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The Technology 202: GameStop controversy sparks Washington scrutiny of Robinhood, fintech apps

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with Aaron Schaffer

Lawmakers from both parties are slamming Robinhood after it froze people’s ability to trade in GameStop, AMC Entertainment and other stocks that were rapidly driven up by retail investors communicating in Reddit forums and other online chat rooms

Politicians as varied as Rep. Alexandria Ocasio-Cortez (D-N.Y.), Rep. Ro Khanna (D-Calif.), Sen. Ted Cruz (R-Tex.) and Sen. Mike Lee (R-Utah) have called for greater scrutiny of Robinhood’s moves. Ocasio-Cortez held a public discussion on the video-streaming service Twitch last night, which at one point attracted more than 300,000 viewers. 

The volatility from the trading bonanza fueled by ordinary investors looking to rebel against Wall Street funds betting the stocks would fall has captured the attention of Washington panels: The Senate Banking and Housing Committee announced a hearing into “the current state of the stock market,” and the House Financial Services Committee announced it would be holding a hearing focused on the recent activity around GameStop. 

Rep. Maxine Waters (D-Calif.), who chairs the committee, said in a statement it would focus on “short-selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.

The scrutiny of fintech apps will come in many forms. 

Lawmakers will question whether Robinhood and similar apps should be able to exert so much power over individuals' investment decisions. The company could also face greater scrutiny of how its app is designed like social networks or mobile games to make the process of investing feel fun and addictive to users – without necessarily understanding the potential to lose big money.

Other retail investment tools such as Interactive Brokers and Charles Schwab also put limits on sales of GameStop stock. Ocasio-Cortez said this should be looked at as well:

The Reddit message boards have also raised concerns about potential violations of securities laws, which prohibit investors from misrepresenting a company's prospects to artificially affect its share price. Due to the anonymous nature of Reddit, it's difficult to discern if the extraordinary trading was a result of average Joes or scam artists involved in a bigger scheme, my colleagues report.

“Folks at the SEC are going to want to take a very close look at this,” said Harvey Pitt, who chaired the commission from 2001-2003. “When you have extreme volatility of this nature, the system is not necessarily working correctly. … You’re starting to see things that would look to a regulator as if they were manipulation.” 

The recent trading is being widely celebrated online as a type of populist revolt over the forces of Wall Street. 

“It finally felt for some.. like everyday people were finally able to collectively organize and get back at the folks who have historical had all the marbles on Wall Street and force one hedge fund into an existential crisis," Ocasio-Cortez said on last night's Twitch stream. She said there were few consequences for Wall Street officials after the financial crisis, and she viewed the recent market volatility as the “first time anyone was held to account.” 

The CEO of Robinhood has publicly defended the moves, saying it was in the best interests of the company and consumers. 

“In order to protect the firm and protect our customers we had to limit buying in these stocks,” Robinhood CEO Vlad Tenev told CNBC last night.

“Robinhood is a brokerage firm; we have lots of financial requirements. We have SEC net capital requirements and clearing house deposits. So that’s money that we have to deposit at various clearing houses. Some of these requirements fluctuate quite a bit based on volatility in the market and they can be substantial in the current environment where there’s a lot of volatility and a lot of concentrated activity in these names that have been going viral on social media,” Tenev said.

Congress and the Biden administration increasingly are grappling with the power of technology companies.

Lawmakers are more closely studying their influence over American institutions, ranging from elections to the health-care system. The latest incident has highlighted how much influence a Reddit message board or Discord chat group can have over stock prices. That can be used for good or bad, and it's unclear what the long-term implications will be. 

“Retail investors with the help of technology acting as a union in attacking is a new phenomenon,” Jim Paulsen, an investment strategist, told CNBC. “You combine the power of technology, which allows you through Reddit postings to magnify your individual impact, with some use of leverage and very targeted bets, [and] they can have a significant influence.” 

Rant and rave

Some people have ideas for how Robinhood should rebrand after facing a backlash for limiting trading on GameStop. Here's one from Tribe Capital co-founder Arjun Sethi:

Aaron Zamost, former public relations chief at Square, seemed to understand the situation:

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Facebook's oversight board overturned several of its content moderation decisions.

In its first set of decisions, Facebook’s newly created “Supreme Court” found the company's content moderation decisions were vague and poorly communicated, Elizabeth Dwoskin and Craig Timberg report. The rulings suggest that the board which was formed to review some of the most polarizing decisions about speech on the social network could force greater transparency from the company. 

The decisions covered a range of issues including alleged hate speech, coronavirus misinformation, references to dangerous organizations and people, and an automated system that removed a picture of a nipple in a breast cancer awareness campaign.

The board overturned several decisions by Facebook to delete posts. It said that a post saying that there is something wrong with Muslims and another with a quote by Nazi official Joseph Goebbels should not have been removed. It also said Facebook's removal of the nipple photograph, which the company had already reversed, was wrong. It made that decision to point out that Facebook’s automated systems are problematic.

Facebook said it had already restored content where its previous actions were overruled. It's also reviewing other decisions to see whether there is other similar content from users that should be restored. 

“We believe that the board included some important suggestions that we will take to heart,” Monika Bickert, vice president of content policy, said in a Facebook blog post. “Their recommendations will have a lasting impact on how we structure our policies.”

Apple CEO Tim Cook criticized Facebook's business model, escalating the public battle of the tech giants.

Cook, speaking at the virtual Computers, Privacy, and Data Protection conference, called out companies maximizing engagement and data collection over privacy, CNBC's Kif Leswing reports. Though he didn’t call out Facebook by name, it was clear he was alluding to the embattled social network.

“If a business is built on misleading users, on data exploitation, on choices that are no choices at all, it does not deserve our praise. It deserves reform,” Cook said.

Cook also criticized algorithms that recommend extremist groups a recurring issue on Facebook. 

The comments came shortly after Facebook CEO Mark Zuckerberg lashed out at Apple, attacking the company as anticompetitive during an earnings call. Facebook is preparing an antitrust lawsuit against Apple that would allege the iPhone maker abused its power in the smartphone market by forcing outside apps to abide by App Store rules that its own services don't comply with, The Information's Alex Heath and Josh Sisco report.

Researchers warn Facebook's advertising tools could be abused to target military personnel in dangerous ways. 

Facebook’s ad-targeting mechanisms allow advertisers to target U.S. military branches and other groups, from broad categories such as “Army” to more narrow groups such as “United States Air Force Security Forces.” That could present a national security threat, Wired’s Lily Hay Newman reports.

“A nation state actor could abuse this to run influence operations against US military members at a large scale or in a more targeted way,” security researcher Andrea Downing said.

Downing, who said Facebook removed military ad-targeting groups in 2019, noticed that targeting groups reemerged last year. In September she submitted a vulnerability report to the company about her findings; Facebook said that it does not view what she found as a vulnerability.

Agency scanner

  • The American Civil Liberties Union, Center for Democracy & Technology, Electronic Frontier Foundation and other groups are calling for the “speedy nomination and hearing” of a fifth FCC commissioner by the end of March. They say that leaving the FCC “impotent” right now “would be a serious failing.”

Mentions

Eli Sugarman, the director of the Hewlett Foundation’s cyber initiative, says he’s joining the staff of Facebook’s oversight board.

Daybook

  • The Senate Commerce, Science and Transportation Committee considers the nomination of Rhode Island governor Gina Raimondo, President Biden’s pick for commerce secretary, on Feb. 3 at 10 a.m.
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