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 Robinhood co-founder used the Clubhouse audio app on Sunday to defend the investment platform’s decision to restrict trading of GameStop and other volatile stocks.
GameStop’s shares have risen more than 1,500% since the beginning of the year, fueled in large part by a wave of retail investors inspired by the advice of Reddit WallStreetBets. These investors huddled in GameStop and other heavily sold stocks, resulting in huge losses for some hedge funds.
Robinhood decided to restrict trading on a number of stocks, including GameStop and AMC Entertainment, on Thursday. Tenev said at the time that the decision was aimed at protecting the company and its customers.
At the Clubhouse session, Tesla CEO Elon Musk lobbied Vlad Tenev of Robinhood about why the platform, a pioneer in commission-free negotiations, decided to restrict negotiations last week. The online brokerage has limited trading to 13 shares, allowing clients to sell positions but not open new ones on certain securities, sparking users’ fury.
“We had no choice in this case,” said Tenev. “We had to meet our regulatory capital requirements.”
Tenev said Robinhood’s operations team received an order at 3:30 am Pacific time on Thursday from the National Securities Clearing Corporation. Robinhood and other clearing brokers are required to comply with certain clearinghouse deposit requirements like the NSCC every day. The amount required is based on factors such as volatility and concentration on certain securities, said Tenev.
Robinhood received a request for a $ 3 billion security deposit from the NSCC to support the negotiations, “an order of magnitude more than it normally is,” said Tenev. The company raised an additional $ 1 billion in emergency capital from existing investors in an effort to support its balance sheet and allow it to ease restrictions on trading.
“Did something maybe dark happen here?” Musk – who showed support for WallStreetBets on Twitter – asked Tenev.
“I would not attribute obscurity to him or anything,” replied Tenev. “NSCC was reasonable after that.”
Robinhood and the NSCC later agreed to reduce the figure from $ 3 billion to about $ 1.4 billion, but Tenev said his company was still forced to take steps to limit negotiations.
Tenev’s explanation of the situation echoed a blog post by Robinhood, in which the company explained that it placed temporary purchase restrictions on some securities due to a tenfold increase in the clearinghouse’s deposit requirements.
Robinhood will continue to limit trade on Monday on short-term names like GameStop. Customers can purchase only one share of GameStop shares and five option contracts. However, the stock trading app favored by the millennium generation has reduced its list of restricted stocks from 50 to eight.
Asked by Musk whether there would be more 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 questioned Tenev about whether Citadel Securities – the largest options market maker in the United States – had pressed the company to impose trading limits. Robinhood derives a significant portion of its revenue from routing orders to market makers like Citadel and Virtu. Citadel also helped to inject about $ 3 billion into Melvin Capital, a hedge fund that bets against stocks like GameStop.
“How much are you indebted to the Citadel?” Musk asked, to which Tenev replied, “There is a rumor that Citadel or other market makers have pressured us to do this and this is simply untrue.”
“This was a clearinghouse decision and was based only on capital requirements,” added Tenev. “From our perspective, Citadel and other market makers were not involved in this.”