Robinhood CEO explains trading restrictions to Elon Musk, says its not his fault

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CEO of Tesla Elon Musk and CEO of Robinhood Vladimir Tenev, GameStop sign in the background
Elon Musk & Vladimir Tenev

Robinhood restricted trading in several growing stocks, including GameStop (NASDAQ: GME) and AMC on Thursday. CEO of Tesla (NASDAQ: TSLA) and richest man in the world Elon Musk questioned Robinhood’s latest move — Robinhood’s co-founder Vlad Tenev replied to Musk’s questions in invitation-only app Clubhouse.  

GameStop shares rose 1,500% since the start of 2021. The rally was led by Reddit board WallStreetBets. However, Robinhood halted trading in the stock, alongside several other stocks that were gaining remarkable price increase.

“We knew this was a bad outcome for customers. They get pissed off if they’re holding stock and they want to sell it but can’t. ” Tenev said. 

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Consequently, Robinhood faced an angry reaction by traders after the company halted trading while the market was facing highly volatile times — preventing traders from opening new positions in the stock, and only limiting selling. Nevertheless, Robinhood’s chief executive Vlad Tenev claimed that the reason behind the decision is that the company was raising more money to cover the trading costs.

In the Clubhouse audio-chat between Musk and Tenev __ CEO of Tesla Musk asked Tenev why they restricted trading last week.

“What happened last week? Why couldn’t people buy the GameStop shares? The people demand answers, and they want to know the truth,” Musk said.

 In response, Tenev said that Robinhood didn’t have a choice, due to regulatory capital requirements.

 “We had no choice in this case. We had to conform to our regulatory capital requirements.”Tenev said.  

Robinhood says restrictions followed a request by the NCSS

Tenev added that to cover trading risk, the National Securities Clearing Corporation (NSCC) requested from Robinhood to get an additional $3 billion deposit. Consequently, the company had to halt the trading to “protect the users” as Tenev claimed. At the moment of the NSCC request _ Robinhood only had $2 billion in venture capital. Clearing agencies oblige Robinhood and other exchanges to keep some accounts with capital to cover the risks.

Furthermore, Tenev said that the clearinghouse requested “about an order of magnitude more than what it typically is.” However, because Robinhood restricted the trading, the NSCC decided to reduce the request to $700 million on Thursday.

Musk was straightforward asking Tenev if there is any shadiness in Robinood’s latest move, especially that it lost traders a big amount of money. However, Tenev said “I wouldn’t impute shadiness to it or anything like that. The NSCC was reasonable subsequent to this.”

Was Robinhood’s move in favor of Citadel? 

Musk continued to ask Tenev on whether the company’s move was innocent. Musk asked if Robinhood is intending to impose any future limits on trading. Ironically, Tenev: “I think there’s always going to be some theoretical limit. We don’t have infinite capital.” 

Furthermore, Musk tried to quiz Tenev to know if Citadel Securities had a hand in the trading restrictions. Robinhood makes a huge profit from routing orders to market makers like Citadel Securities . Some traders believe that the reasons behind is the move is the relation between Citadel and Robinhood. In January 25, Citadel Securities helped infuse $3 billion into Melvin Capital, a hedge fund that made a bet against GameStop.

 “To what degree are you beholden to Citadel?” Musk asked.

Tenev replied: “There is a rumor that Citadel or other market makers pressured us into doing this and that’s just false. This was a clearinghouse decision and it was just based on the capital requirements. From our perspective, Citadel and other market makers weren’t involved in that.”

Tenev added that Citadel Securities have no hand in the trading restrictions, and the company was quick to defend itself in an interview with CNBC. A Citadel Securities spokesperson told CNBC: “Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business. Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions.”