Thread by @compound248

The backstory of RobinHood’s insane week & emergency fund raise:

As I’ve been writing, RH had a full blown liquidity crisis. RH could NOT meet DTCC’s initial call amount.

It cured the issue on the strength of its franchise, raising $3.5b of equity. 1/n

wsj.com/articles/robin…

Those emergency investors will get a quick win, as RH likely IPOs later this year.

“[RH] told in­vestors they still plan to take the com­pany pub­lic some­time in the first half of the year...To do so, he will have to clear the high growth bar set by Wall St. investors.”

2/n

https://twitter.com/compound248/status/1356354169683238914

RH’s business is going gangbusters.

Bizarrely, this whole event is likely to turn into a giant W for RobinHood.

I know that is frustrating and confusing for many people, but it’s true.

RH is well capitalized and is experiencing massive new customer onboarding.

3/n

https://twitter.com/compound248/status/1356619491619319813

Its current risks are Reputational & Regulatory.

Re: Reputational - it’s signing up tons of new users. The fallout is a non-event.

Re: Regulatory - RH didn’t do anything illegal & I don’t see Biden lethally attacking a company serving 20mm retail customers (aka “voters”).

4/n

RobinHood’s customers are “less sophisticated” retail customers who traffic disproportionately in small caps and options. This is a goldmine for order flow buyers.

RH gets paid for order flow (PFOF) by Citadel Securities, et al, selling them a sneak peak at your trades.

5/n

In exchange, Citadel Securities “provide liquidity” (scalp you).

As you can see, RH’s revenue is disproportionately NOT from S&P 500 stocks.

Less liquid small caps & options are the biggest scalping, which makes sense. Likewise on sec lending.

Vig begs to be collected.

6/n

...and the WSJ discusses plumbing:

“The simplicity of [its] user inter­face masked the com­plex­ity of the different parties that touch each trade...clearinghouses [like DTCC] that collect and dis­tribute payments for customers’ or­ders & of­fi­cially transfer ownership.”

7/n

“Clear­ing­houses can take days to final­ize a trans­ac­tion. To ac­count for the risk that a trade—or a bro­ker­age —could fail be­fore the process is com­plete, clear­inghouses re­quire bro­ker­age firms to post col­lat­eral each day to guard against po­ten­tial losses.”

8/n

“Col­lat­eral re­quire­ments can be unpre­dictable. The for­mu­las clearing­houses use to ar­rive at their re­quests aren’t ...public. The amounts are known to go up in volatile times and when a broker’s cus­tomers con­cen­trate trad­ing in a small number of stocks.”

9/n

https://twitter.com/compound248/status/1355276777858457602

The WSJ article discloses RH COULD NOT MEET the DTCC’s initial $3B collateral request.

RH negotiated it lower by halting buying in $GME etc

“DTCC agreed. [It] was re­duced to $1.4B. RH al­ready had $700 MM on de­posit...mean­ing it only had to post an ad­di­tional $700 MM” 10/n

Props to @vladtenev & RH - crafty.

They nearly stole defeat from the jaws of victory, but instead turned it into giant, strange victory.

RH is in great shape now. I expect it to be a force for years to come, expanding offerings, growing users, & building a huge business.

END