I'm confused. Why is everyone getting mad at Robinhood? Wasn't it the market makers who stopped them from trading GME? And doesn't Robinhood have the right to sell margin stocks bought on margin?
https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea56...
https://www.bloomberg.com/news/articles/2021-01-29/for-robin...
https://www.nytimes.com/2021/01/29/business/dealbook/robinho...
I think it could have happened, but I very much doubt they ever did it intentionally, and it is practically guaranteed people would claim this happened to them, regardless of if it did actually happen to them.
Regardless of where the fault lies that seems like a recipe for pissing of a lot of your customers, and from there it seems reasonable that the customers would be pissed at the company who sold them the product (as opposed to one of their vendors/customers).
In that light, and particularly w/ a finance app, it might seem even weirder if their angry customers _weren't_ mad at Robinhood and were willing to accept "it wasn't our fault" for any reason.
They've been dancing around the subject because they don't want to trigger a bank run, but this is likely why they had to suddenly raise $1 billion and draw down their credit lines yesterday.
It appears they reached a point where they simply couldn't afford to support the buy orders on the volatile stocks any more. They likely had 2 options:
1) Shut down the entire platform until they could raise enough additional capital to post the required collateral. It's difficult to retain users and raise another round if you literally have to turn your service off on the hottest trading day every.
2) Shut down buy orders on the few stocks that were driving the capital requirements over the limit, at least allowing users to continue to sell.
Frankly, I think the narrative that Robinhood users are driving this situation has been greatly exaggerated. A few weeks or months from now, I think we'll learn that the majority of volume came from institutional investors rather than retail users. Redditors may have sparked the situation, but hedge funds are certainly capitalizing on it.
b) The MM's almost certainly didn't force RH to shut down buys. Current speculation is it was likely a combination of pressure from clearing houses and their own internal risk management.
Odds are they didn't have enough capital on hand to deal with settlement given the level of volatility, and if they let more people buy, it would've pushed them over allowable levels.
This is supported by the fact that they've drawn down about 500mm from debt facilities and announced a 1B funding raise this morning (https://www.nytimes.com/2021/01/29/technology/robinhood-fund...), while throttling purchases of GME to no more than 5 shares per account and no more than 10 options contracts (https://robinhood.com/us/en/support/articles/changes-due-to-...).
And note, I say this is speculation because RH has been completely opaque about what happened here. All they say is "we have regulatory requirements", and we're left filling the blanks.
Edit: In fairness to RH, I should note that in their blog post on the topic (https://blog.robinhood.com/news/2021/1/28/an-update-on-marke...) from late yesterday they mention:
"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."
This does obliquely point to the issues I mention above, and is enough to unpack what happened here if you have an understanding of the structural mechanics of stock trading. Though it'd be nice if they were a lot more direct in their language, here. If I was a layman investor this'd look like meaningless obfuscation.
But it's certainly (somewhat) better than some of the early interviews and reporting...
As outlandish as this sounds, Robinhood signs everyone up for margin accounts by default.
Users must explicitly opt-out of margin to get a cash account. Robinhood calls it "downgrading" their account.
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...
Good point, and is actually the thing I have the most problem with here with other institutions but you're right that RH did the same thing: only weathered the storm by a few mechanisms, one of which upended democratic access to the market.
RH probably had a bad choice to make: The clearing houses were demanding more collateral, RH had to figure it out. RH was still wrong, but the fundamental problems were those mechanisms that allowed lack of collateral to discriminatorily disadvantaged on class of investors in favor of others. I doubt that was the deliberate intent when these mechanisms arose, but it sure is the result, and needs to be fixed.
I'm not convinced on the theory of efficient markets & allocation of capital. WSB making decisions knowingly contrary to the underlying finances of a company sort of undermines that theory. Those theories pretty much rely on people making, mostly, fundamentally, financial decisions, even if they're wrong or poorly informed. WSB was making more a philosophical decision (along with some pile on FOMO, sure) and that method of decision making is definitely not covered by the theory of efficient markets.
Though I suppose the GME incident, with the peripheral stocks like AMC, could be viewed as the first round of an iterated prisoner's dilemma. It was a "defection" that worked this time. But, if the institutions impacted and those watching are left to respond on their own instead of through artificial protection, they might very well come up with strategies that would thwart the philosophical decision making of WSB in this situation.
CORRECTION: "60% of its users owned GME at the time." appears to have been incorrectly reported and since corrected.
They were the first to suddenly block buying (but not selling!) GME when everyone in retail wanted to buy, and they refuse to explain why.
> Wasn't it the market makers who stopped them from trading GME?
Who knows? They refuse to explain anything.
> And doesn't Robinhood have the right to sell margin stocks bought on margin?
Yes. That part of the anger is misplaced. But it's not a significant part of the drama anyway.
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?
It seems reasonable to fault Robinhood for shitty comms (though, as 'JumpCrisscross pointed out yesterday, the general rule is "aviate, navigate, then communicate"), but the endemic message board pathology is to use shitty comms to justify conspiracy theories, which are more fun to talk about than reality and take over these threads like algae.
My point is exactly the shitty comms of Robin Hood - they were the first to make this move, they gave no reasonable explanation. It doesn't matter what we know now. What matters is that RH's users didn't know then.
The top-level question here was, why people are angry at Robin Hood. My explanation is simple: they cut a lot of people off buying at the moment they wanted to buy, and provided no explanation. Any theory as to why they did that comes from taking explanations of other traders and the mechanics, not from anything RH said.
If you think what they published was sufficient explanation (and remember, the target audience is mostly regular folks with even less clue about stock market than I have), then why did RH's CEO get drilled by the news on the same questions I'm listing? Apparently the newscasters and their audiences also don't believe he answered anything.
Second: I'm not interested in the binary of whether or not people are mad at Robinhood. People should be mad at Robinhood for a variety of reasons, most notably that it is an online casino masquerading as an investment app.
I am very interested in the conspiracy theory that says Robinhood halted GME orders as part of an effort to protect hedge funds. That conspiracy was repeated by a number of legislators yesterday, seemingly encouraging ordinary people to follow on this terribly risky GME bubble. The conspiracy appears to be false.
If we don't disagree, we don't disagree.
I don't subscribe to the conspiracy theory - the "mundane", mechanical explanation seems perfectly adequate. My only opinion on Robinhood is that the current backlash they face could've been avoided if they were communicating honestly and in details. The angry mob ultimately isn't after them.
Only if they issue a margin call. But what if they were the ones responsible for the conditions that lead to the margin call in the first place (blocking buys on a specific stock)?
So is this action Robinhood's fault? Not really. Is the fact that the user doesn't understand this at all Robinhood's fault? 100% absolutely.
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.
I can't get my head around the logic. They allowed people to sell; you can't sell unless there's a buyer. But RH+ blocked people from buying.
Does a clearing house care whether a transaction is a buy or sell?
There are many other exchanges. The buy side of those sells might be on TD Ameritrade or Schwab or other brokerages where purchases were still allowed, not to mention institutional buyers looking to hedge calls or cover short positions.
What this prevented was RH customers specifically loading up on more stock.
I think your confusion might be thinking "they" all blocked buys, but that couldn't be further from the truth. A couple of brokerages blocked buys, but the majority did not.
https://blog.robinhood.com/news/2018/10/9/introducing-cleari...
https://www.cnbc.com/2021/01/28/robinhood-interactive-broker...
Nevertheless, they still have capital requirements they have to adhere to in order to ensure settlement can occur, and it appears they were on the verge of being unable to meet those requirements.