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Comment by Alupis | Hacker News Reader

Let me get this straight:

1) RH automatically makes every account a Margin account.

2) RH doesn't make this clear to their customers (buried in the TOS where they know newbie investors won't look, which makes up probably 99% of their customers).

3) RH allows people to initiate money transfers into RH, but also allows purchasing of stock immediately (on Margin) without informing the customer.

4) Investors believe they've outright purchased stock, because RH app shows the stock in their account, and money now gone (even though it's still pending the transfer).

5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase.

Ya... that seems pretty predatory in my opinion. Downright shady business... How can this not be construed as market manipulation, even if RH had to do this to save themselves yesterday. RH got themselves into this position in the first place...

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There are all sorts of rules that brokers generally abstract away:

https://finance.zacks.com/tax-rules-use-proceeds-stock-sales...

https://www.fidelity.com/learning-center/trading-investing/t...

My understanding is that you couldn't do day trading without a margin account.

I have a margin account but E*Trade let me day trade for years without one. There were rules like you couldn't buy and sell the same stock in the same day but you also got hundreds of violations before they suspended this ability. So if you are more of a day-swing trader and not doing high volume it worked well enough for me.

The point is you are technically margin-trading when you do that. From the broker's perspective you are trading on margin until your prior trades settle.

As a onboarding hack I can see this as a great idea to help people get their first $100-$1000 on the market fast.

But the chance of an eventual margin call is almost certain in the long run (as has happened here).

It’s time to talk ethics in tech, this was a design decision to not unwind this once the user was embedded or otherwise clarify this upfront.

Margin call risk totally must be disclosed and is legally required (in Australia where I am) to be disclosed by any investment professional you paid to setup this sort of arrangement. I’d be fairly confident the same applies to US investment advisers.

It’s totally the sort of ‘feature’ that the user could have been advised of around say the 30 day mark. “We’ve set you up a margin account that’s valid for your first $1000, please now confirm if you’d like to continue to carry a margin call risk otherwise were converting you to a standard account.”

It’s also super common for margin facilities to allow investors carrying the risk, 24-48 hours to contribute to retain the position, auto-selling out is a last resort.

It’s not just on-boarding. People expect to make a transfer from their bank account and have insta-credit to their RH tradable cash balance. This is a core feature of their app.

That is possible in many countries without margin (using faster payments and open banking).

Australia has had real time transfers on our reserve bank's "New Payments Platform" since 2018. Transfers are finalized in a few hundred milliseconds.

And we're actually half a decade behind most of Asia and Europe.

This is not specific to margin accounts and is not what is meant by margin. Cash account with any broker (that I know of) would also give you the same feature -- that is you have access to the cash for trading before the transfer is complete.

If they are letting you trade with instant credit, then under the hood there ARE margin loans going on. To be compliant with SEC regulations the broker must be pulling on short term margin loans from a bank to cover the securities being bought without hard cash in hand.

No they are exposed to you as a credit risk. They trust you that you intend to transfer the money in good faith. As long as the transfer is complete at no point they make a loan to you because trade settles at T+2, i.e. cash is not required on the date of trade. It is the loaning aspect that is regulated. Free riding is forbidden by Reg-T of the FRB. Your broker's settlement risk is not considered a margin loan either. It is a credit risk that they satisfy by depositing funds with the DTCC for a tiny fraction of the notional value.

The difference between the credit risk and the margin loan is that in the vast majority (say > 99%) of times the credit risk does not become a loan. You don't need to punish all the people acting in good faith for the action of a few. The regulation on free riding comes from a money supply perspective. You are not allowed to create money without taking out a loan.

It's time the US got instant wire transfers. Most of the rest of the world has it. Being able to wire money to a friend and 5 seconds later their phone goes 'ding' and they can spend that money is really a requirement of basic functional banking.

The US does have instant wire transfers. But banks usually charge for sending them, so people prefer to send payments with the cheaper ACH network.

The system you mention is the same. Clearing is done at the end of the day.

All that is exchanged during the day are IOUs (debt) and if one player in the chain goes bankrupt during the day the central bank might cover its debt up to some limit.

We haven't had any major crisis since those instant pay apps were put into place. So those aren't really battle tested systems and I guess we'll only effectively discover how resilient they are during the next crisis...

For those trying to follow along. Margin lending occurs when part of the funds put on the market are funded by a debt mechanism. Classically I might invest say $10,000 and the debt facilitate would say provide a $10,000 loan and I’d have $20,000 invested in the market in my name, with a 50% loan to value ratio.

If the investment dropped far enough.. say to $12,000, the margin call facility works like this.

It considers the remaining money is always the lenders, so now the lender is exposed for $10,000/$12,000 eg 83% of the exposure is theirs.

They then ask you to top back up your contribution so they are less exposed (within 24-48hrs), or they auto-sell stock to ensure they are not exposed further.

In the case of Robinhood, the margin lending arrangement is always fully backed once the cash is processed. Which I’m guessing is always reliably a few days after it’s deposited.

So it’s crazy to trigger margin calls as all the debt is quickly fully backed.

It would be expected that Robinhood would have negotiated an instrument that never left them with margin calls on cash contributions like this. This is totally on them.

Does schwab? I've gotten notices for selling stock before it settles

Don't believe so. I got hellbanned for selling, buying something new, and selling that all in one day. Hey, I'm easily confused. You can sell and immediately buy with the proceeds but cannot sell the newly purchased shares until the original trades settle.

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.

Yikes i'm sorry. They definitely give a few chances I also don't really understand. I now always try to have extra cash inside the actual investment account. Maybe you can try to change the sell order (first in first out -> sell the oldest share first)

You can, its called a cash account. IMO this is better than a margin account, especially for <20k$. Below this threshold margin accounts are usually treated nearly identical to cash accounts.. except you can _buy_ when you shouldn't be able to... and then have to hold that security for 1-3days for the funds to clear.

In a cash account when you sell, the funds must settle for 2-3days... meaning you can't use those funds for purchases.

It keeps people who are cash short out of the market, rather than in... that's the main difference for small accounts.

There are certain options you can't trade without a margin account because they are fundamentally on margin no matter what.

Whether or not you can "day trade" on a cash account would probably just be equivocating about what "day trading" is. It definitely does limit your ability to very quickly enter/exit positions.

In Canada I use WealthSimple and they don’t even have margin accounts. In the past I’ve been pissed about the 3 day hold period of funds coming in but I totally get it now.

I'm waiting for when their cash account allows direct deposit and then they support instant transfer from Wealthsimple cash account into Wealthsimple trade.

There's various brokerages that don't give registered users margin accounts by default and it's something that users specifically have to ask for (similar to asking for options trading).

Which ones? I thought being able to buy securities immediately after initiating a transfer before that transfer settles was industry standard? I know (at least) Fidelity and Vanguard let you do so with just a normal run-of-the-mill brokerage account.

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.

With chase you need to request a margin account. I really like their brokerage account. They never blocked GME, and the don't hide anything.

Hmmm... my Vanguard account doesn't work that way. If I initiate a buy using external funds (from my bank), the actual purchase doesn't happen until the funds clear in ~2 days. It will just show "pending".

You sure that’s not the T+2 rule?

That’s exactly what it is. What confuses me is the comment I was replying to doesn’t seem to have this for their Vanguard account?

The general info you cite is great, but I'm disappointed in the Zacks stuff.

The US moved to what's called T+2 settlement (trade + 2 days) in 2017, over 2 years ago. Zacks still talks about T+3. In contrast, your Fidelity link gets it right.

Someone might say "so what!", but Zacks purports to be a financial advice website. They should know better. It makes me question the accuracy of the rest of their website.

https://en.wikipedia.org/wiki/T%2B2 https://www.sec.gov/news/press-release/2017-68-0

Zacks doesn't make any such claim, in fact Zacks very clearly states that settlement is T+2 and points out that this change happened in 2017.

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."

You and I must be reading different documents. You must have navigated elsewhere. Please provide your exact link.

I clearly see the following. Directly from the link of the poster I responded to:

https://finance.zacks.com/tax-rules-use-proceeds-stock-sales... Tax Rules on How to Use Proceeds of Stock Sales to Buy New Stocks

...

For example, imagine that on Monday you have nothing in your brokerage account except shares of a specific stock, which you sell that morning for $10,000. The trade will settle on Thursday.

They just described T+3 not T+2!

It's further down the (infinite-scrolling) page, under the title "Why Wait Three Days to Sell Stock?". Looks like much of the material there is older, but this section at least has been updated to mention the change to T+2.

(Looks like a more direct link would be https://finance.zacks.com/wait-three-days-sell-stock-11114.h...)

You can day trade on a cash account as long as you have enough cash to cover all your positions for the time it takes them to settle (T+2)

No you really can't because of what is known as free riding.

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.

That is exactly what the person you're replying to meant.

Wikipedia, and almost any remotely reputable source, defines day trading as when a trader "buys and sells a financial instrument within the same trading day, such that all positions are closed before the market closes..."

If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.

> If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.

Deposit $1000, wait 3 days, buy and sell $100 of the same stock in the same day. You still have $900 to trade with.

It may be “less efficient”, but it also reduces your risk, and risk management is fundamentally what successful trading is about.

Some people don’t want to depend on the bank for margin or leverage, and are happy to trade with cash only. Increased efficiency brings increased risk and decreased ability to deal with short term shocks.

Perhaps I don't understand it, but I think parent poster gave bad example of what s/he tried to say.

My understanding is that if you had $100 and you purchased stock for $100 and it went up in few hours to $120 and you decided to sell it, so you can purchase something else. You can't you have to wait 2 days.

Of course if you have enough money you will have buffer to account for that, but it makes it harder to do day trading when everything is delayed by 2 days.

> You can't you have to wait 2 days.

The "you can't part" here is what's not clear. My understanding of non-margin trading is that you would be able to sell for $120. What you would not be able to do is then purchase something else with that $120 until T+2 when it settles and the money is in your account again. You technically don't have that $120 until the settlement.

That simply means they haven't had time to settle yet

and you have over 25k in it for pattern day trading... but detaila

I have a RH, and yeah when you sign up they tell you what margin is and you can choose to not use it as it is riskier. As this is just a 'see what happens' use case for me, I didn't elect margin. And well this is what happens. The predatory part is just giving it out at all to low funds retail traders.

99% of the people who use RH could not use it if RH didn't give you "implicit margin". The "democratization" is centered around it

And I mean if you want, ask RH and they'll downgrade to to a cash account... just be ready for T+2 and no options trading

https://robinhood.com/us/en/support/articles/options-investi...

> NOTE: If you start options trading in your Cash account, we’ll automatically upgrade you to an Instant account.

If Robinhood only had covered options you'd be right back to: not supporting the way people are using it to enable all this.

In fact, imagine if they didn't do this, all the new people who tried to enter GME would have had to wait 2 days to enter, and much fewer people would have had access to options

Ironically I actually think it might have stopped this dead in its tracks by damping the influx of cash

> And I mean if you want, ask RH and they'll downgrade to to a cash account... just be ready for T+2 and no options 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 think the way it works now is great, being able to go short on naked options with a proper margin maintenance is way smarter than restricting everyone to go long on options or only allow people to sell calls on covered options (which kind of defeats the purpose of a bearish position when you are required to hold the deliverables).

For a mass-market low-education target demographic? The defaults matter here.

Retail investors shouldn't be restricted from having such capabilities, but that doesn't mean it should be the default

Maybe I'm missing something, but what's the problem with this being the default?

A bearish position is to be long on puts. You don't need to write options, especially naked options which are usually the highest tier of access on every broker and require extra agreements.

If you only go long on options, theta is eventually going to catch up with you.

Edit: Actually can you show me where RH even says you can trade covered options without Instant? I've only found evidence to the contrary, I think you're lying.

https://robinhood.com/us/en/support/articles/options-investi...

> NOTE: If you start options trading in your Cash account, we’ll automatically upgrade you to an Instant account.

Maybe if you've downgraded they won't upgrade you, but it's neither here nor there, covered options aren't what have allowed this to happen

If Robinhood only had covered options you'd be right back where I said it'd be: not supporting the way people are using it to enable all this.

I'm not talking about Robinhood specifically but general rules & regulations (see eg https://www.fool.com/the-ascent/buying-stocks/margin-account... ). RH specifically may have their own constraints beyond what's necessary, though. In which case get yourself a better brokerage.

Multiple brokerages have similar restrictions.

And the discussion is about Robinhood. Any reasonable person reading your comment would rightfully assume you're talking about Robinhood.

> NOTE: If you start options trading in your Cash account, we’ll automatically upgrade you to an Instant account.

HAHA oh my god this is terrifyingly predatory. It says "automatically", but I hope that there is a notice at least. Even if someone went to the effort to make sure that they understood their account type, it would just... change out from under them.

This is sort of like accidently using a premium feature in some SaaS platform, and being automatically upgraded into a free trial without knowing.

I mean I do think that's just legacy wording

You start with Robinhood Instant if your account was made any time in the last 5? or so years?

And things people know RH for won't work without it (like instant deposits and not waiting for settlement)

So options trading was actually added after most accounts had already if not all accounts were Instant

Really the only reason people ever go to Robinhood Cash these days is trying to get around PDT restrictions... but they inevitably realize the entire experience they've been introduced to ran on margin

I read it more as "If you have manually downgraded to a cash account, and then go into the "Trade Options" page and buy something, we'll automatically change your account type so that it works"

But you're right that it could just be legacy wording.

I don't remember seeing such a notice when I signed up, but I've been on the platform for a long time so maybe thats new(ish)?

I’ve had an account since Feb. 2015 and don’t remember seeing an in-app notice either. It’s certainly possible I saw it but don’t remember now.

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.”

I signed up on Tuesday and saw no such notice.

Cash equities settlement is t+2, as are most transactions in financial markets. This is just how the underlying plumbing of the markets work, nothing to do with robinhood. You have the illusion of instant trading, but under the hood there's a huge amount of boring settlement machinery.

Incidently, this is no different to the experience of a big bank or hedge fund trader. Settlement risk is real, and institutions have entire risk management departments devoted to it (banks even need to capitalise for it, to cover precisely these types of scenarios)

And yet people will still say they can't fathom a single possible use case for crypto. Tokenized, non-custodial securities on blockchain can't come fast enough.

With respect i disagree. T+2 is not because of technological limitations of traditional databases or trust issues. Instantaneous settlement is possible (for example in the UK we have instantaneous inter-bank transfers), but it is not desired. Having delayed settlement means you can net offsetting transactions, it means you can handle outages in the infrastructure, it means you can unwind and correct errors.

Thank you for this. It's frustrating to hear people making comments who don't have the fundamental understanding of why/how the markets work and are just upset about not being able to join in on the melee and assume it's nefarious behavior. My POV is that it was obviously a risk RH took to not make it more clear what the behavior of people's accounts would be when market volatility is high. But I worked for a Commodity Risk Management Company on their custom derivatives platform and 90% of what we did was around properly valuing customer positions so we could make sure margin requirements were met. This was a huge deal to everyone involved because the counterparty risk was so high for our company.

Help me understand, if the blockchain has 100% uptime, how would there be outages in the infrastructure? To take down a large blockchain, you'd have to take out the entire network, or basically the whole internet.

What errors would occur if all the rules for transfer of assets were encoded on-chain? Crypto is already moving hundreds of billions of dollars worth of tokens 24/7 every single day. There's no central bank entities or clearing houses. The collateral for loans is completely tracked on-chain and fully auditable on the ledger. Tell me why that's not superior.

I think you’re right and the final point of “being able to unwind trades” is most likely a smaller issue than people make it out to be.

Unlike what a concerning number of crypto enthusiasts appear to believe, "sorry for your loss" is often not an acceptable response in the mainstream world of finance.

But just like most players in the space have magically discovered the need for KYC if they want any real mainstream adoption, I expect that they'll also spend the next few years discovering why chargebacks and fraud protection are a thing.

We know, the Fed will step in at any time to back stop the losses. Don't kid yourself into thinking that such a system is without systemic risks. There's a reason why the big wigs spend their time in Davos dreaming and scheming about The Great and Orderly Reset.

As for KYC, crypto is well aware of it. Any centralized exchange you deal with in US has it in place already.

As for fraud protection and chargebacks, that is really just an insurance problem. And that's got solutions in the works.

A hack that wipes out 20% of the market in a single day.

Re outages, it is not about the blockchain itself necessarily, but all the services and systems that interface with it.

Errors occur because humans are humans and fat finger trade details.

That aside, as I mentioned in original comment, instantaneous settlement has other problems, e.g netting is important in managing liquidity.

And to your point about crypto managing billions of dollars of tokens - it's an absolutely trivial amount compared to what's moved in the markets every day. Blockchains are incredibly inefficient and transaction rates orders of magnitude lower than what'd be needed.

You may not be familiar with the layer 2 innovations in crypto enabled by zero knowledge proofs, but blockchains such as Ethereum are about to get several orders of magnitude more efficient. It will absolutely be able to accommodate these transactions in the not too distant future. I get the tech needs to mature and get to a battle tested point first, but blockchain based stock trading is inevitable.

There’s just a single database that ultimately registers trades and ownership. [1] It’s not a technical limitation that creates the “constraints”. That’s what the parent is trying to explain.

[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...

That leaves me with more questions than answers with regards to DTCC's role in the future of finance. To me, it looks like an archaic, centralized institution that was set up to solve a problem they had in the 1960s with paper securities transfers. Smart contracts didn't exist then, so they weren't even an option. This central clearinghouse concept is going the way of the paper ticker. It has no place in the long term future of finance.

Yes, and they could "technically" build a scalable instantaneous system with a usable API. What prevents any movement in that direction is the messy interconnected web around it. A blockchain isn't going to help with it even if it's a technologically superior solution (it may not be).

What are non-custodial securities, doesn't someone need to hold custody?

Not speaking for them, but the thought would be the custody of the asset is never transferred to a 3rd party like it is with the typical broker/client/clearing corporation arrangement that stocks use. If the asset is traded it goes straight from counterparty to counterparty. There's no need for an escrow arrangement because the execution is out of the hands of the counterparties.

A smart contract or wallet on the blockchain would hold a tokenized version of the security. In this way, folks could leave their tokens on a centralized brokerage if they chose to, or take custody of their shares by transferring the shares to a crypto wallet that they own the keys to.

It’s pretty obvious (at least to me when I signed up) that the “instant money transfer” means margin. Even if you don’t get the concept of “margin” specific to investing, you should get that you’re borrowing against the transfer when you use it.

Edit: I just deposited more money into robinhood, and the screen says "your funds will be transfered in next several days... in meantime, we'll give you access to $X while you wait for the funds to clear"

Also, the UI separates your cleared money, from the instant deposit money as 2 line items.

It says that its not your money in the UI.

In the age of the internet (well 30+ years into it even) thinking that digital funds can be transferred instantly seems a pretty sane assumption.

It isn't.

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.

In the UK bank transfers are instant.

They very likely aren't. They just appear to be to the retail crowd.

It seems to be in fact instant: https://en.wikipedia.org/wiki/Faster_Payments_Service

There is precious little explanation in the article you cite on how this is actually implemented on the back-end.

Banking plumbing is notoriously harder than most folks realize, and I wouldn't be surprised if there wasn't very hard (and very small) limits to how big of an amount / how many TPS you can actually execute with this system.

I might be wrong, but I'd be surprised if you could move 10M pounds instantaneously with this.

Got curious, for SEPA there's next day settlement and 1B EUR limit.

The instant SEPA transfers have a 100k limit.

My understanding is that this is due to instant SEPA blocking chargebacks to some extend.

Stop moving the goalposts.

Just like with Tesla's AutoPilot, naming does matter.

If you tell people your car has AutoPilot, what would a reasonable person assume? It can drive itself! And they did, and people have died.

When RH tells Average Joe that the funds are "Instantly" available... that does indeed mean instant to most people.

Poor analogy.

"Autopilot" comes from airplanes, where all it has done historically is "keep the plane going in a straight line".

In contrast, Tesla's AutoPilot can do much more.

Notably as well with autopilot in airplanes is that the pilot should always be in the cockpit, ready to take over... just like in a Tesla.

You sound like someone educated about aviation - Average Joe is not.

To Average Joe, "Autopilot" means it flies/drives itself.

Average Joe knows that planes have autopilot... that's where Average Joe heard the term first.

Do you really think Average Joe also thinks that planes entirely fly themselves and that pilots are just window-dressing?

Hang out in the Aviation StackExchange long enough and you'll see exactly that question come up. "Why do we even still have pilots?", or "What does a pilot actually do?".

Yes, in general, people are ignorant of what pilots do and what AutoPilot can and cannot do.

This is made even more confusing by recent progress in autopilot with some large jets getting auto-landing features.

And yes... a pilot can program the FMS with waypoints, altitudes, etc, get into the air, push a button... and the plane will indeed fly itself. Modern jets even have automatic throttle/power control too.

A better name for Tesla's system is what it actually is... Driver Asist. But that's not sexy... and we're far off into the weeds.

"Instant" means instant. There is no way to paint it differently.

It's disingenuous to call an ACH transfer "instant" instead of "It'll take several days during which time we'll lend you money", like RH did here.

Notably absent here is the fact that planes can land themselves. In fact the plane can do everything on its own besides taxi on the runway and takeoff...most of the time. Yes, pilots are there to take over if needed, but that doesn't change the reality of autopilot which is not just "keep it in a straight line"

"15 minutes" to settle cash for next trade is enough "instant" for most traders I think. The part that irritates people is the "2 business days" problem in the regular account.

I have heard it is complicated, but can someone elaborate the "computing cost" of a regular (non-coin) digital transfer?

Btw, transfers within 15 minutes are being done all over the world without the fancy blockchain and coin. I do understand the need for some transfers to be delayed , say liquidating all of one's investment to take a few days just for security reasons.

>can someone elaborate

Well there's - for starters - :

https://www.investopedia.com/terms/c/counterpartyrisk.asp

All of that risk is associated with holding the goods and currency for this delayed period! It all makes sense, but, if ACH was 10 minutes instead of two days, the entire issue would barely matter.

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

That's not at all what bitcoin does or helps with.

Settlement is not complicated. ACH is complicated, but ACH isn't just settlement. Bank to bank wire transfers are just settlement, and are regularly same-day (even same-hour) with immediate fund availability.

Hell, FedWire has been doing real-time near-instant moving of money between accounts since 1920 https://en.wikipedia.org/wiki/Fedwire

Imagine if making a bank transfer was as east as sending a spam email.

FedWire works because those banks work very hard to trust each other.

Europeans and Australians [0] don't have to imagine. I can literally do a bank transfer to an email address.

[0] non-exhaustive list

That’s not the same as what parent comment was suggesting. You can’t send money to literally anyone using only an email address. You and the recipient still have to have regular bank accounts within the settlement system. The email address only serves as a more friendly identifier than the account number.

I should've been clearer: as long as the recipient has linked their email and/or mobile to their account (via PayID) settlement is instant and their email/mobile number can be used to address transfers

In a lot of countries bank transfer is near real time. Chip and pin is the standard for more than a decade. Checks are no longer al primary way to pay anymore.

U.S. banks are very much lagging in technology

Why? What service actually transfers your money instantly? None does.

Cryptocurrency.

which ones?

btc transfers are pretty far from instant, by design.

On chain, sure, but Lightning is pretty close to instant

Yeah, but with lightning you really need enough value along the network path(s) to execute a transaction, possibly causing a similar thing as this to happen. I still think it would be an improvement though, as enthusiastic buyers could expand the network and get their buys through.

> Yeah, but with lightning you really need enough value along the network path(s) to execute a transaction, possibly causing a similar thing as this to happen.

It's atomic, it either completes 100% or it fails, there's no partial state where the money gets stuck in one of the middle-nodes.

Nano. Feeless, instant and energy efficient.

Pretend you're not a techie and not aware of how ACH works.

"Instant" means instant to most folks. Not, "we're going to lend you the money for several days and can then force sell your stocks whenever we want".

RH app even pretends the money is actually in your account. There's a lot of deception that went into designing the app.

Any broker that lets you immediately use the cash from a sale to buy something new is also doing the same deception.

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

The typical RH customer... the one that invests spare change, purchases fractions of a share, and thinks they can get rich off a $100 investment, is not going to know these nuances.

There's good reasons the traditional brokerages have so many rules...

The facts seem to be RH saw a opportunity to prey on uninformed individuals by making investing seem "cool" and "stupid easy".

RH deliberately did not do a good job of A) Putting limits on newbies (like no margin!) so they do not get themselves into trouble and B) Explaining the more complicated concepts behind what RH was allowing literally any mirror-fogging human being to do.

Plenty of people trading for 10k at Schwab don't know either. Plenty of people don't know the details of their bank account, too. I do blame RH but not for this..

People are always going to be uninformed about some things, yes we should minimize that but we shouldn't make services available only to the rich because of it.

I'm not aware of any other institution that allows to to take on debt by accident.

You've never heard of a reversed PayPal or bank transaction that leaves users with a negative balance?

Banks (overdraft)

All banks offer overdraft protection when you open your account, and they clearly explain what it would mean for your account to go negative.

Definitely not a good comparison.

RH also explains it. Some people don't bother paying attention to that in both cases.

Also, not having enough money in the bank, getting charged by the bank to hold on to what little you have, eventually getting charged into negative dollars.

ING does too. I've been bitten by that.

> RH deliberately did not do a good job of A) Putting limits on newbies (like no margin!) so they do not get themselves into trouble

But someone who has initiated a money transfer and then used that pending money to buy stock, technically on margin, is not getting themselves into margin-related trouble. There is no good reason for there to be limits here.

Uh no, as defined by Reg T, brokers are free to let cash accounts immediately buy with unsettled funds. It's only a violation if you sell a security before the funds used to purchase it settle.

Margin accounts have a different legal definition and regulations.

Robin Hood is actually pretty unique in that its cash accounts are always restricted to settled funds; instead they decided to optimize for margin accounts that don't allow for increased leverage. Which is not something other brokers optimize for that I've seen.

RH can't win here: Previously they came under fire when a user committed suicide after the RH app showed a substantial negative balance due to an offsetting position that hadn't settled yet.

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.

Any broker that lets you do anything like day trading is essentially extending margin.

A true cash account has quite a few restrictions:

https://www.fidelity.com/learning-center/trading-investing/t...

Sure. And? It used to be the case (only a couple years ago--) that you had to have an account worth at least $10k and at least represent that you had some experience to get approved for margin at most brokerages.

Although it's been a long time, I spent the first decade with a trading account without margin just fine.

As far as I know Robinhood only lets you trade on margin if you have a pending transfer of money in. They also have a very low limit on that of $1000.

It is also margin trading if you buy and sell before settlement. Buying a stock, selling it a day later, and using the funds to buy something else requires a margin account.

https://www.fidelity.com/learning-center/trading-investing/t...

> It is also margin trading if you buy and sell before settlement

Not always, see situation #3 https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_ca...

You need margin to engage in day-trading, but you can sell a settled stock & immediately use the funds to buy something else just fine as long as you then hold onto that purchase for 2 days.

People hate the gatekeeping but then complain when they get bitten by something they didn't understand. There's only so much you can boil this stuff down and if they don't want gatekeeping then they need to accept personal responsibility when it turns out that they didn't know as much as they thought they did.

> they need to accept personal responsibility when it turns out that they didn't know as much as they thought they did.

aka, RH is between a rock and a hard place - either the clueless user suicides due to poor understanding, and causing bad PR, or they do what they're doing now.

One is their fault (being misleading), the other is not (the user not understanding).

Is it so black & white? Is it not possible to design an interface that shows the true state but is also indicative of how things should eventually settle?

The web is full of red circles with exclamation points.

Or, you know, explain what's going on in the UI.

I think RH makes things sufficiently clear. The problem is RH is just a shitty platform that is susceptible to these kinds of problems due to high volatility which forces them into a regulatory corner every once in a blue moon.

I was a user when they had that suicide situation and RH did do a better job of explaining your actual balance when you entered a somewhat complex trade that caused you to have a negative balance. Still a user, who didn't know what he was doing, entered a complex trade, saw something he didn't understand and ended his life. In response Robinhood could have:

1. Made the UI "easier" to understand (i.e. lie) for 99% of situations

2. Raise the entry requirements to ensure people knew what they were doing (Gatekeep)

They chose (and continue to choose) 1, and I don't envy them - how would ever explain all the ways a margin account can put you in trouble on a 4 inch screen? Most users only care about "instant deposits" and will never get into trouble 99% of time. It took 2 "black swan" events (IIRC, the first suicide issue was during the first COVID market crash) for these issues to come to light.

Except their UX is streamlining away things and essentially manipulating users to get higher conversion rates and engagement. As seems to be the norm among successfull apps today. Just that stakes on the user side are more immediate than with news and social media.

They brought this onto themselves by optimizing for growth over healthy and sustainable markets.

Can you explain what specifically is manipulate about robinhood's ux? Maybe is me, but I don't find the ux of robinhood significantly different than the other brokerages I use (Fidelity and Merrill Edge).

This comes from someone who's of the opinion that manipulative dark UX patterns have been normalized - I have not used the competition you speak of, I wouldn't be surprised if they are similar.

The marketing push for options by calling it "instant trading" is pretty BS too.

https://webtransparency.cs.princeton.edu/dark-patterns/

I asked what specifically is manipulate about robinhood's ux, I am not really interested in an unrelated analysis of shopping websites.

They could certainly have won by being clear on each screen.

They specifically positioned as the “everyman trading platform”, and so even from the drawing board they knew that the majority of app users would be people with little or no experience.

All they had to do to win was to say “Hey, I know this balance looks bad, but it’s actually not the final number and here’s why”, and similarly: to be explicit about why they automatically make margin accounts, and then to again mention that when people purchase stocks.

I think you might underestimate how deeply and inexplicably confused people can get.

I fielded a question from a friend who was furious that his broker wouldn't let him exercise a call yesterday ... a call that he was _short_. But he understood his position enough to understand exercising the call would be very profitable for him. Part of the reason that he thought he could excercise it was because there were notices about call exercise (presumably that it was still available for people who were already long the calls).

It's extremely hard to anticipate all the ways someone might become confused and adding additional material to resolve a potential confusion risks introducing other new and novel confusion. There is a constant trade-off and probably the only universal fix is the ready availability of competent human support, which doesn't exactly fit inside the normal "app" business model.

I think the goal of an actual "everyman trading platform" is essentially achieved by the sorts of interfaces offered on 401k accounts-- geared around not-more-than-daily trades of highly liquid securities (and if not outright curated, at least focusing on diverse relatively safe funds). What RH is doing might be marketed as an everyman trading platform but for many (most?) users it's just a casino.

> I think you might underestimate how deeply and inexplicably confused people can get.

> ...

> It's extremely hard to anticipate all the ways someone might become confused and adding additional material to resolve a potential confusion risks introducing other new and novel confusion.

I actually support this argument. I also concede that it’s easy to point out the information in hindsight. But I will still argue that a vital part of building a company of RH’s size and branding is about taking the time to think deeply about the customer experience. To be the experts. To distill that expertise carefully when designing each service and each app screen.

Just based on how RH potentially “sold shares out from under people”, and how the accounts are automatically margin accounts as apparently stated on some part of the user agreement; RH was specifically aware of how this would violate user expectation and they chose not to address it. It’s very difficult, I feel, for someone to argue on the basis of “well yes, of course they were margin accounts, it’s obvious to anyone who knows about how stock accounts work because <blank>” because RH was specifically designing their platform around people who don’t know how stock accounts work.

Sure they can win here. Their advertisement for Gold literally says "access to margin" on one of its selling points. How is anyone without Gold supposed to read that without mistakenly concluding they don't have margin? That's misleading if not outright deceptive. They can easily "win" by... removing that clause, and (optionally, or not) replacing it with something like "access to margin beyond your portfolio value" or something. It's not that they're already doing things as well as they can and the problem is just too complicated to simplify further. They actively mislead people.

And note that "borrowing money" does not imply "have margin" for people either. They might realize they're borrowing money, but not realize that has further implications they might not expect, like the broker being able to sell your stock without your approval. If they actually use the word "margin", people could at least look up what it means and likely realize it's a nontrivial topic. But just saying we'll make $X available to you makes it so much harder for them to understand there are non-obvious implications.

Am I missing something here? The winning play is just not having the instant feature or at very least making it an “and also take out a loan” button. Then you have a $0 balance until your transfer settles and then it’s positive. No weirdness.

You can’t blame people for their ignorance when you present them a fiction. If your cute little abstraction leaks then don’t do it.

Insufficient abstraction-- failing to hide the loan ahead of settlement-- was previously blamed for one of their users committing suicide...

They should be tagging the loan and pending settlements (like every bank does when you deposit a check!) not hiding it.

Actually RH already won: they just got $1B extra from the investors. Also I’m sure what retail investors experience now (dealing with lower lever details of the abstraction they were used to) was known by more experienced traders, but I still think that it’s better to lose money this way than trusting in a pension fund for 50 years that hides everything.

They can show how many funds are pending transfer at the same time they’re showing you your actual balance.

OK so as a none techie why is it not genuinely instant? Why can't my cash be exchanged for the stock in real time (where real time is defined as within a minute or two say).

It's cheaper to do it slower - banks don't have to constantly talk to each other all day. Russia actually gave up on same day settlement and called it a modernization.

https://www.fintechfutures.com/2013/03/moscow-exchange-adopt...

Also, you may still be able to pay for stocks with checks at some places, so the cash isn't always available.

When I left Australia in 2006, inter bank transfers settled every four hours. Often by ISDN lines between banks. "Constantly talking" is a BS excuse. As far as I know (someone still there can correct me) inter bank transfers there are now down to 5 minutes.

The US banking system is arcane and archaic. It's cheaper not to modernize to be sure. Forgive me for being frustrated at banks cheaping out on this when they average quarter of a trillion dollars in profit every year over the last few years.

In India IMPS or UPI tranfer is less than a second.NEFT is weekends every one hour. RTGS is more or less real time

I routinely pay street vendors directly from my bank account to theirs for 10¢ transactions .

Yep, in Europe inter-bank transfers are also instant and if the underlying reason for all these regulations, confusions and trading impact is that US institutions have just been too cheap to upgrade the legacy infrastructure running the biggest store and exchange of value in the world then frankly surprise and anger seems justified.

In Europe we have instant transfers. We can transfer from any bank to any bank in the EU in less than 20 seconds, guaranteed.

Doesn't quite feel that fast with mine.

I AM a techie and even I would take RH on their word when they say 'instant'. When I send money to India from a US bank account via an intermediary (so that neither the US bank nor the Indian bank are first-party to the transaction) it is removed from my US account (in USD) and reaches my Indian account (in INR) within seconds, and I can see the balance in my Indian account and spend it right away, so I have no reason to believe it can't happen domestically when it doesn't even involve a currency change.

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.

It’s a balance, because instant transfer has some bad side effects.

E.g. if a scammer steals all of your money, it would be good to have a day to try to cancel that...

reversing transactions is a thing even without putting an artificial delay in the transaction process.

> When I send money to India from a US bank account via an intermediary (so that neither the US bank nor the Indian bank are first-party to the transaction) it is removed from my US account (in USD) and reaches my Indian account (in INR) within seconds, and I can see the balance in my Indian account and spend it right away

That's actually a lot more complicated. The Banks take loan with one another to make this happen as well from what I read.

It might be so, but I don't work in that field, so my perception will be guided by what I see. Which is my point, unless you are intimately familiar with how ACH etc works it's natural to assume that these transfers are near instantaneous.

it doesn't take techie knowledge, but I'll admit it takes financial knowledge.

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

It was not obvious to me.

What my perception was, was that you were being loaned money against the transfer you were sending in. It was not clear at all to me that it was a generic margin account. Because, among other things, I consider margin trading to be a higher risk activity than I care to engage in; if I had known that I was signing up for a margin account, I would have not signed up at all.

That said, I've definitely been edu-ma-cated on this, and I"ll be reading brokerage ToS more carefully from now on.

>What my perception was, was that you were being loaned money against the transfer you were sending in

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.

https://www.investopedia.com/terms/m/margin.asp

margin trading overwhelmingly refers to paying a percentage as a collateral, not a stop-gap loan to cover ACH transfer delays. Yes you have to have a margin account to trade with immediately deposited funds (thanks ACH), but that's not the typical usage of the phrase and as such isn't what you'll find being described when you look up the term.

Particularly since you can trade with unsettled funds using a cash account in some circumstances, see situation #3 here: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_ca...

Ah - I have generally understood it as working on a percentage of the trade; being part and parcel of a leveraged strategy.

It's one thing to loan me $100 when we have shaken hands and contractually already agreed that $100 is on its way. It's another thing to assume control of that $100 when the $100 already agreed to is on its way.

You do not understand the contract.

The contract with you says that if it settles, you get that money. The contract on the stock market says that it is supposed to settle. But a non-negligible percentage of the time, participants in the stock market do not make good on their contracts. Maybe they are a day late. Or the trade is reversed and the money or stock for your side comes back to you. You will get whatever happens while executing the trade, but it might not be what you expected to get.

In a cash account, the broker takes your money/stock and you live with the inconvenience. In a margin account, the broker is effectively lending you money to cover unsettled trades and is taking on that inconvenience instead. Given the high volume of trades going through a brokerage relative to the wealth of the brokerage, that inconvenience can become a real operational risk.

How real? Well, Robinhood just had to get an emergency loan for a billion dollars to cover trades that are open and have not settled. Why? Your ability to execute the trades that you made depends on various counterparties all doing what they said that they would, when they said that they would do it. But if they don't, and you prove unable, Robinhood is still legally obligated to make sure that they are able to settle all of their contracts on the stock market which they took on on your behalf.

> You do not understand the contract.

that, heh, has been made apparent. Fortunately not at a loss to me.

You’re confusing margin trading with leveraging. Margin trading is just using loaned money to execute the trade.

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

Stick it all in the S&P 500 set up autoinvest and call it a day.

:) I have, approximately, 99.7% of my invested money in vanguard funds. The other 0.3% goes into the fund for doing trading.

To be honest, it's probable that I should adjust my risk tolerance to 5% ultra-low risk assets and 5% ultra-high risk; the current state of asset allocation is overly correlated with US large cap corporations.

The whole innovation of RobinHood stood for is to abstract that away from you so you can instantly start trading and continue when you sell stocks. In the end we get to the same point why a lot of things when it comes to trading are made difficult or impossible after big fiasco and collapses - you can't trust the retail not saying I didn't know better when they lose it all.

I'm a software engineer, so I think I'm more familiar with how apps work than most people, and this wasn't obvious to me! Good thing I only use Robinhood for money I don't care about losing.

I completely agree with you right up until the end. Robinhood's entire product is built on a manipulative and predatory premise that making people feel comfortable "trading stocks", whether they fully understand what is happening under the hood, is a net positive.

It was bound to blow up eventually, but I disagree with your assumption that this is obviously "market manipulation".

If they had to take this action to save themselves, the alternative was worse. Robinhood would have [edit: potentially] gone under while holding all of their customer's stock, and I guess SPIC would have figured it out eventually? No one would have had the option to sell, and Robinhood going under would likely have had a much larger impact on the price of specific securities. I have *absolutely* no idea what would have happened if Robinhood wasn't able to settle trades that it had already made. I assume it would have been an absolute catastrophy. By that logic, Robinhood "manipulated the market" in a way that prevented GME stock from tanking.

I would be very concerned here if Robinhood ends up going under for "market manipulation", with no reference to the extremely poor and predatory product decisions that set this up in the first place. We'll just have the next company pop up, promise to do "nothing illegal", and then set up the same house of cards.

If they had to take this action to save themselves, they have already betrayed the trust of their customers.

> Robinhood's entire product is built on a manipulative and predatory premise that making people feel comfortable "trading stocks", whether they fully understand what is happening under the hood, is a net positive.

I think that people generally understand that when they buy stocks, those stocks may go up or down. There is no guarantee of making money. You take your chances.

What they don't understand is that the brokerage can sell what they bought at the day's low price, because the account they funded with cold hard cash was termed a margin account. What they don't understand is that their brokerage might arbitrarily decide to prevent them from trading particular issues on a given day. What they don't understand is that, due to their broker's lack of financial prudence, that their broker may need to manipulate the market to their individual disadvantage "for the greater good".

I mean, I think you're kind of proving my point. Robinhood's entire product is so predatory that they shouldn't have had their users trust in the first place. But that's not really the question here?

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 agree that RH could have been clearer on the "gotchas" of trading on margin and/or that margin was even involved.

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

I wasn't pretending that they were the only ones. I don't think it's a valid excuse to point to other offenders.

And regarding "manipulating the market", IB's CEO was pretty clear that his intention was to protect large market players:

"... we are concerned about the financial viability of intermediaries and the clearing house."

https://streamable.com/tfg1ow

It's hard to tell what RH's real reason was. They initially claimed that it had nothing to do with liquidity.

I think that the IB CEO really fucked up there by not, and I apologize if this sounds offensive, dumbing his explanation down more and being a bit more clear. As someone who spends a lot of time as an expert in a topic, it is very difficult to have a good calibration about how intracate topics in your domain will be understood by outsiders.

> the financial viability of intermediaries and the clearing house

These are not the "big players" that WSB seems to think they are screweing. IB doesn't give a shit about a couple of hedge funds (who most likely are not in the game any more anyways). They likely don't care much about any market makers who have found themselves in a bind (I doubt many of these exist though).

Intermediaries and clearing houses are the people who's job it is to ensure smooth operations in the market and make sure that trades eventually settle. Ie, if I sell you something (lets say, 1 GME) for $400, that doesn't happen instantaneously, even though we like to pretend it does. If GME goes to $20, it's possible that the person who bought the thing from me just... never shows up with that $400 (maybe their broker went insolvent, who knows, it doesn't really matter). But it's still owed to me, and now someone in the middle is on the hook. And really, this is a correlated risk. If it happens with 1 share of GME, it's much more likely to happen for millions of GME. So now your clearing house is out hundreds of millions -> billions of dollars[0], and are left holding a couple M in GME stock that they can't sell.

There is a difference between trying to protect a specific player or group of players in the game, and making an attempt to protect the infrastructure that makes the game possible.

[0] And if the clearing house can't handle this, then it falls to your broker, who also probably can't handle it[1]. So then if you don't get the money for what you sold, any sort of faith in the financial system evaporates. Which triggers a bank run. Which triggers a financial crisis way beyond anything seen in 2008 because all of the infrastructure was totally destroyed and now we have to start from scratch.

[1] This is especially true in the case of Robinhood, who I am certain (without evidence) has an extremely disproprotional and correlated exposure to specific high risk tickers (GME, AMC, BB, NAKD, etc)

> Ya... that seems pretty predatory in my opinion.

I think Hanlon's Razor applies here:

"never attribute to malice that which is adequately explained by stupidity"

The more I see with this fiasco, the more I feel like RH management just made a platform with a bunch of shortcuts and didn't realize what the unintended consequences of a trading platform with zero friction margin accounts would be.

Not absolving them of responsibility, and I've definitely see some places where their choices favor themselves over their users. But the situation is largely out of their control at this point and they are just trying to do damage control.

Conspiracy theory: This entire GME squeeze was orchestrated by one/many of Robinhood’s competitors who spotted this weakness and knew exactly how to leverage the masses to exploit it and drive RH out of business.

Yeah, no. This is similar to Republican claims of election fraud: it's entirely plausible (and downright indefensible to not believe) that voting machines are subject to manipulation, but at the same time there's just an astounding lack of evidence any such manipulation exists.

there clearly has been manipulation of some sort. However not anywhere near enough to turn the election. A couple dead people who voted here and there needs to be investigated, but 10 votes in a state don't change any results.

What are your sources? I haven’t read that 10 fraudulent votes number anywhere. I did watch the video with the woman unpacking the suitcase full of ballots. That wasn’t her best day for sure.

  Hi, looking for the video - the ones I saw were two from Georgia, both showing regular ballot boxes being counted. Could you provide a link?

That’s the one, and there was nothing “regular” about ballots being counted while everyone else was kicked out of the room for the night.

Fake news. Please do a quick Google search.

I reverse your fake news! ballots being counted while everyone else was kicked out of the room for the night is fraud.

I agree but it's fun to wonder

I think the much simpler "conspiracy" is that a few people in WSB have been using the platform to pump and dump stocks and this one just got a little out of control.

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.

Sorry, but this really isn't just a WSB pump and dump. The real issue is what the hedgefonds did before WSB even got involved.

https://www.cnbc.com/2019/11/05/some-robinhood-users-were-ab...

Here's another bug in RobinHood that allowed people to use unlimited margin.

>Another Robinhood user posted a video claiming to have gotten 25 times leverage by turning $2,000 of stock into $50,000 worth of buying power. Multiple other users posted videos and screenshots of the hack, with directions on how to repeat the cheat code. Bloomberg News first reported the glitch.

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.

> "never attribute to malice that which is adequately explained by stupidity"

I am getting tired of seeing companies and other major entities weaponizing Hanlon's razor. 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. I've seen this sequence of events multiple times:

1. Entity X does thing that directly harms/angers people.

2. Entity X 'apologizes' and says some variation of "oopsies, didn't mean to, just a miscommunication gone awry, we'll definitely look into improving our internal processes in the future :)".

3. Entity X faces no real repercussions.

At what point does this become a violation of Occam's Razor? That all of these decisions that somehow always leave the entity unharmed/better off at the expense of others were not made with intentionality and/or any remote understanding of their consequences? When do they wear away the benefit of the doubt?

> That all of these decisions that somehow always leave the entity unharmed/better off at the expense of others were not made with intentionality and/or any remote understanding of their consequences?

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).

> 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.

What about a sinister plot that fucked up? Being bailed out is consistent both with being dumb and short-sighted, or being deliberately negligent and short-sighted. Failure is possible in both cases if not more likely in the latter (this failure wouldn't be possible if Robinhood didn't decide to facilitate liquidity out of its advertised risk class, but would be tempting to ignore if you precluded the possibility of retail colluding on its own. The benefit for Robinhood would be greater order volume over time which means i.e. higher quarterly revenues).

In addition, if you are willing to claim bailouts are evidence that deliberate negligence/"sinister plans" aren't present, you would have to claim the 2008 subprime mortgage crisis didn't feature deliberate negligence, which isn't true.

My original reply was to a post where someone accused RH of being predatory. To me, that strongly suggests there was intent here by RH to get users into this situation.

I don't think RH intended this situation. That is all.

I'm not suggesting there was no negligence. In fact I think there was. Negligence is essentially criminally screwing up.

This situation is orthogonal to what's predatory. Its predatory that they generally encourage customers to front more than they realise they're fronting. Many customers think they're betting £1000, they don't realise they're actually betting their house.

> Its predatory that they generally encourage customers to front more than they realise they're fronting.

This isn't entirely true. Margin accounts don't have an unlimited bottom. If you put $1000 in a margin account, you can buy more than $1000 worth of securities. As soon as the value of those securities drops below $1000, those shares are liquidated. Typically, you are never on the hook for more than your initial $1000.

From Investopedia: > " The Federal Reserve has a 50% initial margin requirement, meaning you must front at least half the cash for a stock purchase. > This requirement gives you the ability to purchase up to $20,000 worth of stock, effectively doubling your purchasing power."

It is very risky to invest in volatile stocks with a margin account because you can hit a margin call fast. Suppose you put $2000 into RH and get $2000 worth of GME. If GME drops 50% in a day (highly possible), you get a margin call and poof your $2000 is worth zero.

> Many customers think they're betting £1000, they don't realise they're actually betting their house.

This isn't true on either part. To see why, take a peek at RH's FAQ on margin: "Access to margin is not automatic to everyone, and requires you to upgrade to Gold."

In other words. To make leveraged purchases, you have to deliberately upgrade your account to gold and have $2000 in your account. The whole reason people upgrade to gold is to get access to margin.

It is possible to put yourself out there quite a bit further than you want and lose everything you invest, but it's pretty hard to lose more than you invest. (I'm not even sure it's possible).

Calling it a “bailout” is mischaracterising it. The solvency of Robinhood wasn’t in question.

The funds they put up at the clearinghouse are to manage settlement of customer trades. They had to stop allowing customers to open new positions because they needed to deposit more settlement margin at the clearinghouse. The margin required depends on the volatility of the stock symbol, and in this case clearinghouse increased the margin requirement for GME to 100%, on top of the higher demand for shares by customers.

As for paying the price, I’m pretty sure no broker is ever liable for theoretical profits missed out on.

> Calling it a “bailout” is mischaracterising it.

It was an unplanned loan so they could continue operating effectively. If you want to pick nits and say it's not a bail-out... whatever. It's not business as usual.

That billion dollars, while not downplaying it, is not a loan or bail-out but a transient float while transactions clear.

> I think Hanlon's Razor applies here:

Yes and the corollary to that maxim is that these "stupid people should never be in a position to take any decision..."

Sorry, HR applies to human beings.

Corporations do not have the benefit of the doubt because groups of people can deny any intent whatsoever (“it was the majority”).

Did not say RH should get a free pass here. Or some kind of herd immunity because it's a company. I said it was most likely a fuck-up. There can and should be repercussions when you screw up and it hurts other people.

They knew well in advance what the risks and issues were. Previous year they had the exact same issue just on a smaller scale. They just chose to do nothing about it.

Robinhood’s chief legal counsel is a former SEC chairman. There’s no way they didn’t realize what they are doing.

Are you genuinely surprised that a grey haired lawyer might get caught flat footed by the shenanigans of an out-of-control Reddit channel?

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.

Hanlon's razor is not a good heuristic, I don't know why everyone is so into it. If there's a monetary incentive to be deliberate, it's way more likely to be deliberate. Deception is everywhere, especially in sales.

I think the evidence here points towards quite a bit of stupidity on the part of Robinhood. They didn't anticipate the way their platform could be weaponized.

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.

So you think it's a coincidence that most of these brokers around the world were having pretty biased "incompetence" right when the hedgefonds attacked? How convenient.

This is definitely one of those things that may all be somewhere within the bounds of the rules, and the SEC will allow it, as long as you don't fuck it up. A "don't ask don't tell" kind of situation when firms tread into the grey area between the black and white of strict rules. My boss always used to say "We don't have many rules, just don't be the reason why we have to create a rule".

4.5) Because of their insane overuse of margin to ease onboarding, their depository obligations begin bleeding beyond their ability to triage, putting the accounts of both their investors and clients at risk.

5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase (in order to reduce the overall risk profile of the robinhood brokerage and to scrape back as much money as possible to cover their depository obligations which they, goto 1, screwed up themselves by offering way too much margin to clients who didn't know they were getting margin (or what it even is))

Over the past two days, Robinhood royally fucked it up, beyond anyone's wildest fears. If they were Chase or BofA or someone, I'd say they're systemic and will get by to survive another day. They're not.

Robinhood is finished. If they somehow manage to meet their depository and net capital obligations over the next few trading days, and if they somehow manage to survive the large downturn in users the platform will experience after their actions this week, and if they survive the inevitable congressional hearing, they'll still have the SEC investigation to look forward to.

"survive the large downturn in users the platform will experience after their actions this week"

Haven't they been number one in the app store all week: https://www.appannie.com/en/apps/ios/top/

Those who made it #1 are the ones who want to create an account to participate to bankrupt a hedge fund. I say their next move can be revenge on Robinhood for, at the very least, entertaining the misunderstanding with their customers (="They sold my stock without an order from me" when they were effectively on margin and halfway legit).

The downturn hasn't happened yet. There's significant stickiness to getting money out of robinhood; they let you trade instantly using margin, but they don't let you withdraw it until its all settled, and settlements take 2 days after exiting your last trade. Even many of the WSB fanatics who hate RH are stuck with them, because even transferring securities in-kind to a new brokerage is often accompanied by a week or more of a freeze on liquidation.

>5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase.

Is there any evidence of this? The article seems to only say that some people got margin called, but didn't say whether those people were using "real" margin or was using the "instant deposit" margin.

Right, there's probably no way to margin call people who have already initiated the transfer of the money. RH has to float it a few days for the ACH to complete.

Why in the world does ACH take so damn long to complete? Do the electrons move slower in the ACH network? I make a request to purchase, the funds availability in my account are verified, the withdrawl is requested, then, waiting, waiting, waiting. Why? This is the area I would love to see "distrupted". Force the banks to honor the requests in order they are received (not in the order they choose that is most lucrative to the bank). If a transfer request comes in for a value greater than my account has, decline the transfer.

It's largely artificial and controlled by the Fed; it can't really be disrupted since you can't replace the Fed (PayPal and Zelle haven't replaced ACH), but they have shaved off a day in recent years and plan to add actual realtime settlement in the next few years. In the meantime, the computers still work business hours and take off weekends for some reason.

> Force the banks to honor the requests in order they are received (not in the order they choose that is most lucrative to the bank).

Didn't this already happen?

> In the meantime, the computers still work business hours and take off weekends for some reason.

They're just making sure they can avoid needing to pay their computers overtime when they get worker's rights. /s

I always just assume it so they earn interest on the money they have withdrawn immediately from the payer's account, yet refuse to deposit into the receiver's account for 3-5 biz days. I don't think I'm being cynical about it. It's the only logical explanation. Computers only working banker's hours is not a logical excuse (while fun to joke about). A phone support person tried to tell me that a human still approves the transactions. Whatever that means, but it's not logical either.

Interest rates have been effectively 0% since the 90s.

> A phone support person tried to tell me that a human still approves the transactions.

This is true in some cases. They do at least have to audit some of them manually and possibly close your account, file SARs, etc, if they don't like you enough.

ACH settlement is getting faster. There's been a big push in the last few years, which will finish March 19, 2021 with three same day ACH settlement windows, and from what I can tell most (all?) ACH transactions under $100,000 eligible for same day settlement, with the remainder settling the at 8:30 AM Eastern the next business day (or future day if future dated).

What services banks and brokerages offer on top of that, can be more limited of course, but that's the state of the system.

I'm amazed that we consider same day, and not sub-second to be an improvement in an electronic system these days.

A problem os fraud. The faster the settlement, the faster money can be stolen.

The fix is to slow it down at the egress, not within the system.

> ACH settlement is getting faster.

I have seen a snail move through my garden at a faster pace. If it were 1992, and all we had were 9600kbps, then I could understand the burst all transactions after hours and then do the settle up over night. Suggesting that they are going to have 3 windows each day for settlement windows is a 1999 solution. That also sounds counter intuitive in that at each of those windows their systems will get slammed with orders to process. If they just let each one settle as they come in, then they would spread the load.

I'm really dumbfounded at how either I'm an idiot and just cannot understand the issue, or at how the rest of the world has been snowed over into believing it is terribly complex and takes decades to make incremental changes.

Not the rest of the world. Canada has fixed it. Interac settlement is 30 minutes max, with a $5000 limit, and interbank transfers are end-of-same-day. This is even assuming you have to change banks: there are only five banks, and they're regionally divided. Settlement in the same bank (and their investment arms!) is 30 minutes, even if the money is going to a different person. I paid for my house with this, and the payment was received before we walked out of the room!

It's only America's payment system that's woefully behind.

EFT's with IBAN are instantaneous too, at least in Turkey

The FedNow system coming online in 2023/2024 will clear transactions within a few seconds. These are just attempts to make ACH faster in the interim.

> Why in the world does ACH take so damn long to complete?

An ACH transaction is literally FTP and text files. If you can find a way to get rid of millions of lines of COBOL you can probably disrupt this.

This is the most spot on post ever. The amount of stuff in the world that relies on old, tried and true "a file appears in a directory somewhere overnight and is processed the next morning on 'the other side'" method is probably staggering. But most people nowadays don't know or understand this at all, as they've never been exposed to this. And why would they ever be. And all the fixed column width stuff as well and delimiter based import/exports.

Heck I've had to fix one of these things where it suddenly started failing the overnight transfers and when I went to check why it was because a fricking musician had named their song to include the delimiter used in one of those...

> a fricking musician had named their song to include the delimiter used in one of those

Paul McCartney’s “Pipes of Peace”?

Yes, it's a complex problem. Yes, mythical man month, etc. But US banks over the last several years have averaged a quarter trillion dollars per year in profit.

They just have very little incentive to change things. In the meantime, they're earning interest on funds.

Then burn it down and do it from scratch as a parallel system. Or buy a system from Europe, we have plenty of different ones to choose from.

Exactly! Maybe 15 years ago I had the same confusion with fidelity—-why are my trades on margin when there is ample cash to support them? It’s all about the speed of settlement—margin unlocks the opportunity to transact in real-time. At the time, I remember having an option to opt-out of margin based transactions, but don’t remember seeing that anytime recently.

For people playing the gme lotto (no wrong making—-actually wish I had time to join the party), settling any way other than margin is effectively Russian roulette!

the instant availability of funds likely was a growth decision for better on boarding UX. imagine getting a referral from a friend who said hey get in on this stock, installing the app, and having to wait 2-5 business days for ACH to clear. guessing during normal operation this is an acceptable risk for robinhood and users, obviously this isn’t gonna fly when things go wild like the last couple of weeks

Pretty much every broker does that when you buy stocks too. I think most securities settle T+2, which means that you are not the owner (and cash hasn't gone out of the door) until 2 business days after the transaction. But the broker will show your account debited immediately and will add the stock to your portfolio in the UI too. It's well intended but misleading.

https://www.fidelity.com/learning-center/trading-investing/t...

Imo The whole gamma squeeze was based on options writers not taking into account how quickly and army of new investors can leverage this instantly available capital.

The role of option writers is very much an under-reported part of this whole fiasco.

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.

I really think Robinhood might go out of business before Gamestop.

nah this whole thing has been great press for them despite the debacles

There is such thing as bad press. Every time they've shown up in headlines, I remember how happy I am that they don't have any of my money.

> 4) Investors believe they've outright purchased stock, because RH app shows the stock in their account, and money now gone (even though it's still pending the transfer). 5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase.

Wait, what? That is the first that I'm hearing of this. That's crazy. Even without doing all of this, Robinhood having the ability to unpredictably/arbitrarily decide when to disable/enable actions on stocks is extremely bad for the market. They disguise this as protecting their users, but you cannot expect to have freedom as an investor if you don't know when or if you will be able to make a trade because a stock "isn't allowed right now".

Part of the problem is that Robinhood treats their user-base like children. Nobody wants to be protected from risky decisions or from themselves and you can't just do that to people. It is an insult and an unfair withholding of the right of risk and the means to make money from the little guy. That's the dumbest thing I have ever heard. Risk should be a right. Nobody should be able to force you to not take a risk.

I understand that talking to someone off a bridge is a wonderful thing, but at the end of the day, that person is never withheld the right to jump.

They didn't decide actions on market, they pulled back their loan to the users which forced the positions to close, as with any other broker (others are transparent about it though). Not that I approve but that's a difference.

No... they also put caps on how much stock you can buy for a particular symbol. They are basically controlling the volume and direction of trade for some of these symbols on their platform...

In reality, every trade on every broker is settled 2 days later because that's how this archaic netting system works.

People need to see instant updates so that's what every app shows them

This is tangential to RH, but nevertheless I think it's a related issue: For many years now I was wondering how exectly the ETF work and whether when I buy an ETF I can be 100% sure the issuer can follow through on their obligations?

What mechanism are there in place to insure that ETF will not deviate from the underlying stocks it should represent?

I found it difficult to understand the intricacies related to this question.

Here is one example: Suppose I was holding ETF with GME stock in it, the ETF issuer might have decided he knows better and sell the stock expecting its price to drop in the future. Meanwhile the issue will attempt to "follow" the stock by other means. Ultimately is there a way to be sure the issuer will not fail, if GME beats all anticipated expectation the issue might fail to reflect the new GME price...

What mechanism are there in place to insure that ETF will not deviate from the underlying stock?

I honestly don't think so. Before getting into stock trading, I read about it for a couple of months.

About how you can lose money on trading bonds, what is clearing and volatility, how taxes are paid and so, and so. The fact is, you certainly could lose money trading stock, and broker certainly can sell your shares without your permission (in my country).

Especially if you are poor. But that is common knowledge. And people losing money on stock exchange, on forex, wherever is nothing interesting or new. Is this predatory behavior? Maybe. Almost no retail investor makes money doing risky trades on stock exchange. That is what those people did.

Edit:spelling

Inversely, they took a position exploiting pretty much exactly what you describe from a hedge fund, and the only reason it didn't work was that it got shut down by powers from above.

WSB has been trying to push their own version of truth to the media and people seem to be swallowing it whole; that robinhood is basically pure evil and just out to squash the dreams of the WSB geniuses who are trying to stick it to the man. They're really a bunch of whiners. Everything I've read has pointed at that RH has been stretched to their limits financially given their current business model.

I don't think anywhere in their terms did it say users are not allowed to trade outside the US. But that didn't stop RH from freezing $800 in my account for a year after making 103% in a day on $VXX and other ETNs during a trip to Mexico in 2017. I eventually got my money back. But it took me a year.

Under normal scenarios this works extremely well. Being able to trade immediately was a boon. Of course I knew that it was margin but the cover scenarios never even arose for the many years I used Robinhood.

It was one of the many reasons I used them. (I don’t anymore for other reasons)

Unless all those users faked their screenshots, it would seem that Robinhood is lying.

The rules sound quite reasonable to me; Robin Hood is trying to protect itself from the extreme volatility in the wsb/reddit stocks and the higher level of collateral thus required.

Running a brokerage is low margin business.

It's just a minor UI discrepancy. Take it easy man!

One Robinhood user committed suicide because of a UX design and called it out in their suicide note.

UX in financial application is tough , I wouldn't want ever to be handling ux for such applications

Yeah no kidding. Hopefully people caught my sarcasm. This is an area where UX design is absolutely crucial.

That's absolutely not true. You have to specifically opt-in to trading on margin, read disclosures, and have a minimum $2k balance.

Instant deposit is not trading on margin, it's trading on deposits that you make that are instantly available in Robinhood but take a day or two to clear ACH. That's all made clear up front on the screens about Instant Deposit, not buried in T&C.

https://robinhood.com/us/en/support/articles/robinhood-accou...

"When you sign up for a new account, you’ll automatically start with a Robinhood Instant account, *which is a margin account*."

> it's trading on deposits that you make that are instantly available

If it's made instantly available, it is being loaned to you from Robinhood, but that is... still margin. It may be interest free margin, but it's still margin. It is money that has not settled into your account yet. If it's not on margin, you can't use it until it's settled.

Hell if you sell a stock and then immediately buy a new one, that is also margin, because, again, the funds have not settled into your account yet.

If you want a Cash account (a non-margin account), you can downgrade, and "You won’t have access to instant deposits or instant settlements".

The fact that you have to do this manually however is, in my opinion, predatory, and setting up a house of cards that will eventually fall over, because users won't understand what is actually happening.

But the fact that it's predatory doesn't make it not true.

If you want to call that margin, it's margin with 100% collateral. It's not margin in any meaningful sense. It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check. Would the trade clear before the check? Sure. Is that margin? I really struggle to see how.

> it's margin with 100% collateral

Except the collateral hasn't settled yet, so you can't guarantee what could happen.

> It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check.

There are tons of things that could happen here. The check could bounce. Your bank could go under. The check could be fake. You could have stolen the check from someone else, and when they see it clear, they'll call their bank and the funds will be withdrawn.

> Would the trade clear before the check? Sure. Is that margin?

Yes, it is. The broker may choose to loan you the money short term with the assumption that the check will clear, but they don't have to. They could just refuse to make the trade until the funds clear.

If they did choose to buy the stock for you, they would be accepting that risk. If your money doesn't clear, they will be stuck with the stock.

If this was a share of VTI, with low volatility, they'd likely be fine with it. Even if the check didn't clear, they could just re-sell the stock. It's super unlikely to drastically check in value in the 2 days before the check clears.

If this was a share of GME today, they are buying it for you for $350. There is a change that your check doesn't clear. There is a chance that tomorrow GME is worth $50. If both of those things happen, your broker would have paid $350 for a stock that they didn't want, and can only sell for $50, and be stuck holding a $300 loss.

Ie, they have loaned you money (even if it's short term and with no interest), but if the account doesn't actually get funded, or a previous trade doesn't actually settle[0], they are left holding the bag, the same as if it was "traditional" margin.

[0] This is unlikely, but it could happen for a variety of reasons. I believe this would correlate with much larger issues with the state of the financial system, and in that case would just start compounding issues (because if your trade doesn't settle, then chances are a whole bunch of trades don't settle, and your broker will be left holding the bag for all of them)

This all actually seems amazing for the user? I'm confused why people are complaining about it?

In typical times, yes, it is "amazing" for the user, in that they get to trade more often without worrying about the underlying complexity.

People right now are complaining because they are (reportedly) being margin-called, largely yelling on the internet that they are being margin called but weren't using margin therefore Robinhood is conspiring with George Soros or some shit, even though they technically were trading with Robinhoods money.

Should Robinhood be allowed to treat something as a trade on margin when the fact that it is on margin is papered over and the user clearly doesn't understand what they're doing? Probably not.

But this isn't Robinhood "manipulating the market to support Hedge Funds (or whoever the new enemy is today[0]); this is Robinhood having a gold-plated pile of dog-shit that they've been selling as solid gold for the last couple of years, and now the cracks are showing.

[0] I heard this morning that the new enemy who is trying to manipulate the market is the DTCC. Which is just... comical in my opinion, but hey, the internet is gunna internet I guess

Ok sure, but I still don't really see what's so bad about being margin called. Like even given that unlikely occurrence where RH might margin call you, what you get out of RH doing this still seems all around great for the user.

Margin calls typically end poorly for the user because they are highly correlated with the asset being in a negative position.

If you buy a $10 stock on margin, and it raises to $15, you owe Robinhood $10, and that is secured by a $15 stock. This is extremely unlikely to get margin called. Even if it does, you're up.

If you buy a $10 stock on margin, and it drops to $5 (even if just temporarily), you owe Robinhood $10 secured by a $5 stock, which puts them in a riskier position, and may margin-call to cut their losses. You get the $5 from the sale, but still owe Robinhood the initial $10.

I'm sure you can see how this can compound to amplify drops if a large number of people have bought the same thing, all on margin, and it starts dropping for whatever reason.

Edit: Follow-on

This is particularly "bad" if your goal was to "own the stock" (at pretty much any price) just so that someone else can't buy it.

You are correct. FINRA Rule 4210 defines the requirements for margin.

Robinhood's FAQ on the subject was ostensibly written by someone who doesn't understand that "margin" is a word with specific meaning in the context of a highly regulated brokerage business. It's an account where you take risk with only partial equity, with the institution putting up the balance.

From FINRA:

"The term 'margin' means the amount of equity to be maintained on a security position held or carried in an account."

Elsewhere on Robinhood's site, I was happy to find some acknowledgment of the regulatory requirements:

"To purchase a security on margin, we require that you have at least $2,000 or 100 percent of the security’s purchase price (whichever value is less) deposited into your account. This is called the "margin minimum." If you are designated a pattern day trader, you must have $25,000 in portfolio value (minus any cryptocurrency positions) before you continue day trading.

Note: If you are borrowing on margin and fall under $2k portfolio value, you are at risk of a margin call and potential liquidation"

People here are downvoting you because they don't know the rules and they believe Robinhood's website when it says that Robinhood Instant is margin.

RH is free and doesn't charge commissions.

This should be a BIG RED FLAG that you are the product and not the customer. In general, if you aren't paying, they have no interest in keeping you happy.

For regular purchases, most large brokerages don't charge commissions these days on most purchases. Not a particular fan of RH but the fact that they don't charge commissions isn't any more of a flag than in the case of Fidelity.

Where do brokerage firms that don’t charge for trades or membership make their money from then?

Interest on cash/float/loans, management fees on their own funds, "skim" off trades, other fees of various kinds, etc.

it is a red flag indeed. They route orders to market makers that profit from arbitrage (not exchanges), and other shady stuff.

Almost no one charges commission these days.

A bit like the forex shops at airports that sell you the pound for $1.47, and buy it for $1.27, but charge "no commission"...

Obviously brokerages still make money in lots of ways such as low interest on cash accounts, fees on their own mutual funds, etc. But the point is that there's noting unique about RH not charging commissions.

RH isn't free, you can upgrade to a paid account.

They skim a little bit off each trade, but in a way that doesn't cost the consumer more than the sticker price. It's basically a commission and every broker does it, so no red flag.

Do RH users get worse prices than commission brokers?

Depends on which broker. But generally it's somewhere around a penny so for most trades even if you're paying more per stock it's a better deal than even a very cheap direct commission.

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