Robinhood Fallout Sweeps Market After
$1 Billion Lifeline
By Annie Massa, Misyrlena Egkolfopoulou, Michelle F Davis,
and Matthew Monks
January 29, 2021, 12:30 AM EST Updated on January 29, 2021,
6:40 PM EST
DTCC asked brokerages
for $33.5 billion in collateral Thursday
Robinhood taps its
existing investors and bank credit lines
The Reddit hordes were at it again Friday, once again
bidding up shares of GameStop Corp. and warring with hedge funds by seeking out
targets such as Siebert Financial Corp. and Twinkie maker Hostess Brands Inc.
Hours after Robinhood
Markets said it received a cash infusion of more than $1 billion, having
just angered legions of retail investors by imposing a raft of trading
restrictions, the Securities and Exchange Commission said it would look to
identify potential misconduct and review decisions by brokerages to curtail
transactions on certain stocks.
The fallout also humbled one of Wall Street’s best known
contrarians, Andrew Left, whose Citron
Research announced it will no longer
publish short-selling analysis after a two-decade run.
Markets opened Friday
with other heavily shorted and thinly
traded stocks catching massive bids. Siebert Financial soared almost 399%
at one point during regular trading, and Jefferies analyst Steven DeSanctis
offered up other potential targets, including Hostess and mattress-maker Sleep
Number Corp. And the stock that started it all, GameStop, surged 68% on the day
to close at $325.
By mid-afternoon, Robinhood
announced that it had put limits on
purchases of shares and options for 50 stocks, including vaccine maker
Moderna Inc., Bed Bath & Beyond Inc., Tootsie Roll Industries Inc. and
Rolls-Royce Holdings Plc.
The past few days have been a whirlwind for the Menlo Park,
California-based brokerage.
New York markets had just fired up Thursday, and the
investing world was tuning in for the latest episode of the continuing drama:
Legions of Robinhood investors versus
hedge-fund Goliaths.
But within minutes, a shock wave invisible to the outside
world rattled the mechanics of Wall Street -- sending Robinhood rushing for
additional cash. The stock market’s
central clearing hub had demanded large sums of collateral from brokerages including Robinhood
that for weeks had facilitated spectacular jumps in shares such as GameStop
Corp.
The Silicon Valley venture with the wildly popular no-fee
trading app came to a crossroads. It
reined in the risk to itself by banning certain trades and unwinding client
bets -- igniting an outcry from customers and even U.S. political leaders. By
that night, word was emerging that Robinhood had raised more than $1 billion
from existing investors and drawn hundreds of millions more from bank credit
lines to weather the storm.
“Look, it is not
negotiable for us to comply with our financial requirements and our
clearinghouse deposits,” Robinhood Chief Executive Officer Vlad Tenev said
in defending his firm’s decisions on Thursday in a Bloomberg Television
interview. “We have to do that.”
The capital injection is “a strong sign of confidence from
investors that will help us continue to further serve our customers,” a
Robinhood spokesperson later said in an emailed statement. The money will allow
the firm to “continue to invest in record growth.”
Robinhood took additional
precautions, limiting purchases of fractional shares and cryptocurrencies.
When the history of this month’s stock mania is written, it
may be a story of how retail traders set out from Reddit message boards to challenge Wall Street’s status quo -- and
ended up battering their beloved brokerage too.
For weeks, Robinhood, with a mission “to democratize finance
for all,” has been their trading platform of choice as they inflicted billions
of dollars of losses on hedge funds by sending stocks that those firms had
shorted into the stratosphere -- a sort-of populist
crusade into the staid world of finance.
Robinhood’s trading restrictions made virtually nobody
happy, except perhaps the hedge funds. In a surreal scene, political
archenemies Alexandria Ocasio-Cortez and Ted Cruz found common ground in
lashing the firm’s decisions. Conspiracy theories erupted online.
The question is whether such critics will dig into the
industry’s inner workings, where pressure mounted on Robinhood and other firms
to limit certain trades. That would put a rare spotlight on arcane parts of
the market designed to prevent catastrophe, such as the Depository Trust & Clearing Corp.
One key consideration for brokers, particularly around
high-flying and volatile stocks like GameStop, is the money they must put up
with the DTCC while waiting a few
days for stock transactions to settle. Those outlays, which behave like
margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112
like it did at one point during Thursday’s session.
“It’s not really Robinhood doing nefarious stuff,” said
Bloomberg Intelligence analyst Larry Tabb. “It’s the DTCC saying ‘This stuff is
just too risky. We don’t trust that these guys have the cash to be able to
withstand settling these things two days from now, because in two days, who
knows what the price could be, it could be zero.’”
The trouble on Thursday began around 10 a.m., when after
days of turbulence, the DTCC demanded significantly more collateral from member
brokers, according to two people familiar with the matter.
A spokesman for the DTCC wouldn’t specify how much it
required from specific firms but said that by the end of the day industrywide collateral requirements jumped to $33.5
billion, up from $26 billion.
‘Rare Circumstances’
Brokerage executives rushed to figure out how to come up
with the funds. Robinhood’s reaction drew the most public attention, but the
firm wasn’t alone in limiting trading of stocks such as GameStop and AMC
Entertainment Holdings Inc.
Charles Schwab Corp.’s TD Ameritrade curbed transactions in
both of those companies on Wednesday. Interactive Brokers Group Inc. and Morgan
Stanley’s E*Trade took similar action Thursday.
Thomas Peterffy, the billionaire chairman of Greenwich,
Connecticut-based Interactive Brokers, told Bloomberg TV the restrictions were
prompted by concerns “about the
integrity of the marketplace and the system.”
On Friday, Interactive Brokers said in a tweet that it has
removed all of its previously announced options trading restrictions.
E*Trade stressed that its measures were highly unusual. “We
take actions like this seriously, and only initiate them in rare
circumstances,” said spokesman Thayer Fox, adding that he expected normal
trading to resume Friday.
Robinhood said after markets closed that it plans to allow
“limited buys” to resume in affected securities. It also tried to assuage
customer concerns with an email that evening: “This was a temporary decision
made to best continue serving you, and was not an easy one to make.”
Credit Lines
The firm has tapped at least several hundred million dollars
from its bank credit lines, a person with knowledge of the situation said. The
company’s lenders include JPMorgan Chase & Co. and Goldman Sachs Group
Inc., according to data compiled by Bloomberg.
Representatives for Robinhood and those banks declined to
comment.
Robinhood’s capital remains “strong,” CEO Tenev told
Bloomberg TV, underscoring that the restrictions helped protect both the
brokerage and its clients.
One question is whether frustrated customers will forgive
what some see as a betrayal in their campaign against Wall Street’s financial
elite.
Douglas Bray, a software developer from Connecticut who’s
been using Robinhood for about five years, said he plans to withdraw about
$100,000 after the trading restrictions.
“I’m disappointed I could not keep my money in GME like any
institutional investor could,” said Bray, 32, referring to GameStop’s ticker.
“Hedge funds are on the brink of a massive short squeeze and appear to be
calling in all the cavalry. So brokers are now ‘protecting’ customers as a
facade so that they can appease their institutional backers. The entire
community is outraged.”
Webull, which has expanded during the pandemic, saw new
accounts soar 16-fold over the seven-day average, according to CEO Anthony
Denier. Its app ranked as the second-most-popular free iPhone app in the U.S.
on Thursday, up from No. 60 a day earlier, according to SensorTower, which
gathers data on mobile apps. (Robinhood was still No. 1.)
Denier didn’t want to comment on the reason for the jump.
Earlier Thursday, Webull also restricted trading on shares including GameStop
and AMC, but then reversed its decision.
Robinhood has been expected for months to hold an initial
public offering this year. Late Thursday, people with knowledge of those
preparations said the plan is to press ahead sometime in the first half of
2021, despite the controversy and draw-down on credit lines.
But it remains to be seen what the lasting impact is from Robinhood’s
association with the retail trading revolt -- and now any strains in the firm’s
relationship with the rebels behind it.
“The restrictions in trading today only worsened the
situation,” Douglas Boneparth, who competes with Robinhood for customers as
president of the wealth-management firm Bone Fide Wealth, said Thursday. “Many
will ignore the fact that Robinhood faced increased costs that created an
unsustainable business environment.”
— With assistance by Sarah Ponczek, Sophie Alexander, Emily
Chang, and Michael Patterson
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