“Robinhood Markets Inc. blocked trading of volatile stocks such as GameStop last week after a clearinghouse asked for $3 billion to back up the trades, the trading app’s chief executive said in an interview posted online,” WSJ writes.
Why It Matters: Call it a defense mechanism for the millennial-aimed brokerage service, and other outlets. Robinhood and other brokers saw a spike in demand from users looking to get in on a group of popular stock and options contracts. However, the wild nature and erratic shifts in value prompted “clearinghouses that process and settle trades to demand increased cash collateral to insulate themselves from possible losses.”
Robinhood wound up blocking trading on more than a dozen stocks and related options Thursday. Restrictions were loosened Friday, but still only allowed for limited trading.
- Robinhood CEO Vlad Tenev said the app would relax the “stringent position limits” on the assets Monday after raising capital last week.
“By restricting users from trading the most volatile stocks, the company was able to lower its deposit bill to the DTCC by $700 million, which it then paid, Tenev said. On Thursday, Robinhood raised over $1 billion from investors. It also borrowed $500 million from banks last week.”
The Takeaway: The whole saga has placed a lot of heat on Robinhood. Lawmakers from both sides of the aisle tweeted in outrage when news of the restricted trading broke. Tesla CEO Elon Musk has also been a vocal critic and posed the question “hedge funds had pressured the company or wielded influence at the DTCC,” which Tenev called a “conspiracy [theory].”
Read this great tweet thread if you want to dig deeply into the mechanics of why the “plumbing” is getting clogged and why Robinhood needs a lot more capital to keep doing business.