Vlad Tenev, co-founder and CEO of the popular trading app Robinhood, which also allows crypto trading, claims the platform wasn’t in any way directed by anybody to temporarily restrict buying of shares of Gamestop (GME) and twelve others. Meanwhile, Robinhood is reportedly negotiating with its investors to collect more than USD 1bn in emergency funding.
“We weren’t directed by a market maker, or any other market participant,” Tenev said in an interview with Bloomberg Television, adding that all such rumors are “categorically false” and that no market maker or participant even asked him to do it.
The alleged Robinhood email to its customers also claimed that “this decision was not made on the direction of any market maker we route to or other market participants.”
“This was a technical and operational decision that we made,” Tenev said in the interview, “because Robinhood as a brokerage has financial requirements [including] deposits that we have to make to various clearinghouses,” and some of these requirements fluctuate based on volatility in the markets, which can be “substantial” in this “unprecedented climate,” Tenev said.
Therefore, they made this move to protect the company and the customers, claimed the CEO. He hoped to “re-enable buying as soon as tomorrow morning,” which is presumably today.
As reported yesterday, after certain stocks’ prices skyrocketed, pumped by Reddit’s WallStreetBets community, Robinhood suspended GME, Nokia (NOK), and AMC Entertainment (AMC) and few others, prompting a massive wave of dissatisfaction amongst retail traders, many of whom argued that the company went against its stated mission to “democratize finance for all.”
Robinhood “will continue to stand with the individual investor, their ability to have access to buying and selling stocks,” said Tenev, adding that he can now understand “how Clorox and Lysol were feeling at the beginning of the dynamic when there was so much demand,” referring to disinfectants infamously mentioned by Donald Trump as a potential treatment against COVID-19.
The platform’s move, however, was also followed by lawsuits. One was filed in New York, alleging that the platform suspended buying “in order to slow the growth of GME” and “to manipulate the market for the benefit of people and financial intuitions who were not Robinhood’s customers. Another one was filed in Chicago, similarly alleging that the halt of trading “was to protect institutional investment at the detriment of retail customers,” as Bloomberg reported, adding that there were more suits filed in Florida, California, and New Jersey.
When asked about these lawsuits, Tenev said that they understand that customers would be upset when they can’t buy a stock temporarily, but did not reply to the question directly otherwise.
Raising emergency funding
Tenev did not comment on a rumoured Robinhood initial public offering (IPO) either, stating that they’ve raised over USD 1bn in capital last year, “so our position remains strong.” But The New York Times quoted anonymous sources saying that the IPO is planned for later this year.
Per this The New York Times article, Robinhood is allegedly raising more than USD 1bn from its existing investors as it’s strained by the high volume of trading in stocks such as GME, “facing an onslaught of demands on its cash amid a stock market frenzy.” The platform has to pay customers the owed money from trades and post additional cash to its clearing facility to insulate its trading partners from potential losses, but the article cited “two people briefed on the situation” saying that the company “still needed more cash quickly to ensure that it didn’t have to place further limits on customer trading.”
“Five people involved in the [confidential] negotiations” were quoted as saying that Robinhood “contacted several investors, including the venture capital firms Sequoia Capital and Ribbit Capital, who came together on Thursday night to offer the emergency funding.” Investors who provide financing will allegedly receive additional equity in the company, at a discounted valuation tied to the price of Robinhood shares when the company goes public.
The commenters on social media were quick to respond to Tenev’s statements, with some arguing that he confirmed that a cash crunch was behind the buy halt and some saying the platform was under-capitalized for trading of such magnitude for margin accounts in large numbers with small assets. Meanwhile, Mike Novogratz, the CEO of digital asset-focused financial services firm Galaxy Digital, said yesterday that “in all likelihood Robinhood halted trading because the clearing house where they clear trades forced them to because they don’t have enough balance sheet capital for the enormous amount of trades being processed.”
2) This is another reason crypto with simultaneous settlement makes so much sense. This is just my own speculation but it’s the only thing that makes sense. Individual investors don’t have sway over businesses in times like this. Regulatory bodies do.
— Mike Novogratz (@novogratz) January 28, 2021
Stock exchanges halt trading fairly regularly and it’s rarely a big deal, said Jena Martin, a professor at West Virginia University College of Law. “It’s very rare, however, for brokers to suspend trading in a specific stock. I can’t remember that ever happening, and I’ve been closely following the market for 20 years – including five at the SEC.” Extreme volatility in a stock is seen as a sign of suspicious activity in the market, said Martin, and it may trigger a US Securities and Exchange Commission (SEC) investigation. The SEC has the power to halt trading, but will do so only if it’s concerned about issues within the company itself. “Were it to do that, it would be pretty clear it thinks some funny business is going on,” she said.
The Cryptoverse is, in the meantime, utilizing the ‘chaos’. Bittrex Global said in a press release that they have listed GME, NOK, and AMC tokenized shares, as well as BlackBerry and iShares Silver Trust for trading on their digital assets exchange. “This decision is motivated to ensure retail investors have exposure to stocks they may wish to trade anytime during any day of the week,” said the company, with CEO Tom Albright adding that they intend to list every stock that gets delisted from platforms like Robinhood.
And while some wonder if in the future “big banks [would] try to lock Bitcoin investors out,” many are already deep in discussions about which platform to transfer to from Robinhood.
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