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Comment by gruez | Hacker News Reader

If you read the other threads it's clear what's happening is that robinhood's product isn't designed to cope with high volatility[1]. Is this a flaw in their product? Yes. But then again, they are a discount brokerage for a reason. It's not any different than any other consumer product that shits the bed during 99.9 percentile events.

[1] Specifically, they're required by the DTCC to put up a deposit on every trade their users make. During periods of low volatility this is fine because they can come up with the money, but when volatility goes up so do the deposit requirements, which can cause them to become insolvent. This is further compounded by the fact that their product invisibly hands out margin, eg. "instant" deposits of $1000, or giving you the money before it settles (2 days later).

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Obviously the situation needs to be investigated. But I think there is a real possibility they did nothing wrong here.

Despite this, the main problem I see with Robinhood is that with it's gamified UI, ease of access, etc... these 99.9 percentile events are mainly what it is designed for. It's encouraging people to pick up the "hot stock" on social media on a whim.

While there may not be legal repercussions for this, it's fundamentally incapable of it's core purpose. If you are new to RH you might not realize that the platform has outages all the time and it costs its users a lot of money. It is straight up dangerous to trade on this platform for the purpose which the UI glorifies.

Index funds have done a lot more to democratize finance than RH in my personal view. While commission free sounds fantastic, it comes with some very large hidden costs.

There are worse problems with Robinhood, all of which I'm surprised people aren't bringing up more:

1) They've had outages where 100% of stocks were unavailable for trading.

2) Their business model is to offer their users inferior prices and then collect on the arbitrage (Yes, this is illegal. Yes, they are in trouble with the SEC over it).

3) Robinhood isn't transparent with their users about the risks of trading options and trading on margin. Some of the barriers they've removed for their users to make risky bets were there for regulatory reasons, it's not just a matter of their app being over-gamified.

(2) is false.

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.

To say that Robinhood wasn't fined for offering its clients inferior prices directly contradicts the SEC's own statement which you can read here:

https://www.sec.gov/news/press-release/2020-321

"The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission."

What you are referring to is the fact that Robinhood can't offer a worse price than the NBBO, but the NBBO is not the best available price, there are also dark pools and brokers can match orders against their own clients.

Robinhood, like all brokers, has a fiduciary duty to its customers and as such is required to do what it can to always offer the best price to its clients instead of simply offering the NBBO, whose price serves as a worst case scenario when all other options have been exhausted. Robinhood not only failed to do that, they failed to do it while claiming in marketing materials that their execution is better than their competitors (it's not).

I apologize, it looks like you're absolutely correct. I can no longer edit the parent comment, so I hope people read your response.

I also found more evidence your position on FINRA here (pdf):

https://www.finra.org/sites/default/files/NoticeDocument/p00...

It reads:

> The SEC has stated that “routing order flow for automated execution, or internally executing order flow on an auto- mated basis, at the best bid or offer quotation, would not necessarily satisfy a broker-dealer’s duty of best execution for small orders in listed and OTC securities.” The reasoning behind this view is that prices better than the NBBO may be readily accessible to the member."

(1) is pretty weak too.

Yes, they had outages where 100% of stocks were unavailable for trading, which is factually true. What makes that assertion weaker is the fact that other brokerages had the same kind of outages too, and not with less frequency of occurrence either. Which is why (1) is not really a meaningful point against RH specifically.

Yeah... And other stock trading platforms also stopped users from trading GSE. So by your own bad logic the original complaint against Ribbonhood should be no big deal, right?

That other fruits are rotten does not weaken the assertion that this particular fruit is rotten. I don't think anyone is claiming that every fault that Robinhood has is unique.

But it does weaken the argument of "why isn't everyone bringing this up more?"

If they have a normal amount of outages, then the outages aren't brought up because that's boring.

They don't have a normal amount of outages. They have more outages. It's a significant amount of outages. It's already been the subject of complaints previously.

>That other fruits are rotten does not weaken the assertion that this particular fruit is rotten

Services occasionally experiencing unexpected outages doesn't make them a rotten fruit. By that metric, literally every single complex online service in existence is rotten. Given how rare those outages are, and how they are all not happening at the same time across different brokerages, I wager to say it is normal with nothing nefarious going on. Unless you expect a complex online service to have zero downtime ever, which is just unrealistic.

It's partially true tho, they provide inferior price than other brokers using Citadel (because their contract apparently gives them a bigger kickback than most other brokers).

In practice price improvement is split between the trader and the broker right, some brokers might do 50/50 while others will be 80/20.

Yes this is true. It wouldn't qualify under the "best execution" standard, which is based on publicly displayed (lit) quotes.

But you are right that technically you could've been price improved slightly better had your broker signed a more favorable agreement with a market maker (and then passed it onto you). This would really venture into business economics though and is not related to regulation/legality.

If anyone stumbles across this, the above statement is false. (I can no longer edit it.)

Please check this sibling comment [0] to see the correction here. Apologies.

[0] https://news.ycombinator.com/item?id=25966361

thank you

> But I think there is a real possibility they did nothing wrong here.

They did blatantly lie about their liquidity problems. They didn't mention it in their fluff blog post. Their CEO smirked on national TV and insisted it was not about liquidity. Turns out it was. That's the problem.

If he admitted how close they were to insolvency Robinhood would be out of business and no one would be getting their trades closed.

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

Not commenting and saying it wasn’t a liquidity event are very different things.

No sector of the finance industry is ever honest about liquidity... too much fear of a panic.

IB chairman was honest, and WSBers predicably called him a criminal for it.

https://www.cnbc.com/2021/01/28/interactive-brokers-restrict...

I wouldn’t really take any subreddit on its word about what the law is and who has broken it.

The messaging was certainly problematic. But the actions seem to be done in good faith.

> Despite this, the main problem I see with Robinhood is that with it's gamified UI, ease of access, etc... these 99.9 percentile events are mainly what it is designed for. It's encouraging people to pick up the "hot stock" on social media on a whim.

Landline phones and CNBC in the dot com boom and after could do much the same. They had a show where a guy just yelled out symbols all angry with cheesy soundboard effects. Only difference was higher commissions and no buying into fractional shares and stuff.

That I think is the real scandal here. Robinhood was built to market to (and in some sense coevolve with) the wallstreetbets culture of crowd-sourced market manipulation. And that was a great growth hack.

Until it grew enough that the crowd source market manipulation was... actually manipulating significant markets. GME has been ballooned to the tune of something like $13B over the past few days, based almost entirely on a flawed understanding of short trading.

And absent any discussion about Robinhood in particular, I think we need to be asking whether or not this crowd of people who didn't quite understand shorts were fed those lies at the direction of users who did. Someone has (or will have) made a ton of money here at the expense of the late-arriving GME traders. It seems like we should find out who.

Speculation:

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?

It's a good point. Many of the more popular subs are transparently astroturfed, and more than a few mods are bought and paid for. Reddit is already neck deep in information warfare. I'd be surprised if what you describe isn't already happening, although who knows at what scale.

What is the flaw in the understanding of shorting?

"The short interest staying at a similar range means nobody has closed out their old positions so we can keep squeezing" seems to be a big one.

If you assume that new short positions are being opened - and at the recent prices, that's not an entirely unattractive thing to do - then the short interest staying steady suggests some positions being closed and others being opened, and tells you little about single actors.

And anyone opening short positions at today's prices is basically "resetting the clock" on how long you'd need to squeeze to get them to back down... so if I were to sell it short now, I'd be betting that some folks making some of their first investments ever to ride the hype train are going to be more likely to blink first than I am.

The WSB guys are talking about this in their coded meme terms about diamond hands and it's not over til it's over language.

They're basically loudly signalling that they will not sell until the short float is down.

Which is insane, because then it's basically a mexican standoff.

Technically not. Shorts have a borrow fee, and if you trust the wsb guys on this number, the current borrow fee on gme is 80 percent per annum. So if I'm not getting anything wrong here, short sellers do have a bit of a clock.

Yes, but I think hedge funds will easily be able to cover that cost on new short positions basically indefinitely.

Does 80 percent per annum mean that carrying the short for ~9 months will cost roughly the same as closing it out today, assuming the price remains constant for the next 9 months?

It means your broker will charge you that carry cost on a pro rata basis, assuming borrow also remains constant. (It's generally not a fixed rate.)

So if you carry a 9mo short with 80% borrow rate on a stock that realizes 0 vol, you played yourself.

If you don't want to deal with borrow, you can buy a put and sell a call on the same strike (usually slightly higher than ATM) which comes with an implied borrow rate that is locked in.

Probably not. Perhaps if the brokerage blocks didn't cap their momentum allowing the earlier shorts to get out at 120

Trust the plan, as it were. Where they go one, they go all. It's really eerie, the overlap between the worldviews.

Overlap between which world views? Are you saying between the short sellers’ world views and WSB’s? I have a feeling that a lot of the people on WSB actually work on Wall Street and are just on their phones at work. There seem to be some experienced professional traders there(among many who aren’t), but I don’t see much similarity between them and the shorters in particular.

I'm saying that WSB true believers and Qanon nuts sound similar and use similar logic.

It’s really creepy how you just compare WSB to a group that half the country considers “supporters of terrorism” or literal terrorists. This is the “magical thinking” to me.

The original GME investment groupthink (Reddit always works this way, it’s lovingly called “the hivemind”) was based on complex, but logically-sound technical reasoning. A lot of due diligence was done. QAnon, as far as I know at least, was based on a post on 4chan with no verifiable evidence whatsoever. WSB’s GME buying was motivated by logic and evidence at its core, and many aspects of this logic have happened exactly as predicted (for example, the multiple gamma squeezes). Unlike QAnon, the more you learn about this, the more it makes sense (though, very obviously, the price is going to crash eventually, and these people know it). Respectfully, I think it’s disingenuous and below-board to try to baselessly compare something you don’t understand well to an alt-right hate group. Show me the solid due diligence and technical analysis that underlies QAnon, and maybe I’ll give your comparison a closer look.

Could you provide some examples?

I've never heard of WSB being linked to Qanon/trump/alt right until all this short drama started.

I'm just saying that it's all the same magical thinking. I'm not saying it's the same people, though given the demographics I suspect the overlap is bigger than we think.

Your suspicion, and you’re baseless assumptions about the “demographic” of several million Reddit users, sounds a lot like “magical thinking” without any evidence to offer.

The argument against that is the claim that there wasn't enough volume in the last few days to cover all the previous shorts.

Most people seem to have been led to understand that the short leverage of 140% meant that when the short call happens, the hedge fund will "have to buy more stock than exists" to settle, and thus that something like an infinite price spike will happen. The same people tend to refer to this as a "naked short", which it is not[1]. Most of these people seem to have latched onto a theory that the short calls are all coming due today and that they NEED to buy as much GME as possible ahead of the metaphorical rapture.

But the hedge funds in question closed out their short positions days ago. The stock right now is being propped up by simple (and misinformed) speculation. And effectively all of the purchase price that people are paying right now is going to end up being transferred to the people with earlier positions who are getting out at the peak of the bubble.

[1] A naked short is a short sale where no underlying stock was borrowed first. This is a crime, but only possible for certain very privileged traders with control over the various tracking records. Leverage over 100% just means (for example) that you borrowed a share, sold it, then later went to the same buyer and borrowed it again. You end up owing them "two shares", but not necessarily the same share twice. In practice what happened is that as the stock started rising, Melvin closed its position buy repeatedly buying and returning shares to the tune of 140% of the capitalization. (Edit to add: it seems likely that it did so in combination with a bunch of loans and favors from other hedge funds with the ability to buy and hold GME across the inevitable collapse. The WSB folks complaining about hedge fund corruption and insider dealing aren't wrong.)

> And effectively all of the purchase price that people are paying right now is going to end up being transferred to the people with earlier positions who are getting out at the peak of the bubble.

There is at least one other group that is likely benefiting massively through all of this: Those who have been selling options. There are a lot of levels here, but when this is all done I suspect that the aggregate spent by retail traders on premiums for options that expired worthless will eclipse the final market cap of GME.

When there is this much volume, you have to remember that someone is in the middle of it taking a tiny fraction in order to facilitate it. These people are likely doing a very good job limiting their risk, and just printing money right now.

I suspect that overall we'll end up with "Hedge Funds" (as an aggregate) in likely the same positions, intermediaries and market makers wayyyy up, and Retail (as an aggregate) way down. Which, I guess is the system that people are virtual-rioting over.

Hmm. Is there an index of market makers?

I don't know what you mean. You want a list? I don't have one, but I'm sure you can find one.

If you mean a tradeable index so you can invest in market makers... I doubt it. Their entire business is making money for themselves, and likely don't need or want public shareholders that they have to report to.

They are paying for ads saying they closed their position. Why would they do that if they actually closed? The occams razor pushing naivety of this forum is really starting to grate. How many times do they have to fool you before you get the message?

Seen this twice now. This is another conspiracy theory. The screenshot going around is NOT a paid ad from Melvin, it's a promotion of a headline from a CNBC show. CNBC doesn't take money to issue ads on behalf of its guests, they were merely teasing the content of the segment.

Altruism would be one reason?

Individuals buying now are more likely to get screwed. On a self-interested side, they could be wanting as few retail investors to lose as possible to minimize the calls for new regulations

When has altruism ever been a factor in the decisions made by financial firms?

That's as on the face farcical as saying that a lion didn't eat a deer because it felt like being a good guy that day.

> But the hedge funds in question closed out their short positions days ago.

I have asked people about this. They accuse me of buying into corporate media propaganda. Melvin must still be in and be near exploding in their minds.

They put ads on Twitter saying the had closed their positions. Why would someone put ads on Twitter saying that? They're either lying or playing 4D chess.

https://old.reddit.com/r/wallstreetbets/comments/l8539h/cnbc...

That link is to a screenshot of a routine promoter for a CNBC show. I mean, I guess it's possible that this was done because CNBC took a kickback from Melvin to put paid content out on its twitter feed, but that would be a huge, huge scandal if so, much larger than the story of Melvin failing would be. CNBC may be business journalism but they're still selling journalism under the NBC brand.

They don't do that, basically. This is a conspiracy theory.

But it's old news. It's not even relevant content as of three days ago, where they first announced that they had closed their position. Is there even a new press release that restates the action they took and announced three days ago that would make it news?

At this point "Melvin Capital's position" seems like more of a conspiracy theory than anything based in fact.

>But the hedge funds in question closed out their short positions days ago.

No they haven't, because they are literally running ads on CNBC telling people that right now. Why would they spend money doing that if they no longer have skin in the game?

Please be patient, I seem to be experiencing some genuine cognitive dissonance. Rare to catch oneself at it so I hope you'll help.

In your example, if I understand it, I go to Alice, take her share and give her an IOU. I give the share to Bob, and take his money. Then I go to bob, take his share and give him an IOU. I give the share to Christy, and take her money.

I have two people's money, and two people have my IOU's. If ten shares exist and these are the only shares that changed hands, it would be 20% shorted - or am I misunderstanding already?

Assuming I'm not, I would think I need to buy any two of these ten shares to give one each to Alice and Bob, and it could be the same one if Bob or Alice sell it back to me after I return it for my IOU. Okay, so far so good for a 20% short position.

If the shares were 140% shorted, that would imply that I've sold each of the ten shares once, and four of them twice. This sounds like the same situation in theory except that now rather than having the option of buying a share from someone whom I've just returned it to for an IOU I now have to do that - four times at least in total. The difference practically though seems to be that people know I don't have much bargaining power. If ten of the twenty-four people who own either a share or one of my IOU's conspire to not sell me a share back at any price, I'm in a world of hurt - and the more shares I've sold, the higher the odds that enough of the people owning these shares would want to do exactly that.

Am I misunderstanding something?

> But the hedge funds in question closed out their short positions days ago.

Source?

How does one borrow a share of stock?

Go to a broker, search for the security you're interested in but don't have a position in. Hit sell. You will receive cash, and you will see a negative number of shares in your account.

^^^^ so much this.

I keep seeing over and over again that hedgefunds MUST buy stock if the price goes up, and that 100% shares short is some sort of trigger that means everyone must buy.

There is another common misconception that stock cannot be created, that there is some finite supply. People should take note that AMC has (shrewdly) issued a lot of new shares in response to their stock price climb.

There's a few issues for the short sellers though, one is that their brokers are charging them interest on their borrowed shares as a function of their share price. The higher the share price, the more interest they have to pay. Not just that, the harder the shares are to borrow, the more interest they have to pay. This creates a ticking clock. During the initial BYND squeeze, some people were being charged 100% APY.

Then of course as it goes up and they bump up against their personal (or their brokers' personal) risk tolerance, they're forced by them to buy.

Is that what happened? Did hedgefunds run out of credit? The problem with this reasoning is that it takes rules which apply to small investors trading through an intermediate platform and applies them to Melvin. It's just false that anything would be a legal or rules-based trigger for Melvin to buy. They don't HAVE to buy like people have been claiming. Melvin isn't trading on Robinhood.

Melvin may not be trading on RH, but they are trading on a prime broker who has a personal risk tolerance expressed as a function of mark to market losses. Once you exceed your collateral the broker is on the hook for your losses and “shorting GME” is not part of a prime brokers business model.

Do we know if any of the C-Suite of GME sold a ton of shares during this debacle?

If they did, it would be a coincidence, since corporate officers usually can't sell shares whenever they want.

GME might have sold new shares though; they were already set up to do this at any time.

https://thefly.com/landingPageNews.php?id=3209193&headline=G...

Technically selling your own stock at a ridiculous price might be securities fraud though…

Some did a couple weeks ago: https://finviz.com/quote.ashx?t=GME

Scroll to the bottom, there’s an SEC filing section.

Nothing to write home about though.

Commission free is pretty much the norm these days. There are exceptions, but the norm.

I don't disagree that, for most people, just investing in index funds is probably the best approach.

It seems to me like the regulatory framework around brokerages like Robinhood that gamify trading need to be fixed, but it smells like something that’ll take an act of congress.

Which makes retail harder to invest and one of the reasons why people are mad is that they are not allowed to participate in the stock market. It doesn't seem like there's a winning formula here. The term professional investor is already under fire but it's literally by the decision makers to protect you. Not many people like that.

This is the weird part. If RH is in the wrong, the crime they committed was giving users what the users thought they wanted (all gas, no brakes, no seatbelts).

I wouldn't call it a flaw. Their product can handle the high volatility, their finances can't. At least, that's what we believe is true since they got a $1B loan yesterday. But Tenev, the CEO, was on TV yesterday saying that it wasn't a solvency issue...so....

Interactive Brokers Chairman, Petterfy, highlights that in his interview. He also said it caused clearing issues and that his firm could afford it. They just, you know, decided to halt trading cause he thinks the squeeze was illegal.

> Their product can handle the high volatility, their finances can't.

Multiple times both here and previously, RH has demonstrated that their product cannot handle unexpected high volumes of traffic.

Also, their finances are part of their product. They are a financial services company. Money and finance is what they do.

I admit, I am not aware of their products capacity, but they never mentioned it as an issue, nor has their product crashed this week (that I am aware of). It was a conscious decision to stop trading.

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.

The problem here is fundamentally Robinhood is in an industry where screwing up has huge consequences for their customers.

If Apple has a supply chain issue and my phone is 10 days late, I might be irritated but the most it will cost me is a few days frustration.

If Robinhood fails to execute a trade for me, it can and has potentially cost a user tens of thousands of dollars.

What happens when the share price starts to give way and Robinhood fails to execute trades as the share-price is dropping rapidly?

If I owned shares in GME (or AMC etc) on Robinhood, I'd be getting out now because they've done nothing to suggest they are capable of serving users when things get sketchy.

I don't own GME, and will never put money in RH at this point.

I saw the Interactive Brokers interview [0] and his explanation actually made a lot of sense to me (I don't know about Robinhood other than it has had many previous problems).

He said that they were worried about counterparty risk. They are only taking one side of a trade (on behalf of their customers) and depend on the other side to make good on their promise. In this environment they are not certain that the other side can deliver on (for example) certain GameStop options trades, and they don't want to be stuck holding the bag.

When the interviewer asked about customers being angry about the rules changing "in the middle of the game", he said he viewed the game as market manipulation, which is illegal.

But isn't he correct? Jeff Bezos or Bill Gates could almost certainly achieve what the Reddit mob is doing and engineer a short squeeze. But how would that not be market manipulation? Probably almost no Redditors believe the long term value of GameStop is $350, market manipulation is the whole point, the new part is that it's crowdsourced.

IMO both of his explanations are extremely reasonable. But if you look at the comments on the video (and on Reddit), the take away is overwhelmingly, "he is so honest about the fraud", "He should be in a jail cell", that he is covering up insolvency, etc (just look at the linked video, it's not just one or two comments).

This one interview probably isn't a huge deal in the big scheme of things, but I think it's very illustrative of a larger trend. It seems like the level of distrust in our society is so high (particularly towards our institutions) that, increasingly, straightforward explanations for things are rejected in favor of conspiracies.

And once we are at this point, it is hard to see how it doesn't only accelerate. After all, believing one thing happened just makes the anger increase and believing the next one even more plausible. People will inevitably lose their shirt buying GameStop at $350 a share (when it's only been worth <$15 for years) then blame the whole system being "rigged" against them. 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.

[0] https://www.youtube.com/watch?v=7RH4XKP55fM

He said that they were worried about counterparty risk.

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.

> But isn't he correct? Jeff Bezos or Bill Gates could almost certainly achieve what the Reddit mob is doing and engineer a short squeeze. But how would that not be market manipulation?

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.

Very well thought out, thank you for taking the time to reply. Indeed his explanation makes sense in a certain context. However, if he shut it down because it was illegal, then he needs no other explanation. Consider that his primary explanation, the first thing he says is that he's worried about the clearing system. Not the legality...this raises an eyebrow.

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.

Here's a longer clip btw: https://www.youtube.com/watch?v=R6ibh06A-Mw

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

The only thing Robinhood is lying about is their solvency.

I believe this as well. He did not do himself any favors and let himself be cornered on two interviews.

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.

Tenev said they didn't have a liquidity problem. I think he lied about that, but I think they're solvent. The reserve system required by the securities people mean they have to have a cash position proportional to the total flux of trades. There were some laws passed a few years back that reduce how quickly you can turn unsettled trades into new trades. Without that they'd probably need a much larger cash position.

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.

I agree.

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."

It is both, they need to help themselves and help customers who would be harmed if Robinhood had gone under suddenly. An orderly unwinding is better for everyone.

Do you believe that about all the brokerages that halted trading on GME et al? Or did Robinhood call a halt due to insolvency, and coincidentally, other brokerages called a halt for unrelated reasons?

I suspect if they didn’t have liquidity issues, they were just quicker that Robinhood to prevent them. I’m sure they didn’t want to tie up a huge part of their collateral in BME.

You think eTrade, owned by Morgan Stanley, had liquidity problems?? That's so outrageous it beggars belief.

There was absolutely some kind of coordinated manipulation happening. It is telling that the SEC's statement seems to have scared at least some of the brokers away from trying to prohibit buying (but allowing selling).

The market has circuit breakers for a reason and brokers can and do stop all trades on a symbol in certain extraordinary circumstances. But only allowing selling is basically forcing the price down and obvious manipulation.

I doubt E-Trade has access to much of Morgan Stanley’s liquidity, that would be absurd. Even they have limitations their parent enforces, and it would be really inefficient to operate with a massive surplus of collateral.

But again I said they may just not have liked tying up so much collateral for a single trade. Different companies with different needs.

And restricting purchases while allowing selling is the fastest way to reduce your collateral requirements. Every share sold is money the DTCC owes you, every purchase is money you owe them.

Lastly, it wasn’t a very useful conspiracy if restricting purchases on this rabble of minor brokers was the method. You could still buy GME across over 90% of the brokers by client base.

Even my broker, InteractiveBrokers, only restricted options. I could buy all day long. Or go long all day by.

Suppose you're right. How do you explain the $1B loan Robinhood took out?

Taking out a loan, in itself, doesn't indicate insolvency. If it did, nobody would lend, ever. Now defaulting on a loan - that does indicate insolvency.

You are correct. But an emergency loan indicates increased risk of insolvency. Robinhood isn’t going to borrow money they don’t need, and raise their interest costs. Likely the loans were preexisting credit lines, so they were obligated to find Robinhood upon request.

The question is whether it will be enough and if not, whether new loans or investment will be available. Sitting on the outside it’s impossible to know whether this is an eminently comfortable buffer or a last finger in the dike.

Could be something like if Citadel goes insolvent and only makes their payments for flow to Robinhood on a delayed schedule, then Robinhood may not get paid for the last quarter or year of income and incur huge losses.

Citadel (who loaned Melvin a lot of money) and Citadel Securities (who pay RH for order flow) are not the same company - they used to be, but have split up.

Corporate veil could be pierced if there was attempt to have one of the companies change Robinhood's behavior on behalf of the other, but that is pure speculation and many of the other explanations make sense too.

I wonder if they have s-1 confidentiality filed and they are in quiet period.

If the SEC had done their job RH would have been shut down ages ago due to their platform's facilitation of rampant identity theft.

Sorry, as a noob, why does Robinhood need lots of cash to facilitate trades, and what connection does that have to volatility?

It takes a couple days for stock trades to settle. While that process is happening Robinhood has to keep collateral at the clearing house to ensure that when settlement happens the money is there to pay the other party.

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.

Brokers are required to keep a certain amount of capital on hand to ensure that customers can be made whole in case some sort of risk arises.

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.

For shorts and trading on margin that all makes sense, but I still don't get why that would prevent retail investors from buying regular shares with their own cash. Where does the broker assume risk in that transaction?

Edit: nrmitchi below explained how the broker is legally required to have some extra collateral on hand in between accepting and clearing the order.

I think this thread did a great job of explaining how volatility can affect collateral requirements: https://twitter.com/KralcTrebor/status/1354952686165225478

[irrelevant link]

Couldn't Robinhood just disable margin trading without disrupting cash trading?

That link was pretty irrelevant to your original question.

The answer is that even cash-settled trades take 2 days to settle, which most traders would consider an unacceptable wait to take delivery of their shares in this day and age. Seeing the shares appear in your account immediately after buying is merely an abstraction provided by brokers, and the brokers need to have their own cash on deposit to secure this.

Strictly speaking, most traders of US listed stocks wait two days to settle trades. Robinhood will give you an advance on your funds but that doesn't make T+2 settlement "unacceptable...in this day and age" lol.

BTW a few years ago, it was T+3.

The person you are responding to posted that link... incorrectly? There is no context, but it's just not directly applicable.

Yes, if Robinhood is letting people trade on margin, then Robinhood needs to have the cash to support that margin. That is one thing. And they have largely, as far as I know, disabled that already.

The other part is that they are required to have reserves and collateral for trades that are "cash" until they settle, as all brokerages are. I am not an expert here, but my understanding is that this requirement increases as volatility goes up, as as correlation of trades goes up (ie, if all of the volume is in a couple stocks, it's highly correlated, and thus the reserve requirement is higher). This must be, by regulation, Robinhood's money (ie, not customer funds), and Robinhood just didn't have the money to keep opening new positions.

As for the underlying why of the requirement, I don't know. I assume it has something to do with preventing brokerages from accepting increasingly risk trades during high volatility events (which, ya, is what's happening right now). But either way, it's the current rule, and as a brokerage, they have to follow it.

This would require RH to explain to their users the nuances of moving violations (buying a new stock after selling an old stock before settlement) and that gets messy. Nobody wants to be bothered by rules when they're about to make it rain day trading.

> [1] Specifically, they're required by the DTCC to put up a deposit on every trade their users make. During periods of low volatility this is fine because they can come up with the money, but when volatility goes up so do the deposit requirements, which can cause them to become insolvent. This is further compounded by the fact that their product invisibly hands out margin, eg. "instant" deposits of $1000, or giving you the money before it settles (2 days later).

Assuming they aren't allowing any margin to be used on GME (including instant deposits) how could they possibly not come up with the money? Does that mean they are doing other stuff with users money and only fractionally paying for shares? The clearinghouse (normally) just assumes they are good for it if they ever need to come get it?

EDIT: Apparently it is a fractional deposit that the clearing house requires. Apparently though, it can't be client money. So my next question is, why is that?

> So my next question is, why is that?

Don't most brokers allow you to continue trading before settlement? (so someone has to put collateral for that)

I guess most traders would complain if they had to wait two days after every trade :)

Edit, maybe best is to look at the explanation from Money Stuff:

> But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk.

> Don't most brokers allow you to continue trading before settlement?

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.

Cash account violations, there are a few different variations. Here's a Fidelity page that explains them: https://www.fidelity.com/learning-center/trading-investing/t....

> Don't most brokers allow you to continue trading before settlement? (so someone has to put collateral for that)

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.

>and then used client funds as collateral?

check the edit in the parent's comment. It's expressly prohibited.

> and then used client funds as collateral?

But that's not necessarily settled right? E.g. client sells AMC, then buys GME. At this point RH doesn't have the cash to for it (the settlement should clear, but it still needs to come up with the collateral).

(I'm not an expert so take it with a grain of salt, but that makes at least some sense :))

and then used client funds as collateral

Huh?

You realize that's illegal right?

Is it? And if so, why?

The fraction became 100% on GME, which is typical for highly volatile stocks. That's why they had to disable trading in it - they could cover the small fraction, but not 100%.

This explanation is plausible, but then the question becomes RH's lack of openness, and its CEO's laughable non-answers in interviews on the issues.

Their hands may be tied here, but they look bad any way you look at it, and for good reasons.

The only honest answer the CEO can give is “we are a thinly capitalized startup with a unique business model, that meant when the DTCC jacked margin requirements on BME further trades would have pushed us into insolvency”

That’s not the kind of message any CEO wants to put out in public,

It can be spun. "We did it to ensure the stability and integrity of our platform."

Sure but if the the statement gets too close to admitting a liquidity crisis the market will close their doors the next day.

That maybe a reason to lie, but that's still fucking lying.

I think volatility is an issue for any broker.

Does RH wait to confirm an order until they find a counterparty or does their system just accept it and then find someone to clear it with after the fact? If it's the latter, and they find themselves in a situation of extreme volatility/zero liquidity, they could end up holding the bag.

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