Online brokerage Robinhood raised over $1 billion from its investors and millions more through lines of credit in a matter of days as it continues to handle the fallout from its decision to restrict trading on GameStop and other stocks temporarily, the company said.
Robinhood and other online brokers, including TD Ameritrade and Charles Schwab, faced backlash on Thursday after imposing restrictions on the types of trades that could be completed involving stocks such as GameStop, AMC, BlackBerry, and others that had long been depreciating on the market until a group of investors on Reddit sent their prices soaring, disrupting institutional short investments and costing firms billions.
"Look, it is not negotiable for us to comply with our financial requirements and our clearing house deposits,” Robinhood CEO Vlad Tenev told Bloomberg. "We have to do that."
The company called the cash influx following GameStop's meteoric surge "a strong sign of confidence from investors that will help us continue to further serve our customers."
Unlike TD Ameritrade and Charles Schwab, Robinhood temporarily barred its customers from purchasing any shares of GameStop, prompting customers to file several lawsuits that day. Both the House Financial Services Committee and the Senate Banking Committee announced that they would be holding hearings to address the market volatility, short trading, and what House committee chairwoman Maxine Waters called hedge funds' "long history of predatory conduct."
Other online brokers defended their restrictions by citing financial obligations to market clearing houses and the costs associated with extremely volatile stocks. WeBull Financial CEO Anthony Denier said the company's clearing house wouldn't be able to settle trades on stocks like GameStop if WeBull didn't impose certain restrictions.
Transactions completed through online brokers such as WeBull and Robinhood appear to be instantaneous to users, but most transactions actually take days to be settled, and brokers rely on market clearing houses to complete them. But clearing houses require collateral while the trades are being settled, and the more volatile the stock, the more collateral is required.
Depository Trust and Clearing Corporation, one of the largest clearing houses on the stock market, required nearly 100% of GameStop's share price as collateral for each transaction, Denier said.
Tenev alluded to those costs as well, tweeting that "as a brokerage firm, Robinhood has many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment."
Tweet
Robinhood has since lifted some of its trading restrictions, according to a tweet from Tenev, and will "allow limited buys" of securities like GameStop shares when markets open on Friday.
GameStop's share price soared on the news, up from Thursday's closing price of $193 to as much as $340 during premarket trading, suggesting another volatile trading day on Friday.
