Robinhood co-founder and co-CEO Vlad Tenev speaks onstage at the TechCrunch Disrupt New York event on May 10, 2016.
Noam Galai | Getty Images for TechCrunch
Robinhood’s co-founder took to the Clubhouse audio app on Sunday to defend the investment platform’s decision to restrict trading in GameStop and other volatile stocks.
Shares of GameStop are up over 1,500% since the start of the year, not least due to a wave of private investors inspired by the Reddit board WallStreetBets. Such investors accumulated in GameStop and other high-short stocks, resulting in huge losses for some hedge funds.
Robinhood on Thursday restricted trading in a number of stocks, including GameStop and AMC Entertainment. Tenev said at the time that the decision was to protect the company and its customers.
In the session on Clubhouse, Tesla CEO Elon Musk Vlad Tenev of Robinhood insisted on why the platform, a pioneer in commission-free trading, decided to restrict trading last week. The online brokerage firm restricted trading in 13 stocks, which allowed clients to sell positions but not open new ones in certain securities, causing anger from users.
“We had no choice in this case,” Tenev said. “We had to meet our regulatory capital requirements.”
Tenev said Robinhood’s operations team received a request from the National Securities Clearing Corporation Thursday at 3:30 a.m. Pacific Time. Robinhood and other clearing brokers must meet certain deposit requirements from clearing houses such as the NSCC every day. The amount required is based on factors such as volatility and concentration in particular securities, Tenev said.
Robinhood received a request from the NSCC for a $ 3 billion bail to support transactions, “an order of magnitude more than usual,” Tenev said. The company raised an additional $ 1 billion in emergency capital from existing investors in an effort to strengthen its balance sheet and ease trade barriers.
“Maybe something shady went down here?” Musk – who has shown support for WallStreetBets on Twitter – asked Tenev.
“I wouldn’t shadow it or anything like that,” Tenev replied. “The NSCC was reasonable after that.”
Robinhood and the NSCC later agreed to cut the number from $ 3 billion to about $ 1.4 billion, but Tenev said his company was still forced to take action to curtail transactions.
Tenev’s explanation of the situation echoed a blog post from Robinhood, in which the company explained that it imposed temporary purchase restrictions on certain securities due to a tenfold increase in clearinghouse deposit requirements.
Asked by Musk if there would be any further trading limits in the future, Tenev said, “I think there will always be a theoretical limit. We don’t have infinite capital.”
Musk also asked Tenev whether Citadel Securities – the largest options market maker in the US – had prompted the company to impose trading limits. Robinhood derives a significant portion of its revenue from routing orders to market makers such as Citadel and Virtu. Citadel also helped infuse nearly $ 3 billion into Melvin Capital, a hedge fund betting against stocks like GameStop.
“To what extent are you obliged to 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 simply not true.”
“This was a clearinghouse decision and it was based only on the capital requirements,” added Tenev. “From our perspective, Citadel and other market makers were not involved.”