Robinhood spent yesterday taking from its credibility and giving to its critics, in one of the most inexplicable self-immolations Silicon Valley has ever seen.
The latest: Robinhood is racing to raise $1 billion from existing investors, ahead of plans to reopen trading of GameStop and other '90s nostalgia stocks.
What happened: Robinhood prevented its users from buying shares or call options on a bucket of highly volatile stocks that had been shorted by hedge funds and bid up by Reddit and TikTok traders. Several other trading platforms, including Charles Schwab and its TD Ameritrade subsidiary, also put some limits on such activity.
- Pundit reaction: 😡
- Political reaction: 😡😡
- Robinhood user reaction: 🤬🤬🤬
Why it happened: For most of the trading day, Robinhood said little of substance. This created a vacuum for conspiracy theorists, including some elected officials who didn't want to miss an opportunity to slam both Wall Street and Silicon Valley in the same breath.
- The most common claim was that Robinhood was helping out the big hedge funds, including Citadel, that pay it for order data.
- If true, however, it would mean that Robinhood (and Citadel) were willing to risk a massive loss of users, which would then decrease the inherent value of its order data.
- Robinhood has publicly denied that its decision was in any way related to conversations with market makers or other participants.
After market close, Robinhood CEO Vlad Tenev said the decision was based on net capital and clearinghouse deposit obligations.
- That super boring explanation actually makes sense. For example, brokers like Robinhood (and Schwab) must send cash daily to the Depository Trust Co., and the amount changes based on anticipated trading volumes, etc. One source suggests Robinhood's DTC requirement had more than quadrupled from normal levels.
- But: Robinhood wouldn't confirm on the record that DTC requirements played a role. And Tenev said repeatedly last night that liquidity issues weren't a factor.
So, to summarize: Robinhood didn't have enough money to cover regulatory requirements, except that it did. Oh, and then it raised $1 billion to reopen trades even though liquidity issues didn't prompt it to close trades. Yeah, my head hurts too.
Robinhood not only has a big user trust problem, it also may have a political problem. And that translates into an IPO problem, as the company is said to be on the verge of filing confidential paperwork.
- Elected officials want to hold hearings on the entire GameStop matter, unable to resist the lure of verbally shaming Wall Street and Silicon Valley in the same breath. Much of the rhetoric, so far, is ideologically inconsistent — slamming hedge funds for "casino capitalism" while celebrating Reddit users who sat at the same tables (albeit with less money per player).
- The SEC this morning said it will "closely review" the situation.
- As for legislative or regulatory remedies, floated possibilities include the return of a transaction tax (which wouldn’t have really matters), reinstating minimum spreads (which might matter a little) or limits on the ratio of shorts vs. outstanding shares (which would matter the most).
The bottom line: If Robinhood woke up yesterday with short-term liquidity issues, it should have said so to users quickly, clearly and apologetically. Not doing so was a massive failure. And if it was anything else... well, then that would be even worse.