Robinhood, a stock trade app that has found itself in the middle of a massive controversy, has confirmed that it decided to set restrictions on trading after NSCC requested the brokerage firm to deposit $3 billion. The money, according to Robinhood, was supposed to be used to back up trades in GameStop and other volatile shares that were occasioned by the Reddit buying campaign.
These latest details were revealed by Robinhood’s CEO Vlad Tenev. Tenev was speaking to Elon Musk in a live stream on Clubhouse. Musk, who conducted the interview, was as blunt as they came. During the session, he asked the Robinhood CEO why the trading app decided to halt the purchase of GameStop shares, demanding the truth of Tenev.
In response, the Robinhood CEO noted that the National Securities Clearing Corporation or (NSCC) sent an unusual request to the broker on Thursday morning demanding that the trading app come up with a $3 billion deposit. The money according to Tenev was supposed to cover the trading risk associated with the GameStop buying frenzy. Since Robinhood had only raised around $2 billion in venture capital, it couldn’t meet the demand from the NSCC.
But it gets very interesting after that. Tenev admitted that such a request from the NSCC is highly unusual. However, the trading app was pressured to restrict trading on so-called “volatile shares”, including GameStop. After Robinhood caved into the demands of the NSCC, the amount was reduced from the initial $3 billion to $700 million.
According to SEC regulation, brokerage firms, including apps like Robinhood, are required to keep accounts with securities clearing agencies. The minimum deposit required in these accounts will increase as the risk of trading increases. The buying frenzy of the GameStop stock by retail investors was considered as a high-risk activity.
As such, the minimum deposit required from Robinhood also went up. But many feel that the extent of the risk was largely exaggerated. But even then, Robinhood did try to raise some of that money to loosen the restrictions it had placed on trading. But it wasn’t as successful as the broker had hoped.
Tenev even admitted that the trading app knew that restricting trading on GameStop shares would have negative impacts on customers. But as he told Musk, nothing could have been done then. Robinhood has grown in recent years to become one of the most popular trading apps in the world. Last week, a group of retail investors mobilized on Reddit and decided to buy huge amounts of GameStop shares. The video game retailer was seen as a failing company by big Wall Street hedge funds.
These funds had, therefore, shorted large chunks of GameStop shares. But as retail investors pumped in money into the stock, the price went up significantly. As a result, the hedge funds lost billions of dollars. However, Robinhood decided to restrict trading when this happened, leading to some in the media arguing that the app was doing the bidding of large Wall Street investors.