Robinhood is said to draw on bank credit lines amid tumult
bloomberg.com
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Large threads are paginated. If you want to see all the comments you'll need to click through the More links at the bottom, or like this:
https://news.ycombinator.com/item?id=25950685&p=2
https://news.ycombinator.com/item?id=25950685&p=3
(and so 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 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 a broker falls down, the clearinghouse liquidates their collateral and makes their counterparty whole. More volatility means more chance the collateral will be insufficient.)
In this case, collateral requirements on GME went up. Because of its volatility. So while before Robinhood had to pony up collateral for a few shares of GME for every hundred it traded, it now had to, at close of business, pony up one hundred shares' worth of collateral for every hundred it traded. That creates a cash crunch. One that exacerbates itself with every additional trade in the security. If Robinhood fails to satisfy those collateral calls, they go out of business overnight. Into receivership. 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...
Few people are actually getting this information. So... its not horrible press for them.
And if they say this. People would sue like MAD. Because it would be "RH didn't have enough money to trade on a thing they allow trading on. Therefore we missed out on potentially 5 million in profits when I was unable to trade ..." and so the lawsuits begin.
Option 1: The public believes Robinhood is part of the larger finance industry cabal and will screw you over to protect their buddies.
Option 2: The public believes Robinhood is in over its head, it doesn't have the financial backing to do the job they are given, and it can go insolvent at any moment.
Considering the reputation and expectations for the finance industry, it might actually be better if the public believes option 1 even if option 2 is the real story.
This is based on a lifetime of observations without a single counter example, so it is still anecdata but quite a bit of it.
https://blog.robinhood.com/news/2021/1/28/an-update-on-marke...
But the conspiracy theories are more fun, so nobody really paid attention.
Your comment sounds similar to the explanation from the mouth of Interactive Brokers chairman and founder Thomas Peterffy [1]. His comments are based on a broader concern beyond just Robinhood.
I think a lot of people don't understand what I can only describe as the physics of the system. Like a utility, there is only so many electrons that can get pumped through the system from generators through the transmission system, through substation and distribution networks to your house. It is big and powerful, but if there is an unplanned for event that draws too much power it doesn't matter how much generation you have, the system just can't take it. Substation will pop, power will go out if not isolated.
Robinhood is small player that could never have planned for this type of event and likely doesn't want this. Most retail shops likely don't have the sophistication to handle an event like this.
I disagree. It wasn't that long ago that securities and cash from unsettled trades were unavailable to customers. The modern abstraction of frictionless trading is just that--an abstraction.
Adding "free" to the mix removes a balancing factor. (Less cash coming in at t=0.) Becoming a clearing broker removes another, though it adds control. There are vendors selling off-the-shelf systems to calculate clearing margin requirements and risks real time. I'm looking forward to hearing if Robinhood used one of those, or if they tried to roll their own.
Either way, it's not an excusable pain point to push to one's customers. Particularly not retail customers. Particularly not unsophisticated retail customers. These are complicated systems, far more than most professionals fully grasp. A simple back-up plan, like a fallback introducing broker arrangement, would have avoided this whole mess.
Market microstructure is a term I've adopted when studying options and the circumstances where they influence the underlying market prices more than any other factor.
- How come a bunch of other brokers also stopped the trading in these assets? (Webull, Ameritrade, e-trade etc) did all of them end up in this state?
(I'm always worried questions like these in times like these are interpreted in bad faith, but this is an honest question, trying to understand the powers behind it)
In fact, we have seen things like that happen before. Forex broker FXCM blew up after their customers lost large amounts of money in the Swiss Franc in early 2015.
There are two classes of broker here -- brokers that are backed by Citadel, and Brokers that have a different market maker/clearing house and/or are not exposed to Citadel. The WeBull CEO did an interview mid-day and noted that certain market makers and institutions (i.e. citadel and/or Robinhood) were calling banks for bridge loans in the middle of the day. He also mentioned that Melvin Capital was bankrupt. I think Citron got out (that's a different story) a couple days ago or so.
(I hold no shares of GME stock and never have. All these orders went in exactly as normal and I was able to cancel them several minutes later.)
The issue I have, is that I completely understand and expect this to happen, but not as laziee faire. FINRA should have been (also could have been, we don't know) up every orifice on every floor starting at $70+ a share for GME.
Also for as many many contracts to be written at insane IV, this isn't just RH who is at fault. This was literally thought to blow over and didn't -- that's not risk mitigation, that's laziness.
So the problem I have is that they didn't limit the margin requirements last week, got greedy on the potential 'gains' on the fees, and got slammed.
We will see if the 0-fee environment stays -- I hope it doesn't. It completely changes the risk profile of the individual trader were a $5 per trade fee on your one share only covers 1/2 of your fee.
But don't give 'solidity to pure wind' here[0] -- this was absolute negligence on multiple parties.
[0] https://www.orwellfoundation.com/the-orwell-foundation/orwel...
Edit: I've also always thought that the secondary market is a moral hazard. Primary Offerings are more pure in their 'economic productivity' than secondaries. Sure we can make long winded arguments that the stock price incentivizes executives to make long term decisions, secondary prices help your subsequent offerings, converts, etc... but the short of it is, at the time of a secondary transaction between Alice and Bob, $0 of effective capital is deployed to the actual investing machine... that's quite wild.
Edit x2: And the secondary moral hazard is compounded by this 'liquidity' boogyman that we must keep satisfied -- or else people will actually have to hold their positions until they get a good price.
Final edit: If you want another take, here's another view of the mechanics of it all, and again, it didn't start today... it was a boiling pot they thought wouldn't boil over:
https://mobile.twitter.com/KralcTrebor/status/13549526861652...
I have been studying Real-Time Gross Settlement systems for the past two months, including questions of liquidity in settlement systems. The question at the heart of the banking system is quite simple, if banks take capital from customers and use it to provide debt to others, then how much money should they keep on hand for their customers' withdrawals and transfers?
This question is hard to answer. As there is a conflict between what the bank does (i.e. provide debt), and how it is supposed to provide it (by taking savings etc.). Everything else, from central banks "offering cheap liquidity" is an add on. They are mechanisms that allow - for example, a bank to easily borrow this money so that they can cancel it out/repay it from transactions coming into their banks.
What makes it all borked is that you can't trust bankers with their grandmas. If there is a flaw, they will exploit it. Every major change has led to an exploit. E.g. In 1918, the American Government introduced the Leased Wire System that used the telegraphs and a network of 12 Reserves to allow banks to transct with each other across CONUS. It reduced the average time for cheques to be cashed in at banks across the country from 5.4 days in 1912 to just 2.4 days. Theoretically, this reduced the risk taken by banks when they transacted with unknown banks across the country, with the Government acting as the escrow. It catalysed innovation and led to an explosion of financial services across the young country.
The system was supposed to be foolproof by reducing the time "credit" was needed to make transactions. Essentially, until one bank sent the money and the other got it, they were operating on a system of credit. And they would "net" the books at the end of the day/week to physically transfer assets. FedWire (Leased Wire System) made everyone feel safe by sending notes of the transactions across great distances. But the netting still took time. All it took was one bank to fall behind on current obligations to other banks for all of the banks to collapse, leading to the Great Depression.
Important people got together and made rule changes to fix the problem. But then they innovated again. The Federal Reserve started making Automatic Clearing Houses (ACHs) and Remote Check Processing Centres (RCPCs) to make settlement faster, starting in the 60s and precipitating in 1972. This made settlement faster therefore safer. And it led to great financial innovation. The magic of computers and innovation meant that people could use these same systems to transact across the world!
Until in 1974, when the German lender Herstatt collapsed due foreign exchange investments based in the Dollar, which caused the bank to fail to meet its settlement obligations...
> That day, a number of banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt in exchange for US dollars (USD) that were to be delivered in New York. The bank was closed at 16:30 German time, which was 10:30 New York time. Because of time zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments
In response, important people got together and made rule changes and a new system called the Bank for International Settlements. Under the new systems, more computers were added and were linked together with the aim of reducing settlement time... You can see where this is going.
This is a simplified history. But the history of banking is the history of doing settlement while managing liquidity and counter-party risk.
Like it or not, we've hit a wall here because these systems were never designed for such circumstances. Perhaps it's time for the important people to get together again?
Further reading,
https://fraser.stlouisfed.org/blog/2020/09/check-processing-...
https://www.federalreserve.gov/newsevents/speech/bernanke201...
https://luizlaydner.substack.com/p/how-do-instant-payment-sy...
Funny fact, BIS private shareholders kept suing them for last 20 years for 2001 share withdrawal.
In my view the clearing houses had liquidity issues while many of their clients likely had solvency issues which this brick on buying alleviated.
And the IBKR chairman admitted as much.
While that's not 100% accurate, it's in the general ballpark. And frustration with big financial players is high, and has been since 2008, for good reason.
The portion about not having a plan for when market makers don't want their action -- and they have to instead pay to use exchanges -- seems like a pretty stupid problem they set themselves up for.
Do have this right?
If Robinhood cannot fulfill these trades on margins, that is totally fine, they can halt on the margin trades if there are "liquidation issues". For all-cash trade, there shouldn't be any liquidity issues otherwise it calls into question how they manage their deposit.
Or if you've seen/requested a stock certificate. It used to be fairly easy to get a paper certificate from a broker, for a fee on the order of $10. However I've read they charge as much as $500 now, in an effort to discourage ordinary people from doing it.
AU/CA/EU have instant settlement of cross-entity transfers now, but not sure what the underlying clearing/settlement is.
If the US had a modern ACH, I wonder how it would have affected this current situation?
However, Robinhood disabled the ability to buy, but not sell.
Why?
Why is this an issue? Shouldn't robinhood already have the cash, since the trader (who bought the stock) deposited the money into robinhood prior to his purchase?
The mountain of derivatives that they were one of the parties to netted out at zero, but in the process, a lot of people got burnt, including the ultimate mortgagees.
The share market and its derivatives net to zero. It's a mechanism for getting capital flowing between investors and producers.
I'm not even sure that's something to be ashamed of!
https://seekingalpha.com/news/3655987-robinhood-ceo-said-the...
Then you have to consider how they're getting these accounts which need credit histories and social security numbers.
No.
Execution is matching a buyer and a seller. Settlement is handling payment. Clearing is re-assigning the securities. This isn't perfect, but it will do.
Exchanges deal with execution. (About a third of trading occurs away from exchanges [1].) The rule in America is you can't execute, on or off exchange, worse than the national best bid and offer [2]. That number aims to catalog all on-exchange quotes.
Once a trade is matched the exchange is done. Settlement is its own can of worms. This story is about clearing. The shares you bought need to get from their seller's account to yours. Then the shares you sold need to get from your account to their buyer's.
When you bought and sold the shares, the cash and shares "appeared" in your account. That's a convenient fiction. Cash doesn't move instantly. And securities settle over days. While all of that is happening, a complex web of credit arrangements keeps everything stitched together. Those arrangements have costs and risks. One of them is the requirement to post collateral as a safeguard against a broker breaking its word [3]. When those collateral costs get high, for example, because your customers are all trading risky things with high collateral requirements, it can create a cash crunch.
What's happening here has, to my knowledge, nothing to do with exchanges or execution.
[1] https://www.nasdaq.com/articles/slicing-the-liquidity-pie-20...
[2] https://en.wikipedia.org/wiki/National_best_bid_and_offer
[3] "But I don't trade on margin!" No, you don't. But you're still a borrower of sorts from your broker. When you buy a share at 11AM and then sell it at Noon, you've sold a share your broker may not yet own. That's the credit risk between you and your broker. If your broker bought that share at 11AM and sold it at Noon, it sold a share it did not yet own. That's the credit risk between the broker and the clearinghouse. Clearinghouses are nice. They usually say "give us 2% of yesterday's closing price in Treasuries. If you fail to deliver on a trade, we'll sell your Treasuries--maybe all of them, across all of your collateral with us--and make your counterparty whole." But when assets get volatile, the clearinghouse may want more than 2%. So it asks for that. Per its contract. But you don't have that money. And shit, Suzie just bought and sold the same shares thirty-six times in the last minute.
It does, ceteris paribus [1]. But blocking people from exiting a position you got them into, particularly something volatile and almost self-identifying as a bubble asset, is a lot more problematic than blocking people from opening new positions.
[1] The OCC (options) nets. If you have a large collateral requirement in a position and then reduce the size of that position with offsetting contracts, your collateral requirement goes down. I don't remember if the DTCC (stock and other things) does this.
Is there a saying akin to Hanlon's razor in this case, something like "Never ascribe to conspiracy that which is adequately explained by finite resources and inflexible rules/regulations"?
If this is about people trading on RH on margin, then just... stop allowing people to use margin to trade GME etc. "If you wanna buy GME you gotta have the cash in your account to cover it".
Problem solved and you don't need to prevent people from buying a stock they want to buy.
RH users are the product, not the customer. Why in the world would you expect RH to act in the interest of their users over the people that actually pay them, e.g. market makers like Citadel?
>"If you wanna buy GME you gotta have the cash in your account to cover it".
That's great, but that isn't the only relationship in this agreement, RH has agreements with its brokers about capital requirements. It's fairly likely that the attitude of "You need to have cash on hand for everything" basically means "You're done". That's the entire point of these risk management strategies - you are covered for what might reasonably happen so that you're making efficient use of capital.
What you are saying amounts to "when long tail stuff happens," order flow agreements, credit lines and clearing agreements that break down."
This, very directly insulates them (Citadel, other contract originators, RH) from the actual risk they are supposedly being paid for. It's also ostensibly the reason why retail investors can't have access to the same vehicles as financial firms. Retail investors can't reliably back that long term risk. Here is yet another example of loss limits for insiders.
No one is saying that you are not right. You are. The contractual complex does melt down at this point. The rage is people who think this is not ok.
excuse me? what part of inflating GME to $400 is a deserved long term return?
this is effectively a pump and dump scheme, whether or not most of the participants think so. once the squeeze stops, no ones buying GME over $100 and everyone left holding shares better have bought two weeks ago or theyre gonna lose money.
In other words, the situation is "too complicated," and the only solution is that the not-rich person should not do what they're doing with GME right now.
Got it.
Any good lie is based on some truth. That veneer of plausibility makes everyone else carry your water for free.
What issues does it create if your whole client base suddenly want to buy GME?
I guess if volumes overall go up a lot, you might need to post more capital? But since your revenue should be up too, that's a good thing right? And its only for a while, I don't think anyone thinks this will go on for months do they?
And surely it's easier for your clearing house to clear 1 name than 10,000 names?
For no-frills, long, equity positions, it feels like it should be the easiest thing in the world to do. I'm happy to be corrected, I'm aware back office logistics is a dark art so maybe I and other readers can learn something?
Edit: I'm honestly not trying to be snarky here. I just don't get why it would be that big of a problem. I'd be happy to be rescued from my ignorance.
> Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... 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... our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation.
[0] https://finance.yahoo.com/video/heres-why-robinhood-restrict...
The exchange between A and B isn't direct, or instantaneous. The actual money transfer takes days, and there are parties in between that make it possible to pretend it's immediate - much like with insta-transfers of money between the banks. Apparently, these parties are on the hook for any money that is "in flight", so they need to have a substantial buffer.
Once you get this many people trading on a stock this volatile, apparently the buffer in the middle isn't sufficient to cover the risk, so the parties in the middle stop accepting these trades.
EDIT: 'imladyboy quotes the source from which I pieced most of the interpretation above. See also 'JumpCrisscross here: https://news.ycombinator.com/item?id=25951475.
All Robinhood accounts default to Reg T margin accounts.
The entire UX is built around this idea that the margin is transparent to end users. How many Robinhood users are aware that when they open an account, transfer money, and buy stocks all in the same day they're actually buying on margin? The cash isn't in their account until the bank transfer settles.
Likewise, when Robinhood users hit sell and then use the funds to re-buy another stock or back into the same stock, they're buying on margin. Technically the first sell doesn't clear for several days, so the subsequent purchase is made on margin.
This frenzy surely pushed the limits of Robinhood's available credit lines to support all of this margin activity.
Meanwhile, clearinghouses everywhere are increasing collateral requirements for stocks like GME. If Robinhood was struggling to secure additional credit while also facing increased fees for trading stocks like GME, they may have had no choice but to either pause the entire platform (to avoid running afoul of SEC-mandated margin requirements) or pausing meme stocks while they figured out another solution.
> Why in the world would you expect RH to act in the interest of their users
If the whole platform blows up because they go insolvent, that's even worse for the users.
Maybe I'm out of touch but I would guess the answer is "most". Having to wait a couple days for money to clear after being transfered to a financial institution is extremely common.
When I first deposited on RH and saw that the money was available for trading immediately my first thought wasn't "Oh the money cleared instantly", rather it was "Wow, I'm surprised they're willing to take on that risk with new accounts". Turns out, maybe RH should have given that risk a little more thought.
This seems like a key piece missing from lots of explanations I've read. Thanks.
They don't show any of the details on the main screens after that, though.
Normally, it doesn't matter because Robinhood eats the tiny margin cost for the customer. They make up for it by selling the order flow. This only works as long as interest rates are low and, importantly, they can get enough credit to cover it all.
In times of unprecedented volatility and unprecedented risky trading behavior, securing that debt becomes non-trivial. Robinhood's debtors have no desire to be left holding the bag if something blows up.
When you buy a call option from a market maker, they buy shares to cover the delta. When the delta changes, they need to adjust their shares to avoid exposure. Certainly a large part of the price action here is a gamma squeeze, where WSB folks buy tons of OTM calls, which Citadel buys shares to cover, which pushes the price up, which in turn requires them to buy more.
Should they no longer be able to buy or sell options to ensure the solvency of their sellers?
I mean, it's totally reasonable to tell them they shouldn't have taken on that level of risk haha.
In this case, the missing knowledge is that Robinhood is just another middleman: they're subject to margin calls and denials of credit just like Robinhood passed to you. Robinhood's credit facility was exceeded by the growth this week, and their credit provider was uncomfortable with "their" (really, Robinhood's clients) exposure if Gamestop collapsed.
> Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... > 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... > our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation.
[0] https://finance.yahoo.com/video/heres-why-robinhood-restrict...
People are expecting more a scenario in which clients stocks are neatly divided in two piles based on an unrelated criteria, i.e. if they are attributable to margin, or whatever assets you have on deposit. Additionally, the process of having margin is itself like having a credit line - AmEx simply doesn't have the systems or procedure to lower your credit limit because Tickle Me Elmo speculation is at a all time high over the last 72 hours, and it sees you're purchasing tickle me elmos, getting assigned a credit limit is a function of your credit score, and amex isn't tracking line item level purchases
Baseless?! ...That's it! Prepare for hysterical clamouring.
Both the hedge funds who wrote the put contracts and RH took positions nice, high, steady returns and long tail risk. The press is reporting Melvin Capital wrote put options with a face value circa $55m, for example. The long tail risk materialized. Damage is several $bn.
It seems like systemic risk means risk to heads-I-win-tails-you-lose games. This is why the hysteria. This whole thing is a symbol of a rigged system, with the typical patterns of insiders. 9 times out of 10, they win. 1 time out of 10 they pull the fire alarm.
Insiders, from the CEO of the NASDAQ to whoever makes the clearing house rules have come out swiftly and in force to suspend norms and call a literal "all bets are off." Closing buys, but not sells. Liquidating positions. How is this not a rigged game.
It is enraging to hear "be reasonable, we all have to be responsible" from these people.
https://www.esquire.com/news-politics/a35339535/game-stop-st...
Systematic risks should be addressed, yes. But a broker should never do such manipulation.
Options (calls/puts) are permitted.
Edit: I'm guessing it's because the above comment said "only BUYING". I think that was a distinction from blocking both buying AND selling. If you block only one, it forces the market.
For the retail investors, if a broker didn’t foresee systematic risks and cannot clear, the better thing can happen is the broker own up to mistakes and go bankrupt.
Bankruptcy is legal and investors understand such risks.
Spoiler: it’s pretty boring, and there are countless opportunities to misunderstand the relationships between all of the entities involved. What happened today made sense. It sucked, but it made sense.
It was only until after the markets closed that Vlad Tenev really explained what happened: https://twitter.com/vladtenev/status/1354900958942175233
https://news.ycombinator.com/item?id=25950191
Edit: I didn't know before listening to this how much was going on behind the scenes for every stock trade. It reminds me of what it takes to buy a house.
Even now, they haven't come out and said anything directly, they just keep making vague references to having "obligations" and "requirements".
It's just context for the conversation I was missing, it doesn't mean they are completely blameless, and I support a class action lawsuit. I just appreciate a fuller context for myself and figured others might as well.
It's entirely possible, but do you really think that a conspiracy couldn't be possible in the financial world with all that's happened for the past 20 years?
Robinhood deserves all the hell that it raised
Joe Shmoe app user are not Robinhood's customers.
Maybe a few power structures will adapt but rarely doesn’t anything change for the better for the “common” man.
Usually it’s just more restrictions. While LARPers have their fun. The only winners are the ones in it “for the lulz” as they say.
https://www.benzinga.com/fintech/18/10/12481341/why-and-how-...
What? No.
With respect to clearing, transferring stock from the seller to the buyer, there are clearing brokers and introducing brokers. Clearing brokers have a direct line to the clearinghouse. Robinhood is one of these. Introducing brokers use a clearing broker to clear.
With respect to execution, matching buyers and sellers, you have brokers (who represent clients) and market makers (who bet their own capital). Robinhood is a broker. It sells its order flow to market makers, of which Citadel Securities is a major one.
Somebody (another hedge funds) found a flaw in the way RH is operating.
Robinhood just didn’t have the capital to clear trades of super volatile stocks. I think people would have understood if they just came out and said so yesterday.
As long as people executing buy orders have enough cash or margin in their account to cover the purchase, how is this a problem?
It looks like RH let hordes of new users onto the platform and allowed them to put in GME orders before having those users' cash in the bank. Now the clearinghouse sees the volatility, throws up its hands and goes "listen RH, no more of these crazy GME orders from you until you have the cash to pay for them". Understandable – but that should be RH's problem, not that of its users.
What's not OK is RH's sledgehammer solution of disabling buying for all users, even those whose accounts are fully funded, not to mention force-selling people's shares against their will. IMHO they deserve all of the anger and lawsuits currently directed at them. (Edit: unless, of course, they are only force-selling stocks that were bought on margin in the first place, and if their T&C let them do that, in which case ¯\_(ツ)_/¯)
WealthSimple is not restricting trades, but displays warning banners about GME:
"GME is considered risky. Traders should expect high volatility. If you do choose to place an order, use a limit order with a set price."
This was not their stated reason for shutting down the trades. What is your source for this claim?
https://blog.robinhood.com/news/2021/1/28/an-update-on-marke...
They vaguely hint at things that could be the reason, but they never actually say those are the reason. This is either shady or horrible PR.
See here: https://money.cnn.com/quote/shareholders/shareholders.html?s...
Agree. But generally speaking, financial services firms don't like to say "we ran out of money."
Is there another fiction at play here?
US stocks have T+2 settlement, when you buy or sell the money and stock are really only exchanged two days later by the clearinghouse. Until that happens, if they let you trade the proceeds immediately, you're kind of trading with a very short term loan that has your "sold" stock as collateral, it's technically not totally risk-free.
You can buy with unsettled cash even in a cash account but there are a few rules to follow to avoid violations. In a margin account you may be trading with margin without realizing if you trade frequently and don't pay attention to settlement.
Even if you're not trading margin the whole system is kind of running on short-term credit and there are capital requirements. The clearinghouse has to make sure the brokerage can fulfill all its obligations for all the unsettled stuff for the next N days even if it goes under tomorrow.
(EDIT: The whole financial system tends to run like this.. you can spend the money from a deposited check long before it has cleared, etc.)
I'm not necessarily trying to be a conspiracy theorist, but they have horrible PR.
Once most of the brokerages started restricting, I assumed the SEC made the call. If it had just been RH, then some backroom deal might have been more plausible, though still unlikely given the regulations.
How on earth is this legal?
You don't have a right to be lent money by anyone.
Makes me wonder how much of the rest of what social media “directs” and “nudges”. What other high profile events where all of social media happen to agree and line up on are not what they seem? Gell-Mann Amnesia is real.
"Robinhood sold me a stock that was part of a huge bubble, and then they wouldn't let me sell it"
They always had a huge lever but it was not to be used so soon to help their friends. I now hope it becomes deserted. At least I closed my own account after this.
I assume Robinhood also blocked shorting GME. As such, it wasn't blocking buying per se. It was blocking the opening of new positions, long or short.
That's very different from blocking someone from exiting a position that you sold them.
I couldn't sell and the stock went down = real loss
Generally you are only liable for actual losses in court. So stopping the purchase of GME comes with little liability while stopping the sale could open them up to lots of liability.
They can't freeze all trades since they are not the NYSE, so trading will still happen, just not for any of their customers.
It just seems like maybe in this specific once-in-a-lifetime situation, maybe this doesn't apply? The decision to freeze all trades seems more "neutral" than freezing just buying which perceptively seems to favor short sellers?
That's the point: they are not, so they shouldn't act like it.
That isn't the case, they inhibited opening new positions but not closing them.
So if you were short you could but to close.
You can make money as a retail investor. Just avoid meme stocks and stick with more stable titles.
How can this be legal? If someone is holding a large amount of GME stock which they bought at (e.g.) $300 and Robinhood closes out the position below that amount, they're forcing losses on an investor who was specifically holding with the belief that the share prices would go up.
That's just a normal thing we expect for margin accounts though. Is this extra notice being given as a reminder of the terms for margin accounts or are they taking extraordinary action? Hard to say.
I guess the same way that a bank under a run refusing withdrawals is legal.
Do you know which ones? Are the positions of the sort you've mentioned susceptible to this? Because it likely refers to those trading on margin, who aren't entitled to expose their broker to risk that they can't reasonably expect to recover from the customer.
The probable issues is that clearing houses have capital requirements and the higher volume of trades of high volatility stock requires RH to put more money in to ensure it has money to settle the trades. This is what Rh hit and they need to breather for trades to settle is my educated guess. Money doesn’t move instantly behind the scenes which is why you have weird things like overnight lending where the loan is just long enough for the credits to come in.
People may not realize they have a margin account with Robinhood, which is another matter.
[edit] Don't pay attention to me below. I'm wrong. See responses.
Then the absurd requirements to be an accredited investor that require nearly everyone to use a broker should be lowered. It's only a very small segment of the US population that has a net worth of over 1 million dollars or an income of more than $200k/year. Most accredited investors are not human people at all but instead corporate people. If brokerages are going to act this way then people need to have the rights to bypass them.
I know that's not 100% relevant but it was therapeutic to write it.
“The broker stands between these customers and the clearing house,” said Peterffy. “So when some option holders make money, the clearing house has to give us the money to give it to our customers, while other option holders, sellers or buyers on their own side lose money we have to collect money from them and give it to the clearing house. If our customers are unable to pay for their loses we have to put up our own money.”
Explanation from the CEO of Interactive Brokers, which also limited GME trading.
I suppose they had a huge influx of new accounts and RH gives you an advance up to like $1000 before the money is actually moved from your bank account and into your brokerage account but I'm still skeptical that this reasonably leads to "not supporting" stocks.
This answers my question, I think: https://news.ycombinator.com/item?id=25951475
https://www.pcmag.com/news/robinhood-faces-class-action-laws...
Be aware of the risks upfront when doing business with a company when you're not the real customer.
There are claims of wrongdoing alleged in the lawsuit, notably that Robinhood has two classes of customers, its users who buy and sell securities using its app, and financial institutions who pay Robinhood for information about those users. The allegation in the lawsuit is that recent trading on GME by Robinhood app users resulted in a conflict on interest towards Robinhood's institutional clients, and that Robinhood halted trading in GME and other stocks to benefit its institutional customers at the expense of its app users. Given that Robinhood has a fiduciary duty to its app users and no such duty to its institutional clients, that conflict of interest was a breach of its duty and Robinhood must be liable for any losses arising as a consequence of that breach.
That is a claim of wrongdoing. In almost any non-trivial lawsuit, evidence can only be gathered after claims of wrongdoing have been made, at which point both parties are compelled to disclose vast amounts of information that could be pertinent to determine what damage has been caused.
There is a relationship between Citadel and RH and a relationship between Melvin and Citadel.
I want an investigation.
I'm not sure if they did anything wrong or by the book, but the current sentiment of them among the millenial/zoomer demographic that was going to buy there stock isn't exactly favorable.
Ironically, their stock (when it IPOs) might end up being a great candidate to short into the ground. (Disclaimer : This is not financial advice, just musing about the current Keynisian state of the stock market)
They froze only the 'buy' option on their app. Selling would still go through and they'd still have to process those trades. There would still be movement, it would just be solely in the direction of selling.
wallstreetbets used to be full of people like this, it's way less so now, but it would be silly to think that there aren't some hedge funds in on the buy side of this event, if not to ride the volatility. Active trading desks live and die by volatility -- if the market is not volatile, it is much harder to make money.
The discussion on this item has spread over multiple pages, so make sure you check them all! Look for the "More" link at the bottom of the page (on all but the last page), or use a link like this:
link is good for 3 paywall bypasses, comment if you really want to read it and you get paywalled
>Citadel Securities said it had “not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business”.
>Citadel, a hedge fund also owned by Mr Griffin, said it was “not involved in, or responsible for, any retail brokers’ decision to stop trading in any way”. Earlier this week, Citadel provided rescue financing to Melvin Capital, a hedge fund targeted by retail traders on Reddit.
I, for one, believe that Citadel Securities the market maker stands to gain more than Citadel the hedge fund ever stood to lose. And I would note that Citadel (the hedge fund) invested in Melvin; presumably to close out their shorts, not double down. Melvin claims to be out of GME, per FT reporting. FT is generally quite reputable, and it is not clear to me whether Melvin lying on this matter would be a crime?
How come this is the first time these actions had to happen?
How convenient that these actions just happen to help out their partners recover $Billions of dollars and cost millions of users $Billions in gains?
How convenient that these actions always help out the billionaire vulture short sellers, always?
Robinhood didn't just stop trading, which would make sense for these kind of trading issues. They stopped normal users from buying these stocke, while letting them liquidate and sell these stocks. Thereby pushing down price and helping out their billionaire vulture short sellers.