Robinhood Markets’ urgent ban on trading eight shares this week sparked anger across the political spectrum, quickly drew state and federal control and sent angry customers into the arms of competitors.
That was Thursday. Until Friday afternoon, the acquisitions of shares are limited to 23 companies. Soon it was about 50.
A drama that began with a strange leap The shares of GameStop Corp. This month they turned into a complete retail investor revolt against the Wall Street status quo and left Robinhood, their long-time beloved brokerage, caught between clients and the cold demands of finance porters. Rising tensions over the firm have forced it to raise more than $ 1 billion in fresh capital and hundreds of millions in loans.
The startup, which aimed to “democratize finance for all”, is now in an awkward position to tell customers that they can’t buy everything they want. An online job advertisement indicates the complexities facing the Silicon Valley company, Robinhood looking for a federal lobby.
“Obviously, this is not a good position for a brokerage firm,” said James Angel, an associate professor at Georgetown University. “No company wants to refuse customers who want to use their service. I would be shocked if it lasted so long. ”
In a blog post Friday night, the company described the restrictions as necessary and temporary.
“Not because we wanted to stop people from buying these shares,” Robinhood said of his decision to impose limits. “Our goal is to allow the purchase of all securities on our platform. This is a dynamic, volatile market and we have and can continue to take steps to ensure that we meet our broker requirements so that we can continue to serve our clients in the long term. ”
A company spokeswoman declined to comment beyond the blog post.
“Trade and confetti”
At the heart of all the controversy is Robinhood’s highly polished app, which has attracted millions of investors with an experience that seemed to defy ordinary Wall Street physics. Focusing on immediacy, the company allows newcomers to start trading as soon as they have established a bank transfer. It gives them a free stock to sign up for. And then there is the brightest attraction of all: no commission for trades.
No wonder Robinhood has created legions of fans who expect to buy stocks, options and even cryptocurrencies with little sense of railings. But this week, that culture has hit reality. Wall Street trading is a strictly regulated business that may require brokerages to have mountains of cash at their disposal.
After Robinhood customers struggled with hedge funds by sending shares of GameStop and other companies shot down in the stratosphere, the central clearing center of the market asked the company to post much more guarantees to limit the risk that such volatility can the presence of the system. In his blog post, Robinhood said the deposits he had to make for shares increased 10 times during the week.
Read a QuickTake: how a side call paused in GameStop mania
That meant Robinhood needed more money. And to prevent the increase in the burden, the company – like others – began to restrict certain transactions. Initially, it restricted the purchase of some of the most volatile shares. Although he later allowed them in limited quantities, the list of tickers grew. Starting Friday night, customers hoping to buy GameStop were allowed an action.
“What Robinhood promised was free trading and confetti when you trade,” said Angel Georgetown, who specializes in market structure. But the rules of the financial system apply everywhere. Any investor who is considering leaving Robinhood to continue the crusade they started there “will find, at the end of the day, that most other brokers are about the same.”
(Angel humbly noted that he put a small short on GameStop in the middle of the week just to watch the double price.)
“Growth Pain”
Founded in 2013, Robinhood has courted start-up investors with small dollars and beginners with innovations, including its promise of zero commission. It offered, for example, split shares to allow people who can’t afford to pay around $ 800 for a share of Tesla Inc. to buy only one piece of one. These features have become standard in the industry: free trading is the norm and Charles Schwab Corp. and Fidelity investments allow customers to buy “slices” of shares.
As the coronavirus pandemic erupted last year, retail investors entered the market, looking to make extra money and spend time during the blockades. Robinhood’s customer base has exceeded 13 million. Even against the background of this week’s turmoil, its application dominated the download rankings. But sometimes its popularity exceeded the development of its operations.
The company has repeatedly suffered disruptions, while the coronavirus pandemic broke out in the US last year and sent the markets to a negative point. Later in the year, when hackers accessed thousands of accounts, panicked users found that the company did not have a customer service phone number.
Disruptors of financial technology need to learn more quickly the complexities of mechanics and compliance systems on Wall Street, said Jim Toes, head of the Securities Dealers Association.
“We need to find a way to make these growing pains appear in a much shorter window,” Toes said in an interview Friday. “We have a lot of fintech companies entering our market, where in-house expertise is more about technology.”
Customer campaign
In recent months, Robinhood has sought legal assistance, recruiting lawyers from Goldman Sachs Group Inc., Wells Fargo & Co., TD Ameritrade from Schwab and WilmerHale, a law firm known for its expertise in securities rights.
But this week’s rush contrasted with past snapshots of the company’s financial health.
Robinhood’s trading subsidiary reported ample capital in mid-year financial status. At the end of June, the broker-dealer unit had 14 times the minimum level required by the rules of the Securities and Exchange Commission for capital in relation to what the trading clients owe. This level exceeded those of the larger competitors. Charles Schwab’s TD Ameritrade trading unit, for example, had six times the SEC minimum on September 30th.
A few months ago, groups of Reddit enthusiasts began to lay the groundwork for the frenzy that engulfed Robinhood this week. In their online posts, they identified short positions favored by hedge funds, eventually triggering a discount by bidding on GameStop shares and AMC Entertainment Holdings Inc. will cause billions of dollars in losses to money managers.
Read a QuickTake: How “flows before professionals” disrupt stock markets
The degree to which traders relied on Robinhood to carry out their strategy is visible in data from Atom Finance, an investment researcher that connects to its users’ brokerage accounts.
Just over half of Atom users who traded on Robinhood on Wednesday were active in volatile stocks that the brokerage restricted a day later. About 17% of users adjusted their bets on GameStop and 25% on AMC.
DTCC requests
But the action moves had other repercussions. Thursday, around 10 a.m., Depository Trust & Clearing Corp. it demanded much more collateral from member brokers, causing Robinhood and rivals to put the brakes on certain transactions. By the end of the day, industry-wide warranty requirements had risen to $ 33.5 billion from $ 26 billion – an already high level.
Robinhood withdrew at least several hundred million dollars from bank lines of credit, a person with knowledge of the situation said that day. And several of its investors participating in a round of financing. Robinhood said it has raised more than $ 1 billion, which it called “a strong investor confidence that will help us continue to serve our customers.”
The company intends to hold an initial public offering this year. This week’s fundraiser, structured as a convertible banknote, was rated at a low percentage compared to 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 investors involved in the effort, people said. The final amount of funding is still being determined, said one person.
“Rapid change of priorities”
As Robinhood works to consolidate its finances, customers are angry.
At least 18 lawsuits were filed against the company in California, Connecticut, Florida, Illinois, New Jersey, Oregon, Pennsylvania and Texas, largely claiming that the trading limits were in breach of contract.
Robinhood was also among a list of entities issued a civil investigation request by Texas Attorney General Ken Paxton because of investor restrictions this week. New York Attorney General Letitia James said she is reviewing the brokerage’s actions. The SEC said it was also examining brokerage decisions to limit the purchase.
“There was a lot of misinformation out there about why Robinhood did this,” Robinhood executive director Vlad Tenev told Bloomberg Television. interview this week. “We did it primarily to protect the company and our customers.”
Showing Robinhood for a lobby highlights how much work he has in front of him to correlate things with those customers and authorities.
“We are looking for a very adaptable and collaborative person,” the announcement reads. Someone “who can deal with ambiguity and quickly change priorities with flexibility and patience.”
– With the assistance of Lananh Nguyen, Shahien Nasiripour and Katie Roof