Robinhood Co-Founder and Co-CEO Vlad Tenev speaks on stage during the TechCrunch Disrupt New York event on May 10, 2016.
Noam Galai | Getty Images for TechCrunch
The co-founder of Robinhood used the audio chat app Clubhouse by invitation only to defend the investment platform’s decision to restrict trading in GameStop and other volatile stocks.
GameStop shares are up more than 1,500% since the start of the year, thanks in no small part to a wave of retail investors inspired by Reddit board WallStreetBets. Such investors piled up in GameStop and other sharply shortened stocks, causing huge losses for some hedge funds.
Robinhood restricted trading on several stocks, including GameStop and AMC Entertainment, on Thursday. Vlad Tenev, Co-CEO of Robinhood, said at the time that the decision was made to protect the company and its customers.
In the late Sunday (Pacific Time) session at the clubhouse, Elon Musk, Tesla CEO, pushed Tenev on why the platform, a pioneer in commission-free trading, decided to restrict trading last week. The online brokerage firm restricted trading in 13 stocks, which allowed clients to sell positions but not open new ones in certain stocks, causing anger among users.
“We had no choice in this case,” said Tenev. “We had to meet our regulatory capital requirements.”
Tenev said Robinhood’s operations team received a request from the National Securities Clearing Corporation at 3:30 p.m. Pacific time Thursday. Robinhood and other clearing brokers have to meet certain deposit requirements every day from clearing houses like the NSCC. The amount required is based on factors such as volatility and concentration in certain securities, Tenev said.
Robinhood received a $ 3 billion bond application from the NSCC to help secure business. “An order of magnitude more than usual,” said Tenev. The company raised an additional $ 1 billion in emergency capital from existing investors to prop up its balance sheet and ease trade restrictions.
“Did something shady go down here?” Musk – who has shown support for WallStreetBets on Twitter – asked Tenev.
“I wouldn’t ascribe any shadiness or anything to it,” replied Tenev. “The NSCC was sensible after that.”
Robinhood and the NSCC later agreed to cut the figure from $ 3 billion to around $ 1.4 billion, but Tenev said his company was still forced to take action to limit trade.
Tenev’s explanation of the situation echoed a blog post by Robinhood in which the company stated that some securities are temporarily subject to purchase restrictions due to a tenfold increase in clearinghouse deposit requirements.
Robinhood will continue to restrict trading in short squeeze names like GameStop on Monday. Customers can only buy one share of GameStop stock and five options contracts. However, the millennial-favored stock trading app has reduced the list of restricted stocks from 50 to eight.
When asked by Musk if there would be more trade restrictions in the future, Tenev said, “I think there will always be a theoretical limit. We don’t have infinite capital.”
Musk also asked Tenev whether Citadel Securities – the largest options market maker in the United States – had pushed the company to set trading limits. Robinhood generates a significant portion of its income from referring orders to market makers such as Citadel Securities and Virtu. Citadel, a separate hedge fund business, helped raise nearly $ 3 billion in Melvin Capital, a hedge fund betting against stocks like GameStop.
“How committed are you to Citadel (Securities)?” Musk asked, to which Tenev replied, “There’s a rumor that Citadel (Securities) or other market makers forced us to do it, and that’s just wrong.”
“This was a clearinghouse decision based only on capital requirements,” added Tenev. “From our point of view, Citadel (Securities) and other market makers were not involved.”
“Citadel Securities has not directed or caused any brokerage firm to cease, suspend, restrict, or otherwise cease to operate,” a Citadel Securities spokesperson told CNBC. “Citadel Securities remains focused on providing our clients with continuous liquidity in all market conditions.”