Robinhood’s decision to tap into its bank credit lines during the Reddit-sparked trading frenzy was done proactively, the CEO of the brokerage app told CNBC.
The news of Robinhood drawing on its bank credit lines, worth hundreds of millions of dollars, came after the broker on Thursday restricted users’ ability to buy 13 securities, including shares of GameStop and AMC Entertainment. Those stocks had become incredibly popular and volatile after being the target of online investors who hyped the names and instigated short squeezes.
“There was no liquidity problem,” CEO Vlad Tenev said in an interview Thursday night with CNBCs Andrew Ross Sorkin. Rather, Tenev said Robinhood needed to meet requirements with its clearinghouses, which play a key role in finalizing a trade, and net capital obligations with the Securities and Exchange Commission.
Robinhood has experienced unprecedented high volume of trading this week as the Reddit-inspired retail traders attempt a takeover of certain highly shorted stocks. Robinhood, which has to deposit money to a clearinghouse based on the volume of trades, said it restricted trading was because the firm was unable to meet the deposit requirements that it was anticipating. The requirements go up when volatility goes up in case of large losses by many options trades.
“With a lot of concentrated activity in some of these stocks, we need to deposit more money at our clearinghouses to allow for that activity to continue,” Tenev said. “By drawing on our credit lines, which we do all the time, as part of normal day-to-day operation, we get more capital that we can deposit with the clearinghouses. And that will allow us to enable ideally more investing with fewer restrictions.”
Robinhood also raised $1 billion from existing investors, according to reporting from Sorkin, who said on “Squawk Box” on Friday morning that the brokerage needed to shore up its balance sheet as it was set to ease trading restrictions on GameStop and other volatile stocks.
The move to lift some of its trading limits during Friday’s session sent shares of the affected companies soaring in premarket trading. Robinhood’s restrictions Thursday in some cases prohibited users from buying new shares. Instead, they could only sell existing positions. Many of those restricted stocks suffered major losses Thursday, with GameStop tanking more than 40% and AMC falling more than 55%.
Robinhood received fierce backlash for implementing trading limits from customers and a bipartisan group of lawmakers in Washington. Nevertheless, Tenev told Sorkin that Robinhood made the correct decision.
“In order to protect the firm and protect our customers we had to limit buying in these stocks,” said Tenev, who co-founded the brokerage app in 2013. It has surged in popularity, particularly with younger investors, and helped pioneer zero-commission trading.
Robinhood last year hired Goldman Sachs to lead preparations for an initial public offering.
The premarket moves in stocks such as GameStop and AMC Entertainment signals the frenzied trading that has consumed Wall Street in recent days is likely to continue. Rallying together on forums like Reddit’s WallStreetBets, a large cohort of retail investors have hyped up GameStop and other stocks with large short positions.
Short selling is a bet that a stock will decrease in price. But as GameStop’s stock rose this month, shorts sought to limit their potential losses by purchasing stock at the current higher prices. Meanwhile, other investors continued to rally behind GameStop further increasing the stock’s price.
