Elon Musk, CEO of Spacex and Tesla, tried to get to the heart of what happened to the popular trading app Robinhood when it stopped people from buying shares of hot stocks, such as Gamestop. The shares of these stocks became popular due to the Wallstreetbets movement.
Elon Musk says people want the truth of Robinhood
During an interview on The Good Time Show via the Clubhouse app on Sunday night, Elon Musk, CEO of trading app Robinhood, Vlad Tenev, resented the company’s decision to limit hot shares last week, including Gamestop. On Friday, Robinhood also restricted crypto trading, citing ‘extraordinary market conditions’.
‘What happened last week? Why can’t people buy the Gamestop shares? The people are demanding an answer and they want to know the details and the truth, ‘Musk said.
Tenev began by explaining the structure of his company. “Robinhood is actually a couple of companies,” he described. Robinhood Financial processes trading, Robinhood Securities clears and completes transactions, and Robinhood Crypto deals in crypto trading.
The CEO of Robinhood said that his platform experienced an unprecedented volume ‘last Wednesday as’ many of these so-called meme shares went viral on social media and that people joined Robinhood’ to buy these shares. As a result, the company received a file “from the National Securities Clearing Corporation (NSCC) on Thursday morning around 3:30 a.m. PST. It requested Robinhood to ‘assign money to the NSCC based on certain factors’, including the volatility of certain Tenev explained that ‘it is the stock industry, so it is based on stock trading and not on options trading or anything else’, and explained:
They gave us a file with a deposit and the request was about $ 3 billion dollars, which is about a larger order than usual.
Musk interrupts Tenev and asks, “Why is it so high? It sounds like this is an unprecedented increase in the demand for capital. What formula did they use to calculate it? ”
Tenev replied: ‘We do not have the full details. It’s a bit of an opaque formula, but there’s a component called the VAR of it, which is the Value at Risk, and which is based on kind of pretty quantitative stuff … and then there’s a special component which is discretionary, so that the kind of acts as multiplier. Tenev also noted that up to that point, his company had raised a little over two billion dollars in total venture capital, so the request was a large number.
The CEO of Tesla interrupts again and asks: ‘What everyone wants to know is there something harmful here? It seems odd that you’ll get a $ 10 billion demand one morning … suddenly out of nowhere. “Tenev quickly corrected Musk to $ 3 billion. The CEO of Robinhood then emphasized:
I would not make this or that something harmful, and actually the NSCC was reasonable after that. They worked with us to lower it. It was unprecedented activity.
Musk suddenly asked Tenev, “Is anyone holding you hostage now?” Tenev laughs and replies, ‘No, no, I’m fine. Thanks for the question. “They both laughed.
The CEO of Robinhood explained what happened and called the experience ‘nerve-wracking’. He said after receiving the $ 3 billion request, his chief operating officer called someone higher up at the NSSC to discuss what to do. “There was another call and they reduced it to something like $ 1.4 billion from $ 3 billion,” Tenev reiterated that it was still a high number. His company then proposed a plan to the NSSC to “mark these volatile stocks that would only end the activity position.”
Then, around 05:00 to 05:30 PST, before the market opened, the NSCC came back and reduced the deposit requirement to $ 700 million, “which we then immediately deposited and paid,” Tenev stressed. The Robinhood CEO acknowledged that the move was bad for customers, saying: ‘In this case, we had no choice. We had to meet our regulatory capital requirements and therefore the team did what they could to make sure we were available to customers. ”
The Spacex CEO further questioned: “Who controls this organization, this cleaning house?” Tenev replies: ‘This is a consortium. It’s not quite a government agency. I do not really know the details of it all. Nevertheless, he stressed that ‘to be honest … I think there was a legal turmoil in the markets … so there is probably some extra risk in the system that requires higher requirements, so it does not completely is not unreasonable. ‘ He noted that many other brokers were in the same situation and had to limit the same activity.
“So it sounds like this organization is calling you and they basically have a gun on your head: either hand over this money or something else,” the Spacex CEO summed up and elaborated:
What people are really wondering is that you sold your customers along the river or that you had no choice. If you had no choice, that’s understandable, but then we had to find out why you had no choice and who are these people who say you have no choice.
“I think it’s fair. We must meet these requirements. Financial institutions have requirements, ”Tenev replied. Nevertheless, he suggested that it would be useful to know the formula that the NSCC uses to calculate these requirements so that businesses can plan better.
Musk went on to ask if there was outside pressure to force Robinhood to take the action he did. Tenev confirmed that there is a rumor that Citadel or other market makers have put our kind of pressure on this. “However, he said: ‘it’s just false’, emphasizing that ‘it was a decision-making decision and that it was only based on the capital requirements, and Citadel and other market makers were not involved.’
During the same interview with the clubhouse, Elon also revealed that he is a proponent of bitcoin and had to buy the cryptocurrency eight years ago. He believes bitcoin is on the verge of gaining broad acceptance through traditional finance. On Monday, Robinhood raised another $ 2.4 billion from shareholders after securing $ 1 billion last Thursday.
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