Robinhood, the online broker at the heart of the day-trading short-squeeze massacre, has received a new injection of $2.4 billion from existing investors — its second capital infusion since Thursday — to cover increased demands at clearinghouses where trades are processed.
The app experienced an unprecedented surge in trading last week as rookie retail investors bet against established short sellers at establishment Wall Street investment firms, driving up the price of struggling companies such as GameStop and movie theater company AMC.
The fresh injection follows $1billion raised last Thursday for a total of $3.4 billion, Financial Times reported. The $3.4 billion financing was led by Ribbit Capital, an early investor in Robinhood, and included other existing investors Iconiq Capital, Andreessen Horowitz, Sequoia Capital, Index Ventures and New Enterprise Associates.
The latest round of convertible debt financing allows investors to exchange their debt for equity as Robinhood faces sharp increases in demands for deposits at clearinghouses where stocks and options trades are processed.
Robinhood was last privately valued at $11.7 billion after a September fundraising round.
Robinhood infuriated users of the popular Reddit board r/WallStreetBets and other traders after it limited trading in hot stocks, triggering several class-action lawsuits. The app eased off on some of the restrictions on Monday. The cash infusion will help Robinhood maintain trading in shares that are popular among retail investors, FT reported.
Reddit and Robinhood have been credited with gamifying the stock market, “and it’s going to end badly,” Quartz reported, describing a scenario of “lethal combat between individuals and institutions, outsiders and insiders.”
Robinhood CEO and co-founder Vlad Tenev said he had to limit buying of some stocks to protect customers and the firm, Seeking Alpha reported. “We just hadn’t seen this level of concentrated interest market-wide in a small number of names before,” he said. “We understand our customers are upset.”
On Friday, after the first $1 billion cash infusion was announced, Tenev told CNBC, “There was no liquidity problem.”
U.S. stocks fell sharply on Friday after a roller-coaster week on Wall Street as trading by retail investors unnerved the market, CNBC reported. The Dow Jones Industrial average lost 620.74 points, or 2 percent. By Tuesday, the Dow had rebounded by 220 points.
Tenev’s denial of a liquidity problem echoes the words of then-Bear Stearns CEO Alan Schwartz, who, almost 13 years ago denied “market speculation” that the investment bank was in a cash crunch.
“Bear Stearns’ balance sheet, liquidity and capital remain strong,” Schwartz said, according to a March 11, 2008, New York Times report. Five days later, Bear Stearns was acquired by JPMorgan Chase in a fire sale for $2 a share.
Bear Stearns hedge funds posted massive losses and it had to be bailed out internally, costing the company billions of dollars upfront and then additional billion-dollar losses in writedowns. The company had a market cap of $20 billion, so the losses were at first considered manageable.
But Bear Stearn’s clients and trading partners exited the firm because it had made huge bets on what turned out to be toxic mortgages. Ratings firms downgraded Bear Stearns’ mortgage-backed securities and other holdings, leaving it with illiquid assets in a down market. The company ran out of cash in a matter of weeks, “the first domino to fall in the financial crisis, the worst panic to grip Wall Street since 1929,” CNN reported.
Lehman Brothers was the fourth-largest U.S. investment bank before it collapsed, filing for bankruptcy on Sept. 15, 2008. It had 25,000 employees, $639 billion in assets and $613 billion in liabilities. It became a symbol of the excesses of the 2007-2008 financial crisis.
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Robinhood says its customers’ securities and cash are safe, protected by the SIPC. The Robinhood site doesn’t actually spell out what SIPC is. It’s the Securities Investor Protection Corporation (SIPC), a federally mandated, nonprofit, member-funded, corporation created under the Securities Investor Protection Act of 1970 that mandates membership of most U.S.-registered broker-dealers.
The SIPC protects customers of its members up to $500,000 (including $250,000 for claims for cash.
Robinhood also lists what it says are “high-level measures to protect your account, ensuring your experience with us is safe and secure.” These include: “Your account password is … never stored in plaintext”, “your social security number (is) encrypted before (it’s) stored,” and “Once we verify your banking credentials, we’ll never access them again. We use trusted third-party integrations to access information about your bank account, such as your account number and available balance.”
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