Review of ‘Meme Stock’ trading frenzy shows worrying liquidity issues for Robinhood

The House Financial Services Committee released a long-awaited report on the “meme” stock phenomenon on Friday, highlighting the pressures facing retail brokerages, including Robinhood Markets Inc., at the height of commercial frenzy.

Nearly 18 months have passed since a coalition of retail traders banded together on Reddit to make financial market history by sending stocks of “meme” stocks steeply short, including GameStop Corp. EMG,
-4.80%
soaring.

By the end of January 2021, GameStop shares had risen from around $20 per share to over $300 per share, prompting retail brokers like Robinhood Markets Inc. HOOD,
+0.25%
and others to briefly stop buying stocks, in a move that sparked widespread public outrage.

Now investors have another chapter in the saga to read, courtesy of a congressional hearing and an 18-month investigation that culminated Friday with the release of the House Financial Services Committee’s report into 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 additional insight into this week’s events, which spilled over late into overnight, and peaked on January 28, 2021.

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

Internal Robinhood communications, cited in the report, paint a different picture. They show the initial liquidity concerns of CEO Tenev, CFO Jason Warnick, COO Gretchen Howard and Robinhood Securities President Jim Swartwout, turning into extreme alarm on the morning of January 28, when he is became clear that the company was in danger of being cut off by its clearinghouse for failing to meet its collateral requirements.

Early in the morning of Jan. 28, Swartwout texted COO Howard to say the company was having a “huge cash flow problem.” The problem was that the company had not anticipated an “excess capital premium charge” that left the company about $3 billion short of its collateral obligations.

Concerns among Robinhood’s top executives continued to escalate, according to the report, until the company later in the day received a $9.7 billion waiver of its obligations from the Deposit. Trust & Clearing Corporation. Only then was the company’s management given the “breathing room” it needed to focus on other operational issues facing the company, according to the report.

Prior to the waiver, some concerns were expressed that Robinhood could face a forced sale or bankruptcy, similar to Lehman Brothers in 2008 and MF Global in 2011.

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

A representative for Robinhood’s Deputy General Counsel and Chief Government Affairs Officer, Lucas Moskowitz, said the report provided “nothing new,” in an emailed statement to MarketWatch, while qualifying the January 2021 circumstances. detailed in the “Once in a Generation Event” report which highlighted all market players.

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

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