Robinhood Markets’ emergency ban on trading eight shares this week sparked fury across the political spectrum, quickly attracted state and federal scrutiny and sent angry customers into the arms of competitors.
That was Thursday. As of Friday afternoon, it was limiting stock purchases at 23 companies. Soon it was About 50.
A drama that started with a peculiar leap in GameStop Corp. shares this month turned into a total rebellion by retail investors against the Wall Street status quo and left Robinhood, long his beloved brokerage, caught between clients and the cold demands of finance keepers. Increasing pressure on the company has forced it to grab more than $ 1 billion in new capital and hundreds of millions more in loans.
The startup, which set out to “democratize finance for all,” is now in the awkward position of telling customers that they can’t buy what they want. An online job advertisement gives an idea of the complexities that the Silicon Valley company faces, with Robinhood looking for a federal lobbyist.
“Obviously, this is not a good position for a broker,” said James Angel, an associate professor at Georgetown University. “No company wants to refuse customers who want to use its service. I would be shocked if it lasted too long. “
On a In a blog post on Friday night, the company described the restrictions as necessary and temporary.
“It wasn’t because we wanted to stop people from buying these shares,” said Robinhood of his decision to impose limits. “Our goal is to make it possible to purchase all titles on our platform. This is a dynamic and volatile market, and we have and can continue to take steps to ensure that we meet our requirements as brokers so that we can continue to serve our customers for the long term ”.
A company spokeswoman declined to comment in addition to the blog post.
‘Trading and Confetti’
At the heart of all the controversy is Robinhood’s highly polished app, which attracted millions of investors with an experience that seemed to defy the usual physics of Wall Street. With a focus on immediacy, the company allows newcomers to start trading as soon as they set up a bank transfer. He grants them a free stock to sign up. And then there is the most brilliant attraction of all: no fee for negotiations.
It is no wonder that Robinhood created legions of fans who hope to buy stocks, options and even cryptocurrencies with little sense of protection. But this week, that culture has come true. Wall Street trading is a strictly regulated business that may require brokers to have mountains of cash available.
After Robinhood’s clients clashed with hedge funds, sending shares of GameStop and other defeated companies into the stratosphere, the central clearinghouse of the market demanded that the company post much more guarantees to limit the risk that such volatility can represent for the system. In his blog post, Robinhood said that the deposits he had to make for stocks increased 10 times during the week.
Read a QuickTake: how a collateral connection interrupted GameStop mania
This meant that Robinhood needed more money. And to prevent its burden from getting bigger, the company – like some others – began to restrict certain businesses. Initially, it prevented the purchase of some of the most volatile stocks. Although he later allowed it in limited quantities, the ticker list grew. On Friday night, customers wishing to buy GameStop were entitled to an action.
“What Robinhood promised was free trade and confetti when you trade,” said Angel of Georgetown, a market structure expert. But the rules of the financial system apply everywhere. Any investor considering leaving Robinhood to promote the crusade that started there “will find, at the end of the day, that most other brokers are pretty much the same.”
(Angel humbly noted that he placed a small sale on GameStop in the middle of the week just to see the price double.)
‘Growing Pains’
Founded in 2013, Robinhood has courted novice investors and small investors long ignored with innovations, including his zero commission promise. It offered, for example, fractional shares to allow people who can’t afford to pay around $ 800 for a Tesla Inc. share to buy only a piece of one. These features have become standard in the industry: free trade is the norm, and Charles Schwab Corp. and Fidelity Investments allows customers to also buy “slices” of shares.
With the eruption of the coronavirus pandemic last year, retail investors invaded the market, looking to earn extra money and spend time during the blocks. Robinhood’s customer base exceeded 13 million. Even in the midst of this week’s turmoil, your app has dominated download ratings. But at times, its popularity has outstripped the expansion of its operations.
The company suffered repeated disruptions as the coronavirus pandemic broke out in the United States last year and sent markets into a spin. At the end of the year, when hackers accessed thousands of accounts, panicked users discovered that the company did not have a customer service phone number.
Financial technology deregulators need to learn the intricacies of Wall Street mechanics and compliance systems faster, said Jim Toes, head of the Security Traders Association.
“We need to find a way to make growing pains happen in a much shorter window,” Toes said in an interview on Friday. “We have many fintech companies entering our market, where the internal experience revolves around technology.”
Customer Campaign
In the past few months, Robinhood has sought legal help, recruiting lawyers from Goldman Sachs Group Inc., Wells Fargo & Co., Schwab’s TD Ameritrade and WilmerHale, a law firm known for its expertise in securities law.
But this week’s race for money contrasted with previous portraits of the company’s financial health.
Robinhood’s subsidiary dealing with trade reported ample capital in mid-year financial statement. At the end of June, the brokerage unit had 14 times the minimum level required by the Securities and Exchange Commission rules for capital in relation to what trading clients owe. This level exceeded those of larger competitors. Charles Schwab’s TD Ameritrade trading unit, for example, was six times the SEC minimum on September 30.
A few months ago, groups of Reddit enthusiasts started laying the groundwork for the frenzy that swept Robinhood this week. In online postings, they identified short positions favored by hedge funds, eventually starting to tighten up when bidding GameStop shares and AMC Entertainment Holdings Inc. to inflict billions of dollars in losses on money managers.
Read a QuickTake: How ‘flow before the professionals’ is disturbing the stock markets
The degree to which traders trusted Robinhood to execute their strategy is visible in the data from Atom Finance, an investment researcher who connects to his users’ brokerage accounts.
Just over half of Atom users who traded at Robinhood on Wednesday were active in the volatile stocks that the broker ended up restricting a day later. About 17% of users adjusted their bets on GameStop and 25% on AMC.
DTCC demands
But the stock movements had other repercussions. Around 10 am on Thursday, the Depository Trust & Clearing Corp. it demanded significantly more guarantees from member brokers, which led Robinhood and his rivals to hit the brakes in certain negotiations. At the end of the day, collateral requirements for the entire industry jumped from $ 26 billion to $ 33.5 billion – an already high level.
Robinhood withdrew at least several hundred million dollars from bank credit lines, said a person with knowledge of the situation that day. And several of its venture capitalists participated in a financing round. Robinhood said it raised more than $ 1 billion, which it called “a strong sign of investor confidence that will help us continue to serve our customers”.
The company has planned to conduct an initial public offering this year. This week’s fundraiser, structured as a convertible note, was priced at a discounted percentage for the next IPO, according to people familiar with the matter, who asked not to be identified because the information was private.
Index Ventures, Ribbit Capital and Sequoia Capital was among the venture capitalists involved in the effort, people said. The final size of the financing is still being determined, one person said.
‘Fast-changing priorities’
While Robinhood works to support its finances, customers are furious.
Finally 18 lawsuits were filed against the company in California, Connecticut, Florida, Illinois, New Jersey, Oregon, Pennsylvania and Texas, most claiming that the commercial limits represented a breach of contract.
Robinhood was also among a list of entities that issued a civil investigative demand by Texas Attorney General Ken Paxton because of restrictions on investors this week. New York attorney general Letitia James said she was reviewing the broker’s stock. The SEC is also examining brokerage firms’ decisions to limit purchases.
“There has been a lot of misinformation out there about why Robinhood did this,” Robinhood CEO Vlad Tenev told Bloomberg Television in a interview this week. “First, we did this to protect the company and our customers.”
Robinhood’s job posting for a lobbyist highlights how much work he has ahead of him to fix things with these clients and authorities.
“We are looking for a highly adaptable and collaborative person,” says the ad. Someone “who can deal with ambiguity and quickly change priorities with flexibility and patience”.
– With the help of Lananh Nguyen, Shahien Nasiripour and Katie Roof