Spacex and Tesla CEO Elon Musk has been trying to get to the bottom of what happened with the popular trading app Robinhood when it stopped people from buying shares of hot stocks, like Gamestop. The shares of these stocks became popular due to the Wallstreetbets movement.
Elon Musk Says People Want the Truth From Robinhood
During an interview on The Good Time Show via the Clubhouse app Sunday night, Elon Musk grilled the CEO of trading app Robinhood, Vlad Tenev, over the companyâ€™s decision to restrict hot stocks last week, including Gamestop. On Friday, Robinhood also restricted crypto trading, citing â€œextraordinary market conditions.â€
â€œWhat happened last week? Why canâ€™t people buy the Gamestop shares? The people demand an answer and they want to know the details and the truth,â€ Musk said.
Tenev began by explaining the structure of his company. â€œRobinhood is actually a couple of companies,â€ he described. Robinhood Financial processes trades, Robinhood Securities clears and settles the trades, and Robinhood Crypto which deals with crypto trades.
The Robinhood CEO detailed that last Wednesday, his platform experienced â€œunprecedented volumeâ€ as â€œa lot of these so-called meme stocks were going viral on social media and people were joining Robinhoodâ€ to buy these stocks. Consequently, the company â€œreceived a fileâ€ from the National Securities Clearing Corporation (NSCC) Thursday morning at about 3:30 AM PST. It requested Robinhood to â€œput up money to the NSCC based on some factors,â€ including the volatility of certain securities. Tenev clarified that â€œthis is the equities business so itâ€™s based on stock trading and not options trading or anything else,â€ elaborating:
Musk interrupted Tenev, questioning: â€œWhy is that so high? It sounds like this is an unprecedented increase in demand for capital. What formula did they use to calculate that?â€
Tenev replied: â€œWe donâ€™t have the full details. Itâ€™s a little bit of an opaque formula but thereâ€™s a component called the VAR of it, which is the Value at Risk, and thatâ€™s based on kind of some fairly quantitative things â€¦ and then thereâ€™s a special component which is discretionary so that kind of acts as a multiplier.â€ Tenev also noted that up until that point, his company â€œhas raised a little bit around two billion dollars in total venture capital,â€ so the request was â€œa big number.â€
The Tesla CEO interrupted again, asking: â€œWhat everyone wants to know is did something maybe shady go down here? It seems weird that youâ€™d get a sudden $10 billion demand in the morning â€¦ suddenly out of nowhere.â€ Tenev swiftly corrected Musk that the number was $3 billion. The Robinhood CEO then emphasized:
Musk abruptly asked Tenev: â€œIs there anyone holding you hostage right now?â€ Tenev chuckled and replied: â€œNo, no, Iâ€™m okay. Thanks for asking.â€ Both laughed.
The Robinhood CEO proceeded to explain what happened, calling the experience â€œnerve-wrecking.â€ He said after receiving the request for $3 billion, his chief operating officer called up someone higher up at the NSCC to discuss what to do. â€œThere was another call and they lowered it to something like $1.4 billion from $3 billion,â€ Tenev reiterated that it was still a high number. His company then proposed a plan to the NSCC of â€œmarking these volatile stocks that were kind of driving the activity position-closing only.â€
Then, at about 5 to 5:30 AM PST, before the market opened, the NSCC came back and reduced the deposit requirement to $700 million, â€œwhich we then deposited and paid promptly,â€ Tenev emphasized. Acknowledging that the move was bad for customers, the Robinhood CEO said, â€œWe had no choice, in this case. We had to conform to our regulatory capital requirements and so the team did what they could to make sure we were available for customers.â€
The Spacex CEO further questioned: â€œWho controls this organization, this clearinghouse?â€ Tenev replied: â€œItâ€™s a consortium. Itâ€™s not quite a government agency. I donâ€™t really know the details of all of that.â€ Nonetheless, he emphasized that â€œTo be fair â€¦ I think there was legitimate sort of turmoil in the markets â€¦ so there probably is some amount of extra risk in the system that warrants higher requirements so itâ€™s not entirely unreasonable.â€ He noted that lots of other brokers were in the same situation and had to restrict the same activity.
â€œSo it sounds like this organization calls you up and they basically have a gun to your head: either hand over this money or else,â€ the Spacex CEO summarized, elaborating:
â€œI think thatâ€™s fair. We have to comply with these requirements. Financial institutions have requirements,â€ Tenev responded. Nonetheless, he suggested that it would be helpful to know the formula the NSCC uses to calculate these requirements so companies can plan better.
Musk proceeded to ask about whether there was outside pressure forcing Robinhood to take the action it did. Tenev affirmed that there is â€œa rumor that Citadel or other market makers kind of pressured us into doing this.â€ However, he clarified, â€œthatâ€™s just false,â€ emphasizing that â€œthis was a clearinghouse decision and it was just based on the capital requirements so from our perspective Citadel and other market makers werenâ€™t involved in that.â€
During the same Clubhouse interview, Elon also revealed that he is a supporter of bitcoin and should have bought the cryptocurrency eight years ago. He believes that bitcoin is on the verge of getting broad acceptance by traditional finance people. On Monday, Robinhood raised another $2.4 billion from shareholders after it secured $1 billion last Thursday.
What do you think about the Robinhood CEOâ€™s explanation? Let us know in the comments section below.
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