Online stock trading platform Robinhood made the decision to ban its users from buying certain stocks last month after the company that clears stock transactions imposed a $2.2 billion special charge on Robinhood. After the ban, the clearinghouse lifted the charge.
Robinhood was popular among the small investors who organized online to buy the stock of GameStop, a struggling computer game retailer. The run was partly motivated by a belief that hedge funds that borrowed and short-sold the stock would be forced to buy it back, thus increasing its price.
As a mass of investors bought in, the price indeed increased from less than $5 per share in August to $30 in mid-January and then to nearly $500 per share at one point on Jan. 28.
But on the morning of Jan. 28, Robinhood blocked its users from buying the stock, which has since dropped to about $40.
The company was criticized by its users and even some politicians for the decision, with critics speculating whether it was made to protect the hedge funds that were losing money on their bets against GameStop.
On Feb. 18, Robinhood Chief Executive Vladimir Tenev detailed the events surrounding the decision in testimony before the House Committee on Financial Services. He said the restrictions were imposed so that Robinhood could comply with regulatory requirements imposed by the National Securities Clearing Corp. (NSCC), which clears and guarantees stock trades.
NSCC guarantees that each side of a stock transaction fulfill its side of the deal. Since the parties can take up to two days to settle transactions, NSCC requires security deposits from brokerages that would be drawn upon if some traders fail to deliver on their deals.
The NSCC has its own formulas to calculate the deposits, and the run on GameStop caused the deposit requirements to shoot up, Tenev said in written testimony.
“At approximately 5:11 a.m. EST on January 28, the NSCC sent Robinhood Securities an automated notice stating that Robinhood Securities had a deposit deficit of approximately $3 billion,” he said.
That included not only about a doubling of the deposit requirement from the previous day, but also an “excess capital premium charge” of more than $2.2 billion, Tenev said.
“Between 6:30 and 7:30 am EST, the Robinhood Securities operations team made the decision to impose trading restrictions on GameStop and other securities. In conversations with NSCC staff early that morning, Robinhood Securities notified the NSCC of its intention to implement these restrictions and also informed the NSCC of the margin restrictions that had already been imposed,” he said.
“NSCC initially notified Robinhood Securities that it had reduced the excess capital premium charge by more than half. Then, shortly after 9:00 am EST, NSCC informed Robinhood Securities that the excess capital premium charge had been waived entirely for that day and the net deposit.”
A representative of the Depository Trust and Clearing Corp. (DTCC), which owns NSCC, declined to comment to The Epoch Times via email on margin requirements of individual member firms, citing confidentiality issues.
“So what you’re saying is you were paused because you had to comply with regulations, is that true?” Rep. Barry Loudermilk (R-Ga.) asked Tenev during the virtual hearing.
“Correct,” Tenev said.
The DTCC’s letter to the committee said the “excess capital premium charge” was imposed automatically, but the decision to waive it was discretionary. The situation could have been avoided if the market system has been modernized to allow clearing transactions in real time, Tenev said.
While the DTCC agrees with shortening the settlement time to just one day, it opposes real-time settlement, saying that would prevent “netting,” which means adding up transactions and sending each party a bill of just the net of what they owe to each other before the settlement deadline.
Correction: A previous version of this article misspelled the word “transaction” in a way that changed the meaning. “Netting” means adding up transactions and sending each party a bill of just the net of what they owe to each other before the settlement deadline. The Epoch Times regrets the error.