(Reuters) – Robinhood, the online brokerage used by many retail traders to pile in to heavily shorted stocks like GameStop Corp, has made an ambitious push into loaning out its clients’ shares to short sellers as it expands its business.
The broker had $1.9 billion in shares loaned out as of Dec. 31, nearly three times the $674 million a year earlier, and it was permitted to lend out $4.6 billion worth of securities under margin agreements, around five times bigger than the prior year, according to an annual regulatory filing here late on Monday.
The size of the jump highlights Robinhood’s rapid growth over the past year as the number of retail investors has soared in the work-from-home environment during the pandemic and as retail brokers have largely eliminated trading fees, a model Robinhood helped pioneer.
Menlo Park, California-based Robinhood is expected to go public this year with a valuation of more than $20 billion.
Securities lending is common among brokerages, which can earn income by lending shares to hedge funds and others, who then sell the shares back into the market, betting the share prices will drop so they can buy them back at a lower price when it is time to return them, pocketing the difference.
Shares that are in heavy demand from short sellers, like GameStop, which had 140% short interest in January here, command the biggest premium from the lender.
What makes Robinhood notable is that many of the stocks its users invest in are among the most sought-after by people who want to bet against them, said one senior financial executive involved with hedge funds.
It was unclear how great a benefit the securities lending was to Robinhood’s revenue and income, which it does not disclose.
Robinhood declined comment on the filing and did not immediately respond to a request for comment on the details of which stocks it loans out.
In January, retail investors coordinated through trading forums on social media in an attempt to punish hedge funds by buying up shares of GameStop and other heavily shorted names, like AMC Entertainment, driving up their prices and forcing short sellers to close out positions at big losses.
On Jan. 28, at the height of the retail trading mania, Robinhood, along with several other brokers, restricted the buying of GameStop and other so-called meme stocks due to a massive spike in collateral requirements needed to clear the trades, angering many of its customers.
The trading restrictions sparked congressional hearings, regulatory probes and have placed greater scrutiny on short selling.
In response, Vlad Tenev, Robinhood’s chief executive officer, called for shorter stock settlement times, which would reduce clearing collateral requirements.
He also said the idea that more shares of a stock can be shorted than there are available to trade, as was the case with GameStop, is a “pathology” that could destabilize the financial markets.
Robinhood positioned itself for growth in securities lending in October 2018 by launching its own clearing broker, which acts as a go-between with the clearinghouse that settles its trades, and allows it to hold its customers’ assets. The broker can then lend out securities its customers buy on margin.
At present, less than 3% of Robinhood’s funded accounts are margin-enabled, Tenev recently told Congress here.
(Reuters) – The chief executive officers of Robinhood, Citadel, Melvin Capital and Reddit will testify before the U.S. House Financial Services Committee on Feb. 18 on the trading turmoil in GameStop Corp and other stocks, the panel’s chairwoman, Representative Maxine Waters, said on Friday.
The committee is examining how an apparent flood of retail trading drove certain stocks to extreme highs, squeezing hedge funds like Melvin that had bet against those shares.
The family of a 20-year-old stock trader who committed suicide sued the broker Robinhood for his death, citing its “misleading communications” that caused their son to panic over what he wrongly believed were huge market losses, according to a lawsuit.
Robinhood notified Alex Kearns in June of what he thought was a $730,000 loss on a trade, and when he was unable to communicate with anyone at the company, the college student was thrown into a highly distressed mental state, the lawsuit stated.
As a result, fearing he had obligated his family to repay the huge loss, he ran in front of a train and killed himself, according to the lawsuit, filed in California state court.
“We were devastated by Alex Kearns’ death,” said a statement from Robinhood, which added that it was improving its educational materials and more live support staff, among other changes.
Monday’s lawsuit said Robinhood has an obligation to know its customers and ensure their trading strategies are appropriate, but instead the broker preyed on inexperienced investors.
Kearns apparently believed an options trade placed through Robinhood had led to a $730,000 loss, far beyond the possible loss of around $10,000 that he had expected, according to the lawsuit. In reality, the loss was covered by other options in Kearns’ account, according to the lawsuit.
The lawsuit comes amid growing scrutiny of Robinhood’s commission-free trading and seeks unspecified damages.
The app helped fuel a wild rally in shares of video game retailer GameStop Corp and other companies out of favor with Wall Street hedge funds in what has been touted as a revolution in retail trading.
However, Robinhood restricted trading in the most volatile stocks on Jan. 28, a move it said was done to meet capital requirements, sparking outcry among users and demands for its executives to testify before Congress.
A surprise chat between tech billionaire Elon Musk and Robinhood CEO Vlad Tenev on new audio-based social network Clubhouse has helped propel the app to the top of the startup charts and sparked a scramble for invitations to the exclusive service.
The interaction between the two entrepreneurs on the platform on Sunday came amid intense interest in news around Robinhood, the online brokerage caught up in a wild stockmarket battle between retail investors and big Wall Street funds.
Demand for invitations to the less-than-a-year-old service — members get to invite a limited number of friends during its pre-launch period — is so hot, a market for them has grown on platforms like Reddit, eBay, and Craigslist.
In China, invitations are being sold on Alibaba’s second-hand market place Idle Fish, even though Clubhouse isn’t available in Apple’s app store in that country.
In Japan investors, tech workers and the media have swarmed the service.
As of Tuesday, data analytics firm Sensor Tower said there were about 3.6 million installs worldwide for the app–only available on Apple’s iPhone–with 1.1 million of them coming in the last six days.
Investors were so eager for a piece of the action that at one point on Monday they pushed up shares in Clubhouse Media Group [CMGR.PK], a completely unrelated stock, by 117%.
Chinese tech firm Agora Inc, listed on Nasdaq, saw its shares jump 30% on media reports that it may be a technology partner to Clubhouse. Agora declined to comment while a Clubhouse spokeswoman declined to comment on questions about technology partners.
The San Francisco-based company’s latest round of financing in Jan. 24 valued the company at $1 billion, a source familiar with the matter said. The funding was led by Andreessen Horowitz, a leading Silicon Valley venture capital firm.
Amid the buzz, Clubhouse has also drawn backlash from those who criticize the closed-door nature of chats like the one between Musk and Tenev.
Jessica Lessin, editor-in-chief of tech news outlet The Information tweeted that Marc Andreessen, a founding partner of Andreessen Horowitz, which also backs Robinhood, had blocked many reporters from listening in on Musk’s talk.
The chat between Musk and Tenev took place on a regular Clubhouse event called “The Good Time Show.”
Andreessen Horowitz didn’t reply to Reuters’ request for comment on this issue.
However, Clubhouse CEO Paul Davidson told Bloomberg TV on Monday event hosts could choose who is allowed to listen, underscoring concerns about the clubby nature of the app.
Andreessen Horowitz separately said in a blog in January that it was launching new “media property,” adding to its already active podcasting and blogging activities.
Clubhouse aspires to make the app widely available, and foresees business opportunities in subscriptions or tickets to events like the one Musk starred in.
It will have to contend with moderating the kind of site abuses, from hate speech to harassment, that major social media platforms face. Clubhouse has been criticized over reports of harassment and hate speech in its rooms, some of which are private and some public.
A spokeswoman for the app said it has already banned some individual users from the platform for violating its rules but declined to share more details.
The company has said it does not allow racism, hate speech, sexism and abuse on the network, though it says it does allow “general rudeness.” It has said users who found clubs on the app will be able to set rules for their communities.
The Clubhouse spokeswoman said it currently has about 10 staff. The company has said it is investing in tools that detect and prevent abuse as well as features for users to moderate.
Robinhood raised $3.4 billion in capital in the past week, its biggest ever, after the online brokerage was strained by a retail trading frenzy in heavily shorted shares of companies such as GameStop Corp.FILE PHOTO: Trading information for GameStop is displayed on the Robinhood App as another screen displays the Robinhood logo in this photo illustration January 29, 2021. REUTERS/Brendan McDermid/Illustration/File Photo
The brokerage, which has become popular with young investors for its easy-to-use interface, is at the heart of a mania that kicked off last week following calls by Reddit thread WallStreetBets to trade certain stocks that were being heavily shorted by hedge funds.
Robinhood’s existing investors pumped in $2.4 billion in funding, the Menlo Park, California-based company said in a blogpost on Monday, just days after it raised $1 billion through a mix of debt and equity.
The latest round bit.ly/3oHtJx0 was led by Ribbit Capital, with participation from existing investors, including ICONIQ, Andreessen Horowitz, Sequoia Capital, Index Ventures and New Enterprise Associates.
New York Times reported that the $1 billion in funding came from Sequoia and Ribbit.
Robinhood also said it had tapped a credit line and that the funds raised would be used to invest in “record customer growth”.
“This round of funding will help us scale to meet the incredible growth we’ve seen and demand for our platform,” Chief Financial Officer Jason Warnick said.
Robinhood last week was forced to curb the purchase of a handful of hot stocks including GameStop and AMC Entertainment as it grappled with the extraordinary market activity, drawing the ire of customers, celebrities and politicians.
The company on Monday elaborated on the mechanics of how it works in terms of trading, clearing and settlement, seeking to answer questions related to the trading event that has sent shock waves through Wall Street.
Robinhood is preparing for an initial public offering and recent developments raise questions on whether it will push forward with those plans