Robinhood says it could’t reassure traders that meme mania will not strike once more

Commercial information for GameStop is displayed on the Robinhood app while another screen displays the Robinhood logo in this photo illustration dated January 29, 2021.

Brendan McDermid | Reuters

Robinhood said Thursday that the first time Robinhood restricted trading on its app – during the GameStop event earlier this year – might not be the last.

When an epic short squeeze broke out in GameStop stock in January, partly driven by retailers, Robinhood stopped trading certain Meme stocks due to increased capital requirements from its clearing houses. Despite raising more than $ 3.4 billion in just a few days to prop up its balance sheet, the broker restricted trading from GameStop, AMC Entertainment, and other Reddit darlings.

“We cannot guarantee that similar events will not occur in the future,” said Robinhood in its S1 filing with the Securities and Exchange Commission.

As a brokerage firm, Robinhood has financial requirements on the clearing houses that run its clients’ business and some of those requirements fluctuate due to the volatility in the markets. The volatility in January forced higher demands and caused an uproar from indignant customers, many of whom threatened to leave the app.

“This has resulted in negative media attention, customer dissatisfaction, litigation and government and US Congressional investigations and inquiries, us raising capital to lift trade restrictions while meeting our net capital and deposit requirements and causing reputational damage,” Robinhood said on the filing.

Robinhood CEO Vlad Tenev blamed the two-day trade settlement known as T + 2 for some of the clearinghouse deposit issues during the GameStop mania and requested real-time settlement.

“The existing two-day deadline for executing trades exposes investors and the industry to unnecessary risks and is ripe for change,” Tenev said in a statement to the House Financial Services Committee after the GameStop drama.

“The clearinghouse deposit requirements are designed to mitigate risk, but last week’s wild market activity has shown that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks,” he said.

The trading mania was revived last month as Reddit traders continued to amass their favorite meme stocks like GameStop, AMC Entertainment, and others. AMC is up 2,400% this year.

Robinhood is expected to go public on the Nasdaq under the ticker “HOOD” later this year. The free trade pioneer saw record growth last year with 18 million accounts and $ 80 billion in client assets.

Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign in to get started Try it for free today.

Leave a Reply

Your email address will not be published. Required fields are marked *