When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen.
Likewise, when you buy or sell a stock, the trade doesn’t settle for t+2 days. Robinhood again transparently loans you the money while waiting for the stock trade to settle.
If Robinhood exceeds the SEC-mandated limits for margin they can extend, or their creditors decide it’s too risky to continue loaning them the money, the whole show grinds to a halt. They chose to press the pause button on the primary meme stocks driving them toward this cliff. I imagine the only alternative was to hit the pause button on the entire platform until the credit issue was resolved, but it’s much harder to get additional credit when your service has ground to a halt.
Then they can reduce the purchasing power for certain stocks to just the money already transferred.
This thread explains the math in detail: https://twitter.com/kralctrebor/status/1354952686165225478?s...
I know the popular narrative is that this was some sort of conspiracy, but the truth is likely far more banal. Unprecedented volatility and volume are exceeding the limits of these systems. No one budgeted for a single stock dominating news headlines and swinging wildly while millions of retail investors tried to enter at the exact same time.
Whatever changes they make, those changes need to enable them to not intervene in that manner ever again.
The solution would be to disallow this feature, not to stop trading of certain tickets on all accounts, most of which are seasoned and funded
Full explanation with math here: https://twitter.com/kralctrebor/status/1354952686165225478?s...
Also, it’s not realistic to expect them to completely retool their entire app and infrastructure in a matter of hours to disallow margin-based trades of only certain securities. If this was a long-term concern I’m sure they’d do exactly what you suggested. However, this even ramped up in only a couple of days. Let’s be realistic about what they can re-engineer, test, and deploy to end users in that timeframe.
If I'm reading the Twitter thread right, what killed Robinhood was the component of ">30% of your flow is in one stock", which is something that I could absolutely see never having happened to Robinhood until now.
They do have the ability to change the margin requirements for a particular stock, as well as disable “instant deposits”. They don’t let you withdrawal money until it’s cleared so adding the ability to hold the funds in the account until they clear wouldn’t be hard if it’s not already there.
Margin investing is offered to eligible customers through Robinhood Gold, a suite of premium investing products including Nasdaq Level 2 market data and Morningstar Research Reports, for only $5 a month. The first $1,000 of margin is included in the $5 monthly fee. After that, customers pay a flat 2.5% yearly interest rate on any amount used above $1,000. Our pricing is straightforward and the same for every eligible customer, regardless of their account size.
https://blog.robinhood.com/news/2020/12/21/robinhood-lowers-...
"(4) equity of at least $2,000 except that cash need not be deposited in excess of the cost of any security purchased (this equity and cost of purchase provision shall not apply to "when distributed" securities in a cash account). The minimum equity requirement for a "pattern day trader" is $25,000 pursuant to paragraph (f)(8)(B)(iv)a. of this Rule.
Withdrawals of cash or securities may be made from any account which has a debit balance, "short" position or commitments, provided it is in compliance with Regulation T and Rules 400 through 406 of SEC Customer Margin Requirements for Security Futures and Rules 41.42 through 41.49 under the CEA, and after such withdrawal the equity in the account is at least the greater of $2,000 ($25,000 in the case of a "pattern day trader") or an amount sufficient to meet the maintenance margin requirements of this Rule."
https://www.finra.org/rules-guidance/rulebooks/finra-rules/4...
If a large percentage of their customers were new, young, fairly low income (and thus more likely to have their transactions bounce), and they all wanted to buy long positions in a stock that very likely could drop 90% in the next two days, the risk is far higher.
In the old days one would have to formally request margin. Then the broker would give you stern warnings, have you sign a form, mail you a nice booklet explaining margin, options and shorting. I assumed it was a legal requirement, but maybe not?
Well, kind of. If you use the proceeds to do another stock trade, that second trade also settles T+2, so it doesn't require RH to put any of its own capital up.
(Options settle T+1.)
"To let you trade instantly, we lend you money. Because lending is risky, we won't let you use it on high-volatility stocks like GME. We screwed up by applying the same restrictions to confirmed deposits, which no longer involve loan risks. Our team is working on a fix."
[1] https://www.joelonsoftware.com/2002/11/11/the-law-of-leaky-a...
They didn't announce anything to anyone until it went into effect, despite programming their systems in advance for the changes.
Every explanation they've provided has a million holes in it.
This wasn't "just" privacy violations or psychological manipulation with ads, this was Robinhood deciding what to do with YOUR money to cover their ass. Whether they lent it to you or not doesn't matter, because if the bad trade were going the other way, then you, the sucker, would absolutely be on the hook.
Whether it's fraud or flawed or whatever else is beyond my experience or knowledge, but after today I think ending up on the wrong side of the deal with Robinhood again will rightfully be met with suggestions that you should have known better.
While this is all true (and realistically Robinhood has killed their brand and probably won't survive), those same users were also suckers for falling for this ridiculous GME pump.
What Robinhood did was absolutely in self-interest, but it was trying to cover up a mess that fundamentally wasn't of its own devising. They were either going to get sued by a bunch of people that got fleeced in a clear pump and dump scam or they were going to get sued by users they prevented from losing money, and they chose the latter.
I'm not sure what is making you think all of the RH users were suckers, many of them have made quite a bit off of this. I don't personally use RH currently (although I have in the past). Ideally the bag holder in this situation would be those covering their short positions. But there is no doubt some will get burned. It's far from over though and there has been plenty of opportunity to cash out. In fact it's way up in aftermarket again this evening.
So what was done was regulations were put in that forced brokers to limit risk. So RH followed those regulations and now people are pissed.
A friend was telling me a few hours ago that she's exiting once GME hits $5000 - yes, five thousand dollars, I specifically checked that was what she meant. She (and a few other friends who didn't name dollar amounts) have been misled about what a short squeeze is, and believe there's some specific future event called "the short squeeze" where they're guaranteed to make money if they're holding GME when it happens.
It seems that the reddit community has been expecting this for quite a while, though maybe they didn't expect it to get noticed outside of wallstreetbets.
15 days ago, with discussion on upcoming gamma squeezes and eventual short squeeze. Price was $20. https://www.reddit.com/r/wallstreetbets/comments/kwb827/gme_...
1 month ago: "shorts are still ~100% short and running out of time" https://www.reddit.com/r/wallstreetbets/comments/kh9na8/gme_...
4 months ago: "bankrupting institutional investors for dummies, ft Gamestop" https://ns.reddit.com/r/wallstreetbets/comments/ivs6dw/bankr...
(added) another from 4 months ago, focusing even more on a short squeeze: https://www.reddit.com/r/wallstreetbets/comments/ip6jnv/the_...
(I just found these via the search function.)
The stock is still up like 250%. By definition, far more of them are still in their positions than out. You only "make" money when you sell.
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And Robin Hood is free because they sell your trade data to the hedge funds — ironic name, “Robin Hood”.
Guess who pays their bills. If their actual customers went bankrupt, how would they make any money? Think about it!
For more info see
In a different life, I worked for a well known discount brokerage in 2005 processing corporate actions. Mergers, splits, divided payments, proxy voting, exercising bond contract provisions, warrants, short covering etc.for retail customers. Not glamorous work to be sure.
I can tell you unequivocally that to deliver the simplicity, affordability, and transaction efficiency we now take for granted, many MANY layers of broker/dealer process and manpower are built on top of pretty archaic systems and processes and regs. I’m sure that’s something most HN readers would roll their eyes at because of how low tech and antiquated it was. But that’s how the market actually functionally works for retail investors. And those regs are often granular and exist because of historical failure.
Just being able to buy stock, and not worry about getting the literal paper stock in your own name is an innovation we take for granted by having securities held in street name. We in fact had some paper stock in a safe because some clients insisted having in their name.
When we processed shorts we literally would hold the short against a specific humans named account or go borrow shares by picking up the phone and calling another broker. Shorts don’t happen out of thin air. It’s someone else stock you’re selling.
In 2005 I would log into a black screen DTC terminal and pull money down at a firm level by manually typing the values in (lord knows what happens if this gets messed up).
If accounts went over minimum margin requirements we would pick up the phone and call them to explain why they needed to close positions or add collateral. One time we closed the entire account an mailed them a check for the balance because they kept ignoring.
When corporate action transactions settled (T+5) we would manually allocate them to accounts, and then print out the accounts affected for manual QA. The print out went into a filing cabinet for compliance reasons.
All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing. In reality it’s more like an anthill built on top of a Rube Goldberg machine. You may not want to believe that RH and other brokerages have to abide by insanely complex and Byzantine rules and regs and systems and interactions because they make a drop dead simple experience in their app...but they almost certainly do.
Exactly, just because it's abstracted away doesn't mean it isn't there. What else can this startup be other than a client application to a service that isn't theirs?
Citi accidentally paid back a $900 million loan they weren't supposed to. The recipients mocked them and refused to give it back.
I would never apologize for RH, I thank them for pushing mainstream retail commissions to $0, but I don't do business with them (and never have) because they don't seem to have focused on the important parts of being a brokerage.
https://robinhood.com/us/en/support/articles/margin-overview...
https://robinhood.com/us/en/support/articles/robinhood-accou...
That's because they don't. The entire application and order flow seem designed to limit the amount of information given to the actual user, in order to make them more confident in the decision. More confident users trade more stock.
I guess you could argue that "a brokerage makes more money the more stocks are traded, so they are doing the best of the brokerages", but would personally argue that a brokerage should have a responsibility to at least partially work in the best interest of their clients.
Out of curiousity I went through their option buying flow the other day (100% expecting to lose that money); it felt more like buying a lottery ticket than a financial investment.
I feel gross agreeing with Robinhood here, but it doesn't really sound like they were in a position to not take the action they did (this time).
Robinhood may be able to control what happens on their own platform (typically heavily based on regulation), but that doesn't mean they can stop buy/sell activity on the whole market.
We can discuss the trading halts separately.
This isn't a positive. Had they charged fees, they wouldn't today be doing the bidding of of their real clients.
Robinhood forced the major brokers to do $0 stock trades, just need a few others to do $0 option trades too. The fees aren't crazy, but they add up if you do lots of spreads.
> Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue.
https://www.bloomberg.com/opinion/articles/2019-10-02/the-tr...
I'm much happier paying $0 than $20 for the privilege of turning my compensation into cash. The spreads decreased a bit over that time too, which is also nice.
I'm not saying it has no place in the market, but a more informed user might calculate the risk and decide to use a fee-based brokerage instead (like ProtonMail vs Gmail).
That’s false. They’re legally required to get the national best bid or ask just like any other broker. Routing trade flow doesn’t change that, it just gives the recipient the ability to match or beat those prices. If there was a better price elsewhere they’re mandated by law to attain that price. If they’re not doing that the SEC would be en route.
"How Robinhood makes money on customer trades despite making it free" https://www-cnbc-com.cdn.ampproject.org/v/s/www.cnbc.com/amp...
At Gmail's launch, Hotmail was offering only 2MB of free space, while Gmail was offering 1GB. At the time, that was a game changer, and how they captured a good chunk of the market.
The 1GB storage was so ridiculously large, that many assumed it was an April Fool's joke (also because GMail was launched on April 1st).
Most of the people talking about various conspiracy theories about brokerages have clearly very little idea of how brokerages work on the back end (and not very many people do know this) or what regulatory duties brokerages have and hwo that might inform decisions they make.
If you are a bit of a masochist, you can read all about it in After the Trade is Made https://www.amazon.com/After-Trade-Made-Processing-Transacti...
Here is a place to start:
Straight from the horse’s mouth
It sounds like FINCEN requirements require a 2-day settlement period. This period allows fractional trading to work (they pool orders and execute on day 2). Those same restrictions also appear to restrict a broker/dealer from using customer funds to cover this float. From there it's pretty easy to interpret the end results - risk rises, fees rise, and suddenly RH has to pony up massive amounts of liquidity to cover the DTC float.
Fuckery is certainly possible. This explanation still begs the question; at what point can a business decide not to cover the 'cost of doing business' and instead, create explicit downward pricing pressure.
They're covering for the market makers and shorts who are on the hook for all the options bought and shares shorted.
Institutions could enough to ameliorate their pain while the only option given to everyone else was sell.
They should have instead stopped trading so everyone could borrow whatever they needed to pay for the bets they lost.
Someone's gonna complain and ask "why didn't they just disallow buying but allow selling".
They picked the least painful option for themselves. Three options existed:
- Halt all trading - Halt buying - Halt selling
Everyone is pissed no matter what. The first is perhaps the most fair. The last helps the big institutions in this circumstance, the second retail traders.
- If you waited 3 business days for your deposit to clear
- If you waited for stock settlement before buying other stock.
Basically no margin, no 'instant' deposits, and needing 25k+. You wouldn't even bother using robinhood.
With new accounts starting with Instant capability, they are all on margin until the transfer clears.
But only on specific stocks they selected? They still had liquidity for other stocks?
If I were a clearer, and Robinhood were my client, and they had some collateral in deposit with me and a ridiculously large long position in GME in excess of the posted collateral, and GME were suddenly extremely volatile, then I would consider requiring more collateral and/or telling Robinhood that they may not purchase more GME. Because my #1 job as a clearer is to make sure that, at the end of the day, all the money I am owed is actually there.
If GME crashes, then the total portfolio of Robinhood and its clients will lose a lot of value. In theory, Robinhood and its clearer has no skin the the GME game, but, in practice, there are quite a few examples of financial companies taking massive hits when their clients go under.
So yes, the clearer could easily be willing to let Robinhood buy more stock that is seen as uncorrelated to GME but be extremely uncomfortable with the size of Robinhood’s position. This is similar to how Robinhood won’t let its clients hold positions when they have insufficient margin to cover the anticipated possible loss.
The clearing house needs enough money from you to be able to go buy those shares in the open market 2 days from now if you vanish overnight tomorrow. If the stock is going up or down 2% a day, it's a lot easier to predict how much they would need than if it's going up or down 200% a day.
I'm not sure of the biz aspect of this, but given the criticism RH historically got for pay-for-flow schemes (even while they were using Apex) I would assume it was RH which got the market-flow kickbacks - not Apex. So it's safe to assume that's how it still works today. Yet, Apex also halted orders for these tickers. This goes to show you the very real risk these types of retail clearing companies are facing in this market. So, I'm not absolving RH just saying they might have some real reason to have paused.
All this also shows you "there is nowhere to hide". There will always be somewhere somecompany which will put its perceived viability or PR before "sacrificing" for their loyal customers. Especially, given the fact that most of these platforms just one company for clearing anyhow.
RH didn't have to send out a patronizing "we're doing this for your own good" email.
RH didn't have to continue failing at anything resembling forthright communication. (Including their tweets, blog posts, and outright false in-app messages that implied users sold their own shares and cancelled their own orders)
Worst of all, RH absolutely didn't have to sell people's shares out from under them at a dip in GME's price.
They were going to burn some amount of goodwill, but that could have been reduced from company-destroying magnitude to mere bad day had they simply not acted shady at every possible point. That last point is probably going to land them in severe legal hot water, their ToS won't mean much especially if/when the SEC comes knocking.
It's a great marketing tool and definitely had a hand in getting RH to where it is today. Personally, I like the instant settling.
Ideally RH would have just turned off trading to specific securities that required float. i.e. "Cash" accounts can still trade everything, but maybe they can't make that separation... simply on for all or not at all.
They've been defrauding people for quite some time already. I remember reading this on HN in September.
Trump’s executive order in November is forcing Americans to divest from a bunch of Chinese companies - liquidating orders only.