An interesting turn for the latest Robinhood story took place yesterday, when Tesla (TSLA) and SpaceX’s founder Elon Musk had the chance to interview the investing platform’s CEO Vlad Tenev during an informal encounter in audio chat app Clubhouse.
The meet-up, which effectively busted the platform’s guest limit after more than 5,000 people joined the conversation, was moderated by Sriram Krishnan and Aarthi Ramamurthy, the co-hosts of a show on Clubhouse that talks about tech and culture, although Musk eventually took over the interview once Robinhood’s CEO joined the conversation.
During the chat, Musk inquired on the reasons that drove the brokerage firm’s decision to restrict the trading of popular names such as GameStop (GME) and AMC Entertainment (AMC) – a move that contradicts the firm’s mission of democratizing access to the financial markets.
Tenev addressed Musk’s questions by first outlining how broker-dealer institutions function, mentioning that the complex web of interconnected parties that comprise the US financial markets require that the firm follows certain strict protocols to ensure that the system remains stable, especially during times of extreme volatility.
In this regard, Tenev acknowledged that Robinhood’s systems experienced had to deal with unprecedented volumes and load due to these so-called ‘meme stocks’, which were going viral on social media, attracting a significant level of buying activity that just went over the platform’s capacity.
Then, Robinhood’s top executive revealed that the firm received a notice from the National Securities Clearing Corporation (NSCC) demanding a $3 billion deposit from the company to support the transaction volume it was currently handling.
After some back and forth with the institution, Tenev said his team managed to round up the figure to $700 million, which Robinhood was able to gather after receiving a $3.4 billion capital injection from multiple investors including Ribbit Capital, Andreessen Horowitz, and Sequoia Capital.
Tenev said that although the required deposit was somehow “reasonable” under the circumstances, the calculations that led to the initial $3 billion ask were a bit “opaque”.
Musk then made a joke by asking if Tenev was being held hostage at the moment of the call, with Tesla’s founder then inquiring a bit more about how the situation looked like for Tenev in practice – asking if the situation was a ‘gun to your head’ scenario in which the CEO had no choice other than restricting trades to keep the systems running.
“So, I think the one thing that is maybe not clear to people is Robinhood is a participant in the financial system. So we have to work with all of these counter-parties”, said Tenev, a former high-frequency trader (HFT) with plenty of experience in the financial markets prior to his tenure at Robinhood’s helm.
What is the situation with Robinhood at the moment?
At the time this is being written, Robinhood has eased its restrictions for trading most of the shares of these ‘hot’ companies, although trading of GameStop (GME) shares is still heavily restricted to 20 shares per day and 20 options contracts per day.
Meanwhile, investors are allowed to trade many more units of other companies like AMC Entertainment (AMC) and Blackberry, with the current limit sitting at 350 and 700 shares respectively for these two stocks.
On the other hand, fractional shares of these companies cannot be bought at the moment.
As of this morning, these heavily shorted stocks are diving in pre-market stock trading action, with GameStop (GME) shares currently losing 42% of their value after yesterday’s 31% slide, while AMC Entertainment shares are also down 33% before the bell.