“This is a strong sign of investor confidence that will help us continue to serve our customers,” Robinhood said in a statement.
But the fact that Robinhood felt the need to raise so much money, just a few months after raising hundreds of millions of dollars, signals the financial pressure the company is facing. Either it faced a liquidity crisis – or it was strictly avoided.
Robinhood told CNBC on Thursday that reaching its credit line was a “proactive move.”
“We had to restrict the purchase”
Faced with a backlash from investors and lawmakers, Robinhood later explained that the market turmoil had created financial pressures. This is because whenever investors buy shares, brokerages like Robinhood must first make a deposit at a clearing house. To protect investors, regulators need intermediaries to keep a certain amount of capital at hand.
These cash requirements can increase, sometimes dramatically, in times of market stress and intense trading.
“In order to prudently manage the risk and deposit requirements, we had to restrict the purchase of these 13 shares,” Robinhood co-CEO Vlad Tenev told CNN’s Chris Cuomo on Thursday night. “We are in a historical situation where there is a lot of activity and a lot of shopping concentrated in a relatively small number of symbols that go viral on social networks. We have never seen anything like this before.”
Robinhood denies speculative fund speculation
Part of Robinhood’s outrage is driven by the feeling that the company is limiting trading in an effort to help the big players on Wall Street.
Robinhood has denied speculation that the startup has decided to stop shopping on GameStop or be pressured by hedge funds or other Wall Street players.
“I want to be 100% clear. This decision was not made in the direction of any market maker or other market participants,” Tenev told CNN.
Much of the speculation revolved around entities owned by billionaire Ken Griffin.
Citadel Securities, the market maker owned by Griffin, is a major source of revenue for Robinhood. Like other brokerages, Robinhood is paid to direct orders to market makers, a controversial practice known as order flow payment.
Representatives of Griffin-led entities denied any role in Robinhood’s decision to halt GameStop acquisitions.
“Citadel is not involved in any decision of the retail brokers to stop trading in any way and is not responsible for it,” the hedging fund said on Thursday.
Citadel Securities, the market maker, said it had not “instructed or caused in any way a brokerage firm to stop, suspend or limit trading or otherwise refuse to do business”.
However, the whole episode raises questions about Robinhood’s business model – and whether it has enough capital to avoid having to close volatile shares again.
And the biggest question is whether Robinhood’s fast-growing user base stays with the startup or goes to one of its rivals that has adopted its free trading model.