Robinhood, the online brokerage at the centre of wild trading in equities this week, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position after a turbulent four days.
The company has drawn down at least several hundred million dollars via a credit facility with banks led by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the move.
A spokesperson for Robinhood early on Friday described the $1bn infusion from its investors as a “strong sign of confidence” that will help it “further serve our customers”.
The developments came after Robinhood and other retail brokers restricted trading on Thursday in a number of companies whose share prices had risen sharply over the past week, provoking outrage among users and questions from US politicians.
“We made a tough decision today to temporarily limit buying for certain securities,” Robinhood said in a statement late on Thursday. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearing house deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.”
Robinhood’s bankers declined to comment.
Vlad Tenev, Robinhood co-founder, added in a CNBC interview that drawing the bank credit lines would “maximise . . . the funds we have to deposit at the clearing houses” that help manage US markets.
The company said it would “open up trading for some of these securities in a responsible manner” — an announcement that sent an immediate jolt through markets. GameStop shares jumped more than 60 per cent in overnight trading, reversing a drop of 44 per cent on Thursday. Shares in AMC and BlackBerry also reversed much of their losses.
“We’ll continue to monitor the situation and may make adjustments as needed,” Robinhood said.
In common with rivals such as Schwab and ETrade, which also restricted some trading on Thursday, Robinhood clears trades at the main US clearing houses, run by the Depository Trust & Clearing Corporation for equities and the Options Clearing Corporation for options. A clearing house stands between two sides of a deal, managing the risk to the market if one side defaults.
As it takes the risk that an executed trade does not settle on to its own book, Robinhood needs to have capital on hand. It also faces higher costs if the clearing house raises margin requirements to protect its members against high market volatility.
“Robinhood is in a tough spot and it is a highly visible moment,” said Paul Deer, director of Advisory Service at Personal Capital, a digital wealth manager. “They have investors trading on margin and that represents a risk to them and the broker if we see prices reverse.”
The trading platform has proved a popular venue for day traders who organised on Reddit message boards to buy particular stocks, in hopes of inflicting losses on hedge funds that have placed large bets against the same shares.
The decision to curb trading resulted in a fierce backlash from users, a class-action lawsuit accusing Robinhood of market manipulation and calls from politicians to investigate the company. The Senate banking committee said it would hold a hearing into the volatility.
A host of online conspiracy theories also spread online.
There were also statements after-hours on Thursday from market-making groups which process trades and were criticised on social media, including from Citadel Securities, the trading company owned by Ken Griffin, which pays Robinhood for orders.
Citadel Securities said it had “not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business”.
Citadel, a hedge fund also owned by Mr Griffin, said it was “not involved in, or responsible for, any retail brokers’ decision to stop trading in any way”. Earlier this week, Citadel provided rescue financing to Melvin Capital, a hedge fund targeted by retail traders on Reddit.
Mr Tenev said on Twitter that Robinhood’s “mission to increase access to investing” remained a priority.
“We cannot control, however, the lightning-fast spread of information and misinformation that takes place on social media, and for that I am incredibly sorry to our customers and staff for this.”
