Robinhood co-founder and co-CEO Vlad Tenev speaks on stage during the TechCrunch Disrupt event in New York on May 10, 2016.
Noam Galai | Getty Images for TechCrunch
The co-founder of Robinhood on Sunday addressed the Audio Clubhouse app to defend the investment platform’s decision to restrict trading in GameStop and other volatile stocks.
Shares of GameStop have risen more than 1,500% since the start of the year, fueled in large part by a wave of retail investors inspired by the Reddit WallStreetBets board. These investors have piled on GameStop and other very short stocks, which has resulted in huge losses for some hedge funds.
Robinhood decided to restrict trading in several stocks, including GameStop and AMC Entertainment, on Thursday. Tenev then said the decision was aimed at protecting the firm and its customers.
At the session at Clubhouse, Tesla CEO Elon Musk insisted on Robinhood’s Vlad Tenev why the platform, a pioneer of trade without commissions, decided to restrict trading last week. The online brokerage company limited trading to 13 equities, which allowed clients to sell positions but not open new ones at certain securities, causing users to rage.
“We had no choice in this case,” Tenev said. “We had to meet our regulatory capital requirements.”
Tenev said the Robinhood operations team received a request Thursday at 3:30 a.m. Pacific time from the National Securities Clearing Corporation. Robinhood and other clearing brokers must meet certain deposit requirements from clearing centers such as the NSCC on a daily basis. The amount needed is based on factors such as volatility and concentration on certain stocks, Tenev said.
Robinhood received a $ 3 billion request for a security deposit from the NSCC to back up operations, “an order of magnitude more than usual,” Tenev said. The company raised an additional $ 1 billion in emergency capital from existing investors in an effort to bolster its balance sheet and allow it to ease trade limits.
“Has something downright shady come down here?” Musk, who has shown support for WallStreetBets on Twitter, asked Tenev.
“I wouldn’t blame him for shadows or anything like that,” Tenev replied. “The NSCC was reasonable after that.”
Robinhood and the NSCC later agreed to reduce the number from $ 3 billion to about $ 1.4 billion, but Tenev said his company was still forced to take steps to limit trades.
Tenev’s explanation of the situation was echoed in a post on the Robinhood blog, in which the firm explained that it placed temporary restrictions on the purchase of some securities due to a ten-fold increase in the requirements of clearing house deposit.
Robinhood will continue to limit its trading Monday on short names like GameStop. Customers can only purchase one share of GameStop shares and five option contracts. Still, the millennial-favored stock trading app reduced the list of restricted shares from up to 50 to eight.
Musk, when asked by Musk if there would be other limits on trade in the future, Tenev said, “I think there will always be some theoretical limit. We don’t have infinite capital.”
Musk also asked Tenev if Citadel Securities, the largest options market maker in the United States, had pushed the company to impose trade limits. Robinhood earns a significant portion of its revenue from routing orders to manufacturers in markets such as Citadel and Virtu. Citadel also helped fund nearly $ 3 billion in Melvin Capital, a hedge fund that bets on stocks like GameStop.
“To what extent are you bound to Citadel?” Musk asked, to which Tenev replied, “There is a rumor that Citadel or other market leaders pressured us to do so, and that is simply false.”
“This was an information center decision and was only based on capital requirements,” Tenev added. “From our perspective, Citadel and other market makers did not participate.”