Fintech’s moment of reckoning?

Overheard

• "Rough crowd on Twitter tonight. Hey stock jockeys keep bringing it." —Steven Cohen on Wednesday , as GameStop shorts were squeezed out.
• "I'm not feeling the love on this site today. Trading is a tough game. Don't you think?" —Steven Cohen on Thursday , as GameStop longs were crushed.

The Big Story

Fintech's moment of reckoning?

I'd always thought that fintech's moment of reckoning would come from a crash: massive loan defaults, a market plunging too quickly for brokerages to keep up with, that kind of thing. But I should have known better. It's been hit by the age-old WallStreetBets adage: Stocks only go up.

Yesterday was a mess , both in terms of what happened on the markets and how people responded to it. And while this is very much not 2008, this week's event could have similarly large repercussions — only this time, for fintech.

First off, let's run through what actually happened.

• On Thursday morning, Robinhood stopped users from buying shares in some of the most volatile stocks, including GameStop and AMC. It wasn't the only fintech to do so: Public, Webull and SoFi all did the same, as did larger brokerages such as Charles Schwab and Interactive Brokers.
• Instantly, conspiracy theories abounded. People baselessly blamed Citadel, saying that its securities business pressured Robinhood into banning the trades in order to protect its investment business' stake in Melvin Capital.

Unsurprisingly, the reality is much more complicated and much less conspiratorial.

• According to CEO of Webull Anthony Denier , the Depository Trust and Clearing Corporation — which always requires some collateral from clearing houses against each stock trade — significantly raised those collateral requirements for certain stocks on Thursday. That might have been in order to meet its legal requirements amid those stocks' volatility, or maybe it was just the DTCC being unwilling to take the risk of the clearing houses actually having the cash on hand when settlement happened two days later.
• Either way, the DTCC required clearing houses to cough up 100% of the stock's value as collateral, according to Denier.
• Because of the volume of those stocks being traded, Denier said, "we're talking hundreds of billions of dollars that the clearing firm physically has to send in cash to the DTCC." But, surprise surprise, "the clearing firms are not that well-capitalized: They can't do that."
• Webull, Public and SoFi all use Apex as their clearing firm, and so when Apex couldn't complete the trades, neither could the brokerages.
• Robinhood, which handles its own clearing, appears to have been in the same position as Apex. Despite its CEO's protestations to the contrary, it looks like it faced liquidity issues yesterday, reportedly drawing down credit lines and raising $1 billion in emergency funding. It likely didn't have any choice but to shut down purchases, too.

This arcane financial plumbing is clearly a problem for the fintech industry. Regulators will likely look at how to stop this week's events from happening again. There are two obvious ways they could do so: raising clearing capital requirements across the board, so firms aren't blindsided by sudden fluctuations that they can't afford, or trying to stop GameStop-esque pops from happening again, potentially by limiting retail traders' access to options and de-gamifying investing. Either of those would have a significant effect on brokerages' business model.

• Ant isn't a perfect comparison, but it's somewhat instructive: Its capital requirements are soaring because of regulation, and its valuation is correspondingly plunging .

Then there's the reputation problem. This is less of an issue for Webull, Public and SoFi, which loudly and publicly blamed a third party: Apex. But it's a gigantic problem for Robinhood.

• Many consumers probably don't realize that Robinhood's hand was forced by the DTCC, and may never dive deep enough to find out.
• In the "class war" narrative that some politicians are trying to stoke, Robinhood is now firmly on the villains' side. The poster child of democratizing finance and hero of the little guy is now seen by many as just another Big Bad Suit.
• It's unclear if Robinhood can bounce back from that. We'll find out soon enough, though: Bloomberg reports that it's still planning to go public in the first half of this year.
• And it may blow over: Robinhood has bounced back before , after all.

If Robinhood doesn't recover , this could create a huge opportunity for other fintechs. In 2008, the public lost trust in traditional banks, opening the doors to a new wave of companies. Now, if the public really has lost trust in Robinhood, new fintechs could take its place.

• Webull is the most obvious contender for the throne, though some people are mad at it, too.
• Perhaps the change could be even bigger. Crypto folk are convinced that this is their moment , and that security tokens are The Next Big Thing. They've said that before, of course — but maybe they're finally right?

A MESSAGE FROM MICRON

For Raj Hazra, who is senior vice president of corporate strategy and communications at Micron, there has never been a more thrilling time than this golden age of data. In this interview, Hazra describes how "we are now at the doorstep of taking things that we thought were science fiction and making them real, and it's only going to be exponentially faster going forward". Read more from Micron's Raj Hazra.

Up to Speed

• Monday: Taboola said it would go public via a SPAC , at a $2.6 billion valuation. It had previously tried and failed to merge with competitor Outbrain. Also Monday: Latch said it would go public via a SPAC at a $1.56 billion valuation; Vimeo raised $300 million at a $6 billion valuation; Melio raised $110 million at a $1.3 billion valuation; Clubhouse reportedly raised $100 million at a $1 billion valuation; and Huawei was reported to be considering a sale of its P and Mate brands.
• Tuesday: Microsoft , AMD and Texas Instruments all reported earnings that beat expectations, with AMD offering a particularly rosy forecast. Also Tuesday: Twitter bought Revue; Clash bought Byte; Calendly raised $350 million at an over $3 billion valuation; Ant was reported to be in talks to sell EyeVerify; and ByteDance revenue was reported to have more than doubled last year.
• Wednesday: Apple posted its first $100 billion revenue quarter, also beating earnings estimates. Facebook also beat estimates, and announced a buyback. Also Wednesday: SAP acquired Signavio for a reported $1.2 billion; Squarespace confidentially filed for an IPO; 23andMe was reported to be considering a SPAC listing; Huohua Siwei raised $400 million at a $1.5 billion valuation; DriveNets raised $208 million at an over $1 billion valuation; Splashtop raised $50 million at a $1 billion valuation; TCV closed a $4 billion fund; Byjus was reported to be buying Aakash for $1 billion; and Bird was reported to be raising $100 million in convertible debt, while also considering going public via a SPAC.
• Thursday: WeWork was reported to be in talks to go public via a SPAC at a $10 billion valuation. Also Thursday: Samsung earnings met expectations; Qualtrics shares soared on listing; Coinbase said it would go public via a direct listing; Didi raised $300 million for its autonomous driving unit; OwnBackup raised $167.5 million at a $1.4 billion valuation; Full Truck Alliance was reported be considering a $1 billion U.S. IPO; and SpaceX was reported to be raising at a valuation of up to $92 billion.
• Friday: SoftBank reportedly boosted the size of its bond sale, planning to issue around $1.7 billion at a 3% coupon. Also Friday: Ericsson earnings beat its expectations, as did SK Hynix .

Coming Up

• Earnings season continues. We've got a fancy new calendar up where you can see all the dates: The biggest next week are Amazon and Alphabet on Tuesday; eBay, PayPal and Qualcomm Wednesday; and Snap Thursday.
• Kuaishou is finally set to list next Friday. We've got everything you need to know about it on Protocol.

A MESSAGE FROM MICRON

For Raj Hazra, who is senior vice president of corporate strategy and communications at Micron, there has never been a more thrilling time than this golden age of data. In this interview, Hazra describes how "we are now at the doorstep of taking things that we thought were science fiction and making them real, and it's only going to be exponentially faster going forward". Read more from Micron's Raj Hazra.