Ammon News - The high volume of trading by its customers, many of them egged on by social media, has put a strain on the company’s balance sheet.
Robinhood, the trading app at the center of a frenzy over GameStop and other stocks, raised $2.4 billion from its investors over the weekend, adding to the $1 billion cash infusion it took last week as it tries to steady its finances.
The extraordinarily high volume of trading by amateur investors in recent days, many egged on by social media and determined to challenge Wall Street hedge funds, had put a strain on Robinhood’s balance sheet. As an online brokerage firm, the company is required to keep a certain cash cushion to insulate against potential losses, and the required cushion can grow quickly when trading volume and volatility are spiking.
“This round of funding will help us scale to meet the incredible growth we’ve seen and demand for our platform,” Robinhood’s chief financial officer, Jason Warnick, said in a post on the company’s website on Monday. The investment was led by Ribbit Capital, a venture capital firm, and included other existing investors including Sequoia Capital, Robinhood said.
The $3.4 billion that Robinhood raised over the last five days — more than it has raised in its eight years of existence — was more than it needed to stabilize its operations, according to a person close to the company, who called it “a buffer to a buffer to a buffer.” Over the past year, Robinhood has raised $1.3 billion from venture capital investors, raising its market value to $12 billion. The company intends to go public this year, two people close to the company said.
Although the cash infusion by investors will ease Robinhood’s financial stress for now, going public would give it access to more sources of capital to make its finances durable, one of the people said. Privately held companies don’t have access to the same funding markets that public companies do.
Robinhood’s sudden and enormous need for cash came about on Thursday, a day after an online battalion of small investors — many who congregate on the WallStreetBets forum on Reddit — drove the price of GameStop shares up 135 percent. These investors had targeted shares of the troubled video game retailer, determined to drive up its price to put the squeeze on hedge funds that had “shorted” GameStop, betting that the shares would fall because the company’s future was grim. Robinhood customers also pushed up the share prices of some other stocks that hedge funds had shorted.
On Thursday morning, an arm of the Depository Trust and Clearing Corporation, Wall Street’s main clearinghouse for stock trades, demanded $3 billion in additional collateral from Robinhood as a cushion against those risky trades by its customers, according to Vlad Tenev, the trading app’s chief executive.
“Thursday morning, I’m sleeping but at 3:30 a.m. Pacific, our operations team receives a file from the N.S.C.C., which is the National Securities Clearing Corporation,” Mr. Tenev said in a conversation with the Tesla chief executive Elon Musk on the social network Clubhouse. “So they gave us a file with a deposit, and the request was around $3 billion, which is an order of magnitude more” than what was usually required, he said. That demand was later reduced to about $700 million.
“This was nerve-racking,” Mr. Tenev said.
Before it raised the additional funds, Robinhood had more than $1 billion on its balance sheet, two people with knowledge of the company said. On Thursday, Robinhood restricted trading in the group of stocks, including GameStop, at the heart of last week’s surge in trading activity.
By limiting trading, it was able to bring down the cushion of cash, or margin, it was required to keep by its clearinghouse. The company eased some of those curbs on Friday and on Monday decreased the number of companies with trading restrictions to eight from 50.
The limits on trading by Robinhood set off a furious outcry among small investors, who claimed that the very app that had democratized trading was now doing the bidding of Wall Street.
And the news that Robinhood had raised $2.4 billion so that it could ease curbs on trading didn’t impress William Moyer of North Carolina. “It’s just them trying to cover their butts,” he said. “They realized last week they screwed up big time, and now they’re trying to make amends by saying they have the money there to be able to do all those trades now.”
Mr. Moyer, a 26-year-old automotive service adviser who had purchased shares of GameStop, Nokia, AMC and BlackBerry in the past two weeks, said he was offended by Robinhood’s decision to restrict trading on the platform. “I had to suffer through 2008 with my family,” he said, referring to the 2008 financial crisis. “I feel like this is just another way of the big banks showing that they control everything we do,” he said. “They’re just trying to keep us from actually growing our wealth as individuals.”
Robinhood’s decision to restrict trades for stocks also drew the attention of lawmakers from all ends of the political spectrum. Representative Alexandria Ocasio-Cortez, Democrat of New York, called it “unacceptable.” Senator Ted Cruz, Republican of Texas, retweeted her in agreement.
Lawmakers expect to hold hearings to look into Robinhood’s role in January’s market fluctuations.
“I do want to make sure that we understand what happened there,” Senator Pat Toomey of Pennsylvania, the incoming top Republican on the Senate Banking Committee, said during a Monday morning appearance on CNBC of the decision to restrict trades.
Representative Maxine Waters, the California Democrat who is chairwoman of the House Financial Services Committee, said last week that she would hold a hearing on short-selling as well as “online trading platforms” and “gamification.” On Monday, the committee announced it would hold a hearing on the GameStop issue on Feb. 18.
The scrutiny will test Robinhood’s nascent influence network in Washington as it heads toward an initial public offering.
Robinhood’s chief legal officer is Dan Gallagher, a former member of the Securities and Exchange Commission. It hired four lobbying firms this summer, drawing on former aides from Capitol Hill and the S.E.C., according to public records. But its presence in Washington is still limited. In the fourth quarter of 2020, the company spent $175,000 on federal lobbying. Fidelity Investments spent $410,000 in the same quarter. Goldman Sachs spent $1.09 million.
Before January’s sudden market volatility, the company was focused on teaching lawmakers and regulators about how its product worked, said two people familiar with its approach.
Now, it’s scrambling to explain why it shut down trading.
“Perhaps the biggest challenge Robinhood, the S.E.C. and investors now have in D.C. are uninformed members of Congress who make judgments before they get all the facts,” said Lynn Turner, a former chief accountant at the S.E.C.
Over the weekend, Robinhood sent congressional staff members a Friday blog post explaining that it had halted some trades to meet deposit requirements from its clearinghouse, according to an email obtained by The New York Times.
In his Monday television appearance, Mr. Toomey said he considered that explanation of the decision to curb trades “quite plausible” and that he worried about a rush to regulate the industry. His spokesman, Bill Jaffee, said that he did not believe Mr. Toomey had spoken with any Robinhood executives.
*Nytimes
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