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.
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.”