Robinhood’s depiction of liquidity during ‘meme stock’ frenzy questioned

A US congressional committee probing last year’s “meme stock” market frenzy has questioned whether the testimony of Robinhood’s chief executive describing the retail brokerage’s liquidity position was “at odds” with the investigation’s findings.

The US House financial services committee on Friday released a 140-page report based on an 18-month investigation into the market swings of January 2021, in which retail traders drove up the price of previously little-loved stocks such as GameStop and AMC, the struggling cinema chain.

In the report, the committee revealed internal communications that appeared to show senior staff at Robinhood scrambling to avoid defaulting on its multibillion-dollar collateral obligations when a surge in trading led to sharp increases in demands for deposits at the clearing houses where trades in stocks and options are processed.

Before markets opened on January 28, the Depository Trust and Clearing Corporation, which clears and settles all US equities transactions, notified Robinhood that its daily collateral deposit requirement amounted to about $3.7bn, $3bn more than its deposits with the clearing house at the time, according to the report. The brokerage was given five hours to provide the balance.

The report said Robinhood was “only saved from defaulting . . . by a discretionary and unexplained waiver” granted by the DTCC following discussions between the agency and the brokerage.

That finding, the committee said, was “at odds with statements made by the company’s executive leadership regarding the firm’s liquidity”, after Vlad Tenev, Robinhood’s co-founder and chief executive, said there had not been concerns on the matter.

The report provides fresh insight into a wild few weeks in markets that thrust Robinhood into the regulatory spotlight after individual traders, organised on online message boards such as Reddit, collectively unleashed furious rallies in certain beleaguered “meme” stocks.

“This report is nothing new, once again confirming that January 2021 was an extraordinary, once-in-a-generation event,” Robinhood said in a statement. “We remain confident that we took the appropriate and responsible steps necessary to protect and support our customers.”

Nearly 900,000 individual accounts traded shares of GameStop in a single day at the height of the meme-stock frenzy, a 90-fold increase from the start of the year, according to a report from the US Securities and Exchange Commission. The price of GameStop surged 2,700 per cent from January 8 to January 27, hitting an intraday high of $483 on January 28 before tumbling 86 per cent to the end of the first week of February.

Robinhood at one point halted purchases in some stocks because of liquidity issues, which frustrated investors and called into question its preparedness to handle a large-scale market event.

“Robinhood’s risk management processes did not work well to predict and avert the risk of default that materialised,” the report said. “Robinhood’s risk management processes failed and wider risk to Robinhood’s customers was only averted” thanks to DTCC’s discretion.

Tenev had at a hearing in February 2021 told the committee that the company “always felt comfortable with our liquidity”. He added that the additional $3.4bn in capital that Robinhood raised that month “wasn’t to meet capital requirements or deposit requirements”.

But the committee’s report showed senior staff “engag[ing] in extensive crisis management” the morning of January 28. Gretchen Howard, Robinhood’s chief operating officer, messaged Jason Warnick, the brokerage’s chief financial officer, saying: “Huge liquidity issue with [the DTCC]”. She also told the company’s chief marketing and communications officer: “Liquidity issue I want to give you a heads-up on in case it leaks.”

Dan Gallagher, Robinhood’s chief legal officer, on January 28 called a DTCC deputy general counsel, a former colleague, to raise concerns about the collateral requirements, the report said. In an email to DTCC colleagues detailing the conversation, the deputy general counsel wrote: “[Gallagher] suggested they have 600M, but 3B is problematic.” 

Robinhood executives scrambled to implement “remedial measures” including halting automatic approval of new users on January 28, resulting in a queue of about 730,000 accounts the following day, according to the report.

Discussing the suspension, a Robinhood employee said in an internal message that “any additional load takes us to the bottom faster”, sharing a photo of a lorry driving off a cliff.

The DTCC said it was evaluating the report’s findings, adding: “We remain committed to working with all our stakeholders to continue mitigating risk in the markets and safeguarding the investing public.”