Basically, if I'm lending you money to buy something and that thing is suddenly moving a whole lot more than it used to, it's prudent to ask for more collateral to cover your potential losses.
In a way, its a tragedy of the commons. It would be both sad and ironic if the only casualty of this black swan event were robinhood. But, they likely still have avenues open to them toward recovery.
So the clearing house requires 100% collateral for some stocks now instead of up to 5%. RH can't afford that and GME has been eating up 50% of RH daily trades.
What would be the impact of that on the global financial markets? On the real economy?
I think we're going to see some difficult regulations on retail investors in the not too far future.
On one hand if they don't admit their liquidity problems, people will blame them for playing the HFs game.
If they do admit, well.. it's pretty much game over for them.
I wouldn't say their CEO lied yesterday. More like he talked a lot without really saying anything.
I'm willing to accept that it wasn't a total lie yesterday, and the situation has developed. I think we're past the point to where that statement would still be truthful today.
[1] https://www.cnbc.com/2021/01/29/robinhood-ceo-vlad-tenev-tap...
So the root issue is a mix of more users, more trading and more people going long, all of which increase their capital requirements.
It makes perfect sense now why Robinhood are having issues now. I’m surprised they haven’t cancelled promotions or delayed letting people use proceeds from sales. Do you know if that’s permitted?
I was surprised when they started dicking about with what people could trade. That seemed very suspicious to me. But if they’re worried about new users piling in and all grabbing 1k of GameStop, I can see how only a small bump in users sucks up all their spare cash.
For a brokerage, the T+2 transaction settlement system requires brokers post collateral while a trade is in the process of being settled. T+2 means 2 business days.
On top of that Robinhood does all kinds of promotional stuff that's a drain on their cash position like giving away stock to new users.
T+2 must prolong the agony. So new users turn up (which costs capital for their promos), deposit money (which drones clear yet), buy something (using more capital), sell it and buy something else because why not lock in those gains (using more capital) and so on.
What do brokers do in these cases? It seems like they should have a lender who guarantees capital in the even of volume spikes. It seems like a missed opportunity, I’d lend them cash for a few percent a week :)
"On Thursday, Robinhood was forced to stop customers from buying a number of stocks, like GameStop, that were heavily traded this week. To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation."
https://www.nytimes.com/2021/01/29/technology/robinhood-fund...