The House Committee on Financial Services released a report late last week with a harrowing look at Robinhood during the Gamestop stock frenzy early last year.

The stock trading and investing app was caught off guard by strong interest from the first major “meme stocks” after Redditors and other retail investors soared around $GME, sending the price into the stratosphere.

For Robinhood, which provides individual investors with a relatively frictionless way to dive into the stock market, the saga was simultaneously a huge windfall in new users and brand interest and an existential threat that nearly knocked the company down.

Robinhood famously froze trading around Gamestop and some adjacent hot stocks as the company teetered on the brink of what its platform — and its wallet — could handle. With demand soaring, Robinhood was suddenly on the hook for more than it had in collateral to settle the sudden spike in trades.

The Chair of the House Financial Services Committee, Maxine Waters (D-CA), called for a deep dive into what went on behind closed doors, and the new report“Game Stopped: How the Meme Stock Market Event exposed troubling business practices, inadequate risk management, and the need for regulatory and legislative reform,” compiles the committee’s findings. The report, embedded below, is composed of a number of hearings, 95,000 pages of documents and 50 interviews.

“My committee’s investigation into the matter has shown that we need better market regulation to address the troubling trade practices uncovered during our investigation,” Waters said. “Order flow payment and gamification make it profitable for a new generation of trading apps to incentivize retail investors to execute as many trades as possible, making markets more volatile than ever.”

The committee described Robinhood’s business as “disturbing,” citing its bias towards aggressive growth without adequate risk management. The report also found that the majority of financial firms examined by the commission have no plans to prepare for another high-risk phase of “extreme” market volatility.

According to the report:

As of the morning of January 28, 2021, Robinhood already had approximately $696 million in collateral on deposit with the NSCC, leaving it with a collateral shortfall of approximately $3 billion that it must deposit to meet the NSCC’s clearing fund requirement or be at risk. violating the rules of the NSCC and potentially losing the ability to completely erase transactions for their customers.

[President and Chief Operating
Officer for Robinhood’s clearing operation] Confirming that this amount came as a surprise to Robinhood, Swartwout explained to committee staff that they had anticipated and prepared for the $1.4 billion in collateral deposits representing “core” costs, but because they were not a model for Robinhood, therefore, had not anticipated adequate funding nor had it arranged for the additional levy of $2.2 billion in Excess Capital Premium. On the morning of Jan. 28, 2021, Jim Swartwout texted Gretchen Howard at 6:29 a.m. EST saying “Huge Liquidity Problem.”

Within Robinhood, the company’s executive leadership team held off on brainstorming ways for the company to leverage the attention and massive influx of new users, even as the team tasked with arranging its transactions rushed to ” keep the lights on” with “things that were barely held together.”

In the end, the company obtained an exemption from its collateral requirements, paused some trades and averted disaster, but there’s no guarantee that history won’t repeat itself and change differently. In light of the report, Waters called for “major” law reform to prevent another Robinhood-style near-meltdown.

One way Robinhood was wary? Knowing that the company had a serious investigation in store.

“The biggest concern now is whether we can handle our scale,” wrote Robinhood’s senior director of clearing operations. “If we can’t deliver something like that because we aren’t able to handle our own volume, it wouldn’t be good for [the clearinghouse] or the regulators.”