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Comment by swampthing | Hacker News Reader

"nearly goes under because it over extended itself" is not really accurate. They took the steps necessary to prevent that from happening, by blocking the behavior that would have led to that. Unfortunately, those steps, in combination with poor communication on Robinhood's part, and emotion, ignorance, and paranoia on the part of the general public, has led to a PR crisis for them.

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They didn't block behaviour that would lead to that. They disabled their core product and raised $3.4 billion in a week to cover their fuck up. Most likely, the founders of RH found themselve significantly diluted by this event and if they hadn't been able to raise more capital they likely would've gone bankrupt even if they disabled everything. That's pretty much the definition of over-extending yourself.

Where are you reading that they would have gone bankrupt even with the trading restrictions they put in place?

Why else would they need an emergency $3.4B fund raise?

To keep up their margin requirements to allow GME trading.

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.

But they did block GME buying anyway.

It's as accurate as it is inaccurate. Had Robinhood not been able to find hundreds of millions of dollars of cash that day, they would have been declared insolvent.

I don't think that's true. They raised the additional capital so that their customers could continue buying shares of those 8-50 companies. Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise.

> Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise

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.

That sounds plausible, but even then, if Robinhood couldn't meet the new deposit requirements, I think the existing trades just wouldn't settle (and obviously they wouldn't be accepting new ones)? I'm not seeing how Robinhood would have gone bankrupt in such a situation.

> if Robinhood couldn't meet the new deposit requirements, I think the existing trades just wouldn't settle (and obviously they wouldn't be accepting new ones)?

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.

I don't think this is the same as what you're referring to. Under the DTC rules, this would likely have been an "Additional Participants Fund Deposit". The rules seem intentionally vague about what happens if you don't make this payment. As far as I can tell, the rules allow the DTC to unilaterally demand an uncapped deposit from a participant at any time.

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?

Exchange rules, clearinghouse rules and statute are extremely clear on this. Default to your clearinghouse and you are shut down.

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...

Not being able to cover your obligations with current cash flow (the situation where they would be defaulting on their obligations for existing trades they submitted) is pretty much the definition of bankruptcy, isn’t it?

You could call it that, but these are obligations that appear to have been unilaterally decided by the DTC without prior notice. As far as I can tell, any brokerage using the DTC could potentially suffer the same fate if the stars aligned.

Robinhood agreed to those terms as part of being a broker and using DTCC - it’s part of the common broker insurance pool agreement required to use the clearing house, and required when trading on highly volatile stock to reduce the risk to counterparties if the stock falls mid-transaction/clearing. It is for exactly the situation where a counterparty (like RH) goes bankrupt and can’t pay, which they nearly did.

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?

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