How Robinhood fought for survival when meme stocks excited

Robinhood struggled to handle huge volumes of stock trading and sparred with its principal customer, market maker Citadel Securities, during the week in January 2021 when meme stocks exploded, according to a report from the Democratic staff of the House Financial Services Committee.

The committee held hearings in February 2021, questioning the chief executives of Robinhood and Citadel Securities, as well as meme-stock hero Keith Gill and Gabe Plotkin, the hedge-fund manager who lost billions betting against GameStop and other hot stocks. tens of thousands of pages of internal documents, including pointed communications inside and between the companies.

The meme-stock frenzy reached its apex on 28 January, 2021, when Robinhood and several other brokerages restricted trading in GameStop and other stocks.

“January 2021 was an extraordinary, once in a generation event that stressed every stakeholder in the market,” Robinhood deputy general counsel Lucas Moskowitz said in a statement. customers. Since then, we’ve made significant improvements to strengthen our foundation. ”

Here are key takeaways from the report:

Robinhood struggled to handle huge trading volumes. On Monday, 25 January, Robinhood saw a big increase in meme-stock trading. “Today was a huge day,” a Robinhood engineering manager wrote to a colleague. “There are internal things that are starting to buckle under pressure.”

Among them: Robinhood had trouble compiling reports. A vital one was a list of options positions it needed to submit to its clearing house at 9pm. Each night. Failing to do so would trigger huge margin requirements. This is going to cause liquidity issues, ”a senior executive wrote at 4.30pm. On Monday. The deadline was extended, and Robinhood ultimately got the file in.

At the height of the week, hundreds of thousands of new customers were attempting to open accounts on Robinhood. Robinhood had an automated system for approving new accounts. Early on 28 January, executives discussed a “throttle” on account approval as a way to slow down trading. Robinhood ultimately turned off automated approval; on the afternoon of 28 January there were 300,000 customer applications waiting to be approved. The next day, there were 730,000.

On 27 January, Robinhood and Citadel Securities sparred over payment for order flow. Like other retail brokerages, Robinhood sends its customers’ trades to market makers to be executed. The market makers pay the brokerages for this order flow. Unlike other brokerages, Robinhood calculated the size of the payment based on the spread between the bid and offer price on a stock — and for meme stocks like GameStop the spread was getting big, leading market makers to fret about their mounting bills to Robinhood. Citadel Securities pressed for a smaller payment.

READ Nutmeg CEO:’A lot of people will have their fingers burned with meme stocks’

“She always has something to complain about,” a top Robinhood executive said of his Citadel Securities counterpart. The report describes the discussions that day as “tense.” Late in the evening, the two companies agreed to cap the payments. Some lawmakers at the hearing asked whether Citadel Securities pressured Robinhood to restrict GameStop trading the next day; the report indicates that the discussions on 27 January were instead about payment for order flow.

Robinhood employees didn’t understand its clearing house’s requirements. The job of the National Securities Clearing Corporation is to make sure trades get completed — money is exchanged for securities. To mitigate the risk that any one brokerage fails to hold up its end of a trade, each brokerage has to deposit cash with the clearing house , called margin.

The amount depends on the volume of trades and the volatility of the securities traded. Both of those things were soaring. Robinhood employees seemed unaware of how their margin requirements would be affected. “Who knew about NSCC fees?” The head of market operations wrote in a later message.

The clearing house requirements forced Robinhood to restrict trading. By 27 January, Robinhood employees were discussing how to limit trading, and were working on “position limits” that capped how many shares of a particular stock any one customer could own. They also debated “position close only,” or PCO, restrictions — meaning you can sell but you can’t buy.

At 5.11am on 28 January, an automated email from the NSCC landed in a Robinhood inbox: Robinhood was short on its margin by $ 3,006,178,364.89. It had until 10am to fix it. Employees scrambled. Shortly after 6am., a Robinhood operations manager reached a former boss and asked, “Hypothetically what happens if a firm can’t meet their morning NSCC margin settlement?”

He provided some advice and an instruction: “Wake up your senior leaders.” Early that morning, Robinhood decided to impose the PCO restrictions; after frantic negotiations, the clearing house agreed to reduce the needed deposit to $ 734m. Robinhood wired the money.

Robinhood employees worried about growth. “We have to keep the growth flywheel running,” a project manager wrote in an internal message late on 27 January. “Haah don’t worry, we have to survive first,” came the response.

One employee asked for a “customer facing” rationale for trading restrictions. “The real reason is firm risk and us needing to control the velocity of trading … But we shouldn’t expose that,” a colleague responded.

Market makers struggled with the volume of trades. Several of the market makers that handled Robinhood’s orders buckled under pressure during the torrent of meme-stock trading. (Citadel Securities, Robinhood’s biggest customer, didn’t.)

On 27 January, Virtu Financial asked Robinhood to stop sending it equities orders for most stocks whose tickers began with the letter “A” after the server that handled such orders came under strain. Wolverine Execution Services, another market-making firm, also asked Robinhood to stop sending it stock orders, after staffers worried the heavy flow could lead to a systems failure.

The Wall Street Journal reported that the meme-stock frenzy led to such glitches last year.

—Alexander Osipovich contributed to this article.

Write to Charles Forelle at [email protected]

This article was published by Dow Jones Newswires, a fellow Dow Jones Group service

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