Investors in the investing app Robinhood fear that contagion from FTX could affect their trades being processed by Jump Crypto. The link between Robinhood, Jump, and FTX is direct: Sam Bankman-Fried (SBF) notably owned 7.6% of Robinhood’s stock and once claimed to be preparing a full acquisition offer for Robinhood.
Institutional investors are selling first and asking questions later. Already, Catherine Wood’s Ark ETF Trust (NYSE:ARKK) has disclosed $10 million dollars worth of Robinhood share sales in favor of $21 million purchases of Coinbase shares, according to ARKK’s latest SEC filing.
Analysts at JP Morgan also downgraded Robinhood from Neutral to Underweight and reduced its price target by 11% on November 3. The day prior, Robinhood disclosed that it lost 1.8 million customers from the second to third fiscal quarter of 2022, and its quarterly revenue missed Wall Street expectations by $11 million.
Robinhood advertises so-called “commission free” stock and digital asset trades. It accomplished that feat by selling order flow to quantitative trading shops like Citadel and Jump Crypto.
Chicago’s quantitative trading giant Jump Trading has provided (expensive) execution services for Robinhood’s digital asset orders. In 2015, Jump formed Jump Crypto, a subsidiary focused on developing advanced digital asset-related technologies, including low-latency proof generation for Zero Knowledge (ZK) proofs.
Jump Crypto supported FTX, LUNA, and Solana before Robinhood
Jump and SBF’s crypto exchange FTX, as well as his crypto trading firm Alameda Research, were consistent cheerleaders of Solana (SOL). SOL is trading 94% below its all-time high.
SBF worked alongside Jump to organize a bailout of the prominent Solana-Ethereum blockchain bridge, Wormhole, that protected the value of Solana’s ecosystem.
Jump Crypto had been supporting Solana even before then. As the parent company of the cross-chain bridge Wormhole, it jumped in to rescue it from a February 2022 exploit that stole $320 million in assets. It replaced a staggering 120,000 stolen Ethereum (ETH).
Solana tapped Jump Crypto to create a second validator and increase its network thoroughput. That effort became “Firedancer,” which Jump Crypto anticipated would take about two full years to complete.
With enough ETH to bail out Wormhole after such a massive exploit, one could assume that Jump Crypto is sitting on a pile of digital assets. However, where would it have come across $320 million in ETH at a time when it was making bets on other assets that might have been ill-advised? Unnconfirmed rumors are now circulating that it could have secretly dipped into Robinhood customer assets.
In May 2019, Bloomberg journalists received a scoop that Robinhood was using Jump Trading to fill orders for digital assets. Since then, Jump Crypto had time to view vast numbers of orders by Robinhood traders.
As the FTX and Celsius fall-out have revealed, crypto custody providers and order routing services sometimes dip into their customer assets inappropriately. Sometimes, nefarious executives use order flow or traders’ holdings for their own benefit or to bail out another subsidiary, without disclosing their actions for days or weeks.
Update 17:10 UTC, Nov 18: Since publication, Robinhood has posted a comprehensive Twitter thread addressing a number of issues discussed in the article, namely lending and leveraging using customers’ crypto assets, the firm’s risk controls, and storage of its crypto.