Spacex and Tesla CEO Elon Musk has tried to get to the bottom of what happened to the popular trading app Robinhood when it stopped people from buying shares of popular stocks like Gamestop. Shares of these stocks became popular because of the Wallstreetbets movement.
Elon Musk says people want the truth from Robinhood
During an interview on The Good Time Show via the Clubhouse app Sunday night, Elon Musk, CEO of Robinhood trading app, Vlad Tenev, spoke out about the company’s decision to limit hot stocks last week, including Gamestop. On Friday, Robinhood also restricted cryptocurrency trading, citing “extraordinary market conditions.”
‘What happened last week? Why can’t people buy the Gamestop stock? The people are demanding an answer and they want to know the details and the truth, ”said Musk.
Tenev began by explaining the structure of his company. “Robinhood is actually a couple of companies,” he described. Robinhood Financial handles transactions, Robinhood Securities clears and settles the transactions, and Robinhood Crypto deals with crypto transactions.
Robinhood’s CEO explained that his platform experienced “unprecedented volume” last Wednesday as “many of these so-called meme shares went viral on social media and people joined Robinhood” to buy these shares. Accordingly, the company “received a file” from the National Securities Clearing Corporation (NSCC) Thursday morning at approximately 3:30 am PST. It asked Robinhood to “make money to the NSCC based on a number of factors,” including the volatility of certain securities. Tenev clarified that “this is stock trading, so it’s based on stock trading and not options trading or anything else,” and explains:
They gave us a file with a deposit, and the request was about $ 3 billion dollars, which is about an order of magnitude more than usual.
Musk interrupted Tenev and wondered, ‘Why is that so high? It sounds like this is an unprecedented increase in the demand for capital. What formula did they use to calculate that? “
Tenev replied, “We don’t have the full details. It’s a bit of an opaque formula, but there’s a component called its VAR, the Value at Risk, which is based on some pretty quantitative stuff … and then there’s a special component that’s discretionary, so acts like that as a multiplier. Tenev also noted that his company had “raised a little about $ 2 billion in venture capital up to that point,” so the request was “a large number.”
The Tesla CEO interrupted again and asked, “What everyone wants to know is that something shady happened here? It seems strange that you would suddenly get a $ 10 billion question in the morning … suddenly out of nowhere. Tenev quickly corrected Musk that the number was $ 3 billion. Robinhood’s CEO went on to emphasize:
I wouldn’t shade it or anything, and actually the NSCC was passable after that. They’ve worked with us to actually lower it. It was an unprecedented activity.
Musk asked Tenev abruptly, “Is there anyone holding you hostage now?” Tenev chuckled and replied, “No, no, I’m fine. Thanks for asking. ”Both laughed.
Robinhood’s CEO went on to explain what had happened, calling the experience “nerve-racking.” He said that after receiving the $ 3 billion request, his chief operating officer called someone higher at the NSCC to discuss what to do. “There was another call and they cut it from $ 3 billion to about $ 1.4 billion,” Tenev reiterated that it was still a high number. His company then proposed a plan to the NSCC to “highlight these volatile stocks that only drove the closing of the activity position.”
Then, at about 5:30 a.m. to 5:30 p.m. PST, before the market opened, the NSCC came back and lowered the required down payment to $ 700 million, “which we then immediately deposited and paid,” Tenev emphasized. The Robinhood CEO acknowledged that the move was bad for customers and said, “In this case, we had no choice. We had to meet our regulatory capital requirements and so the team did what they could to make sure we were available to customers. “
The CEO of Spacex further wondered: “Who controls this organization, this clearinghouse?” Tenev replied, “It’s a consortium. It’s not really a government agency. I don’t really know the details of any of that. Nonetheless, he stressed, “To be fair … I think there was some legitimate kind of turmoil in the markets … so there’s probably some extra risk in the system that justifies higher demands, so it’s not entirely unreasonable. He noted that many other brokers were in the same situation and had to limit the same activity.
“So it sounds like this organization is calling you and they basically have a gun to your head: give this money or else,” the Spacex CEO summed up and elaborated:
In fact, what people are wondering is, did you sell your riverside customers or did you have no choice? If you didn’t have a choice, that’s understandable, but then we need to find out why you didn’t have a choice and who these people are who say you don’t have a choice.
‘I think that’s fair. We must meet these requirements. Financial institutions have requirements, ”Tenev replied. Nonetheless, he suggested it would be helpful to know the formula the NSCC uses to calculate these requirements so that businesses can plan better.
Musk then asked if there was any outside pressure forcing Robinhood to take the action it did. Tenev confirmed that “there is a rumor that Citadel or other market makers have pressured us to do this.” However, he clarified, “that’s just plain false,” stressing that “this was a clearinghouse decision and it was based only on the capital requirements, so from our perspective, Citadel and other market makers were not involved.”
During the same Clubhouse interview, Elon also revealed that he is a proponent of bitcoin and should have bought the cryptocurrency eight years ago. He believes bitcoin is on the cusp of widespread adoption by traditional financial folks. On Monday, Robinhood raised an additional $ 2.4 billion from shareholders, after securing $ 1 billion last Thursday.
What do you think of the Robinhood CEO’s explanation? Let us know in the comments below.
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