Robinhood raised $ 1 billion from investors overnight to prop up its balance sheet as the brokerage app eased restrictions on trading certain volatile stocks, according to CNBC's Andrew Ross Sorkin.
The money raised amounted to $ 500 million, which the broker had accessed through lines of credit to ensure it had the necessary capital to continue trading stocks like GameStop and AMC Entertainment for its clients.
Robinhood CEO Vlad Tenev told CNBC that wiretapping on credit lines was a proactive move and denied it due to a liquidity problem.
"By drawing on our lines of credit, which we use on an ongoing basis as part of normal day-to-day operations, we get more capital that we can put with clearing houses and that ideally enables us to make more investments with fewer restrictions," said Tenev Sorkin in a CNBC interview on Thursday night.
Stocks of popular retail names rose in premarket trading on Friday in anticipation of Robinhood easing some restrictions. GameStop's shares rose 80% and AMC Entertainment's shares fell 60% on Friday.
In the midst of a wild week of speculative retailing, Robinhood restricted trading in 13 stocks, including GameStop and AMC Entertainment, Thursday earlier. Robinhood only allowed clients to sell positions in certain securities, not to open new ones, increased margin requirements, and even said that some positions would be automatically closed if the client ran the risk of not having the required collateral.
The company then said after Thursday's closing bell that it would allow limited purchases of restricted securities on Friday.
Robinhood saw unprecedented volume of trading this week as retailers reading Reddit attempt to acquire certain sharply shortened stocks. Robinhood, who is required to deposit funds with a clearinghouse due to the volume of trading, said trading is restricted because the company cannot meet expected deposit requirements. The requirements increase when volatility increases, if a large proportion of investors lose an option trade.
The $ 1 billion raised came from previous venture capital investors in Robinhood, including Sequoia, and the lines of credit come from banks like JPMorgan and Goldman Sachs.
When selling short, investors borrow stocks in a company in the expectation that the stock price will fall and make a profit if the short seller has to cover the stocks after the trade is over.
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