“This is a strong sign of investor confidence that will help us continue to serve our customers,” Robinhood said in a statement.
But the fact that Robinhood had the need to raise that much money, a few months after raising hundreds of millions of dollars, indicates the financial pressure the company is facing. It either faced a liquidity crisis – or one barely avoided it.
Robinhood told CNBC on Thursday that using his credit line was a “proactive measure”.
‘We had to buy limited’
In the face of a setback from investors and legislators, Robinhood later explained that the turmoil in the market was causing financial pressure. This is because investors like Robinhood first have to buy shares at a clearing house. Regulators require brokers to keep a certain amount of capital on hand to protect investors.
These cash requirements can rise, sometimes dramatically, during times of market stress and heavy trading.
“To manage the risk and deposit requirements with caution, we had to limit the purchase of these 13 shares,” Robinhood co-CEO Vlad Tenev told CNN’s Chris Cuomo on Thursday night. “We’re in a historic situation where a lot of activity and a lot of shopping is concentrated in a relatively small number of symbols that go viral on social media. We’ve never seen anything like it.”
Robinhood denies speculation about hedge fund
Part of the outrage over Robinhood is driven by a sense that the company is trading in an effort to help big players on Wall Street.
Robinhood denies speculation that the company decided to suspend the purchase of GameStop, or be put under pressure by hedge funds or other Wall Street players.
“I want to be 100% clear. This decision was not made by any marketer or other market participants,” Tenev told CNN.
Many of the speculations involved entities owned by billionaire Ken Griffin.
Citadel Securities, the market maker owned by Griffin, is a major source of revenue for Robinhood. Like other brokers, Robinhood is paid to send orders to marketers, a controversial practice known as order payment.
Representatives of the Griffin-run entities denied any role in the Robinhood decision to suspend the purchase of GameStop.
“Citadel is not involved in, or responsible for, any retail brokers’ decision to stop in any way,” the hedge fund said in a statement Thursday.
Citadel Securities, the marketer, said it had not instructed or otherwise stopped a brokerage firm, suspended or restricted trading or otherwise refused to do business.
However, the whole episode raises questions about Robinhood’s business model – and whether it has enough capital to prevent volatile stock trading from stalling again.
And the biggest question is whether Robinhood’s fast-growing user base will stick to the startup or go to one of its competitors that has adopted its free-trade business model.