Vlad Tenev: … It’s actually a couple of companies. So there’s an introducing broker dealer called “RobinHood Financial”. And that basically is the app that, you know and love. It processes trades. You’re a customer of of Robinhood Financial. Then there’s a clearing broker dealer, Robinhood Securities, that clears and settles the trades. And then we have Robinhood Crypto, which is our crypto business, of which all of these are kind of different entities that are differently operated.
So basically Wednesday of last week, we just had, you know, unprecedented volume, unprecedented load on the system. A lot of these so-called meme stocks were going viral on social media and people or people were joining Robinhood. And there was a lot of net by activity on them, as you guys all know. And Robinhood at this time, I think was number one on the App Store and pretty close, if not number one on on Google Play as well.
So just unprecedented activity. And so Thursday morning, so I’m sleeping. But at three thirty a.m. Pacific, our operations team receives a file from the NSCC, which is the National Securities Clearing Corporation. So basically, as a broker, as a clearing broker, and this is where Robinhood Securities comes in, we have to put up money to the NSCC, based on some factors, including things like the volatility of the trading activity, concentration into certain securities. And this is this is the equities business. So it’s based on stock trading and not options trading or anything else.
So they gave us a file with the deposit and the the request was around three billion dollars, which is about an order of magnitude more than what it typically is.
Elon Musk: So why is this kind of like this seems like like it sounds like this is an unprecedented increase in demand for capital. What formula that they use to calculate that?
Vlad Tenev: Well, yeah, and just to give context, Robinhood, up until that point, has raised a little bit around two billion dollars in total venture capital.
Up until now. So it’s a big number, like three billion dollars. This is a large number. So basically, the and you know, the details are we don’t have the full details. It’s a little bit of an opaque formula, but there’s a component called the VAR of it, which is value at risk. And that’s based on kind of some fairly quantitative things, although it’s not it’s not fully transparent. So there are ways to reverse engineer it, but it’s not kind of publicly shared.
And then there’s a special component, which is discretionary. So that’s that kind of acts as a multiplier and basically…
Elon Musk: discretionary discretionary meaning, like it’s just their opinion.
Vlad Tenev: Yeah, it’s it’s a little bit I mean, I’m sure there’s there’s definitely more more than just their opinion, but basically…
Elon Musk: I mean, I guess what they’ve gone through, everyone wants to know whatever it was like, did something maybe shady go down here? Like, it just seems weird that you get a sudden ten billion dollar demand, you know, three billion or even more. Sorry, how much?
Vlad Tenev: Yeah, it was three billion
Elon Musk: up two to three billion around. You know, just suddenly out of nowhere and what does
Vlad Tenev: I wouldn’t I wouldn’t I wouldn’t impute shadiness to it or anything like that. And actually, you know, the NSCC was reasonable subsequent to this. And they’ve been they’ve been they worked with us to actually lower it. So it was unprecedented activity. You know, we don’t I don’t have the full context about, you know, what was what was going on in what’s going on in the in that is key to make these calculations.
But, yeah, essentially…
Elon Musk: if anyone holding you hostage right now…
Vlad Tenev: But no, I’m OK. Yeah. Thanks for asking. But anyway, so this was this was obviously nerve wracking and I actually was asleep at this point. You know, the operations team was was fielding this had at three o’clock and then, you know, we got back, we put our heads together, you know, chief operating officer basically said, look, let’s call up the higher ups at the NSCC and kind of figure out what’s going on.
Maybe there’s some way we can work with them. And basically, there was another call and they lowered it to something like one point four billion dollars from three. So we were making some progress reports and then but still high number and then. We basically proposed. Well, let’s let’s explain how we plan to let’s explain how we’ll manage risk in these symbols throughout the day. We proposed marking these volatile stocks that were kind of driving, driving the activity position, closing only.
And then at about an hour before the market closed, market opened. So 5:30 or 5 in the morning, they came back and they said, OK, the charges or the deposit. Seven hundred million, which we then deposited and paid promptly and then everything was fine. So that essentially explains why we had to we had to mark these symbols. Position closing only. And also why we didn’t want to we knew this was a bad outcome for customers.
You know, part of what’s been really difficult is Robinhood stands for democratizing access to stocks. And we want we want to give people the access. So that’s been very, very challenging. But we had no choice in this case. We had to conform to our regulatory capital requirements. And so the team did did what they could to make sure we were available for customers.
Elon Musk: Who controls the success of this organization, this Clearing House?
Vlad Tenev: You know, it’s a it’s a consortium, it’s not it’s not quite a government agency, you know, I don’t really know the details of of all of that.
Elon Musk: OK.
Vlad Tenev: But, you know, and to be fair, we were we were I think there was legitimate sort of turmoil in the markets, like these are unprecedented events with these meme stocks. And, you know, there was a lot of activity. So there probably is. So some amount of extra risk in the system that warrants higher, higher requirements. So it’s not entirely unreasonable, but we do operational processes to make sure that customers that had positions could sell their open positions because obviously restricting someone we got a lot of questions about.
OK, you had to restrict buying. Why didn’t you also restrict selling? The fact of the matter is, people get really pissed off if they’re holding stock and they want to sell it and they can’t. So I think that’s that’s categorically worse. So and lots of other brokers, I think we’re in the same situation. Robinhood was in the news. But you you sort of heard this industry wide. Right. Other brokers basically restricted the same exact activity.
Elon Musk: All right, so it sounds like this association should cozy up and they basically have a gun to your head, either the head of this money or else. And so because I mean, basically what people are wondering is like, did you sell down the river or do you have no choice? If you had no choice, that’s understandable. But then we got to find out why you had no choice. And who are the people that are saying you have no choice?
Vlad Tenev: Yeah, I think that’s where we have to comply with these requirements. Financial institutions have requirements. You know, the the formula behind these requirements. I think it would obviously be ideal if there was a little bit more transparency so we could plan better around that, you know, but to be fair, we were able to open and serve our customers. And, you know, twenty four hours later, our team raised over a billion dollars in capital, so that when we when we did open, when we do open tomorrow morning, we’ll be able to kind of relax the stringent position limits that we put on these securities on Friday.
Elon Musk: Will there be any limits?
Vlad Tenev: Well, I think there’s always going to be some theoretical limit, like we don’t have infinite capital and on Friday there were limits. So there’s always there’s always going to have to be some limit. I think the question is, you know, will the limits be high enough to the point where, you know, some they won’t impact ninety nine point nine plus percent of customers. So, you know, if someone were to deposit one hundred billion dollars and and decide to trade in one stock like that, that wouldn’t be possible.
Elon Musk: All right. All right. Well, I guess people really want to know if you had no choice, then you had no choice, that is the situation. And then that’s understandable. But then whoever put that gun to your head. Should you be willing to ask for public.
Vlad Tenev: Yeah, listen, and, yeah, I know there’s this crisis. This is unprecedented times, and to be fair to those guys, I’ve been they’ve been reasonable. So we are I think the one thing that is maybe not clear to people is Robinhood is a participant in the financial system. So we have to work with all of these counter parties. So we do get a lot of questions about, you know, why do you work with market makers? Why do you work with clearing houses? Vertically integrating and getting. It is hard enough to introducing a clearing broker dealer? Not too many people have done that. But the financial system that allows customers to trade shares is sort of a complex web of multiple parties. And, you know, it’s hard to think.
Everyone says it could be better, it could be improved. It’s it’s just the necessity of of trading equities in the US that you have to do all these things.
Elon Musk: To what degree are you beholden to Citadel? I mean, like basically said it was unhappy than I thought then what happened?
Vlad Tenev: Yes, there was a rumor that Citadel or other market makers kind of pressured us into doing this, and now that’s just false. Market makers execute our trades, they execute trades off of every broker dealer.
And this was this was a clearing house. This was a clearing house decision. And it was just based on the capital requirements. So Citadel and other market makers weren’t involved in that.
Elon Musk: But when they have a strong say and who got put in charge of that organization, since it’s an industry consortium, not a government, sort of not a government regulatory agency.
Vlad Tenev: I don’t have any reason to believe that. I think that’s just like, you know, then you’re getting into kind of the conspiracy theories a little bit. So I have no no reason to believe that that’s the case.
Elon Musk: OK. All right. Well, I guess we’ll see what happens with future actions… Oh, you’re not entertained.
Sriram Krishnan: Yeah, OK. Well, I don’t know what to say. First of all, Vlad, thank you so much for jumping on. I know it’s pretty late and thank you so much. I do appreciate it. And I’m sure everyone in the audience here and watching out there.
Vlad Tenev: Thank you so much. Really appreciate this.