Why Robinhood Had to Risk Infuriating Its Customers

‘The entire community is outraged’

Robinhood had to raise $1 billion from investors yesterday to help it cover cash demands during the week’s trading frenzy, while traders and lawmakers sharply criticized the online broker for halting some trading in Reddit-touted stocks. In short: The consequences of the mania in GameStop, AMC and other stocks are becoming more concrete — and, in Robinhood’s case, more serious.

The surge in trading forced Robinhood to raise cash. As waves of investors poured into the markets, Wall Street’s central clearing hub, the Depository Trust and Clearing Corporation, demanded billions more in collateral from brokerages to shield it from the volatility. Robinhood, which had already drawn millions from its credit lines to meet margin requirements, turned to existing investors for additional capital so it wouldn’t have to impose further limits on customer trades.

• A more detailed explanation: Brokerages post money with the D.T.C.C. to cover customers’ transactions while they wait for the trades to settle. With such a big surge in trading, the clearing hub wanted more assurance: “It’s the D.T.C.C. saying ‘This stuff is just too risky,’ ” said the Bloomberg Intelligence analyst Larry Tabb.

• Other online brokerages also cited the D.T.C.C. as a factor in decisions to impose trading restrictions.

Robinhood faces a loss of confidence from customers. After becoming the venue of choice for small investors, the app risks alienating a core customer base — and feelings of betrayal over the trading limits may be harder to address than annoyance over technical outages. (Small groups of protesters gathered in New York and outside Robinhood’s Bay Area headquarters yesterday.) “Brokers are now ‘protecting’ customers as a facade so that they can appease their institutional backers,” one individual trader told Bloomberg. “The entire community is outraged.”

It’s also feeling the heat from Washington. An unlikely mix of lawmakers — including Representative Alexandria Ocasio-Cortez and Senator Ted Cruz — accused Robinhood of imposing trading limits to help out hedge funds caught out by the retail trading frenzy. The heads of the Senate Banking Committee and the House Financial Services Committee called for hearings. It poses a big challenge for Robinhood’s policy team, including its chief legal officer, Dan Gallagher, a former S.E.C. commissioner.

Does the populism angle hold up? Though many traders and commentators — including The Times’s Kevin Roose — see the GameStop mania in part as an internet-enabled pushback against Wall Street elites, financial bigwigs like the investment firm Silver Lake were among the big winners.“Are you entirely sure there aren’t wealthy people on both sides?” Senator Elizabeth Warren asked yesterday.

Lost amid the noise: What about the companies at the center of all this? AMC, for one, is reportedly considering selling shares to take advantage of the huge run-up in its stock, further adding to its cash reserves while many of its theaters remain closed because of the pandemic.

What happens next? We have some thoughts:

• Does Robinhood’s business model need a rethink? It couldn’t raise capital by increasing transaction fees, because it doesn’t have any. The company benefits from more trading — but more trading also means it needs more capital. Going public will help give the company more sources of financing, but this kind of frenzy may emerge again and again.

• Will lawmakers and regulators step in, perhaps with higher margin requirements for brokerages to prevent similar runs in the future? That might make trading costlier for users, which would be politically awkward.

• How will Wall Street reckon with the rise of social media as a market force? Hedge funds are already poring through Reddit and Twitter for the next GameStop, but short-sellers in particular may now be at risk of ruin by masses of small traders who have found a new strategy.

HERE’S WHAT’S HAPPENING

G.M. announces the end of petroleum-powered vehicles. The automaker said it would sell only zero-emission cars and trucks by 2035, an ambitious goal that could reshape both the automotive and oil and gas industries.

Democrats prepare to pass stimulus measures without Republican support. Biden administration officials and Congressional leaders signaled that they would start the process for approving the measures through reconciliation, as new data showed that the economic recovery faltered late last year.

WeWork weighs going public via a SPAC. The office-space company has held talks with blank-check funds to join the public markets, DealBook has learned, confirming a report in The Wall Street Journal. It is also considering raising more money from private-market investors, which may be more likely.

Another Covid-19 vaccine shows promise, except against a new strain. Early trial data on a treatment by Novavax showed nearly 90 percent efficacy, but less than 50 percent against a coronavirus variant in South Africa.

Facebook might sue Apple, escalating tensions between the tech giants. Facebook has considered formally accusing Apple of anticompetitive actions in its App Store. Facebook’s Mark Zuckerberg and Apple’s Tim Cook continue to take shots at each other over their diametrically opposed privacy practices and business models.

Two more thoughts on GameStop

On the media: After the financial crisis in 2008, the financial news media was blamed for not blowing the whistle — or not blowing it loudly enough — before the collapse. It made many of us acutely aware of our responsibility to look out for the so-called little guy. The GameStop situation turns this on its head: The investors piling into the company’s shares say they don’t want — or need — protection. In fact, they argue that by urging caution, the media is actually protecting hedge funds and the Wall Street establishment. There is no question the “system” could be changed to level the playing field. Which “side” is the media supposed to be on? The answer, simply, is the truth.

On short sellers: Traders identified GameStop as ripe for a “short squeeze” rally because of a peculiar development: more than 100 percent of its float was sold short. That is, more of its shares were out on loan to investors than were available to trade. (The average S&P 500 company has less than 4 percent of its float sold short.) Is it something nefarious? Not really: There’s a technical answer, but put simply, betting against GameStop became so popular that chains of traders were lending shares that they had already borrowed to others who also wanted to short the stock. So, when someone in the chain asks for their stock back, it can set off a messy cascade of buying and selling as the shares make their way back to their original owner. The stocks at the center of this week’s mania all had high “short interest,” amplifying the scramble to buy shares to return to lenders before they got even more expensive.

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“Look, before I begin my prepared remarks, I want to preemptively state that we will not be commenting nor answering questions on the recent activity in our stock price.”

— Doug Parker, the C.E.O. of American Airlines, at the start of the company’s earnings call on a torrid day for its stock price.

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Facebook’s ‘Supreme Court’ makes its first rulings

Facebook’s Oversight Board issued its first round of decisions yesterday, overturning four of five decisions in which the company removed posts that it said had violated policies on hate speech and violence. So far, 20,000 cases have been submitted for review by the board, which is made up 20 journalists, scholars and former officials and judges.

What does it mean for Donald Trump’s ban? The board is still debating its highest-profile case: Facebook’s suspending the former president’s account after the Jan. 6 Capitol riots. This week’s decisions could bode well for Mr. Trump, but as our colleague Shira Ovide writes, that eventual ruling will have bigger stakes: “Should Facebook continue to give world leaders more leeway than the rest of us?”

For more about the oversight board, the co-chairs wrote an Op-Ed for The Times.

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Davos goes virtual

It’s the final day of the World Economic Forum, normally held this time of year in the exclusive Alpine resort of Davos, Switzerland. The gathering of the global elite went virtual because of the pandemic, so the C.E.O.s and heads of state who gather amid snow-capped mountains beamed in from their offices and living rooms instead.

What caught our eye this week: Climate change is a perennial conversation topic at Davos, but this year businesses appear to be taking more concrete action to address it. More than 60 corporate chiefs committed to a set of environmental, social and governance measures that they will disclose for shareholders and other stakeholders. Specific, standardized measurements of things like environmental impact are in short supply, but influential investors like Larry Fink of BlackRock have been pushing for more disclosures, and threatening to divest from companies that aren’t forthcoming on E.S.G. metrics.

• John Kerry, the White House’s special envoy for climate change, also made a high-profile appeal to business leaders to prepare for “a zero emissions future”; Bill Gates talked carbon markets; and a new book by the forum’s founder, Klaus Schwab, and its head of communications, Peter Vanham, frames it in the context of “stakeholder capitalism.”

Catch up on all the sessions at the forum’s live blog: Here’s the session with Mr. Kerry; here’s one on digital inclusion moderated by Andrew; and for something different, here’s a chat with the star architect David Adjaye.

THE SPEED READ

Deals

• Shares in the survey software company Qualtrics jumped 40 percent in its New York trading debut yesterday, after pricing its I.P.O. above expectations, while the boot brand Dr. Martens rose by 20 percent in early trading in London today, after its I.P.O. priced at the upper end of its range. (Reuters)

• The cryptocurrency exchange Coinbase said it planned to go public through a direct listing. (Bloomberg)

• The gaming company Roblox delayed its I.P.O. after the S.E.C. raised questions about how the company recognizes revenue. (Reuters)

Politics and policy

• President Biden’s nominee for attorney general, Merrick Garland, reportedly favors a former aide, the Kirkland & Ellis litigator Susan Davies, to lead the Justice Department’s antitrust division. (The American Prospect)

• During his presidential campaign, Mr. Biden warned family members about their business dealings, telling one of his brothers, “For Christ’s sake, watch yourself.” (Politico)

Tech

• Elon Musk news: SpaceX is said to be close to raising new funds at a valuation above $60 billion, and after he changed his Twitter bio to one word, “bitcoin,” the price of the cryptocurrency soared. (Business Insider, CoinDesk)

• SoftBank reportedly approved $600 million in loans to four top executives to let them buy shares in the company, potentially netting them a huge windfall. (FT)

Best of the rest

• McKinsey is reportedly in talks to settle investigations by state attorneys general over advice it gave to opioid manufacturers. (WSJ)

• It isn’t just GameStop: the joke cryptocurrency Dogecoin is having a moment, thanks to Reddit. (CNBC)

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