The real reason is as follows:
You cannot use customer funds to cover dtcc collateral terms.
Your milk example does not work, because you are not settling up the milk buy 2 days after. You settle your milk purchase on the spot.
You cannot use customer funds to cover dtcc collateral terms.
Your milk example does not work, because you are not settling up the milk buy 2 days after. You settle your milk purchase on the spot.
I’m still not understanding how robinhood lost money in the first place.
When you sell a stock on Robinhood, it takes ~2 days to "clear" the transaction. So, Robinhood credits your account, but Robinhood doesn't see that money for 2 days. They don't allow you to withdraw the money from Robinhood until its cleared, but you can purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don't self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of "float" to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is.
Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they're in the app, they're probably using the Instant Deposits feature to trade on up-to $1000 they've started transferring but which hasn't cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float.
If that float hits zero, that's basically like, imagine your company's bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn't go up. In fact, people couldn't even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can't. They're angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm's reputation.
IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn't actually "lost" money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid.
But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.
(1) Credit risk - this is what you describe
(2) Counterparty risk - this is collateral. This is different.
The 2 are interlinked insofar that the counterparty (2) may react to the perceived credit risk (1) , however these are 2 separate risks at play.
** To go back to the milkman, the correct analogy would be:
Your son wants milk. You go to the farmer's market - but you can't hand over cash to farmer. Remember, his milk is spoiling, there's a huge line to buy, and he just doesn't have time to count bills, square exact change, or screen for potential fake bills. He only accepts bank transfers, and you dont have a bank acct. So you buy milk on credit, and agree to settle when he's not too busy (as you have always done).
Now, the farmer has been noticing you are buying a lot of milk for your son, and the empty milk bottles you left with him on deposit ("float") are not sufficient to carry all the milk you are buying....so he's now asking for many more bottles, which are expensive. He refuses cash collateral - he will only take more bottles, because he's concerned about all the cash you seem to be handling recently.
You don't have extra cash of your own, for bottles. You can't commingle funds. So therefore, you stop taking milk requests from son...and the other 10M children
Sorry, I’m going to be That Guy here and point out that when people accuse Bitcoin of having slow transactions, this is what they should be comparing against, not Visa card transactions. Actual settled transactions. Bitcoin takes 10 minutes. US financial system takes days.
I know Robinhood, and other firms, are trying to downplay what happened yesterday (and is continuing to happen right now!). Its possible their version of the story is accurate. It feels more likely that its not the whole truth.
We were treading really close to a 2007-level market event yesterday, though not due to bad ratings, rather liquidity. It wasn't just robinhood that was impacted; robinhood and IB both said that they made the decision internally, but WeBull said they were instructed by their clearing house to cease trading, and even large firms like TDA started enforcing limits. It was very close to going systemic, and not because of bad fundamentals, not because of an economic downturn, all because an unprecedented number of Americans wanted to join in on the stock market they're entitled to join in on, but our financial institutions were not ready for it.
When you lay out the reality of our system; that money moves so slow that every single institution who wants to handle money, for nearly any purpose, needs a bank account billions upon billions of dollars large just to be able to move as fast as people expect the system to move, and if that bank account gets too low the problem near-instantly spreads to the next bank in line; the system is very fundamentally broken, and people need to demand change, because our financial system runs EVERYTHING.
Moreover; if WSB's theory on this is correct, and if these WSB stocks like GME/NOK/BB/etc don't reduce in value; we missed a meteor yesterday, but a second one is still coming. This isn't just about bankrupting a hedge fund. When the margin calls on these short positions start coming in over time, the price of these stocks continues to rise, and eventually, the current "diamond hands" (as WSB call them) will sell their shares. We're talking about billions of dollars here; that's a massive liquidity spike that our institutions are still not ready to handle. Granted, as always, its the IDIOTIC institutions who got us into this by taking out the INDEFENSIBLE short positions in the first place, but they're systemic; they know they can do whatever the hell they want and get away with it, because if they go down they take every American with them.
Of course credit systems have their own problems, like debt growing so large that it's impossible to pay back. But usually a nice reset does wonders.
Since credit systems and money is created by governments, they have the power to do such resets and have done so in the past many times in the last 5000+ years.
If the credit systems collapse into a cryptocurrency hard money world, there will be a new emergence of desperate people, slavery, and war.
Credit systems are not created by the government. Sure, the government is the biggest player, but at the philosophical level, credit systems are created by anyone who has an asset but doesn't need it right now.
The bigger thing that crypto does actively do away with is actively managed monetary policy. The populace hates on the people in power (banks, funds, government) for their quest for wealth and power, but for all the wrong that happens, monetary policy has been the single biggest driver in providing creature comforts and a modern lifestyle for the average citizen of the planet.
There absolutely is a substrate of "holy shit nothing is actually anything" at the very core of our economy. We print money to pay off loans given to us by other countries bought with their printed money. Nothing actually is anything. But, computers aren't cool with that; there is very real, hard math in the deepest parts of cryptocurrencies. You can take one of two sides in this argument, and I'm not sure either is absolutely correct (partly because, I'm not even sure there is a definition for was "correct" means in this context): Either you believe that substrate should be hard math, and modern economics is a farce, or that you believe monetary policy is the only way to ascend an economy beyond trade and barter, that we need men in suits at the top pulling levers and twisting dials to keep this machine running another day.
Maybe its alright that nothing is actually anything, and it can stay that way forever, chasing infinite growth as we expand into the cosmos. Or, then, maybe someone hacks our computer and changes the value of the Blemfark from One of its itself to Zero of itself.
Here's what I do know; whether or not it would be better, people seem to increasingly desire less top-level control and less delegation of so much power to wall street firms. Crypto is going to continue to get more and more popular, even if its against the best interests of the people, because our government and wall street underestimated how much influence the 300 million people that aren't them actually have. That's the cost of democracy and a free society; it sometimes takes the wrong path.
I'm sure there are crypto systems that create this kind of credit, but "lending out your bitcoin to someone" is very different than how Banks create credit.
I created a Robinhood account on Wednesday evening and transferred $1000 via Plaid. My account is still not active and AFAIK that $1000 is in limbo.
The app tells me "We're reviewing your application and your deposit is pending. Application approval may be delayed. We'll notify you when you can begin trading."
Robinhood is accessible, so it has serviced the bulk of the retail investor spike that happened this week. Additionally, I expect that their net liquidity is far, far lower than a traditional bank, just given their age and diversification of business. They needed money, so they went to JP Morgan. Plenty of people also trade with JP Morgan, but (and I can't believe I'm saying this) JP Morgan actually, to some degree, knows what the fuck its doing. Robinhood doesn't; Robinhood is basically a teenager who just got a new car, wanted to show off to some friends, crashed it, and is now crying on the phone to daddy.
Which, to be fair, is exactly the same thing every bank had to do in 2007, except daddy was the US Government.
Also, it should probably exist somewhere a bit more first-class than buried in an HN thread, because it's just unbelievably educational.
This is exactly what Robinhood is doing too.
This twitter user explains, although it gets quite technical:
https://mobile.twitter.com/wallstcynic/status/13550134381546...
Look at the tweet at 7:41PM EST.
" But if RH takes in 500m of new money and 300m buys GME, then at minimum they are looking at posting 30m+ from just that exposure at NSCC. They cannot use client money - RH has to use their own resources to post. And if GME stock drops, RH has to post the loss pre-settlement."