> Brokers cannot use client money to satisfy their clearing fund obligation. So whether or not the accounts had a settled balance didn't matter - as you can see from the other brokers which halted buys and did not have "instant transfers".
One is the payment capability of the customer to pay RH when the purchase is settled (T+2).
The other is the relationship and payment capability of RH to the clearing house (DTCC) for its orders that it has placed with other brokers.
RH is required, as a broker, to provide its own collateral to the clearing house so that the clearing house can guarantee to other brokers that all their trades will be settled at T+2.
RH is not allowed by law to use their customers' money as collateral to DTCC. If RH goes broke, then DTCC does the following:
a) takes all their collateral and uses it to make the other brokers good on their trades (which makes the counterparties good on the trade) b) takes the customers money and uses it to complete the trades (which makes the customers good on their trade).
RH is left to be picked apart.
That's the purpose of the clearinghouse.
I still can’t find an authoritative citation for this, and it seems seems like poor design to me.
Suppose Robinhood has one customer. That customer opens a cash trading account, deposits $1bn into it, waits for the deposit to clear and waits an extra week for good measure, and then uses all $1bn to buy an absurdly volatile stock.
Now, between the execution of the trade and settlement, Robinhood is apparently holding $1bn (in a segregated account?), and Robinhood needs to post some largish fraction of $1bn with their clearer to offset the risk that Robinhood fails to pay the $1bn at settlement.
To me, this seems like un unreasonable requirement for Robinhood. If their actually go bust before settlement, they owe DTCC, etc $1bn, the customer has $1bn deposited (in the same segregated account), and the customer is owed some number of shares of the stock. All the money is there!
So why can’t Robinhood satisfy its clearing fund requirement by putting the appropriate fraction (or even all) of the customer’s $1bn into segregated account with its clearer? After all, the mere fact that Robinhood has a whale for a client does not mean they are any more likely to go bust, except for the fact that “bust” seems to include this odd case where Robinhood can’t independently secure its customer’s trade.
Separately, when someone with Robinhood Gold buys shares on margin, that purchase is financed in part with Robinhood's funds. Look up "initial margin" and "maintenance margin" to understand why. This involves some risk for Robinhood, because assets can sometimes lose value faster than Robinhood can sell them to preserve its equity.
Finally, Robinhood is a clearing member and has to put up money as insurance to keep the clearinghouses capitalized in case some bad juju goes down in the markets and Robinhood hits the skids.
1) Custom initiates $300 purchase of some stock.
2) RH sends customer's $300 to counterparty.
3) After receiving the $300 and before delivering stock to RH, counterparty goes belly up.
Forbidding RH to use customer funds in that manner prevents that race condition.
In any case, I think it would be entirely ridiculous for one’s stock broker to front the entire purchase price for each and every stock purchase to secure customers against counterparties who might take the money and not deliver the stock. This would involve the broker coming up with 100% of the price, not merely an amount related to the anticipated worst-case P&L.
[0] https://www.cls-group.com/ In this particular instance, I do know what I’m talking about. The story of Herstatt Bank is fascinating.