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)_/¯)
To be clear, the RH T&C very broadly protect them in case of any arbitrary service interruption, so on paper they're probably entitled to do whatever they want. But at the end of the day, it was them who got caught with their pants down because they went too far in their UX/risk tradeoff, and now users are paying the price and are understandably pissed.
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.)
From my limited experience back office software is a legacy clusterfuck and the Ops team has to pick up the phone and call counter-parties on T+1 to unfuck things more often than you'd think, but those are things that could be fixed with better systems if the investment was made.
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.