Robinhood in a tough position as it faces a wave of lawsuits over GameStop saga | Hacker News Reader

Robinhood in a tough position as it faces a wave of lawsuits over GameStop saga

finance.yahoo.com

42 pointsdeegles35 comments

They just got a $1B and it’s looking like everything they did was legal and within their rights.

If anything good comes out of this whole fiasco, can it be the end of ACH and the beginning of an instant bank settlement system? Extend that to stock and options and make a T+1 and T+2 disappear. If it can’t be instant due to settlement derivatives, at least settle at close of business.

I’m reluctant to be ‘that guy’, but it really seems like this space is ripe for disruption by a blockchain solution. Surely a stock can be modelled almost directly as a scarce digital asset token traded anywhere or exchanged directly if desired. Voting rights could be implemented with a smart contract.

Sorry, blockchain is still a solution in search of a real world problem.

Stock trades happen in real time or as close to it as possible --- and at extremely high volumes at times. Any delay can cost someone a lot of money. No one wants to wait for a blockchain to try and reach a consensus.

My very basic understanding is that Robinhood is only creating an illusion for its customers that the stocks are settling instantly: in reality it can still takes days behind the scenes to really exchange shares.

No one waits days to buy/sell stocks. Average execution time with the top brokers is a fraction of second.

https://www.brokerage-review.com/investing-firm/broker-trade...

But as far as I understand it, the actual transfer of the underlying shares does not happen in a fraction of a second. The only thing that happens in a fraction of a second is an agreement between two parties to settle some shares in the near future.

Executing a trade is not the same thing as the underlying instrument changing hands, which is still slow.

Nowadays, the underlying instrument (i.e. a fancy piece of paper) rarely ever changes hands. It's possible to get it (with some delay) but most people don't bother.

The digital/electronic record of the trade and the transfer of monetary funds between accounts is generally sufficient to establish ownership and both happen in near real time under SEC regulations between registered brokers.

Basically, if the cross checked double entry accounts of buyer, seller and their brokers all agree that the trade took place, that is good enough for most folks and the SEC. Day traders can and often do buy and sell a stock multiple times in a day without delay.

Sure, it could be implemented like that, but why? What would any of the players who could do something like this have to gain from it? There are simpler ways to implement these things, if you don't have a requirement for a distributed ledger where each actor is untrusted.

> I’m reluctant to be ‘that guy’, but it really seems like this space is ripe for disruption by a blockchain solution.

No. You just need a bog-standard, centralized solution actually implemented.

The problem isn't tech--it's simply getting the legacy financial stuff up to circa Y2K programming standards.

Is it really in a tough position, though? I'm pretty sure they have the right to suspend/restrict trading in any security at their sole discretion.

Yes they have to spend time and money defending these lawsuits but they are mostly frivolous AFAIK.

Do they have that right? Could this been seen as market manipulation by locking out a significant amount of stock market customers? When all of a sudden you say...you can't buy X, but if you own it you can sell it...that will drive the price of X down.

Since the collateral requirements were based on their net position, sells reduced their collateral requirements while buys increased it. This was a risk management decision and since they don’t profit directly from the price moving one way or another, it would be pretty hard to argue it wasn’t just risk management to protect the rest of their users from RH running out of cash and going into receivership.

The Webull CEO was saying that independent of this logic, there would never be a scenario where users be unable to close their accounts. For the user, it's much worse for RH to prevent me from accessing my money than to prevent me from opening new positions.

Risk management in that they don't want to be left holding the bag when the investors go bankrupt.

OK, but they didn't let any users purchase the stock. Ones that have settled funds and don't trade on margin. I get not letting a brand new account with unsettled funds trade on margin for huge positions...but if I've got $100K cash in my account there should be no reason to limit my purchasing.

It is interesting to note that buying was also limited for cash accounts where collateral should not have been an issue.

They can't use customer funds for collateral. If you give $100 to RH for a stock, RH gives $3 of their own money to the clearinghouse. Two days later you get your stock, the buyer gets your $100, and RH gets their $3 back. The $3 turned into the full $100 and RH can't use any of your $100 to pay it.

Yes they do and it's in the TOS of every single retail brokerage account you sign up for.

I won't disagree with this point (companies put forth garbage TOS on the regular), but I am curious to see how this stands up to renewed regulatory (FINRA, SEC) and Congressional scrutiny.

Several brokerages (Fidelity, Vanguard) did not limit trading of GME in any way during high volatility last week, despite DTCC/NSCC's risk model calling for 100% collateral on GME for a duration of time.

Fidelity and Vanguard run their own clearinghouses and don’t touch DTCC. Robinhood technically does as well, but they still do the vast majority of their clearing through DTCC. Pretty likely RH will invest in their clearing operations this year.

That doesn't solve their undercapitalization issue [1]. RH has a license to perform their own clearing [2], but they're still going to have capital requirements governed by NSCC collateral requirements (which is put forth by Dodd-Frank) [3]. If regulators require capitalization to support outlier volatility market conditions instead of allowing brokerages to stop trades due to undercapitalization (whether because of credit line availability, the amount of the market they've captured, etc), ¯\_(ツ)_/¯.

Would it be right and proper (for FINRA and/or Congress) to allow Robinhood to exist to push order flow to institutions only when seas are calm? That does not sound like a functional broker to me.

[1] https://finance.yahoo.com/news/robinhood-said-draw-credit-li... (Robinhood Is Said to Draw on Bank Credit Lines Amid Tumult)

[2] https://blog.robinhood.com/news/2018/10/9/introducing-cleari... (Introducing Clearing by Robinhood, October 2018)

[3] https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co... (NSCC Disclosure Framework, PDF)

Disclaimer: Thoughts and opinions are my own.

Edit window expired on the above comment. Robinhood is solving for capitalization with an equity raise [1] [2].

[1] https://blog.robinhood.com/news/2021/2/1/robinhood-raises-34... (Robinhood Raises $3.4 Billion to Fuel Record Customer Growth)

[2] https://news.ycombinator.com/item?id=25990453 (HN: Robinhood raises another $2.4B from shareholders)

>Several brokerages (Fidelity, Vanguard) did not limit trading of GME in any way during high volatility last week, despite DTCC/NSCC's risk model calling for 100% collateral on GME for a duration of time.

Maybe because those brokerages don't have a high concentration of wsb users, unlike robinhood or webbull?

Revisiting this subthread to confirm you're probably right, based on this comment: https://news.ycombinator.com/item?id=26013821

Robinhood could not have anticipated the clearinghouse requiring 100% collateral for a single named security due to the high FTD (failure to deliver) rate. Robinhood handled the situation poorly (PR and end user communications), but it's possible the clearinghouse would've tied any brokerage's hands with drastically increased collateral requirements when their model indicates a possible insolvency risk.

so whats stopping a hedge fund from paying them $$$ to "suspend" trading on a particular stock for a given time frame?

If what they are doing is legal, than certainly that would be legal?

So here's the thing: there's plausible deniability at play here. RH isn't the only brokerage to suspend/limit trading in volatile stocks.

The reason given (liquidity issues for the broker and clearinghouse) is entirely plausible.

While it's possible, it's (I believe) very difficult to prove that that's what happened, and frankly, there's a more obvious answer. Hanlon's razor applies here.

Do you mean Ockham's razor? Hanlon's razor is completely incompatible with the efficient market hypothesis, and really just finance in general.

Hanlon's razor is "Never ascribe to malice that which is sufficiently explained by incompetence."

The "incompetence" explanation is that RH is a baby newcomer as far as retail brokerages go and made a desperate move to placate NSCC and save their butts. They got in over their heads and cast about to figure out how to make it through this week.

The "malice" explanation would be a sinister cabal led by Citadel (RH's MM who pays them for order flow) pulled strings via a back room threat to make RH suspend buying of GME.

The

Intent matters. In your hypothetical, they wouldn’t be able to rely on the argument of risk management if their risk profile hadn’t changed.

In this case, it would be illegal market manipulation on behalf of both the hedge fund and RH. There are plenty of laws that govern people's behavior depending on intent; for instance, shorting a stock is not illegal, but organizing a short in order to force other companies to sell (the opposite of a short squeeze) is illegal. The SEC can use your own trades as evidence against you; if you build a massive short position that is otherwise inconsistent with your risk management philosophy, it's evidence that this trade was manipulative.

> I'm pretty sure they have the right to suspend/restrict trading in any security at their sole discretion

Not if it's market manipulation.

That's like saying I'm pretty sure a CEO is allowed to trade stock at their discretion. Sure but not if they do it with insider knowledge.

>Not if it's market manipulation.

But what's the evidence for that? The evidence I've seen so far were some vague/contradictory statements the CEO made on TV, and that citadel/melvin stood to benefit. Not exactly a slam dunk imo.

Someone also pointed out that they announced the limit BEFORE allowing trade executions, not retroactively. This is likely fully legal. Their inability to pay up front was the cause.

Its another one of those "we'll worry about it later" problems, that once they hit, they acquired like 3.4 billion dollars and can continue. So yeah, I doubt any of those lawsuits will yield anything.

Even if they do, they have major solvency/liquidity issues as a result of this fiasco and they are feeling the pressure. Folks are moving to other brokerages in large quantities.

They should have just been honest about the situation from the start: "We were caught without enough capital to settle all your trades, we are sorry and will do better next time".

Instead they made it seem like they were protecting traders and doing them a favor. They didn't have enough cash on hand to settle trades and meet the capital requirements. They messed up on that front and are in the process of fixing that with additional investment from their wealthy shareholders.

It may be too late however as everyone I know that did trade on RH is now in the process of migrating to another more established brokerage.

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