Robinhood, the discount brokerage app company, has raised $3.4 billion in an attempt to meet regulatory obligations to keep a certain amount of money on its balance sheet as hundreds of thousands of its customers rapidly battle short sellers in stocks such as GameStop and AMC Entertainment. It has shut down or sharply curtailed trading in shares of some of these companies. Many users have protested, and Robinhood even faces class-action suits over the matter.
Robinhood’s new email to its customers is unlikely to satisfy many of them. Aside from legal problems, some customers may move to different discount brokers that have not put in such strict limits.
We wanted to reach out to you after a transformative week in the markets to answer a question we know many of you are asking: “Why did Robinhood limit certain stocks?”
We understand that the temporary limits we placed on certain stocks this past week were frustrating for many, especially since we built Robinhood to expand access to investing. We have always sought to put our customers first and we want you to be able to invest on your own terms.
To help explain what happened and why we had to take action, we wrote a letter to our customers and captured the key understandings for you below:
For Robinhood to operate, we must meet clearinghouse deposit requirements to support customer trades.
Deposit requirements are determined in part by how much stock a firm’s customers hold. If a firm’s customers’ holdings are volatile, a broker (in this instance Robinhood) is obligated to meet higher deposit requirements.
Last week, in part due to volatility in some popular stocks, Robinhood’s deposit requirements rose tenfold. The combination of the deposit increase and the extraordinary increase in volume on these particular symbols led us to put temporary buying restrictions in place on a small number of those stocks.
We had to take steps to limit buying in those volatile stocks to ensure we could comfortably meet our deposit obligations. We didn’t want to stop people from buying stocks and we certainly weren’t trying to help hedge funds.
We hope you take away this: at Robinhood, we stand with everyday investors participating in the markets. Standing by our Robinhood community means being there for our customers through any trading environment. We’ll continue to improve as we break down barriers in the financial system to open it for all.
Thank you for being a part of the Robinhood community.
The Robinhood Team
However, what is obvious is that everyday investors have not participated in the markets over the past several days because of Robinhood restrictions.