The Reddit hordes were there again on Friday, once again offering GameStop Corp. stock and fighting with hedge funds by tracking down targets such as Siebert Financial Corp. and Twinkie maker Hostess Brands Inc.
Hours after Robinhood Markets said it received a cash injection of more than $ 1 billion, after angering legions of retail investors by imposing a series of trade restrictions, the Securities and Exchange Commission said that it would seek to identify potential misconduct and review the decisions of brokers to reduce trading in certain stocks.
The fallout also humbled one of Wall Street’s most notorious annoyances, Andrew Left, who Citron Research has announced will no longer be releasing short selling analysis after a two-decade period.
Markets opened on Friday with other heavily sold and weakly traded stocks grabbing massive bids. Siebert Financial climbed nearly 399% at one point during regular trading, and Jefferies analyst Steven DeSanctis offered other potential targets, including hostess and mattress maker Sleep Number Corp. And the action that started it all, GameStop, jumped 68% at 11:40 a.m. in New York City.
By mid-afternoon, Robinhood announced that it had placed limits on stock and option purchases for 23 stocks, including vaccine maker Moderna Inc., Bed Bath & Beyond Inc. and Tootsie. Roll Industries Inc.
The past few days have been a whirlwind for the Menlo Park, California-based brokerage.
The New York markets had just started on Thursday and the investing world was tuned in to the latest episode of the ongoing drama: Legions of Robinhood Investors vs. hedge fund Goliaths.
But within minutes, a shock wave invisible to the outside world rocked the mechanics of Wall Street – sending Robinhood scrambling for extra cash. The central clearinghouse of the stock market had demanded large sums of collateral from brokerage houses, including Robinhood, which for weeks had facilitated dramatic jumps in stocks such as GameStop Corp.
The Silicon Valley company with the hugely popular toll-free trading app has come to a crossroads. He limited the risk to himself by banning certain transactions and unwinding client bets – sparking an outcry from clients and even US political leaders. That night, news broke that Robinhood had raised over $ 1 billion from existing investors and pulled hundreds of millions more onto bank lines of credit to weather the storm.
“Listen, it’s non-negotiable for us to comply with our financial requirements and clearing house deposits,” Robinhood CEO Vlad Tenev said in defending his company’s decisions in an interview on Thursday. at Bloomberg Television. “We need to.”
The capital injection is “a strong sign of investor confidence that will help us continue to serve our customers better,” a Robinhood spokesperson later said in an emailed statement. The money will allow the company to “continue to invest in record growth”.
Robinhood has taken extra precautions, limiting purchases of fractions of stocks and cryptocurrencies.
When the story of this month’s stock market mania is written, it may be a story of how retail traders took off Reddit bulletin boards to challenge the Wall Street status quo – and ended up beating their brokerage. beloved.
For weeks Robinhood, with a mission to ‘democratize finance for all’, was their trading platform of choice as they inflicted billions of dollars in losses on hedge funds by sending stocks that these companies had bypassed. in the stratosphere – a sort of populist crusade in the frozen world of finance.
Robinhood’s trade restrictions made virtually no one happy except perhaps the hedge funds. In a surreal scene, main political enemies Alexandria Ocasio-Cortez and Ted Cruz found common ground by overturning the company’s decisions. Conspiracy theories have erupted online.
The question is whether these critics will dig into the inner workings of the industry, where pressure has mounted on Robinhood and other companies to limit certain trades. This would put a rare spotlight on obscure parts of the market designed to avert disaster, like the Depository Trust & Clearing Corp.
A key consideration for brokers, especially around high-end, volatile stocks like GameStop, is the money they have to support with DTCC while they wait a few days for stock trades to settle. These expenses, which behave like a margin in a brokerage account, can create a cash flow crisis on days of volatility, such as when GameStop goes from $ 483 to $ 112 as it did at some point during the transaction. Thursday session.
“It’s not really Robinhood doing bad things,” said Larry Tabb, analyst at Bloomberg Intelligence. “It’s DTCC saying, ‘This stuff is too risky. We’re not convinced these guys have the money to be able to handle these things in two days, because in two days who knows what the price might be, it might suck. “
Thursday’s troubles began around 10 a.m., when after days of turmoil, DTCC demanded many more guarantees from member brokerages, according to two people familiar with the matter.
A DTCC spokesperson didn’t say how much he was charging specific companies, but said at the end of the day, industry-wide warranty requirements jumped to 33.5 billion dollars, compared to 26 billion dollars.
Brokerage executives rushed to figure out how to find the funds. Robinhood’s reaction garnered the most public attention, but the company was not alone in limiting trading in stocks like GameStop and AMC Entertainment Holdings Inc.
The TD Ameritrade of Charles Schwab Corp. slowed down transactions in those two companies on Wednesday. Morgan Stanley’s Interactive Brokers Group Inc. and E * Trade took similar action Thursday.
Thomas Peterffy, the billionaire president of Interactive Brokers, based in Greenwich, Connecticut, told Bloomberg TV the restrictions were motivated by concerns “about the integrity of the market and the system.”
E * Trade stressed that its measures were very unusual. “We take action like this seriously and only initiate it in rare circumstances,” spokesman Thayer Fox said, adding that he expected normal trading to resume on Friday.
Robinhood said after the markets closed that it planned to allow the resumption of “limited purchases” in the relevant securities. He also attempted to allay customer concerns with an email that evening: “This was a temporary decision made to continue serving you better, and it was not an easy decision to make. . “
Lines of credit
The firm has drawn at least several hundred million dollars on its bank lines of credit, one person familiar with the situation said. The company’s lenders include JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to data compiled by Bloomberg.
Representatives for Robinhood and those banks declined to comment.
Robinhood’s capital remains “strong,” CEO Tenev told Bloomberg TV, noting that the restrictions have helped protect both the brokerage and its clients.
One question is whether frustrated customers will forgive what some see as betrayal in their campaign against Wall Street’s financial elite.
Douglas Bray, a Connecticut software developer who has been using Robinhood for about five years, said he plans to withdraw around $ 100,000 after the trade restrictions.
“I’m disappointed that I couldn’t have kept my money in GME like any institutional investor could,” said Bray, 32, referring to the GameStop ticker. “Hedge funds are on the verge of massive squeeze and appear to be calling on all the cavalry. Thus, brokers now “protect” clients as a facade so that they can appease their institutional backers. The whole community is outraged. “
Webull, which developed during the pandemic, has seen new accounts increase 16-fold from the seven-day average, according to CEO Anthony Denier. Its app ranked second among the most popular free iPhone apps in the United States on Thursday, down from 60 a day earlier, according to SensorTower, which collects data on mobile apps. (Robinhood was still # 1)
Denier did not want to comment on the reason for the jump. Earlier Thursday, Webull also restricted trading in stocks, including GameStop and AMC, but later reversed his decision.
Robinhood has been expected to hold an initial public offering this year for months. Late Thursday, people familiar with the preparations said the plan was to move forward in the first half of 2021, despite the controversy and drawdowns on lines of credit.
But it remains to be seen what the lasting impact of Robinhood’s association with the retail revolt – and now tensions in the company’s relationship with the rebels behind it.
“The trading restrictions today have only made matters worse,” said Douglas Boneparth, who competes with Robinhood for clients as chairman of wealth management firm Bone Fide Wealth, on Thursday. “Many will ignore the fact that Robinhood had to contend with increased costs which created an unsustainable business environment.”