508 As a result of this issue, customers were unable to place orders
for the duration of this disruption. 509 Separately, DriveWealth, which Cash App Investing
outsources certain functions to and is responsible for arranging the clearing and processing of
trades initiated through Cash App Investing, also experienced delays to its systems commencing
at around 9 a.m. EST on January 28, 2021. 510 These issues led to delays and, in certain cases,
cancellations of affected customer orders. 511 In addition, once the system delays at DriveWealth
were resolved, there was an influx of traffic to Cash App Investing to process incoming requests. 512
The increased traffic also led to delays in the processing of customer purchase orders between
approximately 10:17 a.m. EST and 12:49 p.m. EST. 513 Also, DriveWealth could not fulfill certain
orders that were placed aftermarket hours on January 27, 2021 for execution after market open on
January 28, 2021, and certain orders placed during market hours on January 28, 2021. Specifically,
DriveWealth only executed orders for whole shares, but cancelled, or busted, certain fractional
share orders due to being unable to process them. 514

In addition to the internal delays and failure to process transactions experienced by
DriveWealth, the company’s staff observed downstream latency throughout the market while
attempting to fulfill customer orders. 515 DriveWealth employees commented to the Committee that
they had never seen the amount of orders that were initiated during this period and that they
observed other firms suffering tech outages and having capacity issues. 516 In addition to broker-
dealers, market makers, and other market participants working through technological constraints,

505
Letter from counsel for Schwab/TDA to Chairwoman Waters and Chairman Green (Sept. 03, 2021). Schwab also
had functionality issues on January 25, 27 and 28, 2021 at market open due to the record volume that was traded by
its customers. Schwab’s information technology support teams introduced technical fixes that provided the processing
power necessary to allow trading systems to perform normally even with volumes that might have been more than
three or four multiples of previous peaks.
506
Email from counsel for Robinhood to Committee staff (Sept. 03, 2021).
507
Id.
508
Email from Head of Federal Policy at Square to Committee staff (Aug. 19, 2021).
509
Id.
510
Id.
511
Id.
512
Id.
513
Id.
514
Id. Email from Head of Federal Policy at Square to Committee staff (Aug. 19, 2021).
515
DriveWealth briefing with the Committee (Sept. 22, 2021).
516
Id.
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other elements of stock market infrastructure also became strained. 517 According to Drivewealth
employees, the volatility had a waterfall effect whereby each company outside of their own firm
that suffered a tech outage or slow-down put more pressure on other market participants to handle
the volume of order flow. 518

To execute a trade, there must be a buyer and a seller. While DriveWealth submitted
customer orders for certain meme stocks, the firm struggled throughout the day to find customers
willing to sell the stock. 519 For example, DriveWealth speculated that with the steep price increase
of meme stocks, many customers were placing buy orders with the expectation of continued price
appreciation but few customers were willing or able to place sell orders. 520 Thus, while the firm
was able to submit buy orders, it experienced delays in receiving a confirmation back that a trade
had been executed. 521 Such a delay-approximately 700 milliseconds or more in this instance-led
DriveWealth to question whether it was achieving best execution on trades. 522 This in turn led
DriveWealth to bust a number of trades that were outside of its risk control benchmarks. 523

Key Finding #3: Most of the firms the Committee spoke to do not have explicit
plans to change their policies for how they will meet their collateral
requirements during extreme market volatility or adopt trading restrictions
when market volatility may warrant their introduction.
Several NSCC member firms
Committee staff interviewed either did
Most of the firms the Committee not model for, or otherwise explicitly
spoke to do not have explicit plans plan for, Excess Capital Premium
to change their policies for how charges prior to the events of January
they will meet their collateral 28, 2021. In the case of Robinhood,
requirements during extreme this gap in its collateral planning and
market volatility or adopt trading liquidity management practices
contributed to an inability to fund
restrictions when market volatility potential NSCC collateral deposit
may warrant their introduction. requirements during the Meme Stock
Market Event, which froze retail

517
For instance, the New York Stock Exchange’s Trade Reporting Facility (TRF), a FINRA managed facility at the
exchange that reports off-exchange trades to DTCC, did not properly process trade reporting on the afternoon of
January 27, 2021. The TRF at the New York Stock Exchange was initially built to process 15 million trades but
received approximately 19 million trades on January 27, 2021. Staff at the NYSE worked through the weekend to
reprocess the trades and confirmed to Committee staff that all trades were properly reported to DTCC and the TRF
has since been expanded to have a capacity of 60 million trades per day. New York Stock Exchange briefing with the
Committee (Oct. 21, 2021).
518
DriveWealth briefing with the Committee (Sept. 22, 2021).
519
Id.
520
Id.
521
Id.
522
Id.
523
Id.
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customers out of trading in certain securities. Committee staff has learned that there are significant
inconsistencies in how individual NSCC member firms approach their collateral planning
processes and there is an absence of precise regulatory requirements determining how individual
firms should conduct collateral planning and related risk management. In certain cases, NSCC
member firms appeared to be entirely unfamiliar with the particularities of the Excess Capital
Premium charge regime and did not specifically address it in their collateral planning and liquidity
management practices. The events of January and February 2021 demonstrate how concentrated
trading activity in a handful of securities can disrupt the stock market and produce spikes in
collateral requirements for individual firms.

In the case of Robinhood, the company confirmed to Committee staff that it relies on
internal statistical models to guide its collateral planning. Prior to January 28, 2021, the company
did not specifically model for, or otherwise calculate, Excess Capital Premium charges as part of
this collateral planning process and, in this regard, Robinhood’s Head of Data Science, who is not
directly responsible for clearing operations but supports multiple teams at Robinhood and its
affiliated companies, commented internally that Robinhood’s collateral charges were a “black
box” to him the day before Robinhood received its historical collateral charge. 524,525

On January 28, 2021 the firm first accessed and utilized the NSCC’s publicly available
Excess Capital Premium charge. 526 On May 27, 2021 Robinhood began modeling what the Excess
Capital Premium charge would be if Robinhood Securities exceeded 100% of its net capital. 527
Prior to January 28, 2021, firm officials viewed the likelihood of Excess Capital Premium charges
being imposed as remote and emphasized that they had incurred such a charge on only one other
occasion in the prior two years, which was during the March 2020 volatility that occurred during
the onset of the COVID-19 pandemic. 528 The DTCC also waived the Excess Capital Premium
charge Robinhood received in March 2020. 529

The perceived remoteness of being required to pay an Excess Capital Premium charge may
have contributed to Robinhood’s inattention to the Excess Capital Premium charge from a
collateral planning and liquidity management perspective. The potential application of the charge
was not at all remote but quite foreseeable—as of December 31, 2020, Robinhood Securities only
maintained excess net capital of approximately $486.8 million, which itself should have put the
firm on notice that it was thinly capitalized for a highly volatile environment. 530

Swartwout confirmed that after the events of January 28, 2021, when Robinhood was
assessed the unanticipated charge, the company took remedial measures and sought to learn about

524
Interview with J. Swartwout (Robinhood) (May 05, 2021).
525
RH_HFSC_00029119 (on file with the Committee).
526
Letter from counsel for Robinhood to Chairwoman Waters and Chairman Green (Dec. 15, 2021).
527
Id.
528
Interview with J. Swartwout (Robinhood) (May 05, 2021).
529
Id.
530
In contrast, after the occurrence of the meme stock market event and Robinhood’s subsequent capital raising,
Robinhood Securities maintained excess net capital of approximately $2.5 billion as of March 31, 2021. See SEC,
Amendment No. 2 to Form S-1 for Robinhood Markets, Inc., at 161 (Jul. 27, 2021).
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the Excess Capital Premium charge and how it is calculated. 531 The NSCC directed Robinhood
officials to explanatory manuals that were already available to Robinhood on its member portal
and that provide details on how Excess Capital Premium charges are calculated. 532 Upon reviewing
these manuals, Robinhood built its own internal models to account for the level of Excess Capital
Premium charges that the company might be assessed. 533

Swartwout acknowledged to Committee staff that Robinhood Securities had not previously
reviewed these manuals. 534 Robinhood’s failure to incorporate the possibility of Excess Capital
Premium charges into its planning processes prior to January 28, 2021, despite the firm’s
vulnerability to the imposition of additional charges because of relatively limited excess net capital
at the time, led to its unpreparedness to meet its collateral deposit requirement on January 28, 2021.
Due to this lack of visibility, no efforts were made to arrange for adequate funding ahead of time
that would have enabled Robinhood to meet its initial approximately $3.7 billion collateral deposit
requirement on January 28, 2021.

Although Apex employs internal Value-at-Risk calculations, Apex confirmed to
Committee staff that the company does not employ its own statistical models to predict NSCC
collateral requirements. 535 Instead, the company employs tools that the NSCC makes available
through its web portal to each of its member firms. 536 The NSCC provides a Value-at-Risk
calculator tool as well as a what is referred to as an “Account Details” tool that member firms are
able to use to help determine the next day’s NSCC collateral deposit requirement as well as a
member firm’s exposure to intraday margin calls. 537 Using these NSCC-provided tools, Apex
reviewed historical NSCC collateral requirement data for up to the prior 12 months and applied a
2X multiple to predict and plan for its collateral requirements. 538 Therefore, it appears that Apex
did not expressly focus on the precise level of an Excess Capital Premium charge that could be
incurred prior to January 28, 2021, but was acting in accordance with general FINRA guidance on
the topic. In Apex’s case, while this gap in collateral planning was unrelated to the Excess Capital
Premium charge that was exhibited in its 10 AM Slice (which, as detailed in this report, was caused
by an operational requirement to manually verify a single trade), it is representative of an overall
lack of industry-wide preparedness for Excess Capital Premium charges as part of routine
collateral planning processes and also the insufficiency of the existing regulatory benchmarks for
collateral planning.

Larger or older broker-dealers, such as Interactive Brokers and Charles Schwab, have taken
a different approach to planning for the prospect of Excess Capital Premium charges. Interactive
Brokers, for instance, confirmed to Committee staff that to date it has not been necessary for it to
build a model or calculations specific to the formula for Excess Capital Premium charges as it is

531
Interview with J. Swartwout (Robinhood) (May 05, 2021).
532
Id.
533
Id.
534
Id.
535
Letter from counsel for Apex Clearing Corporation to the Committee (Jul. 9, 2021).
536
Id.
537
Id.
538
Id.
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outlined in NSCC rules. 539 According to Interactive Brokers officials, this is because the firm
regularly maintains an amount of excess net capital that far exceeds an amount that would likely
trigger the imposition of an Excess Capital Premium charge. 540 Interactive Brokers believes that it
is appropriate instead for the firm to monitor its clearing fund requirements in the ordinary course
of business and update its models and collateral planning procedures to specifically account for
Excess Capital Premium charges only their clearing fund requirements approached the amount of
excess net capital maintained by the company. 541

Charles Schwab and TDA similarly do not model for Excess Capital Premium charges as
part of their own planning processes as they regularly carry excess capital that far exceeds expected
NSCC collateral deposit requirements and regulatory-required capital levels. 542 For example, on
January 28, 2021, Charles Schwab had a total NSCC deposit requirement of approximately $1.1
billion and maintained excess net capital of approximately $3.1 billion. 543 TDA’s NSCC deposit
requirements on January 28, 2021 were approximately $1.75 billion and the firm maintained
excess net capital of approximately $4.1 billion. 544 Thus, even on days that witnessed extreme
market volatility, both firms maintained excess net capital far in excess of levels that would
potentially trigger an Excess Capital Premium charge.

A risk management approach that does not require granular planning for Excess Capital
Premium charges may be suitable for larger, more robustly capitalized firms that have easy access
to public markets and other funding sources. However, it may be unsuitable for firms less able to
maintain large excess net capital buffers and whose business practices and client base make them
more likely to experience the kind of volatility that may lead to spikes in its NSCC collateral
requirements.

The Committee’s investigation has revealed little consistency across the industry in terms
of how member firms anticipate, predict, and plan for NSCC collateral deposit requirements and,
in particular, the prospect of Excess Capital Premium charges, even though existing FINRA
guidance calls attention to the importance of firms having robust funding and liquidity
management. 545 Generally speaking, firms across the industry have a limited understanding of how
to calculate the precise level of Excess Capital Premium charges applicable to their firm. This
likely has resulted in insufficient planning from a liquidity and funding perspective. Furthermore,
neither the SEC, NSCC, or FINRA provides rules or other focused oversight to guide individual
member firms’ internal collateral planning processes. 546

While these blind spots may prove benign for larger firms that are capitalized well enough
to fund unexpected Excess Capital Premium charges, they present far more significant risks when
539
Interactive Brokers call with Committee staff (Jul. 08, 2021).
540
Interactive Brokers briefing with Committee staff (Jun. 14, 2021).
541
Id.
542
Email from counsel for Schwab/TDA to Committee staff (Aug. 05, 2021).
543
Id.
544
Email from counsel for Schwab/TDA to Committee staff (Aug. 05, 2021).
545
FINRA, Regulatory Notice 10-57 (Nov. 2010); FINRA, Regulatory Notice 21-12 (Mar. 18, 2021).
546
The Committee understands that this was a stated priority for FINRA and SEC examinations for 2021 and continues
to be for 2022.
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associated with firms that have more limited capital and liquidity buffers and whose business
models are built on attracting a large number of clients and transactions. Such firms are particularly
ill-prepared to fund the Excess Capital Premium charges that they are more likely to trigger due to
the higher volatility risk profile of their customer base, as was the case with Robinhood on January
28, 2021. As a general matter, firms did not appear to have explicit plans in place to address
collateral deposit requirements in volatile environments because they do not specifically plan for,
nor do many firms understand on a granular level, how significantly Excess Capital Premium
charges might impact such requirements.

Furthermore, Committee staff found no specific industry-wide practice regarding the
establishment of written contingency plans to guide how individual broker-dealers will adopt
trading restrictions when market volatility may warrant their introduction. Several clearing brokers
Committee staff interviewed confirmed that the specific actions they took to limit the impact of
volatility on their trading platforms during the height of the Meme Stock Market Event represented
the best judgment of their operations professionals under exigent market circumstances. No such
firm had in place a pre-established and written contingency plan or playbook to outline what
specific trade restrictions they would adopt to ameliorate the impact of extreme market volatility
and when specific measures might be triggered. 547
The lack of pre-established, written, and publicly disclosed contingency plans that address
the prospect of trading restrictions may exacerbate the risk of error by operations professionals
when attempting to address market volatility in challenging and fast-paced circumstances. Rather
than being forced to rely on their individual experience and discretion to make ad hoc decisions,
operations professionals may benefit from the ability to consult a written contingency plan. In
addition, the absence of such pre-established written contingency plans that can be publicly
disclosed to the market, by definition, means that the market may struggle to establish with
sufficient precision how trading restrictions may impact market activity during periods of
volatility.

547
Although several clearing brokers cited their customer agreements in support of their contractual right to actually
impose the relevant trading restrictions, typically neither these customer agreements nor written supervisory
procedures detail the range of measures that could be adopted to combat market volatility and what specifically might
trigger the imposition of such restrictions.
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Key Finding #4: The Depository Trust & Clearing Corporation (DTCC) waived
$9.7 billion of collateral deposit requirements on January 28, 2021. The DTCC
lacks detailed, written policies and procedures for waiver or modification of a
"disincentive” charge it calculates for brokers that are deemed to be
undercapitalized and has regularly waived such charges during periods of
acute volatility in the two years before the Meme Stock Market Event.
On January 28, 2021, after consulting with several member-firms, senior risk professionals
at the DTCC determined, based
on their qualitative judgment of
The Depository Trust & Clearing
market risk that it was
appropriate and prudent to Corporation (DTCC) waived $9.7 billion
waive the application of Excess of collateral deposit requirements on
Capital Premium charges January 28, 2021. The DTCC lacks
across the board for all member detailed, written policies and procedures
firms. Such use of their for waiver or modification of a
discretion is permissible under
"disincentive” charge it calculates for
NSCC rules. 548 In other words,
waivers from the Excess brokers that are deemed to be
Capital Premium charge were undercapitalized and has regularly
not granted to a single firm, or waived such charges during periods of
a handful of firms that had acute volatility in the two years before
specifically requested it and the Meme Stock Market Event.
warranted it due to their
individual responses and
countermeasures adopted, but
rather the Excess Capital Premium charge component was removed from the daily collateral
deposit requirement of any member firm that was assessed this charge on January 28, 2021. 549

Six member firms were assessed an Excess Capital Premium charge that morning,
aggregating approximately $9.7 billion. According to NSCC rules, each firm would have been
required to pay these Excess Capital Premium charges as part of its daily clearing fund
requirements by 10 a.m. EST. 550 Two of these six member firms, including Robinhood, had
specifically requested to receive a modification of, waiver of, or other relief from, their overall
margin charges from the NSCC on the morning of January 28, 2021. 551

Furthermore, of the six member firms that received an Excess Capital Premium charge on
the morning of January 28, 2021 the NSCC had previously subjected four of those member firms

548
DTCC briefing with the Committee on (Jun. 17, 2021); DTCC briefing with the Committee (Jul. 22, 2021).
549
DTCC briefing with the Committee on (Jun. 17, 2021); DTCC briefing with the Committee (Jul. 22, 2021).
550
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021). The six firms that received the Excess
Capital Premium charge on January 28, 2021, were Robinhood Securities, LLC, Axos Clearing LLC, Instinet, LLC,
Wedbush Securities Inc., LEK Securities Corporation and Vision Financial Markets LLC.
551
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021).
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to Enhanced Surveillance. 552 Enhanced Surveillance is an NSCC program that identifies member-
firms which the NSCC has specific concerns about regarding liquidity and capitalization,
operational concerns, or other matters. 553 Once placed on Enhanced Surveillance, member firms
are subject to heightened monitoring and surveillance. Robinhood Securities was first placed on
Enhanced Surveillance in March of 2020 and has continuously been subject to this status through
the date that this report was submitted for publication. 554 Unfortunately, the NSCC’s ongoing
surveillance proved insufficient to identify potential liquidity constraints at certain firms, including
Robinhood.

At the time of the events described in this report, becoming subject to Enhanced
Surveillance triggered heightened review of the relevant member-firm by NSCC staff, which when
prompted by concerns about financial health, are designed to ensure that such firms are adequately
capitalized, have adequate liquidity, and otherwise address the concerns of NSCC staff. 555 It should
also be noted that even when firms are placed on Enhanced Surveillance due to other factors, such
as operational concerns, such firms would also be subject to greater review from a liquidity and
capitalization perspective as part of carrying out Enhanced Surveillance. 556 In other words, greater
scrutiny of a member firm’s liquidity and capitalization is a routine element of Enhanced
Surveillance irrespective of what triggers it. 557 Thus, the NSCC had pre-existing concerns with
respect to four member firms that ultimately attracted Excess Capital Premium charges on January
28, 2021, which illustrates that those elements of Enhanced Surveillance review that focus on
liquidity and capitalization may not be sufficiently robust. 558 Furthermore, NSCC member firms
are not actually informed when they are placed on Enhanced Surveillance. 559 Not informing
member firms that they are under Enhanced Surveillance may impede effective oversight of these
members or at least misses an opportunity to convey the need to adopt remedial measures to such
firms.

Senior NSCC officials explained to Committee staff that they believed an across-the-board
waiver of Excess Capital Premium charges for January 28, 2021 was appropriate due to concerns
that applying the charge in this instance could have caused systemic risk and therefore proven to
be counterproductive. 560 NSCC officials confirmed that, had the Excess Capital Premium charges
not been waived, several NSCC member firms could have simultaneously been unable to meet
their collateral deposit requirements, which could have had knock on effects on the clearinghouse

552
Id.; DTCC briefing with the Committee (Jun. 17, 2021).
553
Email from General Counsel for DTCC to Committee staff (Aug. 03, 2021) DTCC briefing with the Committee
(Jun. 17, 2021).
554
DTCC briefing with the Committee (Jul. 22, 2021).
555
DTCC briefing with the Committee (Jul. 16, 2021), DTCC briefing with the Committee (Sept. 10, 2021).
556
DTCC briefing with the Committee (Sept. 10, 2021).
557
Id.
558
Id.
559
Id.
560
DTCC briefing with the Committee (Jul. 22, 2021).
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if it was forced to cease clearing trades for such firms and liquidate their inventory. 561 NSCC risk
managers believed an across the board waiver was an appropriate step to take because they are
focused on the market as a whole and the ability of member firms to make margin calls over an
extended period of time, rather than on a particular day. 562 Nevertheless, this resulted in a situation
in which the NSCC was forced to waive the application of the Excess Capital Premium charge—
designed to deter risk—at precisely a time when the need to disincentivize individual member
firms from accumulating excessive risk in their trading books was most urgent.

After waiving the Excess Capital Premium charges for January 28, 2021, NSCC risk
managers engaged in further review and analysis. 563 NSCC risk managers held conversations with
specific member firms to determine what countermeasures the firms were adopting to address
volatility in their trading books as well as to raise capital or otherwise access liquidity. 564 NSCC
risk managers received additional information from member firms regarding the imposition of
trade restrictions, capital raising plans, and other steps individual member firms believed would
mitigate volatility in their trading books and drive down volatility-based collateral deposit
requirements. 565

The NSCC waived Excess Capital Premium charges for all member firms through close of
business on Monday, February 1, 2021. 566 According to the DTCC, because the NSCC operates
on a T+2 basis, the elevated, directional trading activity in meme stocks that occurred on January
27, 2021 and that NSCC expected to continue on January 28, 2021, which had generated the
unusually high Excess Capital Premium charges for certain firms with significant exposures to
meme stocks, would not settle until February 1, 2021. 567 For context, during the entire period
between January 25, 2021 and February 2, 2021, the height of the Meme Stock Market Event,
eight NSCC member firms in total were assessed Excess Capital Premium charges aggregating
approximately $21.9 billion, and five of these firms were subject to Enhanced Surveillance by the
NSCC. 568

On the morning of January 28, 2021, Timothy Cuddihy, Managing Director of Financial
Risk Management for the DTCC, determined that waiving the penalty charges would promote
market stability by mitigating the risk that impacted firms could default due to the application of
a non-core charge that was, in this case, caused by extraordinary market volatility. Cuddihy has
the ultimate authority to authorize waivers of the Excess Capital Premium charges, and in theory
he does not need to consult with anyone to authorize a waiver. On January 28, 2021, however, the

561
Id.; DTCC briefing with the Committee (Jul. 06, 2021). It should be noted that in the event that a liquidation
procedure of a member firm results in uncovered losses, the NSCC is able to mutualize losses amongst other member
firms by calling for them to make contributions to fund such losses. This, in turn, may introduce systemic risk by
straining the capital requirements of non-defaulting member firms.
562
DTCC briefing with the Committee (Jul. 06, 2021); DTCC briefing with the Committee (Jul. 22, 2021).
563
DTCC briefing with the Committee (Jul. 06, 2021).
564
Id.
565
Id.
566
DTCC briefing with the Committee (Jun. 17, 2021).
567
Email and attachment from General Counsel for DTCC to Committee staff (Jun. 20, 2022).
568
Email from General Counsel for DTCC to the Committee (Aug. 4, 2021); DTCC briefing with the Committee (Jul.
22, 2021).
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recommendation to waive Excess Capital Premium charges originated with midlevel risk
management professionals. Moreover, according to the DTCC, given the magnitude of the charges,
the number of firms impacted, and the high level of market volatility, Cuddihy consulted with the
DTCC’s Group Chief Risk Officer, the Head of Clearing Agency Services, and the Management
Risk Committee before ultimately issuing the waiver 569 Though many brokers restricted trading
in meme stocks in an effort to reduce their collateral deposit requirements, Cuddihy informed the
Committee that he first learned of Robinhood’s trading restrictions in meme stocks by reading
about them on Bloomberg. 570 Robinhood executives told the Committee that while the NSCC
engaged them in conversation on January 28, 2021, the clearinghouse never explained the basis
for the waiver of the Excess Capital Premium charge to them in detail. 571

a. The NSCC regularly waives Excess Capital Premium charges on its member firms and,
in particular, for certain member firms that tend to be repeat offenders in attracting this
charge

As part of the Committee’s investigation, we reviewed historic trends associated with
DTCC’s waiver of Excess Capital Premium charges. From January 1, 2019 through February 12,
2021, 22 of the NSCC’s 147 member firms had incurred one or more Excess Capital Premium
charge. 572 In aggregate, Excess Capital Premium charges were incurred on 307 occasions in this
timespan. 573 Approximately ninety percent (90%) of these charges were incurred by eight member
firms (LEK Securities, Corporation, Instinet, LLC, Wedbush Securities, Inc., ITG, Inc., Vision
Financial Markets, LLC, Velox Clearing, LLC, Axos Clearing, LLC, and Virtu Americas, LLC
(277 of the 307 charges)) and approximately seventy-five percent (75%) were incurred by three
member firms (LEK Securities, Instinet, LLC, and Wedbush Securities, Inc. (229 of the 307
charges)). 574 Of these 307 occasions when an Excess Capital Premium charge was incurred, the
charge was ultimately applied without modification approximately seventy-eight percent (78%) of
the time, was applied in a reduced amount approximately ten-percent (10%) of the time, and was
not imposed at all in approximately twelve percent (12%) of the time. 575 The waiver or
modification of Excess Capital Premium charges comes into play more often during periods of
acute volatility; the higher the calculated Excess Capital Premium charges for a particular day, the
more likely the NSCC is to waive it, as illustrated in the chart below.

569
Email and attachment from General Counsel for DTCC to Committee staff (Jun. 20, 2022).
570
DTCC Briefing with the Committee (Jul. 22, 2021).
571
Interview with J. Swartwout (Robinhood) (May 05, 2021); Interview with J. Swartwout (Robinhood) (May 21,
2021); Interview with G. Howard (Robinhood) (Jun. 11, 2021).
572
DTCC, NSCC Equity Clearing & Settlement Overview: Presentation to House Staff, at slide 15 (Jun. 17, 2021);
Email and produced attachment from General Counsel for DTCC to Committee staff (Aug. 03, 2021) (on file with the
Committee).
573
Email and produced attachment from General Counsel for DTCC to Committee staff (Aug. 03, 2021) (on file with
the Committee).
574
DTCC, NSCC Equity Clearing & Settlement Overview: Presentation to House Staff, at slide 5 (Jul. 22, 2021);
Email and produced attachment from General Counsel for DTCC to Committee staff (Aug. 03, 2021) (on file with the
Committee).
575
DTCC, NSCC Equity Clearing & Settlement Overview: Presentation to House Staff, at slide 15 (Jun. 17, 2021).
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Excess Capital Premium Charges Calculated vs. Applied
(January 01, 2019 – February 12, 2021) 576

18
16
14
12
10
8

Billions
6
4
2
0

Calculated Excess Capital Premium charges Applied Excess Capital Premium charges

Most of the occasions when the NSCC did not impose the Excess Capital Premium charge
at all took place either during the market volatility events of March 2020, which were associated
with the outbreak of the COVID-19 pandemic and the rollout of lockdowns and other social
distancing restrictions across the United States and the world, or during the period from January
25, 2021 through February 1, 2021, which was the height of the Meme Stock Market Event. The
NSCC’s regular waiver of Excess Capital Premium charges disproportionately benefits clearing
brokers that attract the largest aggregate Excess Capital Premium charges.

576
Email and produced attachment from General Counsel for DTCC to Committee staff (Aug. 4, 2021) (on file with
the Committee). This chart includes Excess Capital Premium charges calculated and / or assessed from January 8,
2019 through February 12, 2021 for all NSCC member firms. The considerable increase in Excess Capital Premium
charges in March of 2020 and then again in January and February of 2021 were caused by volatility induced by the
COVID-related lockdowns and meme stock volatility, respectively. Data excludes an Excess Capital Premium charge
calculated on March 19, 2019, due to an internal data reporting error within the NSCC.
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Table 1: Excess Capital Premium charges calculated vs applied (in $ billions)
January 1, 2019 – February 12, 2021 577

Entity ECP Calculated ECP Applied % Applied

Instinet, LLC 578 $ 66.98 $ 17.05 25.46%

Robinhood Securities, LLC $ 2.51 $ 0.02 0.92%

ITG, Inc. $ 1.54 $ 0.28 18.30%

Axos Clearing, LLC $ 1.08 $ 0.16 14.63%

Virtu Americas, LLC $1.06 $0.21 19.44%

The eight member firms that incurred 90% of these Excess Capital Premium charges differ
in their capacity to fund potential Excess Capital Premium charges, for instance through support
from a parent company. 579 Regardless, given the profile of this subset of member firms, which
includes both clearing brokers specialized in servicing rapidly growing fintech startups as well as
those servicing larger institutional clients that can produce very large collateral deposit
requirements, the apparent repeated failure of the Excess Capital Premium charge to deter such
firms from accumulating excessive risk and its failure to encourage them to maintain adequate
excess capital buffers, is concerning.

Of the 277 times these firms received an Excess Capital Premium charge during the period
from January 1, 2019 to February 12, 2021, the Excess Capital Premium charge was either not
applied or reduced 63 times. 580 In interviews with Committee staff, NSCC officials stated that at
least one member firm made a business decision to engage in trading activities that will result in
the application of the charge because they are either comfortable that the amount of the charge
itself will be manageable or feel confident that it would likely be waived. For instance, consider
Robinhood Financial President and Chief Operating Officer, David Dusseault’s comment “we are
to(o) big for (the NSCC) to actually shut us down.” 581

The Excess Capital Premium charge is meant to be easy to understand and simple to
implement–—a one-size-fits-all for all of NSCC member firms and the diverse business models

577
This list represents the top five NSCC member firms with the highest aggregate calculated Excess Capital Premium
charges from January 8, 2019 through February 12, 2021. It is worth noting that 3 of the 4 times an Excess Capital
Premium charge was calculated for Robinhood was during the Meme Stock Market Event. Email and produced
attachment from General Counsel for DTCC to Committee staff (Aug. 4, 2021).
578
Instinet, LLC is a subsidiary of Nomura Holdings, one of the largest listed Japanese financial services
conglomerates. In addition to acting as the independent equity trading arm of its parent group, it executes trades for
asset management firms, hedge funds, insurance companies, mutual funds and pension funds.
579
DTCC briefing with the Committee (Jun. 17, 2021);
580
DTCC, NSCC Equity Clearing & Settlement Overview: Presentation to House Staff (Jun. 17, 2021).
581
DTCC briefing with the Committee (Jul. 06, 2021); RH_HFSC_00007111 (on file with the Committee).
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among them. 582 Nevertheless, the Meme Stock Market Event exposed a lack of understanding of
the Excess Capital Premium charge regime and/or a failure to take it seriously by several NSCC
member firms which, in turn, led to a failure to adequately prepare to fund such charges and to
capitalize their businesses accordingly.

This represents a moral hazard that undermines the deterrent value of the Excess Capital
Premium charge. Specifically, these firms may not be deterred from riskier trading practices
because they are comfortable that the Excess Capital Premium charges that they incur may be
modified or waived, particularly when the risk of default is greatest. As NSCC officials explained
to Committee staff, part of the purpose of the Excess Capital Premium charge is to encourage
member firms to maintain reasonable excess capital buffers. 583 In other words, by maintaining an
excess capital buffer, individual firms will avoid the application of the Excess Capital Premium
charge as a penalty. 584 The effectiveness of this policy and the positive result that it is designed to
achieve could be undermined by what appears to be the regular, nearly predictable, waiver of
Excess Capital Premium charges during periods of acute volatility in the two years before the
Meme Stock Market Event. The existence of repeat offenders may act as a signal to other member
firms to not take the Excess Capital Premium charge as seriously as they should. It is worth noting
that the Committee reviewed Excess Capital Premium charges as calculated and assessed in a
period that includes both the heightened volatility brought about by the onset of the COVID-19
pandemic and the acute volatility of the Meme Stock Market Event. While these events may not
be representative of periods of lower market volatility prior to March 2020, many experts the
Committee spoke with over the course of its investigation expected to see periods of acute
volatility more regularly going forward.

582
DTCC briefing with the Committee (Jul. 22, 2021).
583
DTCC briefing with the Committee (Jul. 06, 2021).
584
Id.
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IV. POLICY RECOMMENDATIONS

The extraordinary growth in ordinary retail investor participation in the stock market will
likely accelerate with the continued rise of mobile trading applications that gamify investing, offer
fractional share trading, and other products designed to encourage the frequency of trading.
Growth in ordinary retail investor participation in the market has the potential to increase
opportunities for wealth creation if coupled with a robust framework of investor protection and
high-quality information that prevents abuse and fraud. However, market institutions, regulations,
and policy considerations must be designed with attention to the interests of ordinary retail
investors at the forefront and must attempt to anticipate and plan for the potentially disruptive
impacts of new technologies.

Industry participants and experts that the Committee spoke to, including witnesses
appearing on behalf of the clearing brokers that are addressed in this report, expressed concerns
about a trading environment that simultaneously invites increased retail investor participation
coupled with the advent of social media driven trading activity. DTCC’s Managing Director for
Financial Risk Management, for instance, indicated that the Meme Stock Market Event
represented a new kind of risk that regulators must be prepared for in the future. 585

The DTCC and industry participants are making efforts to move to a T+1 settlement cycle
from the current two day settlement cycle, which the DTCC estimates could reduce the volatility
component of NSCC margin requirements by 41% and alleviate some of the issues described in
this report related to the magnitude of collateral deposit requirements. 586 The SEC has now also
endorsed this shift to T+1 settlement and has proposed a rule to shorten the settlement cycle. 587
Reducing the settlement time may help mitigate collateral requirements imposed by the
clearinghouses, but given that the Meme Stock Market Event occurred after the NSCC shortened
its settlement cycle from T+3 to T+2 in 2017, 588 merely shortening the settlement cycle without
making other changes is not a panacea and does not address all of the problematic issues
illuminated by the Meme Stock Market Event.

585
DTCC briefing with the Committee (Jul. 22, 2021).
586
Members of Congress, consumer advocates, and regulators discussed the pros and cons of shortening DTCC’s
settlement cycle in all three hearings the Committee held on the meme stock market event, with most witnesses
advocating a shorter settlement cycle. For additional detail, see Appendix II: Hearings and Legislation in Response to
Meme Stock Market Event.
DTCC, DTCC PROPOSES APPROACH TO SHORTENING U.S. SETTLEMENT CYCLE TO T+1 WITHIN 2 YEARS
(Feb. 24, 2021); DTCC, Advancing Together: Leading the Industry to Accelerated Settlement (Feb. 2021).
587
SEC, SEC Issues Proposal to Reduce Risks in Clearance and Settlement, (Feb. 09, 2022). The SEC’s proposal also
includes rules that would require broker-dealers and registered investment advisors to shorten the process of
confirming and affirming the trade information used to prepare a transaction for settlement such that the process can
be completed by the end of the trade date. The proposed rule would also introduce new requirements related to
“straight-through processing”—applicable to certain clearing agencies that provide central matching services—which
assist the processing of institutional trades between broker-dealers and institutional customers.
588
DTCC, SIFMA, ICI AND DTCC LAY OUT PATH TO SHORTEN U.S. SECURITIES SETTLEMENT CYCLE TO
T+1 (Dec. 01, 2021).
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In addition, the Committee’s investigation has revealed several potential areas for attention
and reform to help ensure that the retail trading infrastructure operates smoothly in the face of a
rapidly changing trading environment and that the supervision of retail oriented clearing brokers
is updated to meet contemporary challenges. This report’s policy recommendations are set forth
below. While several of these policy recommendations can be implemented by the NSCC, FINRA,
or the SEC directly under existing authority, Congress can also mandate many of these
recommendations through legislation.

1. Understanding the Influx of Retail Traders

a. Congress should adopt legislation mandating key regulators, including the SEC and
FINRA, to study how existing market rules and supervision will need to evolve to
address new technological developments, including the possibility of social media
driven market activity.

The Meme Stock Market Event highlights the need for current rules and market
frameworks to modernize to address novel issues presented by new technology platforms and the
emergence of coordinated market activity by investors using social media. The SEC will need to
consider how to best proceed from an enforcement perspective to protect the market from
potentially manipulative trading coordinated on social media platforms. In addition, the ability to
remain anonymous on platforms such as Reddit while advocating for certain trading strategies may
also provide an avenue to engage in manipulative conduct (for instance, sophisticated investors
could potentially anonymously pose as retail traders and use their outsize financial resources to
promote and advertise certain investments). Such anonymity may undermine the ability of market
regulators to police manipulative and distortionary practices.

Additionally, the new generation of “superbroker” trading platforms provide near
immediate access to customers to trade sophisticated and risky investment instruments like options
and margin, 589 and encourage active trading that may be financially beneficial to the broker and
economically damaging to the retail trader through various digital engagement “gamification”
techniques. This business model can exacerbate volatility and stress the capital base of such firms.
Finally, the rapid pace at which accounts can now be opened on various online trading platforms,
which may be only a matter of seconds, also presents issues relating to the nature and adequacy of
due diligence and know your client (KYC) procedures that such broker-dealers are conducting.

b. The SEC should consider ways to implement trading halts tailored to respond to
concentrated volatility in a limited number of stocks.

Because market wide trading halts are more equitable than restrictions applied ad hoc,
firm-by-firm, the SEC should consider ways to devise trading halts that specifically address
prolonged, concentrated volatility in select stocks. This may reduce the need for individual broker-
dealers to place restrictions on their customers. In instances when a particular stock has exhibited

589
FINRA, Letter of Acceptance, Waiver, and Consent (No. 202006971201) (Jun. 30, 2021).
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repeated volatility in a single day (i.e., GameStop was halted 19 times on January 28, 2021) the
SEC should consider different ways to structure incremental trading halts. 590 Perhaps after a stock
has been halted several times, or several times within an hour, the stock can be halted for
progressively longer periods of time. If the stock continues to exhibit abnormal volatility, the stock
could potentially be halted for the duration of the trading day.
2. Enhancing Supervision of Retail Facing “Superbrokers”

c. Congress should adopt legislation requiring brokers that execute above a pre-
determined threshold of customer orders to establish and maintain a connection to a
public market.

The Meme Stock Market Event exposed certain fragilities in the stock market. On January
28, 2021, as Robinhood faced operational and liquidity concerns, the broker-dealer remained
wholly reliant on its market makers to execute trades for its customers as the firm was not a
member of or connected to a public market such as Nasdaq or the NYSE. Nearly all the market
makers Robinhood routinely routed orders to were unable to execute trades on certain meme
stocks. Had all these market makers been unable to execute trades, Robinhood would have been
unable to execute trades on behalf of its customers. While Robinhood was connected to only six
market makers for equities on January 28, 2021 (functionally providing only six sellers for
equities), a connection to a public stock exchange would have connected the company to thousands
of buyers and sellers from whom to source liquidity. Requiring broker-dealers above a certain size
to obtain and maintain a connection to a public market would promote market resilience and bolster
price discovery in the market.

d. Congress should adopt legislation subjecting broker-dealers that make markets and
provide above a pre-determined threshold of liquidity to other broker-dealers to
Regulation SCI.

Regulation SCI currently applies to self-regulatory organizations such as FINRA and the
MSRB, as well as stock and options exchanges, clearing agencies, and others. The regulation
requires institutions to maintain “written policies and procedures reasonably designed to ensure
that their systems have levels of capacity, integrity, resiliency, availability, and security adequate
to maintain their operational capability and promote the maintenance of fair and orderly
markets.” 591 During the acute volatility in late January 2021, certain market makers such as Virtu
and Wolverine experienced severe operational strain and were unable to execute trades for wide
swaths of securities. During this period, Wolverine had no written policies or procedures in place

590
SEC briefing with the Committee (Jul. 14, 2021); SEC, Staff Report on Equity and Options Market Structure
Conditions in Early 2021, Securities and Exchange Commission (Oct. 14, 2021); The New York Stock Exchange
briefing with the Committee (Aug. 19, 2021).
591
Commissioner Kara M. Stein, Statement on Adoption of Rules to Increase the Operational Transparency of
Alternative Trading Systems (ATS) (July 18, 2018).
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for determining when to restrict trading for volatile stocks. On the other hand, Citadel Securities
became a vital location for broker-dealers to source liquidity in certain meme stocks as its
competitors faced system outages and other operational concerns. Had Citadel Securities also
faced a system outage during the height of the trading volatility, the impact on retail trading and
the stock market would have been severe. Such a vital role in the market demands greater
oversight, as would be provided by subjecting Citadel Securities and other market makers above a
certain size to Regulation SCI. Additionally, market makers should be required to maintain
thorough written policies and procedures to provide guidance on how to maneuver operational
strain whether they qualify to be subject to Regulation SCI or not.

e. The SEC and FINRA should enhance large, retail facing broker-dealer
examinations and mandate stress tests that focus on liquidity management, including
to account for the prospect of social media driven market volatility.

The SEC and FINRA should consider augmenting the routine examination programs of
broker-dealers to assess the adequacy of firm liquidity arrangements and liquidity management
practices more regularly. While it is reviewed regularly by risk monitoring staff, this focus on
liquidity management should be a more regular component of examinations, including in cases
where risk monitoring does not indicate an examination. The SEC and FINRA should also consider
rulemaking to mandate that broker-dealers conduct supplemental stress tests to test their
preparedness for extreme market volatility, including testing their ability to pay Excess Capital
Premium charges triggered by such volatility.

While it may not be possible to predict how precisely social media driven market volatility
may play out in the future, the events of January and February of 2021 show how concentrated
trading activity in a handful of securities can disrupt the stock market. Individual clearing brokers
should expect, and be prepared for, future instances of such concentrated market activity. This
prospect constituted another blind spot in the existing supervisory framework, largely because the
events of January and February of 2021 were, at the time, unprecedented.

f. The SEC and FINRA should introduce a requirement for clearing brokers to
establish written contingency plans to address extreme market volatility and fully
disclose both the contingency plans and any trading restrictions to the market in real
time. Such written contingency plans should be reviewed regularly by the SEC and
FINRA.

As detailed in this report, the response by relevant clearing brokers to the extreme market
volatility witnessed during the Meme Stock Market Event was often an ad hoc exercise in risk
mitigation by operations professionals exercising their best judgment during exigent
circumstances. Similarly, efforts by some firms to seek out additional capital and funding,
including Robinhood and Apex, were also ad hoc and had the quality of an unplanned fire drill.

Several relevant clearing brokers did not have written contingency plans in place
describing, or setting standards for, how risk managers should implement various risk mitigation
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measures, such as trading restrictions. They also did not have in place specific continency funding
plans, other than the general availability of limited credit facilities, which in the case of the relevant
firms proved insufficient. Clearing brokers that Committee staff spoke to, for instance, did not
have in place detailed contingency equity fundraising plans which could have been activated in an
emergency scenario. 592 As a result, it appears that there was a great deal of market confusion and
uncertainty regarding both the nature of trading restrictions and the stability of certain broker-
dealers, including speculation as to whether Robinhood was on the verge of insolvency. 593 In
addition, retail investors exhibited a great deal of frustration with the lack of clarity around trading
restrictions imposed by broker-dealers, trading halts implemented by an exchange or a regulator,
and IT outages on January 28, 2021. 594

The SEC and FINRA should study the possibility of introducing requirements for clearing
brokers to adopt written contingency plans addressing how they will react to extreme market
volatility. Such contingency plans could establish standards and expectations for when various
trading restrictions, such as increased margin requirements, limitations on options trading or PCO
restrictions, might be triggered. Such plans also could minimize the prospect of mistakes and
facilitate speedy action. Such contingency plans could also require the establishment of emergency
fundraising plans and protocols that could facilitate a more rapid capital raising process should
that become necessary. Furthermore, prior public disclosure of such contingency plans to the
market may help prevent speculation as to how relevant actors will react to extreme market
volatility and may have a stabilizing and calming influence on market activity. Such written
contingency plans should be reviewed regularly by the SEC and FINRA once introduced. The SEC
and FINRA should study the viability of mandating the adoption of such written contingency plans
by clearing brokers and the benefits of their public disclosure. In addition to prior public disclosure
of such contingency plans, the SEC should also consider mandating real time information, perhaps
through in-app notifications, regarding the cause of a trading restriction when implemented as this
could provide valuable information to investors and support price discovery in the market. 595

g. Congress should adopt legislation that directs FINRA to conduct more thorough
supervision of the broker-dealer industry and the SEC should conduct more
thorough oversight of FINRA’s activities and any corrective actions FINRA may
propose.

According to GAO’s periodic reviews of the SEC’s oversight of FINRA, the SEC does not
have documented policies and procedures for tracking FINRA deficiencies or any corrective
actions FINRA takes in response to the SEC’s recommendations for improvements. FINRA is not
under a requirement to implement corrective actions if no rule violation was identified by the SEC,
592
Interview with J. Warnick (Robinhood) (Jun. 10, 2021); Interactive Brokers briefing with the Committee (May 25,
2021); Interview with Chief Compliance Officer (Apex Clearing Corporation) and Chief Corporate Development and
Legal Officer (Peak 6 Investments), at 23-24 (Jun. 16, 2021).
593
Andrew Ross Sorkin et al., Why Robinhood Had to Risk Infuriating Its Customers (Jan. 30, 2021); Robert Duff,
Odds Favor Robinhood Will Not Declare Bankruptcy in 2021 (Feb. 01, 2021); Mohit Oberoi, Will Robinhood Survive,
Go Bankrupt, or Eventually Be Acquired? (Jan. 28, 2022).
594
Andrew Ross Sorkin et al., Why Robinhood Had to Risk Infuriating Its Customers (Jan. 30, 2021).
595
The New York Stock Exchange briefing with the Committee (Aug. 19, 2021).
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and there is little federal law controlling how FINRA must carry out its obligations. Therefore,
Congress should act and provide the statutory mandate that is currently lacking to specify how
FINRA should carry out its obligations and authorize the SEC to direct corrective actions when it
identifies problems with FINRA’s examinations and other mandated activities. Until the enactment
of such legislation, the SEC should follow GAO’s recommendations to develop performance
measures for its FINRA oversight, develop policies and procedures for tracking deficiencies and
corrective actions, and develop procedures for identifying and communicating the significance of
oversight findings.
FINRA has taken several actions to respond to both the volatility from the onset of COVID-
19 and the Meme Stock Market event, which includes new and revised protocols and procedures
including the adoption of a Supplemental Liquidity Schedule. However, the Committee’s
investigation also identified multiple areas in which FINRA could have additional rules to guide
its oversight of broker-dealers. For instance, during the course of the investigation, Committee
staff learned that the SEC and FINRA do not require firms to notify them of trading restrictions,
to maintain written plans for emergency capital raisings or liquidity arrangements, or to conduct
stress tests to specifically determine broker-dealers’ ability to offer market access to customers
during periods of peak volatility. 596 FINRA reviews capital and liquidity information from broker-
dealers, but does not currently collect it on a contemporaneous basis unless a broker-dealer is
experiencing significant financial or operational difficulty. The SEC recently approved
enhancements to FINRA’s liquidity reporting framework, and FINRA has discussed with the SEC
additional improvements to Federal and SRO oversight of liquidity. 597
h. When individual firms introduce trading restrictions, they should be required to
notify the SEC and FINRA. Once introduced, FINRA should engage in enhanced
monitoring to ensure that such trading restrictions are appropriate, tailored, and in
place no longer than necessary.

The Committee’s investigation reveals how individual broker-dealers impose trading
restrictions according to their own risk management calculus with limited oversight and review of
those decisions by applicable regulators. Upon inquiry, Committee staff were told that trading
restrictions likely only would be policed in the context of a possible nexus to market manipulation
and that individual broker-dealers have business incentives to be cautious about the introduction
of trading restrictions, specifically because the introduction of trading restrictions tends to alienate
customers. 598 Firms should be required to notify the SEC and FINRA prior to the adoption of
trading restrictions. In addition, FINRA should engage in enhanced monitoring and review of
trading restrictions, when they are adopted by individual broker-dealers, to ensure that they are as
narrowly tailored as possible. Such oversight is important to ensure that broker-dealers do not
abuse their discretionary authority to impose trading restrictions, whether intentionally to protect

596
FINRA briefing with the Committee (Jul. 09, 2021); FINRA briefing with the Committee (Aug. 05, 2021).
597
FINRA briefing with the Committee (Aug. 05, 2021).
598
FINRA briefing with the Committee (Jul. 09, 2021).
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their own interests over those of their customers, or even unintentionally, for instance due to
insufficient attention or poor decision-making.

FINRA and the SEC should consider the adoption of rules and supervisory practices
accordingly. In addition, such a notification requirement would provide relevant regulators at the
SEC and FINRA with important information that would support a more holistic view of how the
market is responding to acute volatility in real time.

Perhaps at some point in the future, trading restrictions at broker-dealers could generate an
automated notice to FINRA and the SEC as restrictions are being implemented. Such real-time,
market wide information could provide regulators greater visibility and transparency into the
market during periods of acute volatility.

3. Strengthening Capital and Liquidity Requirements and Oversight
i. The SEC should introduce enhanced capitalization requirements for clearing
brokers.

The SEC and FINRA should consult with each other to develop enhanced capitalization
requirements (in addition to Rule 15c3-1 under the Securities Exchange Act (the “Uniform Net
Capital Rule”) to provide clearing brokers that support retail trading activity with an additional
monetary buffer to navigate market volatility without the need to resort to remedial measures such
as the adoption of trading restrictions, which could negatively impact ordinary retail investors.
Because FINRA more frequently interacts with broker-dealers, enforcing both SEC and FINRA
regulations, by expanding upon the SEC’s existing capital and liquidity requirements, the SEC
could further empower FINRA to oversee the securities industry more comprehensively by
expanding FINRA’s authority to issue binding guidance.

j. The SEC should introduce a liquidity rule for clearing brokers and FINRA should
establish a rules-based framework governing liquidity planning for clearing brokers.

The SEC should devise a liquidity rule that either updates or complements its net capital
rule and capitalization requirements. FINRA, working with the SEC, should introduce a
complementary rules-based framework establishing liquidity management requirements. In
combination, a liquidity rule and the creation of specific rules governing how firms should manage
their liquidity planning to satisfy the liquidity rule, could better stabilize and strengthen clearing
brokers, and better equip them to handle market volatility in a manner that does not unfairly
prejudice ordinary retail investors.

At present, collateral planning and liquidity management practices vary widely from firm
to firm and are significantly self-regulated. While FINRA periodically issues non-binding
guidance on adequate liquidity planning and may choose to inspect elements of a firm’s collateral
planning process in its examinations, there is an absence of specific rules focused on collateral

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planning and liquidity management practices by clearing brokers. 599 FINRA cannot establish a
liquidity deficiency in an examination outside of mandating compliance with the SEC’s Net
Capital Rule. Therefore, abiding by FINRA’s liquidity guidance is effectively voluntary. The
introduction of detailed and prescriptive rules around collateral planning and liquidity management
practices by the SEC or FINRA would provide FINRA with a more detailed framework that could
be policed and enforced as part of FINRA’s supervision of clearing brokers to ensure that they are
adequately prepared to fund collateral deposit requirements on an ongoing basis.

FINRA, the NSCC, and the SEC should jointly study the prospect of establishing more
detailed rules specifically focused on the collateral planning and liquidity management practices
of clearing brokers. Such rules should involve the conduct of regular reviews to ensure that
individual clearing brokers understand the components of their potential collateral requirements,
are tracking their likely magnitude through the use of appropriate analytical tools tailored to
capture the risks inherent in their respective business models, have a sufficient number of specialist
personnel managing liquidity planning, and have in place adequate contingency sources of funding
to meet prospective funding requirements.

k. The DTCC and its subsidiary, the NSCC, should revisit how it conducts surveillance
of member firms that may pose greater risk, and FINRA should focus more
systematically on assessing the sufficiency of liquidity planning by clearing brokers.

The NSCC has proposed various changes to its Watch List and Enhanced Surveillance List,
such as combining the two into a single list. 600 In addition to simplifying such categorizations, the
NSCC should substantively modify its member surveillance practices to further emphasize
liquidity and capitalization related reviews. Liquidity and capitalization requirements could also
be made part of NSCC’s membership requirements.

A more robust process for evaluating the liquidity and capital position of firms that
continually present heightened risk may help preempt future market events like the Meme Stock
Market Event from occurring. The NSCC should also inform member firms when it is on the
Watch List and provide them with concrete recommendations and timelines to implement them.
In addition, FINRA should also focus more systematically on liquidity planning in its various
examinations of clearing brokers. When certain liquidity related issues or observations are raised
in a FINRA examination, they should be followed up on consistently in subsequent examinations
to ensure that any such issues have been adequately addressed.

l. The DTCC, its subsidiary the NSCC, the SEC, and Congress should introduce an
emergency backstop funding facility for NSCC member firms that provide emergency
liquidity to the NSCC.

599
FINRA briefing with the Committee (Aug. 05, 2021).
600
DTCC briefing with the Committee (Jan. 21, 2020).
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The NSCC, alongside the SEC, should study the prospect of establishing an emergency
backstop funding facility that can be drawn upon by member firms who are unable to meet
collateral deposit requirements by the relevant deadline. Such a facility can be structured to be
expensive and punitive to use with financing costs serving as a form of fine or penalty for member
firms. This lender of last resort solution would avoid the risk of trading restrictions or the cessation
of trading operations by member firms that struggle with the deadline and would therefore avoid
the need to rely on the loss absorption waterfall embedded in the NSCC rules as it would avoid
losses being triggered. 601 Penalties could also be imposed on firms that draw on such a facility
after the fact. A variety of options can also be considered to fund such a backstop facility, including
periodic contributions from NSCC member firms and third-party credit providers.

m. The DTCC and its subsidiary, the NSCC, should introduce clear written policies and
procedures and establish transparency around the circumstances under which an
Excess Capital Premium charge may be waived; such decisions should be subject to
review by the SEC.

DTCC officials conveyed to Committee staff that they use a balancing test when
determining whether to waive Excess Capital Premium charges.602 Specifically, they weigh
whether the charge will serve its intended purposes to disincentivize risk taking in the market
against the possibility that applying the charge may be counterproductive and introduce risk if a
member firm is unable to fund the Excess Capital Premium charge. 603

At present, however, there appears to be a limited concrete framework prescribing when a
waiver from an Excess Capital Premium charge is appropriate. 604 It may be necessary to
occasionally Excess Capital Premium charges, but discretion unfettered by precise standards,
policies, and procedures creates opacity with respect to the charge and may contribute to
undermining it by enhancing the likelihood of speculation or miscalculation by clearing brokers
as to its application. Creating more clarity on when the charge may be waived will help clearing
brokers plan accordingly and may limit overreliance on the broad discretionary waiver authority
of the DTCC Risk Committee. This could promote better capital and liquidity planning by member

601
Because the NSCC is designated as a Systemically Important Financial Market Utility (SIFMU) under Dodd-Frank,
the Financial Stability Oversight Council (FSOC) should study the potential systemic risk of the NSCC’s regular
waiver of collateral charges during periods of acute volatility.
602
DTCC briefing with the Committee (Jul. 22, 2021).
603
DTCC briefing with the Committee (Jul. 22, 2021).
604
NSCC, NSCC Rules and Procedures - Procedure XV I(B)(2) (Jan. 01, 2021). Footnote 7 to Section I.(B)(2) of
Procedure XV (Clearing Fund Formula and Other Matters) of NSCC Rules specifies the circumstances in which NSCC
may exercise discretion to waive an ECP charge. The text of the footnote is reproduced in its entirety as follows:
“The Corporation [i.e., the National Securities Clearing Corporation] has identified the following guidelines or
circumstances, which are intended to be illustrative, but not limited, where the premium will not be imposed: (a) where
the premium results from charges applied with respect to municipal securities trades settling in CNS, where the
member has offsetting compared trades settling on a trade-for-trade basis through DTC; and (b) management will look
to see whether the premium results from an unusual or non-recurring circumstance where management believes it
would not be appropriate to assess the premium. Examples of such circumstances are a member’s late submission of
trade data for comparison or trade recording that would otherwise reduce the margined position if timely submitted,
or an unexpected haircut or capital charge that does not fundamentally change its risk profile.”
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firms of the clearinghouse who may view the prospect of having to fund an Excess Capital
Premium charge more seriously. In addition, for prudential reasons, it may be appropriate to
require that waivers be subject to review by select senior DTCC officials prior to being granted.
The DTCC, in conjunction with its regulator, the SEC, should consider the adoption of a more
detailed framework establishing specific criteria for when a waiver from an Excess Capital
Premium charge will be entertained, such that this can be communicated to member firms, and
they can be educated accordingly.

Another possibility is for the DTCC to consider introducing a system in which firms that
incur an Excess Capital Premium charge are required to always maintain an additional capital
reserve. This would serve the dual purpose of penalizing the offending member firm and
disincentivizing it from accumulating excessive risk in its trading book in the first place. This
system also would bolster the stability of such firms to help them withstand market volatility.

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APPENDIX I: GLOSSARY
Broker-dealers: Broker-dealers are firms that engage in trading securities on behalf of clients and
may also trade for themselves. Some broker-dealers act only as an introducing broker and contract
with a third-party clearing broker to provide clearing services. (See “Introducing Broker” and
“Clearing Broker” below).

Clearing Brokers: Clearing brokers are entities that are responsible for executing and processing
trades, which includes handling buy and sell orders and maintaining custody of investor securities
and assets. They are also member firms of clearinghouses.

Clearing fund requirements (also known as “margin requirements” and “collateral deposit
requirements”): Clearing fund requirements are the daily amount of funds, also known as margin,
that are required to be maintained by member firms with the DTCC as collateral to limit the
clearinghouse’s exposure to a potential default of that member. Clearing fund requirements consist
of various components, which include the calculated Value-at-Risk (See “Value-at-Risk charge”),
mark-to-market charges, certain charges designed to capture risks of variations in a member firm’s
unsettled portfolio which rely on historical information, and Excess Capital Premium charges, if
applicable.

Clearinghouse: A clearinghouse acts as a central counterparty in the execution of trades and
protects buyers and sellers from risk in the case that one entity does not successfully deliver cash
or securities in connection with such trade. The DTCC and its subsidiaries are clearinghouses. (See
“DTCC” below).

Depository Trust and Clearing Corporation (DTCC): The DTCC is a financial services
company that processes, clears, and settles securities transactions. It exchanges securities on behalf
of buyers and sellers and acts as securities depository by holding custody of the relevant securities.
Its subsidiary, the National Securities Clearing Corporation (NSCC), provides clearing,
settlement, risk management, and information services for equity securities.

Excess Capital Premium charge (ECP): The Excess Capital Premium charge is imposed on an
NSCC member firm when the member firm’s “core” margin requirement exceeds its excess net
capital as specified in SEC Rules. If imposed, it is a component of member firms’ overall collateral
deposit requirement, and the charge is calculated based on DTCC and NSCC rules.

Excess Capital Ratio: The ratio of a broker-dealer firm’s “core” margin requirement to its excess
net capital.

Excess Net Capital: The amount by which a firm’s available capital exceeds its regulatory net
capital as specified in SEC rules.

Introducing Brokers: Brokers that interface with individual clients and assist them in opening
accounts but do not maintain custody of funds and securities belonging to customers. Introducing
brokers instead rely on third parties for back-end operations and the execution of trades (i.e.,

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Webull is an example of a broker that acts as only an introducing broker and, in its case, relies on
a contractual arrangement with Apex to clear and process trades initiated by Webull’s customers
on its platform).

Lit Exchange: A “lit” exchange or a lit pool is a public stock exchange where the amount of
liquidity posted for bids and offers for securities are openly displayed to all traders. Examples of
lit exchanges include the New York Stock Exchange and Nasdaq. Lit exchanges are the opposite
of “dark” pools in which prices are not displayed to all market participants.

Market Makers: Market makers are brokers that quote buy and sell prices of securities for itself
and other market participants. They ‘make the market’ by infusing liquidity into the market by
ensuring trades can be bought and sold. Market makers also provide investors with the ability to
trade securities with immediacy and transparency.

Meme stocks: Meme stocks are stocks that experience increased trading volume activity by retail
investors because of heightened social media discourse (i.e., on Reddit, Twitter, and TikTok)
surrounding the stock. Examples of meme stocks from the Meme Stock Market Event include
GameStop (GME), AMC Entertainment Holdings Inc. (AMC), and Naked Brand Group Ltd.
(NAKD).

Meme Stock Market Event: The volatility experienced in the pricing and trading of meme stocks
during January and February of 2021 and the related actions taken by various broker-dealers.

Payment for Order Flow (PFOF): Payment for Order Flow is the payment a broker-dealer
receives for directing orders to a market maker for trade execution. The broker-dealer receives
payment in the form of a PFOF rebate, usually fractions of a penny per share, as compensation for
routing orders to market makers.

Uniform Net Capital Rule or Net Capital Rule: SEC Rule 15c3-1; This rule allows the SEC to
directly regulate the ability of broker-dealers to meet their financial obligations to customers and
other creditors by requiring them to maintain a minimum net capital based on the requirements set
out in the rule.

Short selling: To “short” a stock, an investor borrows shares of a stock or asset that they believe
will decrease in value. The investor then sells these borrowed shares to buyers willing to pay the
market price. Before the investor returns the borrowed shares to the lender, the trader is betting
that the price will drop and so they can purchase the shares at a lower cost.

Short squeeze: A short squeeze occurs when the market price of shorted stock rises above the
price at which the stock was borrowed, forcing short sellers to purchase the stock at a higher price.
This creates a self-reinforcing upward pressure on the price of the stock, which then causes
increasingly higher losses for the entity that had shorted the stock initially.

Slices: Regular, periodic information the NSCC communicates to each of its member firms
throughout the day outlining the total potential deposit requirement applicable to that member firm,
broken down by each of its components. Slices are sent to the firms intraday.
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Superbroker: As used in this report, the term “superbroker” refers to a new generation of retail-
facing self-directed broker-dealers that are incentivized to push their customers to make as many
trades as possible through digital engagement features that include “game-like features and
celebratory animations,” lenient extension of margin trading to their customers, increased access
to fractional shares, and related practices.
Value-at-Risk (Value-at-Risk or VaR) Charge: The Value-at-Risk charge is an NSCC
requirement that is based on a complex formula which measures the volatility and risk within each
clearing broker’s daily book of business and on the broker-dealers previous day’s activity. It is
used to mitigate the NSCC’s risk of exposure to a member firm’s portfolio. These risks are laid
out in Procedure XV of the NSCC’s Rules and Procedures.

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APPENDIX II: HEARINGS AND LEGISLATION IN RESPONSE
TO MEME STOCK MARKET EVENT
1. Introduction
In early 2021, the Financial Services Committee convened a series of three hearings to
explore the increased trading activity in “meme stocks” that generated significant market volatility
in January 2021, which ultimately led several introducing brokers to restrict trading for customers
(Meme Stock Market Event). Meme stocks are stocks that generate immense investor interest due
to activity on social media and online forums, and not necessarily on analysis of a company’s
fundamentals. 605 The U.S. House Committee on Financial Services (Committee) convened the
hearings to establish the facts about the events that occurred and to evaluate whether existing
regulatory measures are sufficient to promote integrity and uphold fairness, transparency, and
accountability within our capital markets. These hearings are part of the Committee’s efforts to
ensure that the regulatory architecture of U.S. capital markets is designed to provide a level playing
field for ordinary retail customers and does not provide undue advantages to sophisticated market
participants, including hedge funds, and financial intermediaries.

2. Hearing Series Overview
a. Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide, Part I

On February 18, 2021, the Committee received testimony from representatives of
institutions involved in the Meme Stock Market Event. 606 The witnesses were:
• Mr. Vlad Tenev, CEO and Co-Founder; Robinhood Markets, Inc.;
• Mr. Kenneth Griffin, CEO, Citadel;
• Mr. Gabriel Plotkin, CEO, Melvin Capital;
• Mr. Steve Huffman, CEO and Co-Founder, Reddit;
• Mr. Keith Gill, retail investor a.k.a. “roaringkitty”; and
• Ms. Jennifer Schulp, Director of Financial Regulation Studies, Cato Institute.

In her opening statement, Chairwoman Waters stated that the market frenzy leading up to
the Meme Stock Market Event “illuminated potential conflicts of interest and the predatory ways
that certain funds operate” while also demonstrating “the enormous potential power of social
media.” 607 During the hearing, lawmakers focused on the trading restrictions Robinhood placed

605
Nasdaq, Ride the Renewed Meme Stock Wave With This New ETF (Jun. 2, 2021).
606
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
607
Id.
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on certain meme stocks, including placing several equities in “position closing only” (PCO) in
which investors could liquidate their stock but not open new positions. 608 Mr. Tenev explained
that Robinhood Securities established restrictions so that the company could meet increased
collateral deposit requirements issued by the National Security Clearing Corporation (NSCC) in
response to increased risk in Robinhood’s cleared portfolio as a result of concentrated activity in
meme stocks. 609 Melvin Capital CEO Gabriel Plotkin testified that because of the “unprecedented”
events, the company closed its positions on GameStop and other meme stocks and that the
company and its investors “suffered significant losses.” 610 Chairwoman Waters confirmed with
Citadel Securities CEO Kenneth Griffin that the market maker executed above 40% of the
country’s retail trade, and expressed concerns about Citadel Securities’ business model. 611 Citadel
Securities makes use of dark pools and other off-exchange trading and has access to key non-
public information such as the direction of trade volume at counterparty broker-dealers. 612

b. Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide, Part II

On March 17, 2021, the Committee convened a second hearing focused on market structure
issues that may have contributed to the volatile trading environment leading up to the Meme Stock
Market Event such as payment for order flow (PFOF, the practice by which a broker-dealer routes
a customer order to a market maker and in return the market maker pays the broker-dealer a fee or
offers a rebate for that order and as such the broker-dealer profits from selling its users’ order), the
systemic risks posed by market makers, and the duration of the trade settlement cycle. 613
Chairwoman Waters called for capital market experts to provide their perspectives. The witnesses
were:
• Mr. Sal Arnuk, Partner, Themis Trading LLC;
• Mr. Michael Blaugrund, COO, New York Stock Exchange;
• Dr. Vicki Bogan, Professor, Cornell University;
• Ms. Alexis Goldstein, Senior Policy Analyst, Americans for Financial Reform;
• Mr. Dennis Kelleher, President and CEO, Better Markets;
• Mr. Alan Grujic, CEO, All of Us Financial; and
• Mr. Michael Piwowar, Executive Director, Milken Institute.

608
Id.
609
Id.
610
Id.
611
Id.
612
Id.
613
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
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In her opening statement, Chairwoman Maxine Waters stated she had convened the hearing
to hear perspectives from capital markets experts and investor advocates. 614 The Meme Stock
Market Event had “cast a spotlight on gaps in regulation of our capital markets,” and Part II of the
hearing series would provide an opportunity to “assess what legislative steps may be necessary.” 615
Ms. Alexis Goldstein, Mr. Sal Arnuk, and Mr. Dennis Kelleher argued that PFOF should be
prohibited or changed. 616 Witnesses also expressed concerns regarding the systemic risk posed by
Citadel Securities’ market maker subsidiary, which executes over 40% of retail trading for U.S.
listed equities. 617 Mr. Kelleher testified that Citadel Securities and other major market makers do
not have sufficient transparency, regulation, oversight, and accountability. 618 Ms. Goldstein
testified that Robinhood’s decision to halt trading was arbitrary and harmed investor confidence. 619
Mr. Arnuk highlighted the advantages that institutional investors and accredited investors enjoy at
the expense of retail investors and those who save for retirement. 620

c. Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide, Part III

On May 06, 2021, the Committee held a third hearing analyzing the regulatory response to
the Meme Stock Market Event. 621 The witnesses were:
• The Honorable Gary Gensler, Chairman, U.S. Securities and Exchange
Commission (SEC);
• Mr. Michael Bodson, President and Chief Executive Officer, the Depository Trust
& Clearing Corporation (DTCC); and
• Mr. Robert Cook, President and Chief Executive Officer, Financial Industry
Regulatory Authority, Inc. (FINRA)

In her opening statement, Chairwoman Maxine Waters emphasized that, “it is critical for
our cops on the block at the SEC to protect investors and ensure that our markets are transparent
and fair.” 622 Regulatory leaders shared their evaluations of how existing standards protect
consumers in a market undergoing rapid change in the face of new technologies such as stock
trading platforms that feature gamification, the application of typical elements of game playing
such as animations, point scoring, leaderboards, and a free random stock upon signup. 623 SEC
Chairman Gary Gensler argued that while new user technology has “expanded access to capital”
and made it “easier for [an] investor to sign up, start trading, and learn about investing,” the SEC
614
Id.
615
Id.
616
Id.
617
Id.
618
Id.
619
Id.
620
Id.
621
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
622
Id.
623
Sarah E. Aberg and Shane J. Killeen, Game On: FINRA Hints at Upcoming Gamification Sweep, The National
Law Review (Jun. 1, 2021).
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would continue to consider aspects of new technology applied to retail trading like “[gamification],
behavioral prompts, and predictive data analytics.” 624 FINRA CEO Robert Cook testified that after
the Meme Stock Market Event, FINRA established an internal working group that would devote
“significant resources to investigating whether it’s broker-dealers members comply with SEC and
FINRA Rules.” 625 DTCC CEO Mr. Michael Bodson also provided insight into the settlement
clearing process and the clearinghouse’s ongoing efforts to implement a reduced duration of
settlement clearing. 626

3. Key Issues
The hearings brought attention to several significant factors at play during the Meme Stock
Market Event.

a. Gamification

Lawmakers expressed concerns regarding Robinhood’s gamification of stock trading
through the design of its app and the company’s lack of retail investor protections. Representative
Cynthia Axne (D-IA) discussed the negative behavioral implications of the Robinhood app’s
design, arguing that features like virtual confetti celebrating an investor’s trade or constant push
notifications encouraged “more frequent trading” and did not help “people build equity through
smarter investing.” 627

Representatives Emanuel Cleaver (D-MO), Sean Casten (D-ILL), Ritchie Torres (D-NY)
and James Himes (D-CT) cited the passing of Robinhood retail investor Alex Kearns as a tragic
example of the consequences of inadequate consumer protection and regulations over trading
processes. 628 Mr. Kearns had taken his own life after three unsuccessful attempts to contact
Robinhood’s customer service and believing that he had a negative balance of $730,165 on his
account. 629 Ms. Alexis Goldstein from Americans for Financial Reform also questioned “the way
that Robinhood may be enticing people who may not have the needed expertise to trade.” 630 Mr.
Keith Gill testified that, from his perspective as an investor, “increased transparency could help”
in understanding the market and would be “beneficial to retail investors.” 631

624
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
625
Id.
626
Id.
627
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
628
Id.
629
Maggie Fitzgerald, Robinhood sued by family of 20-year-old trader who killed himself after believing he racked
up huge losses, CNBC (Feb. 08, 2021).
630
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
631
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
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At the March 17, 2021 hearing, Dr. Vicki Borgen shared that trading app’s interface and
design “influence the type of decision that a retail investor makes almost on an unconscious level”
and could elicit “particular behaviors [that are] not beneficial for retail investors.” 632 At the May
6, 2021 hearing, SEC Chair Gensler testified that the SEC would continue to review the effects of
gamification on retail investors, stating some broker-dealers, like buildings in “Las Vegas and
Atlantic City… [are] using psychological prompts and behavioral prompts to get investors to trade
more.” 633

b. Payment for Order Flow

At the February 18, 2021 hearing, members of Congress questioned Robinhood’s revenue
model, particularly the share of revenue the company derives from PFOF. Representative Axne
stated that this arrangement resulted in retail investors serving as Robinhood’s “product,” which
was sold to its “customer,” Citadel Securities and other market making firms that could result in a
hidden cost to customers if it resulted in higher charges than what could be obtained from other
market makers. 634 Representatives Brad Sherman (D-CA), Torres, and Alexandra Ocasio-Cortez
(D-N.Y.) highlighted that PFOF established a “hidden cost to investors” which could potentially
conflict with broker-dealers’ duty to its customers of best trade execution. 635

At the March 17, 2021 hearing, Mr. Sal Arnuk, a partner at Themis, LLP, argued that PFOF
“distorts order routing” because it does not account for odd lot orders that retail investors using
apps like Robinhood primarily trade. 636 He also stated that due to PFOF arrangements, Robinhood
“abandoned its … education and its suitability requirements … because it has this massive
incentive to do so.” 637 Mr. Kelleher stated that the app’s “primary function is not to get people to
invest, it’s to get people to trade” and suggested that the SEC should declare that PFOF “violates
or facilitates the violation of the best execution duty.” 638 Since retail investors compete with
institutions that have maximal resources at their disposal, Mr. Kelleher also remarked that retail
investors “lose consistently … because they’re paying more for every single one of their orders.”639
Alternatively, Ms. Goldstein pointed out that broker-dealers could pass the payment to consumers
or permit them to opt out. 640

At the May 6, 2021 hearing, regulators weighed in on whether PFOF inherently presents a
conflict of interest. Chairman Gensler argued that there could be an “inherent conflict [] if a broker-

632
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
633
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
634
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
635
Id.
636
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
637
Id.
638
Id.
639
Id.
640
Id.
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dealer has arrangements … on payment to order flow” which could oppose upholding consumers’
interests. 641 Mr. Robert Cook also stated that PFOF “does create a conflict,” expressing concerns
over whether an order is routed a certain way because of a rebate or because of actual best
execution and asking whether these concerns are “adequately addressed through disclosure.” 642

c. Social Media and Market Manipulation

At the February 18, 2021 hearing, Representatives David Scott (D-GA) and Josh
Gottheimer (D-NJ) raised concerns about social media’s role in influencing trades, spreading
misinformation, and market manipulation. 643 Reddit CEO Steve Huffman assured lawmakers in
his testimony that the company “ensure[s] the authenticity of [its] communities” and did not
discover evidence of manipulation on the platform. 644 Melvin Capital CEO Mr. Gabe Plotkin
discussed how investors, coordinating through social media, can collectively drive stock prices,
and that the “whole industry will have to adapt.” 645

At the May 6, 2021 hearing, Chairman Gensler responded to questions about the SEC’s
role in preventing market manipulation, especially on social media. He stated that the SEC’s
protective measures would not interfere with “somebody’s free speech rights on social media” but
would seek to “root out” the attempts of large institutions, individuals, or even computer
technology to manipulate capital markets for the purposes of defrauding or misleading
Americans. 646

d. Short Selling and Securities Lending

At the February 18, 2021 hearing, Melvin CEO Mr. Gabriel Plotkin testified that before
the company closed its meme stock positions and incurred losses, his firm had been “shorting
GameStop since Melvin’s inception six years earlier,” and that the company conducts extensive
research before entering a short position for “the long term.” 647 Members including Carolyn
Maloney (D-NY), Sherman, Nydia Velázquez (D-NY), and San Nicolas (D-GUAM) expressed
concerns with the lack of transparency surrounding short-selling. 648

At the March 17, 2021 hearing, the New York Stock Exchange’s Chief Operating Officer,
Mr. Michael Blaugrund, argued that the market on which short-selling depends is “opaque and
inefficient” and aggregate data collected by regulators like FINRA is “insufficient for market

641
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
642
Id.
643
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
644
Id.
645
Id.
646
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
647
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
648
Id.
126
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139

participants or regulators to understand how supply and demand are changing for stock loans.” 649
Mr. Kelleher also urged for increased disclosure on short positions to inform market
participants. 650

At the May 6, 2021 hearing, Mr. Cook responded to Representative Sherman’s question
about FINRA’s disclosure protocols, noting that FINRA is committed to analyzing disclosure
around short positions and soliciting comments to change its procedures around short selling. 651
Chairman Gensler emphasized that appropriate disclosure regimes and other forms of transparency
are “at the heart of investors being able to take risks and understanding their risks.” 652 Chairman
Gensler testified that he has asked SEC staff to propose measures so there is “greater transparency
in the short-selling side.” 653

e. Role of Market Makers

Throughout the series of hearings, Committee members and witnesses expressed concerns
with the imbalanced concentration of market makers executing trades, particularly Citadel
Securities, and how that factors in with PFOF, market stability, and investor protection. At the
February 18, 2021 hearing, Chairwoman Maxine Waters (D-CA) raised concerns about the
systemic implications of Citadel Securities executing nearly half of all retail trades in the United
States at the time of the hearing. 654 Chairwoman Waters argued that Citadel Securities, and similar
market makers’ “business strategy is designed intentionally to undermine market transparency and
skim profits from companies and other investors.” 655 At the March 17, 2021 hearing,
Representative Al Green (D-TX) raised concerns about the possibility of Citadel Securities and
other market makers being able to trade ahead of their customers because they “get to see
unfulfilled orders from customers” and could anticipate the movement of a stock with this data.
Goldstein argued “inherent structural advantages” benefit large players, especially Citadel
Securities, because of its “systemic significance to the financial system.” 656 Because PFOF
protects and furthers these market makers, Mr. Kelleher also argued that retail investors receive
“the worst deal” and only by leveling the imbalance and creating a more transparent, accountable,
and fair system would retail investor confidence increase. 657

649
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
650
Id.
651
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
652
Id.
653
Id.
654
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
655
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide (Feb. 18, 2021).
656
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
657
Id.
127
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At the May 6, 2021 hearing, Chairman Gensler emphasized that trading ahead of a
customer’s order was already prohibited. 658 He also noted that PFOF enabled “one or two
wholesalers to have a dominant share in the retail market” and this concentration leads to concerns
over market fragility and “competitive advantage[s] on the rest of the market” that may be gained
by these entities from the data they collect. 659

f. Settlement Clearing Cycle

Across all three hearings, Committee members were interested in learning more about the
DTCC’s trade settlement clearing process (which currently operates on a “T+2” timeframe
consisting of two business days to clear and settle a trade after it is executed) and how its collateral
requirements are impacted during periods of significant market volatility.

At the March 17, 2021 hearing, Mr. Piwowar argued that shortening the cycle could lead
to operational risks. 660 Ms. Goldstein disagreed, however, stating that existing capital deposit
requirements were the primary reason Robinhood established restrictions, alleging that it was
“Robinhood’s inability to manage its own risk and not any fault of any regulation.” 661 Dr. Bogan
stated that had Robinhood “not been able to make [the] deposit requirement … SIPC… Securities
Investor Protection Corporation … would take over” to protect investors. 662

At the May 6, 2021 hearing, DTCC CEO Michael Bodson testified that the organization’s
clearing process “protects both firms and their customers against default … risk” by “collecting
margin … which is money that clearing members post as collateral.” 663 Mr. Bodson also discussed
the correlation between increased market volatility and margin requirements due to higher risks in
a member’s portfolio. 664 The day before the Meme Stock Market Event, Mr. Bodson stated that
the NSCC processed an unprecedented amount of 474 million transactions (versus approximately
200 million on a normal day). 665

Lawmakers also inquired about the implications of a reduced settlement cycle. Mr. Bodson
asserted that reducing the settlement clearing time would decrease the value of capital
clearinghouse members needed to maintain on deposit with the NSCC. 666 Mr. Bodson testified
that a shortened cycle would “enhance market resilience,” reduce margin requirements by forty
percent, and “lower costs for investors.” 667 Since the Meme Stock Market Event, the DTCC has

658
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
659
Id.
660
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
661
Id.
662
Id.
663
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
664
Id.
665
Id.
666
Id.
667
Id.
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engaged with the Securities Industry and Financial Markets Association (SIFMA) and the
Investment Company Institute (ICI) to advance “in-depth analysis on the next steps to achieving
T+1,” and expects to shorten its settlement cycle to T+1 within the timespan of a few years. 668

g. Regulatory Solutions and Further Considerations

At the March 17, 2021 hearing, industry experts suggested several ways that regulators
could reduce systemic risks and ensure that retail investors are protected. Mr. Piwowar believes
that the SEC should address rulemaking changes through its cost-benefit analysis and review Rule
605 reports from market maker firms to understand the execution quality of trades. 669 Rule 605
requires market makers to provide certain order execution information such as effective spreads
for customers routed to a market center and the extent to which market centers provide executions
at prices different from public quotes to investors. 670 Ms. Goldstein encouraged regulators to use
enforcement actions and conduct investigations to ensure consumers are adequately protected
notwithstanding the use of payment for order flow. 671 She also suggested that Treasury Secretary
Janet Yellen could restart the working group at the Financial Stability Oversight Council (FSOC)
dedicated to analyzing risk in the system caused by hedge fund activity and to also enhance the
tools that can identify systemic risks overall in the system. 672

Mr. Kelleher emphasized that the SEC should investigate market makers and not exclude
them from Regulation SCI. 673 Regulation SCI currently applies to self-regulatory organizations
such as FINRA and the MSRB, as well as stock and options exchanges, clearing agencies, and
others—the regulation requires entities to maintain “written policies and procedures reasonably
designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and
security adequate to maintain their operational capability and promote the maintenance of fair and
orderly market.” 674

At the May 6, 2021 hearing, regulators shared their efforts post-January 28, 2021 to
assessing whether the existing regulatory framework can protect investors against future market
volatility. Chairman Gensler testified that the SEC was working on recommendations and releasing
a report that would detail the activities surrounding the events in January 2021. 675 FINRA CEO
Mr. Cook mentioned that the organization has “established an internal working group …
668
Michael Bodson et al., A Shorter Settlement Cycle: T+1 Will Benefit Investors and Market Participant Firms by
Reducing Systemic and Operational Risks, DTCC (May 4, 2021); DTCC, DTCC Proposes Approach to Shortening
U.S. Settlement Cycle to T+1 Within 2 Years (Feb. 24, 2021);
669
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
670
FINRA, SEC Rule 605 (accessed on. Jul. 14, 2021).
671
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021).
672
Id.
673
House Committee on Financial Services, Virtual Hearing – Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part II (Mar. 17, 2021); SEC, Responses to Frequently Asked
Questions Concerning Regulation SCI (last modified Aug. 21, 2019).
674
SEC, Responses to Frequently Asked Questions Concerning Regulation SCI (last modified Aug. 21, 2019).
675
House Committee on Financial Services, Virtual Hearing - Game Stopped? Who Wins and Loses When Short
Sellers, Social Media, and Retail Investors Collide, Part III (May 06, 2021).
129
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139

investigating whether it’s broker-dealers members comply with SEC and FINRA rules” and
“issued regulatory notices reminding firms of relevant duties and responsibilities in this area.” 676
In response to Robinhood’s customer service and transparency issues, FINRA is also looking at
“the minimum levels of support customers might need.” 677 The DTCC continues to work on
decreasing the settlement time to T+1. 678

4. Proposed Legislation

Based on its detailed and focused consideration of the Meme Stock Market Event, and
building upon lessons learned from public hearings, this investigation and policy analysis, the
Committee drafted legislation to address many of the issues highlighted by these market events,
specifically:

• H.R. 4618, Short Sale Transparency and Market Fairness Act, to amend the Securities
Exchange Act of 1934 to modernize reporting requirements under section 13(f) of such
Act, and for other purposes:

• Summary: This bill modifies the reporting requirements applicable to certain
institutional investment managers that have more than $100 million in assets under
management and that are required to file ownership reports with the SEC, by (1)
reducing the reporting window from 45 days to 10 days after the end of each month for
such asset managers, and (2) expanding such reports to require reporting of direct or
indirect derivative positions or interests (including short positions). The bill also
requires the SEC to (1) issue rules for the public disclosure of short sale activity by
institutional investment managers, and (2) report on the standards and criteria
determining whether confidential treatment applies to certain reports filed by
institutional investment managers.

• Status: Introduced in the House of Representatives and referred to the House
Committee on Financial Services on July 22, 2021. Consideration and Mark-up sessions
held on July 28, 2021, and July 29, 2021. Ordered to be Reported in the Nature of a
Substitute (Amended) by the Yeas and Nays: 27—22 on July 29, 2021.

• H.R. 4685, Trading Isn’t a Game Act, to require the Government Accountability Office
to carry out a study on the impact of the gamification, psychological nudges, and other
design techniques used by online trading platforms, and for other purposes:

• Summary: This bill would require the GAO to conduct a study on the impact of
gamification, psychological nudges, and other design techniques by online trading
platforms, including whether such techniques are detrimental to investors or empower,
inform, and educate them, among other potential impacts. The Comptroller General of
the GAO would be required to issue the report within 270 days to the Office of the

676
Id.
677
Id.
678
Id.
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Investor Advocate of the SEC and the Congress. The Investor Advocate shall then
review the report and issue any regulatory or legislative recommendations within 90
days.

• Status: Introduced in the House of Representatives and referred to the House
Committee on Financial Services on July 26, 2021. Consideration and Mark-up sessions
held on July 28, 2021, and July 29, 2021. Ordered to be Reported in the Nature of a
Substitute (Amended) by the Yeas and Nays: 28—23 on July 29, 2021. Reported
(Amended) by the House Committee on Financial Services and placed on the Union
Calendar, Calendar No. 165 on January 20, 2022.

• H.R. , to amend the Securities Act of 1934 to establish certain requirements with
respect to retail investor options trading, and for other purposes: this discussion draft
would require enhancements for retail customers who engage in options trading, including
preventing broker dealers from offering retail customers monetary and non-monetary
incentives that encourage options trading; and would require broker dealers to disclose to
customers the percentage of the broker dealer’s retail client accounts that lose money on such
options trading.

• H.R. 4617, to require the Securities and Exchange Commission to carry out a study on
payment for order flow, to require the Investor Advocate of the Commission to provide
recommendations on payment for order flow, and for other purposes:

• Summary: This bill would require the SEC to carry out a study on payment for order
flow received by brokerage firms for routing customer orders to market centers. The
SEC would be required to issue the report with all findings and determinations to the
Congress within 180 days. The SEC shall then issue rules consistent with the results of
the study within 18 months, including to prohibit or limit payment for order flow if
warranted. The SEC may issue such rules before the completion of the study if the SEC
determines it necessary or appropriate.

• H.R. 4619, to amend the Securities Exchange Act of 1934 to prohibit trading ahead by
market makers, and for other purposes:

• Summary: This bill would statutorily prohibit market makers from “trading ahead”;
require the CEO of each market maker to annually certify that the CEO has performed
reasonable due diligence during the reporting period to ensure the market maker has not
traded ahead; and would impose personal liability on any associated person of a market
maker who knowingly and willfully trades ahead, directs another associated person to

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trade ahead, or is personally unjustly enriched by trading ahead. The bill requires the
SEC to issue rules carrying out the legislation within 90 days.

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APPENDIX III: THE U.S. GOVERNMENT ACCOUNTABILITY
ORGANIZATION (GAO) FOUND SIGNIFICANT GAPS IN THE
SEC’S OVERSIGHT OF FINRA IN CONGRESSIONALLY
MANDATED REPORTS

Section 964 of the Dodd-Frank Act (Section 964) requires the U.S. Government
Accountability Organization (GAO) to periodically evaluate the SEC’s oversight over FINRA and
submit a report to the House Committee on Financial Services and the Senate Committee on
Banking, Housing, and Urban Affairs. 679 The GAO’s reports have been duly issued and submitted
to Congress in 2012, 2015, 2018, and 2021 and have regularly found deficiencies and opportunities
for improvement in the SEC’s oversight of FINRA. 680
December 2021 GAO Report
The GAO submitted its most recent report to Congress in December 2021 (GAO-21-
576SU) and found material actions the SEC could take to improve its oversight of FINRA. 681 The
GAO reviewed all 69 SEC inspections or examinations that the SEC conducted of FINRA in fiscal
years 2018, 2019, and 2020. 682 SEC oversight focused on FINRA’s policies and procedures and
the execution thereof, as well as issues such as timeliness, staffing, and training. 683 The SEC’s

679
The statute requires the SEC to conduct oversight of national securities associations registered under Section 15A
of the Securities Exchange Act of 1934. FINRA is currently the only national securities association and self-regulatory
organization registered with the SEC under Section 15A of the Securities Exchange Act of 1934. H.R. 4173, 111th
Cong. (2010).
680
Id. These statutorily mandated reports are required to evaluate the SEC’s oversight of FINRA with respect to 10
specified areas—governance, examinations, executive compensation, arbitration services, advertising reviews,
cooperation with States, funding, employment of former employees, rules, and transparency—as well as any other
issue determined by the GAO to have an impact on FINRA’s effectiveness.
681
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at 18
(Dec. 2021) (GAO-22-105367).
682
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at 8
(Dec. 2021) (GAO-22-105367).
683
According to the 2021 report, FSIO issued deficiency letters to FINRA listing suggestions for improvements in its
operations and the deficiencies it found. For 11 of 13 FINRA program inspections reviewed by FSIO, 43 out of 81
findings were for deficiencies and about 50% of all findings related to maintaining inadequate policies or procedures.
FSIO had also determined that there were instances when FINRA staff had not correctly applied its own sufficient
policies and procedures. For all 10 thematic oversight examinations conducted by FINRA in the period reviewed, 95
of 112 findings were for deficiencies. Most findings of deficiency related to examiners incorrectly executing
examination procedures (58 out of 112). FSIO also discovered instances where FINRA inadequately defined the scope
of examinations (43 out of 112), with some examinations excluding reviews of transactions and registered persons
that were relevant and should have been considered. There were 37 findings related to FINRA’s insufficient
documentation or retention of materials associated with examination decisions and files. FSIO additionally identified
24 instances where FINRA’s policies and procedures were found to be inadequate and 12 broker-dealers rule
violations missed by FINRA in its initial examination of firms. 76 deficiency findings were noted in 36 of 44 FINRA
single oversight examinations. FSIO similarly determined that in single oversight examinations FINRA had
conducted, the SRO maintained inadequate policies and procedures, poorly documented and retained materials, and
missed 24 rule violations during its initial review of firms. GAO, Securities Regulation – SEC Could Take Further
Actions to Help Achieve Its FINRA Oversight Goals, at 10 (Dec. 2021) (GAO-22-105367).
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program for examining FINRA, known as the FINRA and Securities Industry Oversight
Examination Program (FSIO), highlighted multiple areas of concern with FINRA’s program
inspections, thematic oversight examinations, and single oversight examinations conducted in the
aforementioned period.

GAO Report (GAO-21-578SU) Chart of Findings in FSIO Reviews of FINRA

The GAO’s 2021 review found that the SEC frequently identified deficiencies in FINRA
activities, and in response FINRA typically proposed corrections to those deficiencies. 684
However, the GAO found that the SEC lacked important components of a risk-based program the
GAO had previously recommended. 685 The GAO stated that the SEC performance measures were
task-oriented instead of outcome-oriented and therefore not in keeping with leading best
practices. 686 More critically, the GAO found that the SEC did not have documented policies and
procedures for tracking FINRA deficiencies and corrective actions. 687 SEC officials informed the

684
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at 11
(Dec. 2021) (GAO-22-105367).
685
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at
11-12 (Dec. 2021) (GAO-22-105367).
686
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at 13
(Dec. 2021) (GAO-22-105367).
687
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at 15
(Dec. 2021) (GAO-22-105367).
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GAO that FINRA is not under a requirement to implement corrective actions if no rule violation
was identified by the SEC, and there is little federal law controlling how FINRA must carry out
its obligations. 688 Therefore, SEC oversight often results in observations ranging from minor to
noteworthy that are intended to improve FINRA’s processes or procedures but which are not
consistently tracked outside of the formal examinations system. 689 The GAO recommended that
the SEC develop performance measures for its FINRA oversight, develop policies and procedures
for tracking deficiencies and corrective actions, and develop procedures for identifying and
communicating the significance of oversight findings. 690
April 2015 and July 2018 GAO Reports
In its April 2015 (GAO-15-376), the GAO recommended enhancements to the SEC’s
oversight of FINRA, largely regarding the adoption of a risk-management framework. 691 The
GAO found that the SEC had successfully incorporated elements of this framework into its FINRA
oversight, but that it still lacked certain components. 692 Specifically, the SEC needed to develop
performance targets in order to monitor its goal of improving oversight of FINRA; formalize and
document its FINRA oversight objectives; and assess its own internal risks (e.g., staff availability,
competing priorities) in order to achieve its oversight goals. 693 In 2015, the GAO declared that a
proper assessment of the SEC’s oversight of FINRA could not be assured because the SEC had
not fully implemented a risk-management framework in line with general auditing principles used

688
Id.
689
GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals, at 14
(Dec. 2021) (GAO-22-105367).
690
In its comment letter responding to the GAO’s analysis, SEC noted that findings are tracked in a spreadsheet and
are communicated through an informal process but that it would develop policies and procedures to formalize both
processes. GAO, Securities Regulation – SEC Could Take Further Actions to Help Achieve Its FINRA Oversight
Goals, at 18-19 (Dec. 2021) (GAO-22-105367).
691
GAO, Securities Regulation – SEC Can Further Enhance Its Oversight Program of FINRA, at 29-30 (April 2015)
(GAO-15-376).
692
GAO, Securities Regulation – SEC Can Further Enhance Its Oversight Program of FINRA, at 10 (April 2015)
(GAO-15-376).
693
GAO, Securities Regulation – SEC Can Further Enhance Its Oversight Program of FINRA, at 30 (April 2015)
(GAO-15-376).
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by other agencies. 694 Apparently satisfied by the SEC’s progress toward this end, the GAO’s July
2018 report provided no recommendations for improvement. 695
May 2012 GAO Report
In its May 2012 report (GAO 12-625), the GAO identified multiple opportunities for the
SEC to improve oversight of FINRA. 696 First, the GAO found that, other than FINRA regulatory
programs relating to examinations, surveillance, and enforcement, the SEC conducted little to no
oversight of other FINRA operations. 697 As a result, the GAO found that, of the 10 major areas
identified for evaluation in Section 964 of the Dodd-Frank Act, the SEC conducted annual or
continuous oversight in only 3 of those areas, only occasional oversight in 4 areas, and no oversight
at all in 3 areas. 698

694
GAO’s April 2015 report noted substantive improvements to the SEC’s oversight of FINRA. The SEC created the
new role of “Senior Counsel-FINRA and New Markets” to monitor FINRA generally and coordinate FINRA
oversight. SEC inspections of FINRA in 2014 were conducted largely as planned, and the SEC had adjusted its
oversight of certain Section 964 areas of evaluation with the aim of addressing them all by year 2015. However, the
GAO failed to elaborate on details of these adjustments. The GAO stated that the SEC had recently completed
inspections of each Section 964 area of evaluation, but GAO reviewed key inspection documents for only 4 out of the
10 Section 964 areas, and the GAO stated that it did not attempt to assess the validity of any of the inspections. The
GAO stated that because the SEC had not fully implemented and documented the risk-management framework
recommended by the GAO, the SEC’s fulfillment of its oversight responsibilities may not be fully assured. However,
extensive analysis was provided on whether SEC oversight of FINRA was consistent with accepted government
auditing standards. The GAO’s only concluding recommendations were regarding the implementation of risk-
management practices.
695
The GAO’s July 2018 report (GAO-18-522) identified no major areas for improvement. The GAO found that from
October 2014 to April 2018, the SEC had conducted oversight of FINRA in each of the 10 areas of evaluation specified
in Section 964 and selected the SEC guidance used to examine FINRA adhered to generally accepted government
auditing standards. However, the GAO stated that it reviewed examinations only to determine if the SEC followed
certain guidelines, and the GAO did not evaluate the content of the examinations. The only Section 964 area of focus
in the GAO’s July 2018 report was the SEC’s inspections of FINRA governance. The GAO concluded that the SEC’s
inspections of FINRA governance were consistent with SEC’s internal guidance regarding inspections; and the results
of the five governance inspections by the SEC of FINRA from 2015 to 2017 were summarized positively but with
little analysis. GAO, Highlights of Securities Regulation – SEC Inspections of Financial Industry Regulatory
Authority’s Governance Were Consistent with Internal Guidance, at 11-12 (July 2018) (GAO-18-522).
696
GAO, Highlights of Securities Regulation – Opportunities Exist to Improve SEC’s Oversight of the Financial
Industry Regulatory Authority (May 2012) (GAO-12-625).
697
GAO, Securities Regulation – Opportunities Exist to Improve SEC’s Oversight of the Financial Industry
Regulatory Authority, at 7 (May 2012) (GAO-12-625).
698
The thrust of the SEC’s oversight was on FINRA’s 16 regulatory programs enforcing securities laws and FINRA
rules, and 29 such inspections of FINRA district offices were conducted from 2005 to 2010. However, oversight of
other, non-regulatory programs occurred even less frequently than planned. For instance, the SEC planned to inspect
FINRA’s regulation of broker-dealer advertising once every four years, but the most recent inspections had occurred
only in 1998 and 2005; and the SEC planned to review FINRA’s arbitration program on a two-year cycle, but
inspections had occurred only in 2000, 2005, and 2010. That stated, the GAO determined that the inspections that
were completed, although infrequent, were executed well.698 For its part, the SEC stated that the lack of inspections
in non-regulatory areas was due to competing priorities or a lack of resources. The GAO also found significant gaps
in the SEC’s oversight of FINRA rulemaking. A proposed FINRA rule subject to approval by the SEC undergoes a

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formal process to determine if the rule is consistent with securities laws and regulations as well as if the proposed rule
complies with requirements for providing adequate information for public comment. However, neither SEC nor
FINRA had a formal process of conducting retrospective reviews of FINRA rules. Therefore, neither SEC nor FINRA
were in a position to systematically assess whether FINRA rules were efficacious and, if not, whether to modify or
repeal rules as appropriate. The GAO also recommended that the SEC revise its oversight of FINRA from a routine,
cycle-based approach to a risk-management framework, which emphasizes those areas that present the greatest
potential risk to an organization. The SEC stated that it was in the process of implementing such an approach in its
oversight. However, the GAO found that while the SEC had collected and analyzed a substantial amount of
information toward completing this process, the implementation of all elements of a risk management framework had
not been fully articulated or documented. GAO, Securities Regulation – Opportunities Exist to Improve SEC’s
Oversight of the Financial Industry Regulatory Authority (May 2012) (GAO-12-625).

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