Hacker News Reader

Comment by gryz | Hacker News Reader

Do users actually lose the stocks, if something that happens to the Robinhood itself? I live under assumption that it is not happening. In any case stocks should stay belonging to the folks who purchased them.

View on HN

If the stocks are still there, then you are entitled to get them.

Unfortunately, there is no way to check if the stocks are really there. RH showed you some pixels on the screen saying they hold stocks for you. If RH maliciously or by mistake lost them or never bought them, then there is no third party that will make you whole.

Failure to deliver on borrowed/shorted stocks would be a conpletely plausible scenario during a short squeeze.

Robinhood is a SIPC member. It rarely comes into play, but my understanding is that SIPC is there to ensure securities get back to their rightful owner in the event that something weird happens to the brokerage.

The issue is when?

If that takes several weeks or months in a highly volatile market its basically life or doing a flip.

They are only covered up to $5 billion for the entire brokerage industry, it may be like 2008 and they all get turned into FDIC insured banks over night if tons of margin accounts fail.

And a max of $100k per account.

Yeah we'd be looking at losses much bigger than that if the short-sellers go under due to a squeeze.

Yes, but it can be a messy process:

https://www.investopedia.com/articles/investing/050515/what-...

That is normally what happens if the broker goes bankrupt the stocks should still be yours.

I doubt users will lose the stocks. This will be really weird. Worst case, you will be given some time to transfer your stocks to another brokerage and perhaps RH will make that process a lot faster than the nominal 2-3 days it takes now.

Well something weird happened already so I dobut it's that hard for them to loose your shares

In practice, share lending is backed by (over)colateralization ( e.g cash or highly liquid short term debt). The worst case for you would be to receive cash instead of the he stock itself.though this doesn't give relief to the broker not to fulfill its obligations.

I hear your stocks can get lent out for shorting by others, which means you might not actually have them even while Robinhood is alive when you think you do...

Only if you have a margin account and made purchases on margin.

Instant deposit & instant settlement both open a margin account though. And purchasing with unsettled funds requires margin. Which I would bet a huge number of people have enabled on their accounts, if not actively use.

Stocks don't belong to you, unless you have the actual physical stock. Everybody borrow them from 3rd party who borrow them from 3rd party who borrow them from 3rd party, who actually lended them multiple time to short the stock, who borrow them from a 3rd party, who actually have the physical piece of paper in a vault somewhere.

I am not even joking.

And it's the same for transactions or your bank balance. The bank doesn't keep your money and give it back to you. At least, for banks, they are backed by the government and IMF. For stocks and gift card balance, I am not so sure.

If I understand correctly, it's actually even stranger: "Nobody owns stock. What you own is an entitlement to stock held for you by your broker. But your broker doesn't own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co., which is a nominee of the Depository Trust Company, which is a company that is in the business of owning everyone's stock for them." - https://www.bloomberg.com/opinion/articles/2015-07-14/banks-...

Which system evolved partly to make it more straightforward for custody to be resolved when a broker goes out of business

Reply on news.ycombinator.com