Last week outrage ensued when the company Robinhood stopped allowing Gamestop to be purchased after redditors had figured out how to surge the stock and game the system, which sent big hedge funds into panic.
Elon Musk wanted to know why Robinhood would make such a move and asked the CEO in a podcast this morning, and he got the answer:
NY POST – Billionaire Tesla boss Elon Musk pressed Robinhood CEO Vlad Tenev to explain why the popular stock app blocked investors from buying shares of GameStop last week.
“Spill the beans, man — what happened last week?” Musk asked Tenev during an early Monday morning broadcast on Clubhouse, an audio-streaming app.
“The people demand an answer, and they want to know the details and the truth,” he added.
Musk’s playful but serious questioning elicited a play-by-play of how the Reddit-fueled surge in GameStop’s share price put Robinhood under intense financial pressure before it placed limits on the video-game retailer’s securities on Thursday.
At the heart of the story is the National Securities Clearing Corporation, or NSCC, a financial institution that clears and settles stock trades between brokers. As Tenev explained, Robinhood has to deposit money to the NSCC based on several factors, such as the volatility of trading activity and “concentration intro certain securities.”
At 3:30 a.m. Pacific time on Thursday — the morning after Reddit’s WallStreetBets message board sparked a flurry of trading in GameStop and other “meme stocks” — Robinhood received a request from the NSCC for a roughly $3 billion deposit, a far larger number than normal, according to Tenev.
“Just to give context, Robinhood, up until that point, has raised … around $2 billion in total venture capital up until now,” Tenev said. “So it’s a big number.”
The NSCC eventually lowered the request to $700 million after Robinhood officials outlined a plan to “manage risk” in GameStop and other volatile stocks on Thursday, according to Tenev.
That was why Robinhood temporarily blocked traders from buying new GameStop shares, a move that sparked widespread outrage and several lawsuits. Robinhood has since allowed its customers to buy limited numbers of GameStop shares and options contracts.
The NSCC defends its decision…
The NSCC’s parent company, the Depository Trust & Clearing Corporation, stood by its deposit requirements, saying the NSCC collects money “according to calculations that are set forth in its rules.”
“When volatility increases, portfolio margin requirements increase too, and NSCC clearing members may pass on these costs to their clients, including brokerages that clear through them,” the Depository Trust & Clearing Corporation told The Post in a statement. “Margin requirements protect the entire industry against defaults and systemic risk in volatile markets.”
Tenev was dragged through the mud last week after they stopped allowing Gamestop and other stocks to be purchased. He’s probably glad to get this information out there. For those of you who understand all of this, does the statement from NSCC’s parent company hold water?