$3.4 billion in new investments will help Robinhood loosen limits for now

David Brancaccio and Daniel Shin Feb 2, 2021
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This photo illustration shows the logo of trading application Robinhood on a mobile phone in Arlington, Virginia on January 28, 2021. Olivier Douliery/AFP via Getty Images

$3.4 billion in new investments will help Robinhood loosen limits for now

David Brancaccio and Daniel Shin Feb 2, 2021
Heard on:
This photo illustration shows the logo of trading application Robinhood on a mobile phone in Arlington, Virginia on January 28, 2021. Olivier Douliery/AFP via Getty Images
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COPY

Robinhood, the commission-free stock trading app favored by many younger, amateur investors, has been passing the hat, looking for more cash. It’s been caught up in the current frenzy of buying downtrodden financial instruments like shares of GameStop or AMC Entertainment stock.

The news is that Robinhood managed to raise another $2.4 billion from company investors to help it meet a demand for cash.

“So, Robinhood needs the money because of the antiquated nature of how we settle stock trades in the United States,” said finance professor James Angel from the McDonough School of Business at Georgetown.

These rules say a buy or sell has to be completed by day 2, something done by what’s called a clearinghouse.

“The clearinghouse requires brokers to put up collateral on the day after the trade, but even if the customers have given the money to the broker, the broker is not allowed to use the customers’ money for that. So the broker has to put up their own money to prove that they can actually deliver the money on the settlement date for the trade,” explained Angel.

Smoothing out the demand for collateral to satisfy the clearinghouses is a key reason Robinhood had to put in limits on trading of some stocks in recent days — limits that angered many of its customers who saw this as Wall Street protecting its own.

The billions of new investment will let Robinhood lift limits for now.

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