'Spill the beans man:' Tesla's Elon Musk grills Robinhood CEO on GameStop/Reddit trading saga
Tesla's (TSLA) CEO Elon Musk spontaneously interviewed Robinhood CEO Vlad Tenev for 14 minutes late Sunday evening, injecting himself into the fray of the retail investing frenzy that’s sent markets into a tailspin, and put the trading app on the defensive.
The billionaire jumped on the invite-only voice chat app Clubhouse to answer questions ranging from colonizing Mars to Bitcoin (BTC-USD) late Sunday night. Yet toward the end, Musk ended up grilling Tenev on behalf of outraged individual stock buyers who have taken issue with how Robinhood has handled the crisis.
On Thursday, Robinhood curbed buying in GameStop (GME) shares and a handful of other volatile stocks following the stock's Reddit user-fueled surge that's burned hedge funds that were short. It’s sparked an outcry from its users, set off conspiracy theories that the decisions came from outsiders shorting the stocks — and unleashed a class action lawsuit.
Tenev, who described his week and weekend as "surreal," began to say that many people have come "out of the woodwork" to offer support and advice. Yet Musk, a fierce critic of the practice of short-selling, pressed Tenev to "spill the beans” on why Robinhood undercut its users.
"What happened last week? Why can't people buy the GameStop shares? People demand an answer and want to know the details and the truth," Musk said.
"I'm the CEO of an appalled Robinhood Financial, and that basically is the app that you know and love. It processes trades," Tenev began. He then outlined Robinhood's three lines of business — including the broker-dealer Financial arm, which processes the trades; Securities, the clearing broker-dealer; and Robinhood crypto, the app's cryptocurrency business.
Tenev described last week's trading volume on Wednesday in so-called "meme stocks" as an "unprecedented load on the system."
$3 billion at 3:30 a.m.
Tenev explained that while he was sleeping, at 3:30 a.m. PT on Thursday, Robinhood's operations team received a file from the National Securities Clearing Corporation (NSCC) that as a clearing broker, Robinhood Securities needed to put up around $3 billion "an order of magnitude more than what it typically is."
"Now, why is that so high? Like this seems like, it sounds like an unprecedented increase in demand for capital. What formula did they use to calculate that?" Musk asked.
To contextualize the number, the app's CEO noted that RobinHood had raised about $2 billion in total venture funding. He added that the formula was “not fully transparent” and “not publicly shared.”
"I think there was legitimate sort of turmoil in the markets. Like, these are unprecedented events with these meme stocks, and there was a lot of activity. So, there probably is some amount of extra risk in the system that warrants higher requirements, so it's not entirely unreasonable." Robinhood CEO Vlad Tenev
Yet Musk pressed the CEO on whether "something maybe shady” happened — a popular conspiracy theory among retail investors that were temporarily shut out of the market. “Like, it seems a little weird that you'd get a sudden [$3] (sic) billion demand at 3 in the morning just suddenly out of nowhere?" Musk asked.
Tenev however denied that anything shady went down, citing the National Securities Clearing Corporation’s role in helping Robinhood lower the amount.
“So, it was unprecedented activity. I don't have the full context about what was going on, what's going on in the NSCC to make these calculations," Tenev added — prompting Musk to joke if someone was “holding you hostage right now.”
Tenev said that after putting their heads together and calling the higher-ups at the NSCC, they got that figure down to $1.4 billion, from the initial $3 billion. "We were making some progress, right, but still a higher number," he added.
Next, Tenev said they had to explain how to "manage risk in these symbols" by restricting activity in the volatile stocks. After that, the NSCC said the charges on the deposit were $700 million, which Robinhood "paid promptly."
"So that essentially explains why we had to mark these symbols as ‘position closing’ only… We knew this was a bad outcome for customers,” Tenev said, acknowledging the outcry from small investors who have called him out.
“Part of what's been really difficult is Robinhood stands for democratizing access to stocks, and we want to give people the access. So that's been very, very challenging,” the CEO said.
“But, we had no choice in this case. We had to conform to our regulatory capital requirements, and so the team did what they could to make sure we were available for customers," Tenev added.
Musk then questioned who controls the NSCC, a consortium that’s not quite a government agency. Yet Tenev defended the group’s actions that were rooted in market conditions.
"[To] be fair, I think there was legitimate sort of turmoil in the markets. Like, these are unprecedented events with these meme stocks, and there was a lot of activity. So, there probably is some amount of extra risk in the system that warrants higher requirements, so it's not entirely unreasonable," Tenev added.
The executive pointed that they made sure they had the operational processes to allow users to sell open positions because restricting people from selling — if holding stocks is "categorically worse." Tenev added that other brokers were in a similar situation of curbing buying in volatile stocks.
Musk’s responded by equating the NSCC’s action to “basically [putting] a gun to your head either hand over this money or else. Basically, what people are wondering is like did you sell your clients down the river, or did you have no choice?”
The billionaire added: “If you had no choice, that's understandable. But then we've got to find out why you had no choice and who are these people that are saying you have no choice?"
Tenev emphasized that as a financial institution, Robinhood must comply with these requirements. He noted that more transparency behind the formula for the requirements "would obviously be ideal" for planning purposes.
"To be fair, we were able to open and service our customers. Twenty-four hours later, our team raised over a billion in capital, so that when we do open [Monday] morning, we'll be able to kind of relax these stringent position limits that we put on these securities on Friday," Tenev said.
Musk then asked Tenev if he was "beholden to Citadel” the trading giant that’s a major investor in Robinhood and pays for its order flow data. “Basically, if Citadel is unhappy, then what happens?" Musk asked.
However, Tenev dismissed that idea, calling it a “conspiracy theory.”
"This was a clearinghouse decision, and it was just based on the capital requirements. So, from our perspective, Citadel and other market makers weren't involved in that,” he added.
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.