Robinhood, the online brokerage firm at the center of the wild trading of GameStop and other hot stocks, struggled to strengthen its financial position and public reputation on Thursday after a day of chaos and anger among its clients.
The company has drawn at least several hundred million dollars through a credit facility with banks run by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the movement.
He came after Robinhood and other retail brokers restricted trading earlier Thursday in a number of companies whose stock prices had risen sharply over the past week. After the cash injection, the company said it would allow trading in those securities to resume on a limited basis on Friday.
“We have made the difficult decision today to temporarily limit the purchases of certain securities,” he said in a statement. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearing house deposits. Some of these requirements fluctuate with market volatility and can be significant in today’s environment. “
Robinhood bankers declined to comment.
Robinhood has proven to be a popular place for day traders who organize on Reddit bulletin boards to buy stocks such as GameStop, the video game retailer, the AMC movie chain and BlackBerry, the Canadian technology group, in the hope of inflicting losses on hedge funds that have placed bets on the same stocks.
The decision to curb trade resulted in a fierce backlash users, a class action lawsuit accusing Robinhood of market manipulation and calls by politicians to investigate the company. It has also sparked a host of online conspiracy theories.
In an attempt to limit the damage, Vlad Tenev, co-founder of Robinhood, took to Twitter “to clarify some things,” including its regulatory requirements.
“These requirements exist to protect investors and the markets and we take our responsibilities to meet them seriously.”
Much like competitors such as Schwab and ETrade, Robinhood clears trades in major US clearing houses, operated by the Depository Trust & Clearing Corporation for stocks and the Options Clearing Corp for options. A clearinghouse sits between the two sides of a transaction, managing the risk to the market if one side fails.
While self-clearing saves on fees that would otherwise go to another clearing broker, it also means Robinhood must have more capital, as it assumes in its own ledger the risk that a executed trade does not. cannot be adjusted. The broker also faces higher costs if the clearinghouse increases the margin requirements to protect its members from high market volatility.
News that Robinhood had tapped into its credit facility was first reported by Bloomberg.
Robinhood’s statement that it would reverse some of the trade restrictions sparked a strong rebound in stocks during after-hours trading in New York City. GameStop grew more than 50 percent after falling 44 percent in regular hours. AMC and BlackBerry stocks canceled half of their regular hourly losses.
“We will continue to monitor the situation and we may be able to make adjustments as needed,” Robinhood said.
“Robinhood is in a tough spot and it’s a very visible time,” said Paul Deer, director of advisory services at Personal Capital, a digital wealth manager. “They have investors trading on margin and it is a risk to them and the broker if we see the prices reverse.”
On Thursday, there were statements from market making groups, which process transactions, and which have been criticized on social media for the sidewalks, including from Citadel Securities, the trading company owned by Ken Griffin, which pays Robinhood for orders.
Citadel Securities said it “did not order or otherwise induce any brokerage firm to stop, suspend or limit trading or otherwise refuse to do business.”
Citadel, a hedge fund also owned by Griffin, said it was “not involved in, or responsible for, the decision of retail brokers to stop trading in any way.” Earlier in the week, Citadel provided bailout funding to Melvin Capital, a hedge fund targeted by retail traders on Reddit.
Mr. Tenev said “Robinhood’s mission to increase access to investment” remained a priority.
“We cannot control, however, the super-rapid spread of information and disinformation that occurs on social media, and for that I am extremely sorry for our customers and our staff.”