“This is a strong sign of investor confidence that will help us continue to serve our customers,” said Robinhood in a statement.
But the fact that Robinhood felt the need to raise so much money, a few months after raising hundreds of millions of dollars, signals the financial pressure that the company faces. He either faced a liquidity crisis – or narrowly avoided one.
Robinhood told CNBC on Thursday that taking advantage of his credit line was a “proactive measure”.
‘We had to restrict the purchase’
Facing a backlash from investors and lawmakers, Robinhood later explained that the market turmoil created financial pressures. That’s because, whenever investors buy shares, brokers like Robinhood must first make a deposit at a clearinghouse. To protect investors, regulators require brokers to keep a certain amount of available capital.
These cash needs can increase, sometimes dramatically, during periods of market stress and intense trading.
“In order to prudently manage risk and deposit requirements, we had to restrict the purchase of these 13 shares,” Vladinhoev, co-CEO of Robinhood, told CNN’s Chris Cuomo late on Thursday. “We are in a historic situation where there is a lot of activity and a lot of shopping concentrated on a relatively small number of symbols that are going viral on social media. In fact, we haven’t seen anything like it before ”.
Robinhood denies hedge fund speculation
Part of the outrage at Robinhood is driven by the feeling that the company has limited trade in an effort to help big players on Wall Street.
Robinhood has denied speculation that the startup has decided to stop buying GameStop or has been pressured by hedge funds or other Wall Street participants.
“I want to be 100% clear. This decision was not made under the direction of any market maker or other market participants,” Tenev told CNN.
Much of that speculation revolved around entities owned by billionaire Ken Griffin.
Citadel Securities, Griffin’s property market maker, is an important source of revenue for Robinhood. Like other brokers, Robinhood is paid to forward orders to market makers, a controversial practice known as payment by order flow.
Representatives of Griffin-led entities denied any role in Robinhood’s decision to suspend GameStop purchases.
“Citadel is not involved in or responsible for any retail broker’s decision to stop trading in any way,” the hedge fund said in a statement on Thursday.
Citadel Securities, the market maker, said it did not “instruct or otherwise cause any broker to stop, suspend or limit trading or otherwise refuse to do business”.
Still, the whole episode raises questions about Robinhood’s business model – and whether he has enough capital to avoid having to close the volatile stock trade again.
And the biggest question is whether Robinhood’s fast-growing user base remains with the startup or goes to one of its rivals that adopted its free trade business model.