Robinhood denies claims that it sold GameStop shares out from under its traders

Normally you want option writers to be able to provide liquidity by going naked short when selling calls. Obviously that fails when involving small companies with high short interest and hordes of "4chan found a Bloomberg Terminal" investors.

I looked a little at GME during the week and I saw that the option market makers had significantly reduced their participation. I bet that they're also big losers. But that's what they do for a living, it's their own fault if they blew up selling calls naked. They knew the risks. Delta hedging doesn't work when a stock can move 100% in a single day.

Settlement is complicated business.

Complicated enough that it took the invention of Bitcoin to take it out of the bankers hands and move it to the digital realm.

And even then, it was not instantaneous (10mn) until layer two solutions appeared.

Thinking that "money can be transferred instantaneously because digital" is not a reasonable assumption.

If an account allows those, it is a margin account.

If they reflected it accurately they'd be showing a negative balance until the funds arrived and some users would think they lost all their funds.

The real mistake is that they're extending margin to uninformed and unsophisticated users. ... but pointing that out just brings accusations that it's gatekeeping or limiting access to people who aren't rich.

It's like this in most parts of the world. It's only the perversity of the American banking system where money transfers in this day and age routinely take 2-3 days and no one thinks there's anything bizarre about that.

Which IMO you should have before you do anything "complex" like invest real money.

That is margin trading though. It sounds like you thought only some trading on a loan counts as margin per definition but you knew you weren't trading with your actual money but a loan which is the important part.

The “dangerous” part of margin trading is taking a loan for more than you have equivalent cash collateral of.

Fortunately they make it easy to create new accounts and transfer from one to another. Now my banned account is empty and I'm more careful.

My husband once accidentally messed up his transfer to Vanguard and it didn't go thru and he already purchased mutual funds with that money he meant to transfer. It told him he had a trading violation and the lady on the phone said having just a single trading violation didn't matter.

Directly from the link:

"In 2017, the SEC amended the T+3 settlement cycle to a T+2 settlement cycle, effectively shortening the three-day rule to a two-day rule."

Consider a scenario where you have a cash account with say 100 dollars and you buy 1 share of stock X for 100 dollars. That's it, you can no longer trade for two days. Because trades take two days to complete, if you have a cash account you need to wait that full two days before you technically own the shares and can sell it. Until that two day elapses, your account has 0 dollars in it.

This is known as free riding:

https://en.wikipedia.org/wiki/Free_riding_(stock_market)

Now if you have 100 dollars in your account and you buy stock A for 30 dollars, then your account will have 70 dollars left that you can use to trade with, but this is an incredibly inefficient and impractical way of trading.

You can do options trading on a cash account. You can only do covered options, but honestly that's probably a good restriction for most.

I checked back through my email archives and found the announcement email “Introducing Robinhood Instant” from Feb. 23, 2016.

From the small print terms at the bottom of the email:

“Robinhood Instant is implemented as a limited margin account designed to allow customers to purchase with unsettled funds. Robinhood Instant is free, which means customers will not be charged interest. Further, Robinhood Instant accounts will not be able to purchase securities with more than the account cash amount (leverage) or engage in short selling.”

RH has fucked up a bunch here, but there are some folks who are going to make a killing on this (maybe already have). It's quite possible there are a few front-runners on WSB who are talking GME up like mad even as they quietly sell off shares for a big profit. The front runners have big profits on this deal.

This one is incredible because he put all of that money into Apple puts two days before they released their earnings report. He lost everything.

Robinhood just had to borrow a billion dollars. Having to get a billion dollar emergency bail out is not the sign of a sinister plot, it's the sign of a colossal fuck up.

> I refuse to believe that such a massive entity with so much resources at it's disposal has a think-tank consisting of two interns and a comatose member of middle-management.

There are a fair number of signs that Robinhood is a mess. This isn't the first time the company has run afoul of their own success and wound up screwing over investors.

> Entity X faces no real repercussions.

I didn't say they shouldn't be responsible for the consequences of their mistake. My point was that it's more likely this is a screw up than some sinister plan on their part.

We're on the same page as far as this last bit goes for sure. Regardless of whether it was a screw up or malice, they should be the ones paying the price (though sadly I suspect we both know they won't).

Don't get me wrong, there are definitely people in the 65+ club who understand tech. But frequently older people don't, even older people who were near tech. And in particular many of them don't get communities like Reddit.

I don't think a lot of people could have predicted that tens of thousands of retail investors would flash mob an out of favor stock to bust a hedge fund's short position. The chances that a 65 year old lawyer would see that coming? Seems pretty unlikely.

There is plenty of malfeasance as well, as things have gone off in ways they didn't anticipate, RH and the other exchanges are making sure their big money clients are protected as best as possible from the WSB craziness at the expense of retail investors.

But the last bit wasn't planned which is what I was getting at.

The things you mention are things that people should probably understand. The fact that customers en-masse did not understand these things is *definitely Robinhood's fault*.

> the account they funded with cold hard cash was termed a margin account

Until it was actually funded and settled though, it is on margin (after which it's still a margin account, it's just covered, and you can not use margin). This is again something that customers should be educated on. Robinhood could have made the user wait 2-3 days (while waiting for the funds to settle) before they could buy any stock. Robinhood prioritized user engagement. Robinhood could make users wait 2-3 days between selling a stock and buying a new one. Again, Robinhood chose to prioritize user engagement instead.

> due to the broker's lack of financial prudence

Robinhood was not even close to the only broker who was impacted by this, so can we stop pretending that they were?

> may need to manipulate the market to their individual disadvantage

Again, I disagree that Robinhood following the actual policy of the accounts the users were using, in order to be compliant with financial regulations, is "manipulating the market".

We know how easy and cheap it is to buy anonymous Twitter and Facebook accounts and use them to create a convenient illusion of crowd sentiment.

We also know that Bitcoin appears to have been pumped and dumped through a number of cycles.

https://www.financemagnates.com/cryptocurrency/interview/cry...

If - hypothetically, ignoring the nominal legalities - it were possible to do the same on Reddit without leaving too obvious a trail, what's to stop one or a small number of players from running a virtual operation that creates this kind of sentiment for trading?

And then betting for or against it - or perhaps both, in sequence - for some very easy money?

Financial firms never warn about liquidity issues to prevent a run on their bank.

You can't offer "inferior prices" to customers. It's called the Order Protection Rule of RegNMS. You must price improve the customer, by law. If a bid-offer is 23.01/23.02, Robinhood (but actually Citadel/Two Sigma) _must_ transact with a buy order at 23.0199 or less (the subpenny rule only applies to quotes, not actual trades). The reason Robinhood sells this order flow is because Citadel/Two Sigma would rather collect a spread of almost 1 cent (23.0199-23.01) from _you_ rather than a hedge fund, who may conceivably move the market against the market maker. They are "paying for order flow" (PFOF) - much less than 1 cent - to collect the 1 cent spread from you.

Robinhood is in trouble with the SEC for a failure to disclose this relationship to customers, _not_ for having the economic arrangement to begin with.

Sure, but I wonder why RH didn't just change their rules to being that you won't be able to trade instantly with any sold GME, and then used client funds as collateral? This seems much better than stopping buying altogether. I suppose maybe the code wasn't in place for something like this, idk.

Hasn't that changed a bit though? I'm trying to recall what the policy change alert I got a few years ago. Something about you can buy shares with proceeds of unsettled sales, but if you sell the new shares before the previous sale is settled, your account can get flipped into some state where you have reduced trading abilities for a period of time. 30 days?

It was implied that "the SEC made us do it". I think it was meant to put the kibosh on day trading. You can still day trade, but your returns are cut dramatically by requiring a larger cash position.

I would bet they don't have available funds. They framed it as, "We're stopping this to help you." But the reality was more like, "We're stopping this because we can't legally facilitate any more of these trades since we don't have the money to spare."

I respect that he cannot come out and say they have solvency issues, as his accounts would empty fast turning a potential solvency issue into a real one. But he didn't seem to even have a clear idea of, nor a numerical way to explain why they were having settlement issues.

My guess is that they will be spending more money in their clearing department this year.

I suspect he was thinking of bank runs. If people think they aren't solvent, then it becomes true. If he says they have a liquidity problem (which I agree the loan they took out is a confession of that fact), then they could have a solvency problem if everyone without a margin account cashes out.

The amount of money they are required to keep on hand varies according to the risk of the investment (among other things). The increased volatility translates into higher risk and therefore requires the broker to keep more money on hand.

I haven't seen the exact amount in this case other than hearing total amount of $14 billion and that it would be a percentage of that.

Volatility makes that requirement go up because of the time risk. If you agree to buy something for $300, fail to settle, and it drops to $20 in the meantime that counterparty is out more money.

They cannot control the volatility of the products they sell and the subsequent increase in the cost of doing business. They can't control their whole supply chain and do not sell GME and other products out of inventory so have to buy it from someone else.

Not saying he's wrong, just that framed in the context of deep-pocketed, connected market players losing money then he'd better be pretty damned specific.

Like you, I won't bother to dignify the comments on the video. There is a mob with pitchforks out there. The ending will not be pretty and the repercussions will be felt for a long time.

The idea that what is happening is illegal market manipulation is kind of ridiculous to me since it's not really any different than anyone (including shorts) going on CNBC and talking about why you should buy X stock

So I actually spent a bunch of time thinking about this the other day, and came to the conclusion that yes, either of them could easily do the same thing to a small-cap stock all by themselves. There are a couple differences though. First, as soon as they control 5%, they would have to report. This would likely start making it more difficult for them to acquire additional shares), and they would have reporting requirements. This doesn't apply to a group of small individuals.

Second, even if they could, what is the point? They bid up the stock, completely corner the market, and then what? *They would have no exit plan.* If they just start selling, the price will start dropping again. At the end, they'd end up in a similar position to where they started (minus transaction fees). If they planned to keep the entire company, and were buying it to control it, it would be cheaper to just acquire the company the traditional way ("hostile takeover" type acquisions not-withstanding)

For what it's worth, I think this logic applies to hedge funds as well; they need to have an exit strategy, or there is no benefit. They can't make money for some of their investors, and lose money for others.

This is different than the current WSB group. Their exit strategy is "try to undercut the rest of the group". Some of the group will benefit, while most will lose. This leaves an actual benefit for the leader.

> The number of people who want to burn it all down is only increasing and it makes it hard to be optimistic about the future.

It may seem rather tin-foil hat of me to say, but seeing reports of large amounts of foreign money piling in to the GME situation definitely made me consider how this would be yet another time that a relatively small amount of money could do a lot to destabilize the country.

Peterffy is a brilliant guy. You've got to respect anyone who is a self-made billionaire.

But I thought he did a bad job expressing himself in this interview. IMO he should have clearly separated stocks and options at the very beginning, and he should have stressed the difference between them.

The counterparty risk is higher in options. A lot of the Robinhood crowd is/was playing by owning call options.

If professional option market makers step away (which, in my limited study of the market they did), then the only way to make money on an in-the-money option is to exercise. But the risk is huge on a stock that is so volatile. And most of the Robinhood crowd that owned those call options most likely didn't have the cash needed to exercise.

Peterffy is right that being a counterparty to Robinhood was risky. As proven by Robinhood needing to raise $1 billion in capital on an emergency basis.

Of course everything gets even more complicated as soon as the DTCC starts increasing margin requirements. They probably demanded 100% (instead of more typical 2%) on GME stock. Oh shit! Now the stock itself is very hard to trade. So much capital required.

Peterffy should have explained stuff like that. But that's probably hard to do when the CNBC anchors are asking loaded basic questions.

How is it possible that a $20bn company threatens the stability of clearing houses. Tesla moves by $20bn regularly. How does one affect the clearing house as a whole differently from the other?

And Robinhoods actions affect on GMEs price was likely small. The investing world is far larger than Robinhood, and Citadels own statistics show retail investors have been net sellers of GME since Monday.

And again, every time that GMEs price crashed, Robinhood’s collateral requirements increased. Why would they try to kill themselves?

Saying they manipulated GME trading is like saying one pirhana quitting the school is manipulating the feeding frenzy.

Do note that RH is not the only one that paused buy trades.

What I find more suspicious on RH's part is the timing of this all. RH should have known well before this week that GME was going to be a highly volatile stock. They should have already reached out to investors and banks for credit. They should have already had over a billion lined up to take on the volatility. I can understand other brokers like TD not being prepared because they might not be used to this Reddit-driven WSB volatility. RH, on the other hand, should have been ready. They've been aware of WSB and their antics since its inception. Yet they waited until Thursday to pause trades. That's where I start to go into conspiracy mode.

Would you prefer Robinhood to implode so you have to wait years to get a small fraction of your account paid?

They were told by their clearing house they aren't allowed to continue allowing $GME trades due to capital requirements, and they have to let customers unwind their positions at any time.

I don't think that "biting off the nose to spite the face" is the approach I would prefer when it comes to my money. And, I think, a lot of people would agree with me this.

Also, the whole "protect themselves" line sounds like pure outrage without thinking about the actual consequences. If your brokerage doesn't "protect itself" and implodes, what do you think is gonna happen to the value of your assets sitting in that brokerage (as well as the assets of everyone else in that brokerage)?

My overall point is that looking at the float is almost meaningless.

Days to cover is arguably a more important figure (how easy is it to buy / sell GME? Since GME has such high volume in the past few days, its not really hard at all to find shares right now).

You're right that the borrow-rate is also important to look at, but the short-float doesn't necessarily correlate with the borrow rate. You absolutely can't state facts like:

> With this much short interest the borrow fee must be close to 100% APY.

That's... just not how this works.

EDIT: I looked up some public information: https://iborrowdesk.com/report/GME

Seems to be 35%/year right now for GME shorts. If a GME short borrowed at $300, the stock price needs to fall to $200 by 2022 before they lose money. Do you really think GME can be propped up above $200 for a whole year?

If they short sold months ago at lower borrow costs, they've basically would be in the position to wait it out longer than most bulls who are just messing with 3-month call options.

> There's really no good way to wait it out for the shorties.

Selling ITM calls (and maybe hedging slightly by buying an OTM call) seems to be the obvious bear trade that would be doing well under these circumstances. The theta on these call options are ridiculous. That brings theta over to your side.

Because Blackrock commonly does whole-market index funds. They have to hold onto those shares as long as people are buying their mutual funds.

Might as well collect some interest while waiting. They wouldn't lend all their shares away: they just lend away all the shares that they expect that their mutual fund won't sell this year.

I'd say it really only sends a message about your assets.

In this example, you'd be sending the "correct market signal" if you sold your shares as soon as it appreciated to $20. Anything more, and you're moving the market away from its efficient price.

The problem with the squeeze is that certain participants are put into a position where they're being forced to buy. And, that creates an incentive for other shareholders to hold onto their shares well past their fair value. Holding onto shares well past their fair value is antithetical to efficient price discovery.

How is that incentive any different than the incentives of someone taking the opposite position:

> Sometimes people will put out rumors or even go on fiance shows talking about how ~poorly~ well run some company is.

It’s to help investors invest their monies more cheaply and safely. The side effect is that companies get cheaper access to investment funds.

Without short sellers frauds would be even more prevalent, investor costs would be higher and companies would raise less money.

If you have a solvent company brought down by a short seller, you never had a solvent company.

And value != price. True investors like Buffett don’t really mind the casino aspect, because volatility creates opportunities when value diverges far from price.

Some people buy a stock, and then put out rumors or even go on finance shows talking about how great this company is and how its stock is undervalued. And then sell it at the peak, leaving others holding the bag. Yet people don't run around saying that we should ban people from being able to buy stock because of that.

Both the scenarios (the one you describe and the one I describe) are illegal market manipulation. Sure, I would not be surprised if market manipulation of the short side were vastly underprosecuted, but I don't think that's a reason to complain about short selling per se.

“ Tesla CEO Elon Musk had a number of things to talk about during Wednesday's quarterly earnings call, but spent a lot of time discussing the company's Full Self-Driving system. According to Musk, the FSD will be capable of Level 5 autonomy by the end of 2021.”

How is Elon Musk claiming (lying) that level 5 FSD will be available for Tesla vehicles in 2021 any different from short sellers making similar claims about the potential downsides of a stock?

FWIW, Elon Mysk said they’ll have a million robotaxis operating before the end of 2020. I believe there are 0 currently operating. [1]

I will bet anyone 10,000 dollars that Tesla will not have level 5 FSD by EOY. If anyone is willing to lend me money to make the bet, I’ll bet as much as they’ll lend me.

[0] https://www.cnet.com/roadshow/news/elon-musk-full-self-drivi...

[1] https://www.cnbc.com/2019/04/22/elon-musk-says-tesla-robotax...

In other words, as long as I have shares to sell, and there's a contract saying that you will buy them from me for a fixed price, then put options could most certainly exist.

Customers regretting a bad trade use the hoary old claim a “glitch” to try to get broker to reverse it, post about it to try the ol social media shaming to ratchet up the pressure, and dozens of copycats do same?

Or Robinhood decided to start driving GME price down with forced client sales to make the DTCC increase their collateral requirements and force them into bankruptcy so they can end this madness?

What does Occam say?

It would be much more transparent to be opt-in & say "Hey, you deposited $1k. If you want, we're willing to loan you an additional $1k." I think more people might refrain from margin trading if it was presented that way. But it would reduce trading volume, and therefore a major revenue source in the form of trading data they sell to market makers, so of course they don't do that.

As it stand though, to my outsider's eyes it makes their theoretical liabilities twice their collateral. Normally that's probably fine, gains & losses on large volumes of divers stockes will even out. But in unique circumstances (um, right now) the collapse of a single stock (or worse, a highly correlated asset class) puts them on the hook for an amount equal to their customers' losses. Considering their retail clientele, it's probably fair to assume that many of their customers can't (or won't) cover those loses by depositing more cash... hence the suicide a while back.

Honestly, I think this is tough. Building a regulatory regime for a six sigma event is extremely difficult.

That being said, there probably needs to be a better mechanism--maybe a market wide 24 hour circuit breaker plus some sort of emergency credit backstop--to ensure liquidity for these types of events without disadvantaging any particular market participants.

I dunno, I'm making shit up here and don't know what the hell I'm talking about.

Seems complicated though...

Now, I will say, if you ask me, it's about time to start putting in even more short-side controls.

Allowing these massive funds to build gigantic positions with infinite loss potential clearly represents systemic risk, particularly given we've seen over and over and over again that, as much as these institutions are supposed to be "professionals", their risk management is utterly inadequate.

Start with totally banning naked shorts. Increase margin requirements on short positions. Maybe flat out ban shorting over a certain percentage of float. How about limit the amount of short-side risk a firm can hold as a percentage of its total portfolio.

RH is in many ways a victim of a much much larger structural market dysfunction.

> Fortunately RH had sufficient funding for that,

So that I don't agree with.

RH had to completely stop buy-side activity on their platform yesterday and then massively curtailed it today. Not only did they not have sufficient funding to support BAU, they still don't!

Meanwhile, the controls they put in place to allow them to limp along single-handedly produced a massive drop in the price. Then, to add insult to injury, they increased margin requirements and margin called accounts, forcing liquidation at substantially reduced prices, thereby locking in losses for their clients.

My guess is they're buying time, right now, by limiting buy-side volume and dipping into credit lines, until the 1B cash infusion lands on their books, all while preparing for the class action lawsuits and congressional investigations.

Oh, and that IPO? Expect that to be postponed...

The explanation they offered in their blog post:

"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today."

That's not an explanation, that's just hot air.

What financial requirements? What capital obligations and clearinghouse deposits? Which requirements fluctuate based on volatility? How do these requirements protect the investors and the markets? And ultimately, how exactly any of this leads to them blocking buy orders on $GME?

And a lot didn't.

Some (e.g. TD A) imposed increased margin requirements, but that's perfectly normal for high volatility stocks or options in margin accounts, and to be honest I'm amazed it didn't happen sooner.

This comes down to those brokers that are their own clearing house versus those brokers that rely on a company like Apex.

It looks like Robinhood, Webull, IBKR, and others, all ran into the same capital requirements issues as their customers loaded up on a high value, high volatility stock. Their clearing houses basically told them they had to pony up more cash, or they had to stop allowing customers to increase their positions.

So this was "coordinated" insofar as they all used a clearing house (I believe RH and Webull both use Apex, but don't quote me on that) that made what amounts to a margin call on the brokerage.

To be clear, this should not have happened. It's entirely a function of the companies being under-capitalized as a result of inadequate risk management practices in this very strange market environment.

If that's the actual intent of this document, it is substantially misleading.