Funds Needed to Increase Liquidity
The California-based financial services business appears to be having a hard time with handling extremely high volatility on its popular trading platform. Wall Street has witnessed a “war” between retail investors centered around a subforum on Reddit called “WallStreetBets” and short-selling hedge funds.
A number of stocks have been the target of short squeezes recently, encouraged by Reddit and Discord communities that prompted small-scale speculators to boost stock prices of a handful of stocks including those of AMC Entertainment (AMC) and GameStop (GME) businesses.
Vlad Tenev, a co-founder and chief executive of Robinhood, previously insisted that his company has no liquidity problems. However, the online trading business was forced to temporarily halt purchases of particular stocks on the platform as it struggled to cope with demand.
Tenev defended his company’s decision to restrict trading in certain stocks as needed “to protect the firm and protect our customers.”
“We have lots of financial requirements. We have SEC net capital requirements and clearing house deposits. So that’s money that we have to deposit at various clearing houses. Some of these requirements fluctuate quite a bit based on volatility in the market and they can be substantial in the current environment where there’s a lot of volatility and a lot of concentrated activity in these names that have been going viral on social media,” he told CNBC in an interview.
Trading of these stocks will be allowed again on Friday, but the company will keep monitoring the situation and make adjustments accordingly, the online trading business said in a statement.
"To be clear, the decision was not made on the direction of any market maker we route to or other market participants," it said.
Sequoia Capital and Rabbit Capital, Robinhood’s existing investors, have also backed the company in a new fundraiser on Thursday night, according to The New York Times. Two investment funds offered a cash injection to the embattled online trading company in exchange for debt.
"This is a strong sign of confidence from investors that will help us continue to further serve our customers," Robinhood told NYT.
Online trading business Robinhood has raised more than $1 billion from existing investors this week. The company is reportedly having trouble with handling increased trading on its platform, driven by a Reddit forum WallStreetBets which encourages investors to boost share prices of a group of stocks.