Robinhood and other brokerages in recent days have experienced a surge in trading volume in a small number of stocks, prompting the clearinghouses that help process and settle trades to ask them for more cash to cover the transactions.
Thursday’s fundraising came together in a matter of hours after Robinhood received an early morning message from a clearinghouse asking for a sharp increase in deposits for that day’s trading, according to people familiar with the matter. While Robinhood executives felt they had the resources to cover that request, they worried that similarly high increases in the ensuing days could potentially strain the company’s finances, the people said.
A decision was made to restrict trading in about a dozen hot stocks and shore up the company’s finances. Robinhood also borrowed roughly $500 million from its banks this week, the people said.
“Part of the mechanics of what makes this difficult is things go viral on social media, and increases like that can be exponential,” Robinhood Chief Executive
said of the trading restrictions in an interview late Thursday. “With something exponential, things can change very, very quickly. Part of this was also anticipatory in nature.”
The Securities and Exchange Commission said Friday it plans to closely review the actions of Robinhood and other brokerage firms that restricted investors’ ability to trade volatile stocks such as GameStop this week.
The Robinhood funding deal capped a strange week in the markets, when an army of regular investors piled into a handful of heavily shorted stocks—sending their prices up sharply and dealing painful losses to some hedge funds that were betting the shares would fall. GameStop, the stock that kicked off the retail frenzy, rose 68% Friday to end the week at $325. When 2021 began, the stock was under $20.
The episode caused one battered short seller to call it quits. Andrew Left, founder of Citron Research, said Friday his firm will no longer publish short-seller reports and instead will pivot to providing insight into companies the firm thinks investors should buy.
The effects rippled beyond stocks. Robinhood on Friday cited “extraordinary market conditions” for temporarily turning off instant buying power for cryptocurrencies including bitcoin, a day after its decision to restrict trading in popular stocks drew widespread complaints.
The funding deal was structured as a note that conveys the option to buy additional shares at a discount later, some of the people said. More than a dozen existing Robinhood investors participated in the Thursday capital infusion, one of the people said.
There was excess investor demand, and Robinhood is considering raising hundreds of millions of dollars more in the coming days or weeks, some of the people said.
Robinhood’s popularity is at once a blessing and a curse. Hardcore and casual investors alike have thronged together in online forums, including Reddit’s WallStreetBets, planning coordinated stock buys and encouraging one another to upset the Wall Street status quo. They did a lot of their trading on Robinhood, which added more than 500,000 new accounts in recent days, according to people familiar with the matter, and zoomed to the top of the
Users were drawn to Robinhood’s mission to bring investing to the masses by eliminating obvious barriers like…