Robbing Peter To Pay Paulie

After drawing down more than $500 million from a credit line with a half-dozen banks, Robinhood “still needed more cash quickly to ensure it didn’t have to place further limits on customer trading,” The New York Times said, in the course of reporting that the company (or can I just call it an “app”?) tapped its VCs.

According to the Times, Sequoia Capital and Ribbit Capital (among others) joined up to provide what was described as “emergency funding” for Robinhood, which is under fire from its customers for freezing some trading in the popular retail stocks at the heart of this week’s frenzy, and under scrutiny from lawmakers irritated by the prospect that the firm is, ironically given its raison d’être and branding, exacerbating the undemocratic character of financial markets.

Amid the drama, the company was named as a defendant in at least two lawsuits and found itself targeted by Alexandria Ocasio-Cortez.

Read more: WallStreetBets, GameStop, Robinhood Drama Becomes National Scandal

Josh Drobnyk, a spokesman for the company, told the Times that the funding was “a strong sign of confidence from investors that will help us continue to further serve our customers.”

Those investors will get something for their trouble, of course. Sources said they’ll receive “additional equity in the company… at a discounted valuation tied to the price of Robinhood shares when the company goes public.”

Nothing to see here, folks. Just VCs opportunistically extracting their pound of flesh prior to an assumed future liquidity event. You know, the kind of thing the Reddit crowd is implicitly angry at.

Robinhood attempted to explain itself Thursday. The company’s CEO, Vlad Tenev, chatted with Bloomberg Television and a blog post essentially parroted his message. “Amid this week’s extraordinary circumstances in the market, we made a tough decision to temporarily limit buying for certain securities,” it read. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment,” the post added, noting that “these requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously.”

I doubt that pacified anyone feeling aggrieved. “To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” the company went on to insist. “Look, it is not negotiable for us to comply with our financial requirements and our clearinghouse deposits,” Tenev told Bloomberg. “We have to do that.”

GameStop jumped more than 100% during premarket trading Friday. By the closing bell, its weekly gain was nearly 400%. Other favorites of the WallStreeetBets crowd similarly surged.

Commenting late Thursday, Rabobank’s Michael Every said that Robinhood’s actions during the frenzy meant that the broker had “de facto become a regulator.”

“On one level this is indeed Game Over. The House wins. The Empire Strikes Back. ‘Sanity’ prevails,” he wrote, “and, yes, we should not be encouraging retail investors to manipulate markets and pile into obvious bubbles with stimulus checks ‘because markets.'”

But he also added the following passages which at least attempt to put this debacle into perspective. From Every:

However, on another level this is Game On. The retail horde are not going anywhere, and may have no day jobs to go back to. They have been defeated here, but can pile into any stock or asset they choose, forcing brokers or regulators to shut down trading, making life hard for The Street, and a mockery of the system. Moreover, they have political support: when AOC and Ted Cruz and Donald Trump, Jr. all agree the system is rigged, you know something is happening.

The easy to grasp political meme is that the ‘sanity’ now restored is one of infinite liquidity and light touch regulation for established market players –so hedge funds can short more than 100% of a stock (which is the market ‘genius’ the Redd-olution first spotted) or buy 100-year Argentinian bonds, or go long tech that bleeds money– but means bankrupting rule-changes and a heavy regulatory hand for retail punters trying to cut out the middle men.

Of course, there are unintended consequences. For instance, Robinhood’s VCs will now get even richer assuming this storm passes and the company later goes public. The circle of life will be complete if the Reddit crowd ends up bidding up those shares.

In addition, WallStreeetBets helped the Ontario Teachers’ Pension Plan cash out of a 16.4% stake in high-end mall owner Macerich, which Bloomberg noted “has been struggling for years and was battered by [the] pandemic.” Through the end of 2020, the stock was down 84%. Bloomberg recounted what came next:

Then comments began appearing on Reddit boards including r/wallstreetbets. Macerich shares jumped 68% in four trading sessions and reached about $26 at one point on Wednesday on frenetic volume — allowing Ontario Teachers to get out.

Thanks, Reddit! At least you’re saving teachers’ pensions. Or something.

All this story is missing is Silvio Dante and Paulie Walnuts getting a cut somewhere along the line.

“Over 40 years we still haven’t seen any political action to reverse the collapse in US real wages that has led people to need to day-trade for a living or retirement,” Rabobank’s Every went on to say. “But it took just 48 hours to act to save hedge funds.”


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11 thoughts on “Robbing Peter To Pay Paulie

  1. “But it took just 48 hours to act to save hedge funds.”


    In other news.

    “I don’t think there’s a single Republican who would vote for the $1.9 trillion bill,” said Sen. Mitt Romney (R-Utah)

    Pretty stark contrast.

    1. Citron won’t want to publish research – they can achieve their goals more effectively through social media. If you can’t beat them, join them.

  2. It’s too late for Citron to change this.

    Social trading is now loose. Like social media and social politics before it, it’s running far ahead of the previous generation’s ability (or desire) to grasp the implications of what’s going on.

    Look at crypto this morning – that’s social trading in action; I’m not even sure where it’s being driven.

    I sincerely hope that somewhere, there are some sociology or psychology PhD candidates mining reddit and its brethren for thesis material in culture creation. It’s happening there in real time: new language, new memes, new values, new ideas. Spend some time there and just sample it. Fascinating stuff.

    I fully expect that “GME meets bitcoin” will send H to all new heights of sardonic wit, but really there is something more serious going on here.

    1. So, the herd have moved on to crypto and at the moment Elon Musk is its pied piper.

      Musk added #bitcoin to his Twitter bio and endorsed dogecoin which promptly rose 500%.

      The wildebeests were led to new pastures – however briefly – by an iconoclast icon who has long ago become part of the establishment.

      I suppose that is appropriate.

  3. A few comments-

    Lets see how effective the Working Group on Financial Markets ( established in 1988 and comprised of Sec. Treasury, Chair SEC, Chair Federal Reserve and the Chair of Commodities Future Trading Commission) are at the intended goal of such commission- to enhance integrity, efficiency, orderliness and competitiveness of the financial markets while maintaining investor confidence. Hopefully, Janet Yellen responds to this higher calling and not to Citadel- who paid her gobs of money in “speaking fees” in the 12 months prior to her appointment. So far, it seems like their response is basically, “no comment “.
    I will be shocked if Robinhood survives- if you are going to gamble and regularly lose to “The House”, at least they will want to lose to a House they do not hate. There are other trading apps- including SoFi- ( Social Finance being taken public by Chamath). Those accounts at Robinhood can get moved overnight.
    No wonder China is putting controls in place for their financial markets watching what is going on here. I am all in favor of capitalism, just not crony capitalism.

  4. You just know that somehow this is all going to end badly for someone- my bet would be on the retail horde losing out. And the financial markets are being damaged as well. AOC and Ted Cruz are focusing on equality of retail traders vs. big guys. So it turns out Robin Hood did not have enough capital to support the explosion of trading on their platform. Seeing that, a temporary cutback on trading until they could raise capital is a reasonable response. I would be curious to see what solution Cruz or AOC would propose to fix that problem, other than what Robinhood was forced to do. Retail on their platform is braying and their saviours Cruz and AOC joined in- counterparty risk is a hard lesson to learn. We all learned more about it in 2008-9 and the REDDIT Bros are learning about it now. I am astonished at the lack of wisdom out there- what would everyone have said if Robinhood was undercapitalized, ran into an operational/financial problem and failed?

    1. You do realize that Robinhood is using a cover story to explain why it caved, right? It’s clear that a great deal of pressure was brought to bear on the company. After all, the people running Robinhood have a lot to lose what with the company getting ready to go public.

      As far as politicians, we live in the age of populism and social media. What else would you expect but personal base building?

  5. I’m waiting for the ‘social law enforcement’ to appear.

    Oh wait! That’s right they’re called militia and they already did.

    I’m not sure the ‘nation-state’ can withstand the forces unleashed by social media. Libya and Syria still haven’t recovered. I’m not sure the West in the long run will do any better. This looks a lot like Phillip Bobbit’s ‘market-state’ but even he I think would admit this is taking things far further and quicker than he imagined. God help us all.

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