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
Co-founder Robinhood went to the Clubhouse audio app on Sunday to defend the investment platform’s decision to restrict GameStop trading and other volatile stocks.
GameStop shares have risen more than 1,500% since the beginning of the year, fueled largely by a wave of retail investors inspired by Reddit board WallStreetBets. Such investors have piled up in GameStop and other very short-circuited shares, resulting in huge losses for some hedge funds.
Robinhood decided to restrict trading in 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.
In the Clubhouse session, Tesla CEO Elon Musk pressed Robinhood’s Vlad Tenev on why the platform, a pioneer of commission-free trading, decided to restrict trading last week. The online brokerage firm limited trading in 13 shares, allowing clients to sell positions, but not to open new ones in certain securities, causing anger from users.
“I had no choice in this case,” Tenev said. “We had to comply with our regulatory capital requirements.”
Tenev said Robinhood’s operations team received a request Thursday at 3:30 a.m. Pacific Time from the National Securities Clearing Corporation. Robinhood and other clearing brokers are required to meet certain deposit requirements from clearing houses, such as NSCC, on a daily basis. The amount needed is based on factors such as volatility and concentration in certain securities, Tenev said.
Robinhood has received a request for a $ 3 billion security deposit from the NSCC to support the transactions, “an order of magnitude larger than usual,” Tenev said. The company has raised an additional $ 1 billion in emergency capital from existing investors in an effort to strengthen its balance sheet and allow it to ease its trading edges.
– Did something shady come down here? Musk – who showed support for WallStreetBets on Twitter – asked Tenev.
“I wouldn’t blame the shadow or anything like that,” Tenev replied. “The NSCC was reasonable after that.”
Robinhood and the NSCC later agreed to reduce the $ 3 billion to about $ 1.4 billion, but Tenev said his company is still forced to take steps to limit transactions.
Tenev’s explanation of the situation resonated in a blog post from Robinhood, in which the company explained that it had placed temporary purchase restrictions on some securities, due to a tenfold increase in the deposit house’s deposit requirements.
Asked by Musk if there will be other limits to trading in the future, Tenev said: “I think there will always be a certain theoretical limit. We don’t have infinite capital.”
Musk also questioned Tenev as to whether Citadel Securities – the largest options market maker in the US – pushed the firm to impose trading limits. Robinhood earns a significant share of its revenue from directing orders to market makers such as Citadel and Virtu. Citadel also helped infuse nearly $ 3 billion into Melvin Capital, a hedge fund that bet against stocks like GameStop.
“To what extent are you vigilant at 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 that is just false.”
“This was a decision of the clearing center and was based only on capital requirements,” Tenev added. “From our perspective, Citadel and other market factors were not involved.”