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“This is a strong sign of investor confidence that will help us continue to serve our clients,” Robinhood said in a statement.
But the fact that Robinhood felt the need to raise so much money, just months after raising hundreds of millions of dollars, indicates the financial pressure the company is facing. He was either faced with a liquidity crisis – or one narrowly avoided.
Robinhood told CNBC on Thursday that tapping his line of credit was a “proactive step.”
‘We had to restrict purchases’
Faced with backlash from investors and lawmakers, Robinhood later explained that the market turbulence created financial pressures. This is because every time investors buy stocks, brokerage houses like Robinhood must first make a deposit with a clearing house. To protect investors, regulators require brokerage firms to keep a certain amount of capital.
These liquidity needs can increase, sometimes dramatically, in times of market stress and intense trading.
“To prudently manage risk and deposit requirements, we had to restrict the purchase of these 13 stocks,” Vlad Tenev, co-CEO of Robinhood, told CNN’s Chris Cuomo Thursday evening. “We are in a historic situation where there is a lot of activity and a lot of shopping focused on a relatively small number of symbols that are going viral on social media. We’ve never really seen anything like this before.”
Robinhood denies hedge fund speculation
Part of the outrage at Robinhood is driven by the feeling that the company has limited its activities in an effort to help the big players on Wall Street.
Robinhood has denied speculation that the startup decided to stop buying from GameStop or was pressured by hedge funds or other Wall Street players.
“I want to be 100% clear. This decision was not made under the direction of a market maker or other market participants,” Tenev told CNN.
Much of this speculation involved entities owned by billionaire Ken Griffin.
Citadel Securities, the market maker owned by Griffin, is a major source of income for Robinhood. Like other brokerages, Robinhood gets paid to route orders to market makers, a controversial practice known as payment for order flow.
Representatives from the entities run by Griffin have denied any role in Robinhood’s decision to stop GameStop purchases.
“Citadel is not involved in, or responsible for, the decision of retail brokers to stop trading in any way,” the hedge fund said Thursday in a statement.
Citadel Securities, the market maker, said it had “not ordered or otherwise prompted any brokerage firm to stop, suspend or limit trading or otherwise refuse to do business.”
Still, the whole episode raises questions about Robinhood’s business model – and whether it has enough capital to avoid having to shut down volatile stock trading again.
And the bigger question is whether Robinhood’s rapidly growing user base is staying loyal to the startup or reaching out to one of its rivals who has embraced its free trade business model.
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