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.
Most of these people aren't holding any stocks. They're buying derivatives, so they technically have no stocks to dump. They will likely bet like crazy on the downward part too.
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.
1. https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
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...
Melvin is that it was also shorting GameStop, meaning it was borrowing shares of GameStop, selling them on the market and using those proceeds to make other investments. Problem is, Melvin eventually has to return those GameStop shares. So now Melvin has to buy GameStop at their new, inflated price, only to give those shares back to the original owner
https://www.esquire.com/news-politics/a35339535/game-stop-st...
TLDR is getting onerous
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.
Robinhood is not the entire market. I don't know what the exact number is, but I doubt they're even a material number of the entire stock market.
If Robinhood is the entire buying market, to the point that Robinhood pausing buying is detrimental, then how does that not make it clear that this entire situation is setting up Robinhood users to lose everything they buy?
Here is a fascinating interview with the CEO of IBKR where he literally says they prevented buying for retail and closed large short positions for others: https://streamable.com/ycdec9
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.
The type of retail investor that is using RH doesn't understand the bankruptcy process and certainly wouldn't be happy to be stuck in SIPC limbo while the value of their stock plummets. When it comes to what is best for RH users, this seems like it was one of the least bad options among a collection of horrible options that are due to the way RH is managed.
People who already owned shares were able to sell, but nothing else.
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.