Robinhood raises $3.4bn, co-CEO set to face US politicians this month

Written by Ruby Hinchliffe
3rd February 2021

Robinhood, one of the trading apps at the heart of Wall Street’s stock market chaos last week, has raised $3.4 billion in just a week from shareholders.

That’s more than the fintech has raised in its lifetime, having been founded back in 2013.

The scrambling capital raise follows days of complaints from customers and the eventual levy of a class action lawsuit. The online brokerage, prior to the rapid mega-fundraising, didn’t hold enough in reserves to meet “regulatory capital requirements”.

Allegations allege Robinhood succumbed to pressure from big-paying hedge fund clients

This meant it had to limit trading in 13 volatile equities, including GameStop and AMC Entertainment. Clients could sell positions but couldn’t open new ones.

Vlad Tenev, Robinhood’s co-CEO, told Elon Musk in a Clubhouse session, as reported by CNBC, that the National Securities Clearing Corp requested a security deposit of $3 billion to back-up volatile stocks.

Robinhood negotiated $3 billion down to $1.4 billion. But it still meant the fintech needed to raise fresh capital fast to unlock restricted stocks.

Audience with US politicians

The surge in collateral requirements and resulting uproar amongst Robinhood customers has sparked government intervention. Tenev will be attending a hearing before a House Financial Services Committee on 18 February, according to Politico.

The hearing will review allegations made last week that Robinhood succumbed to pressure from big-paying hedge fund clients to curb trading.

“I am concerned about whether or not Robinhood restricted the trading because there was collusion between Robinhood and some of the hedge funds that were involved with this,” House Financial Services Chair, Maxine Waters, told MSNBC last weekend.

Ken Griffin-founded market maker Citadel Securities makes up a substantial portion of Robinhood’s revenues. Citadel, a separate hedge fund also founded by Griffin, made up part of a $3 billion injection into Melvin Capital – a hedge fund which bet against GameStop.

Musk asked Tenev “to what degree are you beholden to Citadel?”. Tenev dubbed allegations of collusion as “conspiracy theories”.

“There is a rumour that Citadel or other market makers pressured us into doing this and that’s just false,” he said.

“This was a clearinghouse decision and it was just based on the capital requirements,” Tenev added. “From our perspective, Citadel and other market makers weren’t involved in that.”

The GameStop saga

GameStop, a seemingly struggling retail chain which has closed more than 783 stores in the last two years, became one of a number of seemingly underperforming stocks to receive a boost from retail investors last week.

The 37-year-old company became the subject of a Redditor-induced rally against the Wall Street hedge funds which bet against it.

GameStop’s share price was $3.25 in April 2020. By Wednesday last week, its value had risen an astronomical 10,692% to $347.50. In just three days, the stock jumped from $96.80 to $347.50.

GameStop’s rise in value is largely down to Reddit. Specifically, a subreddit known as WallStreetBets – which now has more than eight million members.

Josh Gross, a partner at digital design studio Planetary, shared a Twitter thread. In which, he explains the entire history of GameStop’s rise to now.

In short, it began back in September 2019. One user – by the name of “u/DeepF**kingValue” – began posting monthly updates about his Long-Term Equity Anticipation Securities (LEAPS) on GameStop via Reddit.

Gross points out that GameStop sat in a much better financial situation than it seemed, according to its filings. Or at least, better than what the hedge funds betting against it had made out. That’s what u/DeepF**kingValue figured out.

These hedge funds’ short interest on GameStop was incredibly high (140%), because they expected GameStop to go bankrupt, meaning they wouldn’t have to cover – that is, return their shares.

Eventually, other Reddit users caught onto u/DeepF**kingValue’s position. This has now culminated in the forum fuelling massive gains for the US games retailer, and massive losses for hedge funds.

The social media platform has also lifted a number of other struggling firms and millennial “meme stocks” – including AMC Entertainment, Koss Corp, BlackBerry and Nokia.

According to AltFi’s Daniel Lanyon, Reddit investors are now moving to a new target – low cost index funds in “vanilla” global equities in “well run companies with strong balance sheets” embracing environmental, social and corporate governance (ESG) criteria.