So new entrant joins industry, ruins pricing by giving product away for free, nearly goes under because it over extended itself, and then blames the rules. Yeah I'm sure everyone else wants to do what RH says.
If they had kept blocking GME buying, they wouldn't have needed the extra funds, but also would've pissed off their clients even more.
This is not my understanding. The 3AM phone call was a collateral call. That covers existing trades.
As a clearing broker, when they sent in the trade they created the liability.
Defaulting on clearing obligations is the old school way for a brokerage to go under. The moment that happens, customers’ funds and assets are segregated and what is left goes into receivership. The parent company would then file for bankruptcy protection to avoid being stripped for the broker-dealer.
The point of a clearinghouse is that trades always settle. Certainty in that is paramount. Individual members’ survival is secondary. Which makes sense since it aligns interests.
Fidelity has $3.3 trillion AUM. Imagine if all its customers decided to take some actions that led the DTC to demand an "Additional Participants Fund Deposit" equivalent to 100% of what's at risk, like in Robinhood's case. Would Fidelity's inability to pay that be viewed as due to a failing on Fidelity's part?
Fidelity, the asset manager, doesn’t clear its own trades. National Financial Services, LLC, a separate legal entity, clears some of its trades [1].
Becoming a clearing broker is a huge deal because it takes an enormous amount of discipline.
[1] https://www.dtcc.com/-/media/Files/Downloads/client-center/D...
Knowing this in advance and preparing for it is exactly the business RH is in, and they should have been much better prepared for it.
If they were unable to meet this requirement it is a clear default on their obligations as a broker, and they would be bankrupt at this point.
It would be like if I was trading on margin, but had no idea what my margin collateral requirements were - one day prices drop on the stock I’ve been trading and my broker does a margin call, and I’m going ‘uh what do you mean?!?’ when they liquidate my holdings because I never paid attention to any of that paperwork they sent over. Is it my brokers fault then?
Credit where it's due: ripping off the commission band-aid was overdue, and Robinhood single handedly caused it. And abridging T+2 is probably a good idea. (Though real-time settlement and clearing is probably not.)
What's missing in their communications is the mea culpa. We got into this to make big changes. We made them. One thing we overlooked was this weird bit of the financial system. Here is why we missed it, here is why it is obscure, and here are our tabula rasa suggestions on how it could be improved.
This seems to me a lot like when VC backed startups artificially suppress prices below break even to push out competitors, with the intent to raise prices even more later. It's good for the consumer while they can get VC subsidized goods and services, then very bad for the consumer once the VC funds dry up.
Are there serious accusations of front-running (a serious financial crime) and collusion to facilitate that crime? Or are you referring to people with a poor understanding of the interactions here making complaints that really boil down to privacy concerns, not actual front-running?
I haven't seen anyone post any evidence of actual front-running.
For why Citadel would pay for retail flow, if they're not committing financial crimes, market making is essentially profiting from separating pricing signal ("alpha") from pricing noise. If the prices are jumping around randomly, you make money by holding prices steady against that noise. If the prices are moving in one direction because new information ("alpha") has become available, you lose money if you try and hold prices steady against those moves. Empirically, in aggregate, retail flow has a lower signal-to-noise ratio (lower alpha) than the market as a whole, so market making on just that flow is more profitable, even though Reg NMS[0] requires Citadel to give RH customers' round-lot orders prices at least one cent per share better than available in the open market (price improvement over NBBO, combined with no sub-penny pricing).
By paying to exclusively trade against a low-alpha channel and damp out some of that noise before it affects the market as a whole, Citadel makes more money, at the expense of other market makers who would normally have exposure to that noise.
Also, there's a bias in execution called adverse selection: bad trades tend to get filled faster than good trades. For their non-market-making strategies, crossing against low-alpha flow has less adverse selection than trading those strategies on the public markets. Here too, RH customers trading round lots get prices at least 1 cent better per share than NBBO, unless the orders are passed through and placed on a regular public venue.
Disclosure: I work in financial services, but have never worked for Citadel.