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Comment by JumpCrisscross | Hacker News Reader

> Can someone help me understand Robinhood's POV?

Robinhood is a margin-lending options-trading broker. If a customer falls down on a trade, it is ultimately liable. If a retail customer loses money and makes a FINRA complaint that Robinhood induced them to buy through its gameified interface, it is liable. Risk and compliance likely made this call.

Also, Robinhood makes its revenue from market makers. They are the customers. Clients are not. So when trading these equities gets unprofitable, they will pull the plug. (Though anecdotally, everyone I know on the sell side in equities and equity derivatives is making a killing on this.)

What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.

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> If a customer falls down on a trade, it is ultimately liable.... Robinhood induced them to buy through its gameified interface

Why would robinhood be any more liable than other online traders like Fidelity or etrade?

> What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.

How can you guarantee that? Robinhood likely routes most of it's trades through citadel, which has informed partners it will not be fulfilling GME or AMC or BB trades.

And it turns out Citadel is also a hedge fund that has massive short positions on GME.

Every brokerage house has this problem. If their client goes bankrupt, then the brokerage house has to eat the loss.

They would have different risk profiles depending on what their clients are actually doing. RH probably has much greater net exposure than Fidelity since they have a greater share of meme investors in their customer base. Fidelity definitely has a less gameified interface as well.

Corporate risk controls are also not a hard science, different risk teams can and do come to different conclusions on the same issue.

> Why would robinhood be any more liable than other online traders like Fidelity or etrade?

Every brokerage house ultimately vouches for their clients.

Robinhood has extra exposure because clients could claim its interface induced them to overtrade.

> Robinhood likely routes most of it's trades through citadel

Do we have a source for this?

Also, Citadel just made money bailing out Melvin Capital. The short squeeze let them buy assets at dimes on the dollar. Assets which do not include GameStop shorts.

> which has informed partners it will not be fulfilling GME or AMC or BB trades

Former market maker. When trading got crazy we'd take profits. When it got inexplicable, we'd pull the plug. If we didn't, risk would. In this case, there is the additional factor of political risk--you don't want to be making millions of dollars off GameStop at its peak when that's going to cost you tens of millions of legal fees in front of Congress.

A simple explanation for Robinhood's behavior might be that their customers, the market makers, backed away from paying for this order flow.

All this said, I'd be highly pissed if my broker did this to me. But Robinhood customers have known since the beginning they weren't the customer.

>> Robinhood likely routes most of it's trades through citadel

>Do we have a source for this?

Yes.

https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2...

Citadel Securities is a market maker. Do you have any evidence that Citadel has un-hedged "massive short positions on GME"?

I find it nuts how this has transformed into a populist thing.

If you buy a share of GME from Citadel Securities, that may typically result in an immediate unhedged short position at Citadel, if they weren't already holding it.

Normally, a market maker might then close it by buying a share from someone trying to sell. But in a massively one-way market like GME, it's quite likely that they build up a large enough unhedged massive short position that they say "no, we're not taking on any more risk" and communicate that to Robin Hood.

They immediately hedge it. If the market for GME is "one-way" (it's not, people are shorting), they might also hedge the sale by buying more exotic financial instruments and correlates of the GME price.

> they say "no, we're not taking on any more risk" and communicate that to Robin Hood.

Maybe, although they would probably do that when their ability to hedge started breaking down, not when they'd already acquired massive short positions.

More likely, to me, is that they would just increase the bid-ask price spread continuously as their ability to hedge degrades.

> They immediately hedge it

This assumes continuous liquidity. Dangerous assumption to make in choppy markets.

It is not uncommon for markets to gap up or down discontinuously. You look at the market and see bid 899 at 901, buy some shares for 898, offer them at 890 and find the market is now 125 at 901.

> What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.

Not sure how you could possibly gaurantee that. Also given that Robinhood edit got a huge chunk of cash from a shorter makes that pretty weird to "guarantee"[1]

[1] https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2..., https://news.ycombinator.com/item?id=25945258

The same shorter is making money hand over fist on market making due to increased volatility, volume, and unsophisticated investors.

Exatcly volatility is the name of the game. They do not care about the direction as long as it moves and if it moves a lot twice as good.

Market makers always win.

> given that Robinhood got 40% of their revenue from a shorter

I'm seeing one tweet from Adam Hackney claiming this [1]. Do we have a real source?

[1] https://twitter.com/mindmeld_me/status/1354807424998281217

Yes, Robinhood disclosed that Citadel's MM desk accounted for the largest portion of their payment for order flow income in their rule 606 disclosures. But still a bad take because Citadel stands to make much more money on further trading, and Citadel's hedge fund likely has the capital to outlast retail.

https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2...

Let me be clear: if I were sales at Robinhood, Citadel MM is a huge client.

But Citadel MM is more likely to pull the plug on making markets in a name for risk reasons than to benefit a hedge fund position. To say nothing of the fact that Citadel got to bail out Melvin Capital, which is traditionally a profitable trade.

I am agreeing with you that there is not much merit to a conspiracy that Citadel asked Robinhood to pull out.

In particular, I believe Citadel would gain more from continued trading on Robinhood than they would lose from their hedge fund positions.

This is most likely the answer. They are taking on a lot of risk allowing this type of trading behavior. They likely don't have suitable risk infrastructure developed to feel like they have a handle on it, so they shut it down.

Robinhood takes on a lot of risk when their customers buy GME?

Even when they're not buying on margin GME is in a short term bubble that will soon pop and leave millions of their users worse off than before. There probably was some internal logic of "protecting" folks from themselves whether we agree with that or not.

Did they stop people from selling in March when the World was panicing about Covid, despite most people assuming the stock market would rebound?

The answer is no.

Quite a bit of difference from markets being influenced by outside events and the market being influenced by your gamified platform.

> most people assuming the stock market would rebound

No, people / pundits / the media were widely proclaiming that the healthcare system would be overrun and the next great economic depression was upon us. Most people assumed the stock market would continue to fall.

Buy high, sell never. Everyone who bought the stock has already written it off as a complete loss. Everyone is banking on being worse off than before. They still buy it for the entertainment value and Robinhood denied them that.

The risk to Robinhood is GME crashing by more than the amount of the margin. A large brokerage that has been through crashes before has systems in place, and can spread the remaining risk around. If a large portion of your customers are invested in a handful of stocks, their risk becomes your risk. Also, other customers of Robinhood who have cash that is in an uninsured account are also at risk even if they are not invested in GME.

Then why not shut down margin purchases of GME, but not cash purchases?

There was some speculation that they didn't have that capability. Brokerage firms should have the ability to restrict margin trading in particular stocks, but what if Robinhood couldn't, at least not on short notice?

There could is also the concern about new accounts trading in GME with funds that might be suspect. It's a risk you don't want to take if you don't know your customers and the bubble is ready to burst at any moment.

They did shut down margin trading in GME and others several days ago, this is a further step atop it.

Did they issue margin calls?

aggregate customer exposure means that massive simultaneous losses by retail traders following the herd can mean losses for RH, which they want to prevent.

It does because they let them buy on margin.

Interactive Brokers hiked the long margin to 100% (and short to 300%) which is a reasonable way for a broker to behave.

Killing the ability to buy is not.

IB doesn't allow you buy GME even w/o margin account.

I don't think that is correct. They stopped options trading in it not 100% cash backed stock buying or 300% cash backed shorting. I think their position is fairly reasonable and as an account holder there I don't want people going crazy on leverage on this amount of volatility.

Got email from IB that you cannot open new positions on GME this morning.

Probably not even long positions and probably just purely for liability reasons to stay away from the mess when shit hits the fan

That's what they advertise via Twit. But if you try to buy even 1 stock of GME on non margin account (our own money only) it doesn't allow you to do that. I have a screenshot for that if you want. And customer support line is overloaded as expected.

ok that is unfortunate I didn't go all the way through with trying to actually buy. I'm a long time customer and they were definitely better before they went public

Why can't they just stop the people on margin from buying gme? That would be reasonable. But if it's your money, I don't see how it's risky for RH.

RH makes money by selling data to investment firms, not off individual trades/fees.

If their customers - the firms that pay them, not app users - see the RH platform as a threat to their business they could pull the plug[0]. Or if this prompts regulators to examine RH and similar products.

The risk isn't in the outcomes of options/trades; its risk to their business model.

[0] RH's customer are actually market makers, who by and large will be profiting heavily off of this.

> If their customers - the firms that pay them, not app users - see the RH platform as a threat to their business

This point has been made repeatedly elsewhere but it bears repeating. Market makers are getting rich off this trading. Robinhood's customers are not hurting from this.

Point taken.

Still, as far as risk to RH is concerned - if this kicks off a change via their customers, regulators, or legal action the change is probably not in their favor.

> if it's your money, I don't see how it's risky for RH.

FINRA arbitration, and the FINRA complaint process, is highly sympathetic to retail clients. When these clients lose money on GME et al, there will almost certainly be a class-action lawsuit for some fraction of their collective losses. And Robinhood's lawyers will almost certainly recommend they settle. That is the risk, beyond margin lending and options settlement, they are seeking to mitigate.

(Also, when that money is lost, there is a decent chance Robinhood will be fined by half the regulators on this planet for inducing people to overtrade through its gameified interface or something like that.)

One issue is a lot of retail people bought GME options. If those expire in the money, these people will be on the hook to buy 100s of shares of GME and likely don't have the cash on hand to purchase the shares (which leave RH holding the bag).

On one hand, you could say RH shouldn't let people buy options if RH doesn't believe those people can pay up when the option expires. On the other hand, you have people buying options who maybe don't understand that you need cash to buy the shares if the option expires in the money.

If you bought options, you don't have to exercise them. They could expire worthless.

That's whay Schwabb did and what any serious broker would do if there's volatility. If you have cash you should always be allowed to play if you are not doing anything illegal. If it's dangerous, it's your cash not theirs.

If it was the answer, then RH could have instead only forbidden margin trades and restricted to cash.

Additionally, other retail brokers selling to Citadel Capital have done the exact same (Schwab comes to mind, but not only).

Other brokers however (fidelity), have not. If the short squeeze is to happen tomorrow, this seems an unlikely coincidence that those retail brokers affiliated with Citadel Capital tool positions that would ultimately deflate the stock.

I don't see how GP can assure that no short sellers is behind those moves.

> Robinhood is a margin-lending options-trading broker. If a customer falls down on a trade, it is ultimately liable. If a retail customer loses money and makes a FINRA complaint that Robinhood induced them to buy through its gameified interface, it is liable. Risk and compliance likely made this call.

This is a very tenuous argument. By law, options customers in the US have to receive an information packet and accept an Options Agreement, wherein it's clear that they could lose 100% of their premium outlay (or more). Options trading is approved based on levels; not every account can buy options, and not every options account can sell naked options.

If we are assuming good faith from RH, maybe they are trying to prevent margin-call suicides. But I don't assume good faith from RH.

Not to mention that they turned off all opening trades -- not just large trades, margin trades, or options trades.

Robinhood didn't pull the plug. Tastyworks did the same and they said they were more or less forced by Apex Clearing. Here is CEO of interactive brokers also admitting to the reasons: https://www.youtube.com/watch?v=7RH4XKP55fM

You could also imagine that they have concern about the volume causing issues on their servers. A literal thundering herd might mean owners of GME can't sell during the collapse which would put robinhood in a bad situation

> A literal thundering herd might mean owners of GME can't sell

I can assure you there are very few cattle, bison, or caribou near the exchange.

I strongly dislike nits like this. I don't think this clarifies what I was saying or provides any value. I also don't find it humorous.

While writing, I was thinking of the thundering herd problem and imagined that individual users is more literal (than many processes), more like the thing for which the problem was named.

If I'm not not mistaken, I think you can also refer to a group of humans literally as a herd. But I very rarely think such prescriptivism (saying one should not use terms inappropriately) provides value, especially on a word that is so far past being used correctly with any consistency.

Hedgefunds are real Robinhood customers buying their order flow. They go belly up Robinhood looses their actual source of income plus Robinhood lent them a ton of stock to short so they are on the hook too.

> Hedgefunds are real Robinhood customers buying their order flow

Market makers buy order flow. Hedge funds don't. The only major hedge fund affiliated with a market maker is Citadel.

Melvin and Citron placing shorting GME is an anomaly in the hedge fund world. Most institutional short views are expressed through options and structured products. (Market makers convert those options into shorts, the same way they convert calls into stock purchases.)

Market makers are making tonnes of money on this. It's the low-information non-directional trading their models are built for. (Source: former options market maker. My former colleagues are making annual targets in a week.)

Some hedge funds are getting screwed. But that is mostly over. Few funds' risk tolerances let them extend a 10x loss on an outright short. With respect to their puts, their maximum loss is the premium. That's generally baked into the risk model ex ante.

The only sophisticated parties holding the bag are brokers. Margin loans at risk. Uncovered options sales at risk. Most significantly, when the scheme inevitably crashes, almost-inevitable class-action lawsuits from clients claiming to have been misled by their interfaces.

And Citadel is responsible for 40% of Robinhood revenue and oh surprise Citadel is in the hole on the money sunk into Melvin.

>Market makers are making tonnes of money on this. It's the low-information non-directional trading their models are built for. (Source: former options market maker. My former colleagues are making annual targets in a week.)

Aren't these market makers sitting on a ton of stock to cover call positions?

They may have picked up a lot of pennies these last two weeks, but the bulldozer is getting bigger and faster. This is a truly unprecedented situation and I doubt they have confidence that their models can handle it.

Market makers aggregate their risk exposure across all of their holdings and put limits on how large those exposures get.

> Aren't these market makers sitting on a ton of stock to cover call positions?

The whole purpose of delta hedging is to make them immune to the first-order effects of market moves. The first-order derivative of the value of everything they hold with respect to price moves in any one stock is constantly kept near zero.

In the old days, many options traders would put off hedging their books until near the closing bell. Smart equities traders would watch the options market to see which way the traders would be rushing to hedge in the cash equities market. These days, there are systems that automatically hedge out the positions throughout the day.

> The only major hedge fund affiliated with a market maker is Citadel.

How many shares of Melvin Capital were bought by Citadel when they injected $2.75B? Is there a way to know how exposed they are?

Isn't there a conflict of interest in them floating a hedge fund losing money due to flow orders they are buying (or, potentially, not buying anymore)?

So as a platform Robinhood wants to make money from trading options, but it will shut down the platform when it sees too much risk for itself? If so, would this damage the trust to Robinhood?

Yes but

a) most of the platforms are doing the same

b) it's hard to imagine that with half of RH currently holding GME they're not going to come out of this having gained more in users than they lose over trust issues

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