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.
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.
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.
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.
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.
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.
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.
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
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.
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."
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.
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.
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.
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.
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.
Edit: nrmitchi below explained how the broker is legally required to have some extra collateral on hand in between accepting and clearing the order.
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.
BTW a few years ago, it was T+3.
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.