It’s been a wild and volatile week for certain stocks on Wall Street. The GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings, Inc. (NYSE: AMC) experienced massive short squeezes.
Robinhood, the free trading app facilitating many of the transactions in these short squeezes, appeared to be in trouble with a lack of liquidity for the second time in less than 12 months.
Citing unnamed sources, Bloomberg reported Robinhood had to draw “several hundred million” dollars from its credit lines.
When volatility increases so do margin requirements. The central Wall Street clearinghouse demands more cash to act as collateral when risk is higher.
Robinhood faced a similar problem in March 2020 when the market crashed. It was reported that its $200 million lines of credit were completely maxed out.
Robinhood defended its use of the credit lines and denied there were ever any liquidity issues.
Vlad Tenev, co-founder and co-CEO of Robinhood, told CNBC the use of credit lines was a “protective measure” used to meet its legal requirements.
Stock trades typically settle days after the trades are recorded in the individual trader’s account. During the settlement time, brokers must provide collateral for the shares in the form of cash.
On Thursday, the Depository Trust & Clearing Corp., which is the main clearinghouse for Wall Street, said it had increased collateral requirement industry-wide by $7.5 billion, an increase of nearly 30% from the previous day.
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