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Comment by sbelskie | Hacker News Reader

“ANTHONY DENIER: Well, it wasn't our choice. Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions in the three names, AMC, GME, and KOSS. Highly volatile, and what happens is this is not a political decision. And unfortunately, it got political. I think, you know, I think it was once said that don't let any good crisis go to waste. And that's clearly what's happening here.

And we're seeing politicians jump on the bandwagon so they can get-- so they can start trending on Twitter. But in reality, what's going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.“[1] from the CEO of Webull.

[1]- https://finance.yahoo.com/video/heres-why-robinhood-restrict...

Edit: Non amp link.

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Insightful interview.

More money quotes:

ANTHONY DENIER (CEO Webull): [...] our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar-- smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.

ZACK GUZMAN (interviewer): [...] We had the CEO of Robinhood on yesterday kind of talking about why they were taking a different tact [sic] and not restricting trading because, you know, they wanted to leave it to their individual retail investors to make these decisions. Didn't want to step in and fuel into the nanny state idea. But what about maybe curbing this a little bit earlier? Because the fact of the matter is, you're going to have retail investors who are now kind of on the hook, who might want to dump some of these shares, who are stuck. And it seemingly looks like some of these moves have now triggered the bubble bursting. So what do you say to that?

ANTHONY DENIER (CEO Webull): Well, that's absolutely false, actually, Zack. There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position.

[...]

I think when you say the regulators stepping in, it will happen on both sides. It's going to happen on looking into should a hedge fund be allowed to get a 10 times leverage and short 140%, 150% of a company. Should that be allowed in a regular-- you know, in a healthy market.

And then, on the other side, should it also be allowed to have mob and herd mentality of rolling into stocks? And should these things be curbed? Look at the examples that happened overnight in Australia, where a mining company, GME in Australia, was up 100% overnight because people just blindly went in on anything GME without reading below the headline.

He lied. They’re forcing retail investors to sell their positions.

Brokers must often sell customers' positions if they have insufficient margin. Where did he say they wouldn't?

True, but that's for leveraged positions. So I wonder was that leveraged position or just plain "own stock" position? If the latter, I never heard about broker liquidating a position against the will of the client, when settlement of debt is not involved. Does it happen?

Edit: screenshot from reddit: https://pbs.twimg.com/media/Es1pb5KWMAE19CD?format=jpg&name=...

$118? That's daylight robbery. It must have been the lowest point of trading today.

In fact, when I look at the stock chart on Yahoo the lowest value $GME had was $126!

https://finance.yahoo.com/quote/GME?p=GME

Forced selling doesn't just happen arbitrarily, but precisely because the price is low. Long positions using borrowed or unsettled funds are similar to shorts in that they can be squeezed, just in the other direction.

It applies to any margin position. This can just mean trading with unsettled funds. E.g. you buy a stock, sell it, then use the proceeds to buy another stock (or the same one) before two days have elapsed.

> Because the fact of the matter is, you're going to have retail investors who are now kind of on the hook, who might want to dump some of these shares, who are stuck. And it seemingly looks like some of these moves have now triggered the bubble bursting. So what do you say to that?

It looked more like, what happened was you had retail investors that couldn't buy securities, but Robinhood was allowing them to sell them to make them available to customers in order to clear leveraged short positions.

So if a new investor puts a stop loss order in at a 60% loss, brokers let them exit their position and then didn’t let them back in?

This seems unconscionable given the >300 point volatility today and the large number of brand new investors.

It’s hard to imagine how these actions didn’t benefit wallstreet at the expense of regular people.

Ok so let me understand. You can sell you position no problem. So who's going to buy it, if buying is not allowed?

In this case, either the hedge funds clearing their short positions, or traders on literally almost every other platform out there (I opened a few positions on Ameritrade today for example).

Someone not on Robinhood can buy it.

Right, so... the shorts that need to clear their position before the price rises further.

Sounds like market manipulation to me.

> Well, that's absolutely false, actually, Zack. There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions.

This is a problematic statement. Because to sell your position there has to be buyers, and the only buyers who were allowed at the table suddenly were those who wanted to pay significantly less then the stock had recently been trading at.

Of course it's not political, in the sense that RH routes their order flow through Citadel's MM arm, who are probably getting squeezed by Gamma on their (previously) OTM naked calls, and if Citadel is the prime broker for all of these shorts _significant_ exposure on that end, as well as the exposure that Citadel hedge fund has on the short position through Melvin.

> if Citadel is the prime broker for all of these shorts _significant_ exposure on that end, as well as the exposure that Citadel hedge fund has on the short position through Melvin.

Isn't this meant to be the reason for the "Chinese Wall"? In theory, Citadel as a brokerage is meant to have no insight into the operations or needs or desires of Citadel Hedge Fund. The technically correct answer here seems to be "not my problem", however... not so much.

In theory... in practice? So much illegal shit goes down in finance all of the time. rarely if ever it gets caught.

And when they have literal billions on the line a slap on the wrist fine is preferable.

This was a better worded answer to the question I posted in a sub comment:

If I'm understanding (i might not be) this is why it feels like fraud/not following fiduciary responsibility to their clearing partners.

Does citadel clear their own trades? I could be off here, but what I'm asking is getting at like if they are on all the sides of the transaction as market maker, participating or allow others to participate in 'betting', and clearing the trades themselves? Does a trade even need to clear if it's just moving internally changing col A owner ID from 1234 to 9999?

Citadel has two sides to their business; Citadel Securities and Citadel. Citadel is the investment side and Citadel Securities is the MM side. I'm assuming that Citadel Securities does not clear the trades for Citadel, but don't quote me on that.

This reads like GPT-3 output, like what on earth are you talking about. I don't think you understand how options market making works and for the record citadel is not a prime broker. I'm no citadel fan but the descent of this sub into lunacy conspiracy is something to behold.

Citadel has two main arms; Citadel Securities which is a market maker, and Citadel, which is their investment arm.

I don't think you understand how the options market work. Several of the large spikes on Friday and the past week is the result of MM (like Citadel Securities) having to purchase shares to cover the naked calls they sold.

I'm well aware of how citadel is structured thanks, I used to work there.

If you think options dealers go around taking massive unhedged directional bets then you are very misinformed. I don't have any inside knowledge but i'd bet a pound to a penny the options desks have been making out like bandits this week.

Robinhood does clearing by itself. Webull uses a partner company for clearing.

But still, I think that there are legitimate factors for why Robinhood stopped taking buy orders for those stocks, like ensuring liquidity through clearinghouse deposits while trades are underway.

I thought RH used Citadel

They write about it in their FAQs: https://robinhood.com/us/en/support/articles/whats-clearing-...

To my knowledge, RH sells its users' order flow to Citadel (which is how they make money).

clearing is totally separate from flow

Yes, the factors are governed by how they make money.

If one is not the customer, then they are the product!

tldr; even if Robinhood does it's own clearing (which I'm not suggesting they don't) it's reasonable to not risk their business to support the current market. Does "the market can remain irrational longer than Robinhood can remain solvent" apply here?

Any valid argument that would cause another clearing house to not be able to afford to handle these orders would seemingly-equally apply to Robinhood's own clearing house; no matter who owns it, the clearing house can't afford to go broke.

If someone is arguing that Robinhood should have the risk tolerance and reserves of a larger financial institution in order to service high volatility trades.... then maybe that person should use a larger financial institution to place these high volatility trades.

This sounds very plausible, but: I don't remember any cases when I've ever heard of specific platform stopping trade for specific stock just for volatility. I've heard about the cases of trade stopping when something clearly going wrong - like market crash, or bot-driven feedback loop, or such. And this usually then comes for the whole exchange or all exchanges the stock is listed on, not just a handful of platforms. That of course doesn't mean it didn't happen - just that I haven't heard of it. So is such thing common and does anybody have examples of such things happening in the past - I understand it may not gather as much press as this one but somebody should have mentioned it somewhere? Is it indeed a routine thing that got overhyped, or is it an exceptional thing trying to hide behind a routine procedure?

Also, these stops are supposed to be written into the rules BEFOREHAND and should have clear rules for when they can and cannot happen.

suggest you use a non-amp link:

https://finance.yahoo.com/video/heres-why-robinhood-restrict...

Done. Thanks!

Now there are reports they (robinhood, not webull) are force-selling positions: https://redstate.com/scotthounsell/2021/01/28/robinhood-app-...

If that's true (never assume something coming from Twitter is true without verifying, so it's still a rumor by now) then I don't see how "it's too risky" explanation holds. And of course selling somebody's property against their will is a fraud, at least on the face of it (IANAL).

Edit: screenshot from reddit: https://pbs.twimg.com/media/Es1pb5KWMAE19CD?format=jpg&name=...

That makes sense as an explanation - but this interview is with the CEO of another brokerage, Webull.

It seems that Robinhood does its own clearing (maybe not for everything?), cf. https://robinhood.com/us/en/support/articles/whats-clearing-..., so the story is probably a bit more complicated there. Could still be a similar dynamic, of course.

Short squeezes are illegal. Any brokerage that knowingly allowed a short squeeze to continue without taking action, could have potentially massive legal liabilities.

That is another explanation beyond the 2 day settlement window that Webull published.

You keep saying this here but AFAIK they are not illegal. What are you basing this on?

The SEC published guidance here https://www.sec.gov/investor/pubs/regsho.htm

Yeah you keep linking that too, it says market manipulation/schemes are illegal.

It's absolutely unclear if that's the case here, and in fact based on the few extreme times short selling has been illegal I'd say this definitely does not get there.

> Short squeezes are illegal.

Nope.

"Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal" - SEC site. See link in my reply to the other comment.

That entire argument depends on being able to determine individual trader's motives for their trades. Also, by that argument Robinhood is acting illegally by manipulating the availability of the stock.

The key word there is "scheme". If we both agree out loud that the sun will rise tomorrow we're not scheming to make it so.

If some dude in an expensive suit gets on TV and says a stock will fall then buys a couple billion in shorts and you do the same because you like his style the two of you aren't scheming to make it happen.

Likewise, if some guy in his basement posts on an internet forum about how he's sure a stock will go up and you feel compelled to buy some too you're not scheming.

Finally, if millions of people are collectively motivated by the idea that they just really dislike hedge funds, want to make some money, and maybe want to watch the world burn, so they buy into an increasingly ridiculous idea they're _still_ not scheming because they all made the independent decision to do so after doing what amounts to each individual's 'due diligence' and are not entering or exiting the position in concert.

I think the notion of a scheme here is what's debatable.

The risk was there when these funds shorted 140% of the stock. Retail folks noticed the potential for a naturally occurring squeeze and shared the info with world.

Source on the illegality of short squeezes? To my knowledge the term just describes the phenomenon of prices rising as a result of shorts being forced to buy shares to settle their positions. It's a natural consequence of market forces, I don't understand how it could be illegal.

https://www.sec.gov/investor/pubs/regsho.htm

That doesn't say short squeezes are illegal, it says manipulating the market to cause a short squeeze is illegal - but that's not what's happening. People are buying stock to profit off of a short squeeze or to hurt the short sellers. Some people believe GameStop will go up and others think it's an opportunity to profit off of a naturally occurring short squeeze and others think it's a way to hurt the hedge funds. None of that is manipulation.

By contrast preventing a million people from buying a stock at a critical moment is clearly manipulation.

"Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal."

By this logic though, if you're already in a short squeeze, then the retail buyers (the ones who are doing the squeeze) not buying any more should not cause the price to drop: the person getting squoze (did I use that word right?) will have to buy whether or not Robinhood traders are. The price would still be shooting up. In a short squeeze all that WSB had to do was hold.

If your "short squeeze" is dependent on people buying more in order to create a short squeeze, then you are just coordinating to create a short squeeze, not dealing with a "natural occurring" one.

> By this logic though, if you're already in a short squeeze, then the retail buyers (the ones who are doing the squeeze) not buying any more should not cause the price to drop: the person getting squoze (did I use that word right?) will have to buy whether or not Robinhood traders are. The price would still be shooting up. In a short squeeze all that WSB had to do was hold.

Obviously the blocking of buys will have an effect on the price and availability of the stock. Not that it provides any reasonable justification for RH either way.

> If your "short squeeze" is dependent on people buying more in order to create a short squeeze, then you are just coordinating to create a short squeeze, not dealing with a "natural occurring" one.

Even if you want to buy the stock because you know there is a short squeeze ongoing, that is not illegal. That is just analysing the market conditions and seeing the obvious.

> If your "short squeeze" is dependent on people buying more in order to create a short squeeze

Who said that was the situation though?

The problem is that buying the stock became something that was largely barred from retail investors, while institutional investors faced no such issue. Indeed, when a stock can only be sold, that means it can only go down, so the pressure of the short squeeze was alleviated as a natural amount of selling occurred while buying was artificially deflated by multiple brokers and entities preventing retail investors from purchasing a stock that was > 100% shorted.

This was guaranteed money for these traders too, the short squeeze was already on - the shorters were on the hook for this money.

The fact that there are huge financial relationships across the chain from one of the biggest shorters of the stock all the way to Robinhood makes this the controversy it is today. The market prevented natural market mechanics dictating a short squeeze that was already on.

The natural short squeeze, or the possibility for a natural short squeeze, is created by the fact that there is more than 100% short interest of float and the price is going up. At that point retail investors realize possible short squeeze and buy in to profit off of it simultaneously making the squeeze worse for the shorts.

I'm honestly having trouble grasping what you and others think could possibly be illegal about this. Short sellers aren't prohibited from losing money by law.

Can you point to the legislation that indicates this? (Curiosity)

> Short squeezes are illegal

This is the first time in all this crisis that I see anybody say that short squeezes are illegal. Can you elaborate? What's illegal about them?

They have happened many times. I rememeber the VW one a while ago, and I don't rememebr anybody saying they were illegal.

Edit: Right, I saw the link now. Very interesting, thanks.

This user is repeatedly posting misinformation and hiding behind links that don't support his position. I have repeatedly called them a shill and wish to spread the awareness

[0]: https://news.ycombinator.com/item?id=25950680 [1]: https://news.ycombinator.com/item?id=25950493

Hey, I'm afraid you broke the site guidelines badly and repeatedly. We ban accounts that do that, regardless of how wrong other commenters are or you feel they are.

If you wouldn't mind reviewing https://news.ycombinator.com/newsguidelines.html and sticking to the rules when posting here, we'd be grateful.

But if they are doing their own clearing, then they are taking the risk directly, which other clearing houses seem to think is significant. Robinhood isn’t obligated to put itself at risk of bankruptcy so people can make free trades.

Wait his name is Denier and WeBull is the company name? Humm..

And these businesses have contracts specifying that they can increase prices absurdly high from one day to the other?

> these businesses have contracts specifying that they can increase prices absurdly high from one day to the other?

The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on.

Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker.

There are clear rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If something goes up and down more, ceteris paribus, small mistakes are more likely to become firm-ending ones.)

Again, these are well-known formulas. Unusually, however, Robinhood didn't build this into their fee model. Given market makers, their revenue source, stopped making markets in GME on account of how volatility effects their risk profile, executing GME trades would leave Robinhood sending orders to an exchange, which may cost money, and ponying up collateral, which also costs money.

In my opinion, that's what they should have done. Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug.

[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...

[2] https://www.dtcclearning.com/products-and-services/settlemen...

This is probably the most fascinating thing I've read so far on the subject. Given that many other brokerages seem to be doing the same as Robinhood, is it safe to assume they also are not accounting for such situations?

Also, another user shared a link above where Robinhood claims there are two types of brokers, introducing and clearing, and describes themselves as the latter[0]. Is that at all relevant here? If I understand correctly, "clearing house" is still a distinct concept that is very much involved.

[0]: https://robinhood.com/us/en/support/articles/whats-clearing-...

Thanks!

> Robinhood claims there are two types of brokers, introducing and clearing

Clearing brokers interface directly with the the clearinghouse, i.e. the DTCC. Introducing brokers clear through a clearing broker. (Who in turn interacts with the clearinghouse.)

A modern service whose whole concept is built on scale and somehow they couldn't handle the scale here. I don't buy it.

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