Robinhood will fail again: stock trading is broken
fattailedthoughts.substack.com
fattailedthoughts.substack.com
This is false. You could close positions (ie. sell), just not open new positions.
https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
>In light of recent volatility, we restricted transactions for certain securities to position closing only.
The big problem here IMO is Robinhood's messaging. What the heck was their PR department thinking? Why didn't they just come right out and say "hey look, we have legal requirements which we're unable to fulfill in the short term, here's an explanation of the risk controls we're unable to meet. We want to help you do these trades safely, we're working to put more capital on the table for you, our beloved users"? Why molly-coddle your user base with "uhh sorry can't, goodbye"?
1. PR people didn't really understand what was going on
2. Ppl at the company didn't expect retail traders to understanding what was going on.
3. They had trouble with regulation in the past and are trying to appear as a legit brokerage.
4. Maybe they figured that they could get enough capital quickly enough to open up trading again or they were in active negations with DTCC. (Which they sort of did.)
EDIT: Formatting
Just to be clear... I too am not aware of any evidence that this was the case. HOWEVER, there is a clear link of stakeholders between Citadel and Melvin Capital. Citadel provides the settlement for RH and it's entirely plausible that Ken Griffin reminded Robinhood who's paying their bills. RH had the shroud of legitimate direct financial reasons to stall order flow - so it was a win-win at the loss of PR/customer service.
By all accounts, RH was the most restrictive and had the highest number of users placing non-sell orders. Very different ball game.
What else is wrong?
In other words, "there's no evidence that they did it, but they stood to benefit so they probably did it"?
The terms of their deal weren’t disclosed but a lot of the news stories suggested Citadel got a slice of Melvin for a line of credit. That’s a pretty good distressed asset price!
Not sure, but Ken Griffin personally would.
Right. Speculative, but plausible.
Nice try, but Citadel is the largest market maker and if it were an exchange (ostensibly, it might as well be one!) then it would be almost as large as the CBOE!
Source: Image from Quartz: https://i.imgur.com/SBzQn5C.png
I didn't assert that. Any brokerage that uses a provider for settlement was taking on additional untold risk (including Schwab). Schwab, in theory, has enough assets to cover something of that size of trading GME introduced but their clientbase isn't the same as RH, so the reputational risk was much lower. It was a precautionary move, not a "our company might go under and we're gonna piss off our key partners" type of move.
See my other note - you're wrong about the nature of restrictions and level of impact on Schwab vs RH (and other brokerages for that matter).
Providing payment for order flow neither means you are the settler or the clearer.
Effectively every entity that trades securities in the US has to be either a client of a member or a member of DTCC.
- Ken Griffin owns 85% of Citadel
- Citadel handles 40% of stock trades in the US
- Citadel has $38 billion of assets under management as of March 2021
- On January 25, it was announced that Griffin's Citadel would invest $2 billion into Melvin Capital, which had suffered losses of more than 30% on account of its short positions, particularly on GameStop
- On January 28, Robinhood, an electronic trading platform favored by many traders involved in buying GameStop stock and options, abruptly announced that it would halt all purchases of GameStop securities except to cover shorts and would only allow these securities to be sold if already held (but not sold short); the price of GME stock declined steeply shortly thereafter.
This is not a silly assertion.
EDIT: PS - I know US Senators can be silly, but here is the implication from a US Senator and former law professor: https://www.warren.senate.gov/imo/media/doc/02.16.2021%20Let...
> maybe you think they can strong-arm Schwab, too?
I never said that, did I? I think its well known that PFOF is a controversial business practice because it can create conflicts of interest. That's not a new thought.
Read the full article and maybe you'll understand better? If you're lazy here ya go:
> Call it shabby if you want. Payment for order flow was legal, and Madoff fought to keep it so. Under pressure from the SEC, the NASD, the securities industry's self-regulatory body, assembled a panel to study the issue in 1990. At the time, payment for order flow was highly controversial, and opposition was intense.
I don't understand why you guys are so hand-wavy about the the idea that PFOF introduces serious conflicts of interest, when it's been debated for decades (with serious thought, not just some random internet trolls). A bunch of reddit/RH users talking about the issues with PFOF isn't new - that's my point. You seem to suggest that just because they are the ones bringing light to it that it shouldn't be taken seriously. Weird.
Well you just casually linked a 11k word article with little context. I'm not going to read that and then try to figure out whether that article was supposed to serve as an addition to your original argument, or merely a source to back up your claim about PFOF being pioneered by maddoff.
>At the time, payment for order flow was highly controversial, and opposition was intense.
In other words, PFOF is bad because Madoff fought for it and it was controversial? That's still guilt by association, and a terrible argument.
>I don't understand why you guys are so hand-wavy about the the idea that PFOF introduces serious conflicts of interest
Because they're already obligated by law to provide best execution. They're also obligated to provide reports on the quality of execution.
>You seem to suggest that just because they are the ones bringing light to it that it shouldn't be taken seriously. Weird.
You started off by insinuating that robinhood took orders from melvin/citadel to restrict trades. Insofar as that's concerned, it shouldn't be taken seriously because there's scarce evidence.
I guess the statement "At the time, payment for order flow was highly controversial, and opposition was intense." doesn't mean the same thing to you as it does to me. In other words it didn't say it was controversial because it was Madoff, it was controversial because of the nature of incentives. If you're not going to read the article or understanding why PFOF is controversial (sans Maddoff or Warren's involvement) then it's not worth discussing anything here. Thanks.
> Because they're already obligated by law to provide best execution. They're also obligated to provide reports on the quality of execution.
You mean the same law that...you guessed it Robinhood violated?!
Here is the CEO of a big brokerage explaining how bad of a situation the hedge funds (shorts) were in, they made a terrible trade.
All you need to know. Shorts made a terrible bet and had Robinhood cut off retail to save their asses.
Now, that is now how things actually work, but I could easily see such an announcement causing that.
You must be new to RH's PR team. This is the same company that tried to roll out a 3% savings account, but had to pull it back because they deceived the public about it actually being a true savings account[0].
But the best part of this campaign was they got to keep all of the customer acquisition (even if some churned) to people they could upsell into brokerage accounts. Legality and ethics aside, this probably netted them more customers/money than the perceived mishap of the rollout...win for the PR team.
[0] - https://clark.com/personal-finance-credit/robinhood-checking...
...because they failed to prepare for a 99 percentile event?
They weren't well capitalized. What gave you that idea? Just to preempt the "but DTCC said so" reply: https://news.ycombinator.com/item?id=28000185
>and continued to do so until the price was 1/10th of the high
Because the price isn't a relevant factor. GME being 1/10th the price just means that people would buy 10x more shares, leading to the same deposit requirements.
>...because they failed to prepare for a 99 percentile event?
Because they used the funds that their clients had deposited to buy stocks with as cash to make their margin business work. At least that's how I understand it.
Not really, because there's an extenuating circumstance that forced them to do it (ie. DTCC raising deposit requirements).
EDIT: Updated with source. I'm curious about the downvotes.
1. Page 4. https://www.dtcc.com/-/media/Files/PDFs/DTCC-Statement-Febru...
Source? And for how long?
>All DTCC clearing members satisfied their requirements before the market opened.
That says nothing about the requirements they'll face later, as a result of trades made on the 28th.
Source: https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea56... Excerpt: "Robinhood, the online brokerage at the centre of wild trading in equities this week, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position after a turbulent four days. The company has drawn down at least several hundred million dollars via a credit facility with banks led by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the move."
Posted collateral also isn't "very liquid"; the whole point of that money is that if shit goes sideways --- and everything was going sideways at Robinhood --- that money will get spent making counterparties whole. Robinhood couldn't just give the money back to its lenders.
The $3B collateral call was withdrawn just as quickly as it had been made - even better, since they raised $1B against what seems to be no collateral call. Robinhood actually had two ways of resolving the situation. One was to admit fault and either liquidate the underlying securities or have a portion of their clearing position liquidated, which would have resulted in the ability to return collateral and to be on the hook for the losses they caused for their customers. The other, was to restrict purchases on securities that either were thought to contribute to the VaR collateral assessment, or for which Robinhood's bookkeeping did not match between investor accounts and actual cash/security holdings.
As it turns out, neither of these options was necessary according to the facts at hand - Robinhood's collateral call was withdrawn prior to Robinhood taking any action at all, and according to media sources in a Fortune article, no negotiation took place between the NSCC and Robinhood. So there must be another reason that Robinhood's books were not balanced. However, Robinhood used the second option anyway. This is the circumstance which has led to the WSB "conspiracy" theory that you discounted in other comments, which explores the idea that Robinhood is somehow involved, either willingly or not, in some type of market manipulation in conjunction with their payment-for-order-flow market maker, Citadel, who fills basically all of their orders for them. I'm not sure that "conspiracy" is the word to use when fines, penalties, and settlements for breaking securities law are commonplace among financial institutions, but that is just my opinion.
To address the matter of payment-for-order-flow, it's a practice that is currently banned in countries like Australia, Canada, and the UK, largely due to conflicts of interest. There is actually another way of brokering which these countries use instead - it's simply paying a fee to execute the trades, old-fashioned and usually minus the confetti. That said, market makers are often given a good chunk of direct order flow anyway, which tends to move the flow off-exchange even if they are not paying for the privilege of obtaining order flow.
What's the implication here, that "they were able to raise capital within a very short time frame so they didn't have to restrict trading"? Of course we know after the fact that they were able to secure funding. What if by 1pm they ran out of money and didn't know whether the funding would be secured or not? Do they continue allow trades and hope that the funding will come through? Do they issue a hasty statement and halt all trading?
Likewise, it is not unreasonable for investors to expect that a broker would actually possess the shares that the investor has purchased, and it is expected that the broker would make a timely effort to procure actual shares after acknowledging that an order was filled. It seems that perhaps this expectation was broken by Robinhood's bizarre book-keeping practices. The "extenuating circumstances" are simply a result of Robinhood deciding to play a game of brinkmanship, and rather than owning up to the problem and paying out of pocket for their mistake, they decided to hurt their own customers.
EDIT: I'd like to cite some articles which hopefully provide insight into Robinhood scrambling to locate shares on transfers to other brokers, and the unusual amount of reported fails-to-deliver that immediately occurred at the time that Robinhood took action. https://www.cnbc.com/2021/02/05/ftc-sees-surge-in-robinhood-... https://www.bloomberg.com/news/articles/2021-02-17/sec-data-...
You can get angry at Robinhood for being a clownfire and I won't argue. But you're saying much more than that.
People buying high risk securities isn't uncommon, but everyone piling on to the same high risk security at the volumes seen that week is uncommon.
>Likewise, it is not unreasonable for investors to expect that a broker would actually possess the shares that the investor has purchased, and it is expected that the broker would make a timely effort to procure actual shares after acknowledging that an order was filled.
Did robinhood fail to do deliver shares? Also keep in mind robinhood doesn't operate like amazon. They're not fulfilling orders from shares they have on hand. Them being able to deliver the shares is contingent on the clearinghouse being able to deliver the shares. Them not being able to because the clearinghouse and/or their counterparties weren't able to shouldn't really be blamed on robinhood themselves.
Even if they had not met the requirements (again, which they did), a depository requirement change is not an extenuating circumstance in the least. That is part and parcel of this business.
Nobody should be defending Robinhood here. People are just wrong about what Robinhood did wrong.
...the morning of. The deposit requirements will go up as customers place more trades.
>a depository requirement change is not an extenuating circumstance in the least. That is part and parcel of this business.
If it's a 99 percentile event that nobody could have saw coming happened, why shouldn't it be an extenuating circumstance? Keep in mind, they're a discount brokerage. It's like getting mad that your vps from a lowendbox provider had a few days of downtime because their raid6 had 2 disk failures.
I mixed up my frozen trading stories here. It was March 2020 where we saw fully frozen trades due to internal Robinhood infrastructure failures, unrelated to DTCC infrastructure and margin.
SEC Charges Robinhood Financial With Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution
It's not especially heinous, but they were not very transparent about it (to be fair, it probably would have taken a bit to explain that they took a greater cut of the price improvement vs the legal benchmark).
All RH did was substantially reduce fees and make trading a little more exciting for unsophisticated "investors."
They did. I personally tried (in addition to RH) WeBull and Fidelity. Both allowed me to access margin and options just as easily. The only difficulty I had with Fidelity was their atrocious UX (not just for options, but in every single aspect).
>then have cute animations and other tech-inspired addictive features.
Tech-inspired addictive features? Like which ones? The only "addictive" feature that RH has over Fidelity is UX that doesn't suck massively. Had to help a friend recently with something as simple as closing out a trade on Fidelity, and we spent 10-15 mins trying to figure out how to do it. This is a disgrace, given how basic and fundamental of an operation closing a trade is.
Imagine if gmail has made it extremely difficult to reply to an email, by making you click through bajillion submenus and dropdowns to even get to the textbox. That's how bad it is.
So basically the thing left to blame them for is good UX.
"No using colors in your UI other than grey, white and black"
There is more than just random numbers involved. Equity prices may have a tenuous connection to reality, but there is some real-world basis for stock, bonds, and derivatives. That is what separates financial markets from casino games (which are purely random number games).
Minor nitpick: some companies do this. There are plenty that never issue dividends, don't sell voting shares, and don't do buybacks.
Mostly because not everyone is bound by that distinction. Many people recognize that the need for there to be a difference between financial games is purely cultural or religious.
Even the delineation between positive expected value games (buy and hold investing) and negative expected value games (table games at casinos) is not so binary with derivatives.
The reason this discrepancy exists in the US is because states regulate casinos and property and the federal government regulates the subset of property that are deemed securities. But despite the supporting culture, the Federal government is actually quiet on gambling, except to maintain a prohibition on financial services helping transfer funds to online gambling, allowing states to maintain their monopolies.
For me, it doesn't matter, I like to know the rules or lack thereof for whatever game I happen to be playing. For me, energy is better spent towards fixing structural issues, such as DTCC and antiquated mandates on long settlement times, which should be much shorter.
It did catch up with them, but the headline marketing remains unchanged. https://www.sec.gov/news/press-release/2020-321
Actually your broker has to execute your order at a better or equal price than the NBBO. I'm presuming that's what you mean by "best public offer", because the price improvements that you get from market makers are definitely not public.
In one poll conducted in the FinTwit community, about 70% of individuals said they could not trade because of an outage at some point. Wild.
We're hoping to bring light to this issue, and hold brokers responsible.
Might want to polish this up a bit first mate.
This keeps getting worse! This is as useful as a rock on a string telling me the weather.
For some reason I feel like this string of comments is all the same person and the person who downvoted everything. Trolls...
""The risk of a single centralized party was realized at the worst possible time when the system could least tolerate it.""
I can't believe our SPOF actually F-ed!!
As is tradition.