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Robinhood is preparing a lobbying effort on key pieces of legislation that if passed, could weigh on its business model.
The stock trading start-up registered its in-house team to begin lobbying on Feb. 5, according to a new registration report reviewed by CNBC.
The filing gives a first glimpse into what legislation the start-up plans to target in the wake of Joe Biden becoming president and Democrats taking control of Congress. Some bills on the registration report could negatively impact Robinhood’s revenue model of profiting off of customer trades.
One of the bills Robinhood plans to focus on is the Wall Street Tax Act of 2019. It was introduced by Rep. Peter DeFazio, D-Ore., and Sen. Brian Schatz, D-Hawaii, two years ago, with the goal of imposing a 0.1% excise tax on certain financial transactions including the purchase of stocks, bonds and derivatives.
Imposing a trading tax has been floated as a way to dampen some of the frenzied activity seen in recent weeks. Less trading could weigh on profits at Robinhood and other major online brokerage firms.
Despite not charging for it upfront, Robinhood and the rest of the industry rely on what’s known as payment for order flow in lieu of commissions. Market makers, such as Citadel Securities or Virtu, pay e-brokers for the right to execute customer trades. The broker is then paid a small fee for the shares that are routed, which can add up to millions when customers trade as actively as they have been in recent months.
Robinhood has grown into one of Silicon Valley’s most valuable private start-ups. It was last valued at $11.7 billion with backers including Sequoia and Andressen Horowitz. Despite the trading chaos and pushback in January, multiple venture capital investors told CNBC the company is still on track for an IPO in 2021.
A Robinhood spokeswoman declined to comment on the lobbying plans.
Robinhood’s business model came under fire from lawmakers and some traders after the company and other brokers in late January restricted the buy-side of trades for volatile stocks, such as GameStop, on their platforms. Robinhood said it did not make the move because of any outside pressure, and needed to limit trading due to unprecedented collateral requirements from its clearing house.
GameStop’s stock price had soared in late January after traders on Reddit pushed one another to keep doubling down on buying shares, and inflict pain on hedge funds who had taken the other side of the trade by shorting it.
Short selling is a strategy in which investors borrow shares of a stock at a certain price on hopes that the market value will fall below that level when it’s time to pay for the borrowed shares. Buying back borrowed shares to close out a short position, whether for a profit or loss, is known as short covering.
Robinhood has since lifted limits on trades.
Lawmakers from both major parties criticized Robinhood following those restrictions. One of the first barbs came when Rep. Ro Khanna, D-Calif., a progressive who represents Silicon Valley, called for “more regulation and equality” in financial markets in a statement about Robinhood’s move. Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sens. Ted Cruz, R-Texas, and Elizabeth Warren, D-Mass., also blasted the company’s decision.
The Senate Banking Committee and the House Financial Services Committee are aiming to hold hearings in the coming weeks about recent restrictions by trading platforms such as Robinhood. Vlad Tenev, the trading company’s CEO, is expected to appear in front of the House committee on Feb. 18.
The two lobbyists listed on the new filing are Beth Zorc, associate general counsel of Robinhood, who has prior experience at Wells Fargo and the Senate Banking Committee, along with Lucas Moskowitz, the company’s deputy general counsel. Moskowitz’s previous work included a stint as chief of staff to former Securities and Exchange Commission Chairman Jay Clayton.
Robinhood spent $275,000 on lobbying in 2020, according to the nonpartisan Center for Responsive Politics. The firms it hired lobbied the SEC.
Another proposal Robinhood is taking aim at is the Inclusive Prosperity Act of 2019. The bill was introduced two years ago by Rep. Barbara Lee, D-Calif., and Sen. Bernie Sanders, I-Vt. The hope of the legislation is to impose an excise tax on the transfer of ownership in certain securities, including any share of stock in a corporation.
A bill introduced by Rep. Patrick McHenry, R-N.C., is also under scrutiny by Robinhood, according to the lobbying disclosure report. The legislaton, which was introduced in 2020, seeks to “impose a limitation on taxation and fees on transactions by certain securities industry participants, and for other purposes.”