Congressional review of ‘meme stock’ trading frenzy shows Robinhood’s liquidity troubles worse than reported

Before the end of January 2021, GameStop shares had surged from roughly $20 a share to more than $300 a share, prompting retail brokerages like Robinhood Markets Inc.
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and others to briefly halt buying in the stocks, in a move that provoked widespread public outrage.

Now, investors have another chapter in the saga to read, courtesy of a congressional hearing and an 18-month-long investigation that culminated Friday with the release of the House Financial Services Committee’s report on the episode.

Officially titled “Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Legislative and Regulatory Reform,” the report offers further insights into the events of that week, which spilled late into the night, and came to a head on Jan. 28, 2021.

Specifically, it provides new details about what happened behind the scenes as Robinhood executives, including CEO Vlad Tenev, were asserting that the brokerage always was comfortable with its liquidity.

Internal Robinhood communications, cited in the report, paint a different picture. They show initial concerns about liquidity by CEO Tenev, Chief Financial Officer Jason Warnick, Chief Operating Officer Gretchen Howard and Robinhood Securities President Jim Swartwout, turning into extreme alarm by the morning of Jan. 28, when it became clear the firm was in danger of being cut off by its clearinghouse for falling short of its collateral requirements.

Early in the morning of Jan. 28, Swartwout texted COO Howard that the firm was experiencing a “huge liquidity issue.” The problem was that the firm had failed to anticipate an “excess capital premium charge” that left the firm roughly $3 billion short of its collateral obligations.

Anxieties among senior Robinhood leadership continued to escalate, the report shows, until the company later in the day received a $9.7 billion waiver of its obligations from the Deposit Trust & Clearing Corporation. Only then did the company’s leadership receive the “breathing room” it needed to focus on other operational issues facing the company, according to the report.

Prior to the waiver, some fears were raised about the possibility of Robinhood being subject to a forced sale or into bankruptcy, in a similar fashion to Lehman Brothers in 2008 and MF Global in 2011.

“The company was only saved from defaulting on its daily collateral deposit requirement by a discretionary and unexplained waiver issued by the NSCC over which Robinhood had no control,” the report stated. The National Securities Clearing Corporation is a subsidiary of DTCC.

A representative for Robinhood’s Deputy General Counsel and Head of Government Affairs Lucas Moskowitz said the report provided “nothing new,” in an emailed statement to MarketWatch, while calling the circumstances of January 2021 detailed in the report a “once in a generation event that stressed every stakeholder in the market.”

“The report corroborates that the decisions and requests Robinhood made and waivers granted were generally the same decisions, requests and waivers made and granted by others in the industry,” the statement continued, adding that it has made “significant improvements” to its platform.