Robinhood reports 43% revenue decline
wsj.com
wsj.com
All people who I interact with who are investing with robinhood have very little knowledge of the financial system. I hate making a generalization, but after the whole scandal it seems that robinhood investors were/are in fact not very knowledgeable about how trading works.
By being presented with learning material on how trading works, instead of trying to hide reality behind a pretty GUI? That'd be my choice.
For example on TDAmeritrade you only get a cash account by default, no margin or option trading. You can upgrade and there are multiple levels of margin upgrades in increasing steps of risk. To do an upgrade you have to at least read some material and answer some questions and check boxes. Sure you could lie through it, but at least they make it clear you're signing up for ever increasing risk at every level.
When I first read that RobinHood was allowing people margin and option trading without even telling customers that those are enabled and what it means, I always felt it can only end badly.
And it's not like they did not have other options -- they could have posted more collateral, and given that they raised billions soon after, it was within the real of possibility for them.
Money they raised later couldn't have been used as collateral until they actually raised it, even if the investors would still invest under those conditions.
Hindsight is 20/20. Prior to that event happening, was there credible evidence that an S&P 500 company was going to get pumped 10x in price by a bunch of investors coordinating on social media?
Q: "Do you realize that you literally manipulated the market. Yes or No?"
Vlad: "Thank you for the great question. When I was a boy in Bulgaria [ladida]"
If he had been honest in his dealings then he wouldn't have had to evade every question posed to him.
So why did you start out saying they didn't lock trading...to then say they did lock trading? Do some people will only read the first fifteen words of your post? Like are you aiming to fill the air with positive-sounding sounds that make Robinhood sound good? You think we don't think?
Sometimes contradiction is good and helps with nuance and is meaningful. Here it's just gross, like I don't even have to quote two separate parts of what you said. But since I am entitled to quoting you twice to argue with you, but need no other piece of evidence, I'll just quote that same passage again.
> robinhood didn't lock trading - or at the very least, they were far from the only brokerage to do so and had very little choice in the matter.
If they locked trading...get this...this is my logic...then it is in fact FAIR to SAY that they locked trading. It's only complex because they were cheating their customers, hence the decline of the platform, hence this chain of posts, hence the end of this sentence having spoken my piece.
It was financially unavoidable for Robinhood because they didn't have the _extra_ billions$ in collateral deposited at the clearinghouse to back up their customers' trades (e.g. GME). Various stories about it having to raise extra billions in an emergency: https://www.google.com/search?q=robinhood+emergency+raise+bi...
But retail traders (not the professional traders like George Soros) don't understand that the "Robinhood smartphone app" is a leaky abstraction over final trade settlement at traditional clearing houses. The real-world aspect that "leaked out" was that Robinhood didn't have enough billions in cash. So the ramifications to the UI/UX (the stuff the smartphone user sees) is that you can't transact GME. All that "trade settlement accounting" is too much complexity for non-professionals to understand so the easier narrative to believe is that Robinhood was part of a conspiracy theory to screw the little guy. Yes, being underfunded made them look bad.
**EDIT to add extra link explaining why Robinhood has to post their own collateral to buy stocks on behalf of their customers: https://money.stackexchange.com/questions/136272/why-would-c...
There are many other ways they could have handled it beyond halting buying (and buying only) in an individual stock. The most obvious being just stop letting customers trade with unsettled funds.
You'd think so, but no. The brokerages can't use customer funds to do that. They have to front the cost themselves.
>We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it.
https://finance.yahoo.com/video/heres-why-robinhood-restrict...
I don’t think it resulted in a satisfactory explanation but it goes over a bunch of the same questions being asked on this story, and I still think it’s useful to help isolate what part doesn’t make sense.
The bottom line is that the retail trader stays whole in the case the trade fails to clear.
If the broker was allowed to use the retail trader's money for collateral it would either not really be collateral or it would be at risk of being forfeit. You can't have it both ways.
Edit: note that this other authoritative explanation claims the failure mode is RH holding the bag for a client not depositing funds as promised.
I can't answer why customers with cash in hand couldn't directly settle the trade. Maybe most of the time it doesn't matter and it's easier for brokers to have one settlement process. Maybe the industry has come to depend on the delayed settlement in some unrelated way. Maybe it's something that hasn't fully been adopted due to change taking time. Maybe the referenced regulations get in the way of an uncollateralized process.
They outlined a (dubious) scenario where the collateral protected the clearinghouse or counterparties, not the retail consumer, which your original comment appealed to. So no, you can’t mix and match and equivocate between the two justifications, and if your comment is going to appeal the latter, you can’t equate it with the former.
>I can't answer why customers with cash in hand couldn't directly settle the trade. Maybe…
Okay, I hate to come down hard on you, since you’re far from the only (or worst) offender, but … if what you’re saying is true, you really shouldn’t be commenting on this thread.
If you’re coming in with the view that Gamestonkers are just misinformed about how things work, and you want to tell them so, it’s incumbent on you to actually understand “how things work” at a deeper level, which includes being able to answer follow up questions.
I linked an earlier thread where I, following the Hacker ethos, applied my curiosity to pin down a model that would explain the Robinhood failure and reconcile any deficiencies in my worldmodel. That exchange was an attempt to pin things down rigorously, and a rigorous answer requires that you be able to answer questions like that.
So this really isn’t the place for “fake it till you make it” or throwing around wild speculation. If you speak authoritatively while lacking the requisite understanding, then you’re adding noise, not signal.
It is not a strike against you that you lack that understanding. Heck, I’m the same way! But it is when you want to call others’ understanding deficient. And it does mean you should leave room for others who can (justifiably) offer understanding.
What I can say is that the explanation given is consistent with motives that make sense for the relevant parties. And I feel that was perfectly clear in the linked thread as well. And guess what, the involved parties are publicly saying things that are consistent with all this too!
I never mentioned or in any way disparaged "gamestonkers".
As to the rest of your comment: Actually understanding how this part of the financial system works is going to require a good deal more work than being the obtuse end of a discussion. And I expect you'll be disappointed with what you learn.
1. Clearinghouse member A buys 1000 shares at $200 each, costing a total of $200k. On the day of trade (not settlement) they put up $20k in collateral.
2. Clearinghouse member B buys 2000 shares at $200 each, costing a total of $400k. On the day of trade (not settlement) they put up $40k in collateral
3. Something bad happens. The price of the stock drops to $150, and clearinghouse member A goes bankrupt. They're supposed to pay $200k for the shares they bought, but they can't and those shares are now worth $150k, so they owe the clearinghouse $50k. They only put up $20k in collateral so there's a $30k shortfall.
4. The clearinghouse somehow socializes the losses, presumably using some of the collateral from member B to make up the deficit. Now member B is short $30k.
For a small amount they might be able to cover it out of pocket, but if it was sufficiently large they won't be able to. In that case the net result is that the customer had their funds seized (because their funds were used for the clearinghouse collateral) but their brokerage can't pay for the stock. Forcing the brokerage to use their own funds prevents this problem. The brokerage and their creditors might still lose money, but their customers shouldn't be affected.
I think what you're trying to ask is that if clearinghouse somehow knew that a given buy order would be good (ie. was paid with settled cash), then this whole fiasco wouldn't have occurred. That's true, and that's essentially what T+0 settlement is (ie. you have to come up with all the money on the day of trade).
And for that matter, how can bankruptcy even matter? These are all funds that live in a separate bucket from the rest of operations. Even in a bankruptcy, they wouldn’t disappear (like your coat at a dry cleaner’s.
[1] Recall the comment about how you’re implicitly supposing a “credible lockup of funds” primitive, which has a strange structure, on closer examination: https://news.ycombinator.com/item?id=27694540
1. the collateral is good because it's transferred/wired on the day of purchase.
2. as mentioned in my previous comment, that could theoretically be done today (ie. "trust me, I can definitely come up with the money on the day of settlement"), but it's not done for various reasons.
>And for that matter, how can bankruptcy even matter? These are all funds that live in a separate bucket from the rest of operations. Even in a bankruptcy, they wouldn’t disappear (like your coat at a dry cleaner’s.
but in the scenario mentioned above, how are you going to recover the funds? specifically, from where are you going to get the money to make the seller whole?
Yes, it does.
Robinhood is buying GME for you. They’re buying it on credit (for two days) from a clearinghouse. GME became an extremely volatile asset. That meant that it was much more expensive to buy on credit. Robinhood did not have enough collateral to back up these extremely expensive purchases.
I can think of nothing an app-based brokerage could do that would anger customers more. The entire point of the app is to facilitate quick and easy trading. The job of the app providers is to abstract away all of the backroom accounting. Requiring customers to wait for settlement would cause a riot.
Disagree, I think this would have angered customers less than what actually happened..
Yes.
Stock trades don't settle instantly, and brokers must put up collateral to ensure that parties don't walk away if the price moves against them between the order and the settlement.
Thanks to the meme-stock volatility, DTCC (the clearing house) imposed special collateral requirements for Gamestop stock. Also thanks to it being a meme stock, Robinhood was "net long" in its purchases -- its users weren't making offsetting transactions.
The overall result was that Robinhood was on the hook for stupidly high (and unexpectedly high) collateral requirements for Gamestop, but most other stocks were business-as-usual. That's also why Robinhood would allow users to close out (sell) Gamestop positions even during the purchase freeze: doing so would reduce Robinhood's collateral requirement.
None of this has anything to do with unsettled customer funds. Usually DTCC's operations are invisible to retail investors, so it's a huge surprise when the exceptional happens.
It is usually strictly regulated. In some jurisdictions you must hold it in specific accounts that have particular attributes and you must have dollar for dollar parity between the account and the money you collect. In almost every situation where you are holding money for someone else you aren’t allowed to use it to pay your own debts. And in this case the collateral obligation is on Robinhood not on their account holders.
The problem as you can see is that you deposited $100 and they have to use $15 (for example) more of their own cash. If overnight the 15% margin requirement changes to 30% and RH doesn't have a huge amount of cash sitting around they are going to get squeezed.
More precisely: US Law for the time (and today) is T+2 settlement. Meaning the trade doesn't _actually_ happen until 2 days later.
It is the job of all the middle-men to make it look like it appeared instantly. But the price of GME was changing dramatically, so the middle-men (DTCC) asked Robinhood for more money than Robinhood expected.
Robinhood couldn't afford the higher price, and DTCC didn't want to trade anymore unless more $$$ was offered up to "cover their ass" in case the stock price changes in 2 days.
------
Those middlemen work in most situations. But when the stock is like +500% in a few hours (or whatever happened that day...), they tend to get squeamish. After all, they're the bagholders if any of these trades go bad.
Quickly-changing stock prices makes them more-and-more squeemish.
Yes. Have you ever heard the word "Volatility" ?
AMZN is not going to go from 2500 to 25000 back to 2500 in the span of a week.
I'm not sure how you got the impression that the parent comment was laying the blame on the user. I interpreted it as excusing the behavior of robinhood. Blame isn't a zero sum game, it's possible to argue that robinhood is less blameworthy without saying that the retail traders are to blame.
>I'd lay the blame with the company that had such poor risk controls that they allowed this to happen in the first place.
What risk controls? As per the parent comment, it's an issue with settlement/collateral requirements, and robinhood not being prepared to satisfy them in light of a stock going 10x in a short period of time. I'm not sure how "risk controls" would have helped.
They probably didn't do this because they underestimated the need for it (poor risk models), or simply didn't want to pay the extra cost.
They had an opportunity to rail at the system and cast themselves as the vanguard and champion of their users's rights. They were doing everything they could to cover the collateral obligations, but the big bad clearing houses and various market makers were dead set at dousing a bit of water on the fire. Instead they kept to the line, "There is no liquidity problem", which was a bald faced lie to protect against a run and/or loss of faith as you point out.
If there was any lesson to take from GME/meme stocks, "lack of faith" due to poor fundamentals is not a problem haha. Users would have LOVED Robinhood more if they perceived them as helping them fight "the power". But they chose not to and anecdotally any of my friends that were caught up cooled considerably on Robinhood, I don't know a single of my dozen or so acquaintances still using it fearing that Robinhood will fail them when it is critical.
Some other brokers decided paying the premium to cover gme trades for the short term wasn't worth it, so they cut it off. To varying degrees
Schwab and TDA (which was already or was about to be bought by Schwab?) both put some limits on, like options or something.
Some other brokers did not (Fidelity I think?)
RH failed to adequitely plan for a surge in activity, which seems like an odd thing to blame retail trader ignorance on.
But that's the thing, a bunch of their userbase aping into one stock isn't (or rather, wasn't) normal operations. It's the financial markets equivalent of jumping in an elevator.
Yeah, but the high volume of people buying a specific stock, and that stock being exceedingly volatile (which meant higher collateral requirements) was unknown.
I wouldn't qualify that as normal operations.
It's certainly not a positive mark for them, but it seems reasonable, and they were able to quickly get more collateral, just not quickly enough to enable the surge of trading to continue on that particular day. Not the worst brokerage failure.
And, to be frank; Robinhood can obviously accept some blame, sure, but the financial settlement system is what almost bankrupt them. There's no good reason why transfers have to take four, now three, now two days to settle. Everyone in the industry knows this; but they're slow as molasses at remediating it.
Its insane to think about how much economic prosperity has been, quite literally, destroyed into nothingness by this antique component of our financial system. Whether its the billions of dollars tied up in depository collateral, rather than being productively deployed. Or the businesses, like Robinhood, which were (or were nearly) destroyed due to black swan events.
What part of the real economy requires any of that?
I'm doubtful.
I wonder what a Tobin tax, and possibly even some kind of ban on high speed or even fast trading would do? i.e. throttling limitations? Or something to slow down the trading?
Would it affect the real economy and would the financial sector be prevented from creating value?
Or would it just mean some casino aspect of the operation is limited ...
I'm not suggesting we actually do that, because it's fine if people want to do those things so long as it doesn't affect the real economy with negative externalizations. But I wonder if it would be better for the system as a whole.
Collateral was a known requirement in known amounts. And then the clearing house increased that known collateral requirement amount overnight, due to GME volatility. That overnight increase was a complete unknown until it actually happened.
It doesn't matter what the reason is - underfunded collateral or otherwise. The experience they provided to their customers was "you can only sell this stock, nobody can buy it." That's not their customers' fault. It just isn't.
Also, not for nothing, I don't think that many of the larger retail traders in e.g. /r/superstonk are as confused about clearing houses' role as you believe them to be.
Because Robinhood didn't have enough margin to keep buying GME.
But if you sold GME, that reduced the margin Robinhood had to keep.
-------
In other words: Robinhood has no more money to buy GME on behalf of its customers. It could sell however, because selling unwound Robinhood's GME position.
Robinhood (and Robinhood's partners) are "on the hook" for all GME for the 2-days in the T-2 transaction period of modern US trading law. Trades take 2 days to take place, so somebody needs to be "the risky bagholder" whenever a stock's price changes dramatically.
Robinhood only had enough money to support X amount of buys. When that money ran out, Robinhood was unable to buy, and could only sell GME.
Of course, this only happened for 2 days as the stocks / money exchanged hands. But 2 days is apparently an eternity and none of these stock buyers were buying GME for the long term, just for the hype of it all. So it was all over by the time Robinhood was able to buy again.
Stock freezes happen. They are, all things considered, fairly routine affairs. This was not a stock freeze - it was a company that got out over its skis, ran out of money, and screwed their users to ~unfuck the situation~ unwind their position.
To be fair exchanges do that all the time (ie. trading halts).
This subject is infuriating to discuss, nobody understands the basics of why it happened!!
They had no choice. They literally couldn't obtain any more GME stock. You cannot squeeze blood out of a stone. What do you want Robinhood to do?
The GME situation got into a "sold out" situation. Much like how a toy-store runs out of Furbies back in the 90s, Robinhood ran out of GME-stock to sell to its customers.
They would allow "selling", because Robinhood can then obtain that customer's GME stock, and then give it to another customer almost immediately.
------------
All of this margins and stuff is probably just overcomplicating things. You're basically getting mad at toy stores for running out of Furbies, PS5 (or whatever fad-toy is available) during Christmas. Sold-out means sold-out, they can't sell you anymore.
But they were willing to accept sell orders (aka: buy GME stocks from others), because that would replenish their stocks of GME to sell to other customers. If some PS5 scalper came up to (insert store here) saying "I wanna sell my PS5 at market prices", of course the toy-store would buy the PS5 (and immediately sell it to the next customer for a higher price).
This is a poor analogy. So long as there is a large enough float, which is a requirement to be listed on some exchanges, there should always be stock to buy and sell.
Don't compare it to something else that's commonplace and misleading. I am aware of the margin requirements and what happened with DTCC and am purposefully avoiding that more complicated subject only to point out how much I dislike your analogy.
Robinhood didn't have the money / collateral to obtain any more shares.
As far as Robinhood is concerned, GME was sold out for that time period. It really is actually that simple. No shares for Robinhood meaning no new shares for Robinhood customers.
In 2 days time, Robinhood T+2 settlements occurred and everything cleared up. Except the meme-stock buyers already lost interest because they had the attention span of gnats.
> how much I dislike your analogy.
Care to explain why its a bad analogy? The only meaningful difference I can think of is the whole T+2 settlement thing (but that's very much like "The next delivery of Furbies is in 2 days", yall can buy Furbies then). Perhaps this is stretching the analogy too far now but... the fundamental situation seems to be solid.
The reason I dislike the analogy is because brokers aren't (typically) supposed to run out of shares to buy and sell. Retail traders don't think of trying different brokers for availability like you might trying different toy stores. The point of having a large enough float is so that you can continue trading the stock. Market makers exist to provide liquidity. It's supposed to keep trading, and only some brokers like Robinhood were unable to manage this.
They are paying for $0 trades to a very, very small trading firm with well-known trade-execution problems months / years before the GME instance. No serious trader actually trusted Robinhood, and nobody was surprised when Robinhood's trading ability was shown to be so weak in that timeframe.
There were many respectable banks with much stronger finances who were able to support the GME-rush. It was just the small guys without much $$$$ who failed, like Robinhood.
--------
If you did a bit of research, you would have found Interactive Brokers (for instance). I'm not a customer of IB, but they have plenty of online material for what exactly you're paying for.
And that is, trade execution. It matters, especially in times of trouble / times of risk. The stronger the bank, the better their ability to continue operations during weird times.
> The reason I dislike the analogy is because brokers aren't (typically) supposed to run out of shares to buy and sell.
Except they do. All the time when bubbles pop and other crisis form. Good luck selling stocks during the crash of (whatever). When the stock market is crashing, there's no buyers, so the price keeps dropping and dropping.
Without any buyers, you will never be matched and you'll never be able to sell until its too late. Understanding these mechanics is very important to any market participant.
"Flash crashes" with stop-loss orders are particularly lulzy. Your stock is automatically put up for a sale on a flash-crash. There's no buyers, so you sell the stock at a grossly lower price than expected (when some savvy buyer finally decides the price is low enough). That's when you're matched up. By the time you look at the stock, the "flash crash" is over, your stock is randomly sold and at a bad price.
Etc. etc. Its annoying, but these sorts of events happen all the time, and its important to remember the mechanics of buying/selling stocks at all times when trading.
Options are extremely different than the underlying stock.
Options is everything we discussed except with way less volume and way more margin requirements.
It doesn't seem like IB restricted GME-stock, only options-on-GME-stock, which is a very, very different instrument.
------
That being said, if I were a paying customer to IB and was hoping for good options-trades during that time, I guess I would have been pissed off. Still though, its a far more understandable issue to have a derivative-trade fall through rather than the underlying stock-trade fall through.
Market halts are completely different from what we are discussing. And one of the purposes of market makers is to provide liquidity in extreme cases as you are describing (I'm not saying it works perfectly, but it's one of their reasons for existing).
Anyway, I feel like we aren't quite getting our points across to each other. Not blaming you just saying let's agree to disagree.
I'm not talking about market halts. I'm saying when all the buy-orders vanish from the marketplace, it results in a "flash crash". Hitting the "sell" button will do really weird things at these times.
After all, a "sell" can only mechanically happen if the market pairs you up with a "buy". That's just how the stock market works. If there's no buyers, you can't sell, even if you're hitting the "sell" button.
I realize every buy needs a sell. I also said "typically" and considering there obviously were buyers since you could still sell, everything you're saying is irrelevant to the discussion we had about GME in 2021.
Anyway, we're not getting anywhere. You can respond but I'm not responding anymore.
No, RH matched the sell order with an internal buy order and netted them out to reduce their collateral requirements over the T+2 settlement period. They didn't use cash to buy stock from other brokerages.
https://www.sec.gov/news/press-release/2020-321
Robinhood was all kinds of shady long before the GME events.
If Robinhood is taking a net inflow of shares, then logically other brokers must have a net outflow. So of course there would be other brokers with shares to buy.
One reason you could go to some other broker and buy GME is because that broker had many other customers looking to offload an overhyped stock. You couldn't buy on Robinhood because their customer base was mostly retail traders looking only to buy.
The other poster is saying outcomes matter more and that the perception and promises you make to users matter.
Both valid points, but Robinhood losing their ass to perception, their direct fault or being the victim of a crappy system, is just the way the cookie crumbles. There is a play here which Robinhood hasn't considered: own up to it and build a plan to be reliable to retail investors and use realistic messaging while doing so. Their CEO is apologized but they've failed to unveil how they intend to be an ally to retail investors in the future: https://news.yahoo.com/robinhood-ceo-apologizes-restricting-...
I had a furry white one and it was awesome.
So when a RH user hit the buy button, RH couldn't find a seller within Robinhood and had to go to the clearinghouse to find other sellers. Robinhood maximized its buy orders to the clearinghouse (ran out of money), and that was it. RH couldn't afford finding sell-orders anymore. Game over.
------
Furthermore, the amount of money needed at the clearinghouse was clearly a burden to Robinhood. When they saw the bill, I'm sure they would have preferred for sell-orders to go to the clearinghouse (rather than internally), to unwind from DTCC.
All stock brokers prefer trading "within" the system rather than seeking out 3rd party partners to find stocks / stock-buyers. Its cheaper and easier.
A laymen would look at what Robinhood did and think Robinhood cut the fuse to the short squeeze bomb.
As explained elsewhere in this thread, regulations don't allow this.
The SEC report says the short squeeze drove the initial price action, but retail attempting to chase the short squeeze drove the majority of the price increase when RH was shutting down trading. (Graph on page 28 or 29 of the SEC report shows this).
Basically because of the balance of upside and downside --
If I can't buy into a stock that's suddenly spiked, at best I'm experiencing FOMO and at worst I'm missing out on some potential profits.
If I can't liquidate my position on a stock that's suddenly spiked, then at best I'm missing a chance to realize my gains and at worst I'm being forced to sit there and lose money.
(I realize this is only considering long buying. TBH, I can't really think up a story for retail short sellers more compassionate than "caveat vendor." Nor am I sure why I should try to.)
You aren't missing anything. This is fairly obvious to anyone who understands how exchanges/brokers operate even on a basic level.
The bottom line of it is, disabling buying was a hard necessity to avoid a complete disaster for everyone involved (including customers). Disabling selling wasn't a necessity in any way whatsoever. It wouldn't have solved any problem at all, and would only add an extra problem for customers who wish to exit their positions.
I think the next step, then, is to observe that I don't see how this can be characterized as a case of Robinhood getting out over their skis. Gamestonk looks for all the world to me like it was a black swan event that nobody could have anticipated. And the amount of reserve money Robinhood's clearer required is, realistically, set by the clearer. I suppose technically Robinhood could have held more, but that seems like the kind of thing that no consortium of mere humans would ever actually do, right? Just something a monday morning quarterback might say they should have done.
Yep. That's why RH wasn't the only major brokerage that disabled buying of GME on that day. They just got the most media coverage. Probably because most of superstonk users, I assume, used RH instead of other brokerages, or because RH was an easy target for the media.
Webull, Schwab, IB, and some other brokers restricted GME trading activity during that time as well, here is a list with details on each major brokerage someone on WSB has compiled[0]. I cannot verify all of those myself, but I can confirm that Webull definitely restricted it as well, as I used it myself during that time period. But that little fact wouldn't support the whole "shadow cabal" conspiracy theory though, so it gets conveniently omitted in almost every discussion of it by superstonk users.
0. https://www.reddit.com/r/wallstreetbets/comments/l6xlw3/robi...
Also, it is not correct that they "didn't have enough money to buy GME". Restricting trading of GME was a choice they made to post less collateral, which they didn't have.
That's basically how the entire financial system works. You're supposed to be able to withdraw deposits as cash, but if everybody does it (from say, an internet meme event), the banks obviously wouldn't be able to "fulfill their obligations [...] to their customers". It's also unreasonable to have 100% of deposits as cash on hand on the unlikely chance that occurs.
>Also, it is not correct that they "didn't have enough money to buy GME". Restricting trading of GME was a choice they made to post less collateral, which they didn't have.
I don't get what distinction you're trying to make here? That "money" doesn't mean "collateral"? Those seem fairly interchangeable in this context.
Indeed, that's the whole point of fractional reserve.
Collateral in this case is just a fancy word meaning "money".
Why? Robinhood wanted more GME for themselves so that they can sell it to other customers, who were furiously buying up GME to the point that Robinhood ran out of GME to sell.
-------
That's like a Gamestop banning used PS5 during Christmas. Erm... wait, you want to sell me your used PS5 when no one else can get it? Sure, I'll buy it from you (and immediately resell it within 5 minutes).
The problem is that there's this *myth*, this *conspiracy* where a cabal of shadowy people were "owned" by the noble Redditors / meme-stonk buyers who saved the world... and people who participated in the myth want to be seen as the "good guys".
But in actuality, they're jumping at shadows and inventing boogiemen, and fundamentally misunderstanding the situation.
I mean, whatever. Its what people do and it happens all the time. But Imma call people's idiocy out when it happens. For people who actually want to understand the GME event, feel free to read the GME report from the SEC: https://www.sec.gov/page/sec-staff-release-gamestop-report
And stay away from the meme-stonk myths. Those guys don't know what they're talking about.
Robinhood has conflicts of interest that don't require meme stock myths. The collateral requirements was from DTCC which affected many brokers and Robinhood simply got all the attention and is unrelated to Robinhood's conflict of interest, doesnt that prove I'm not subscribing to the conspiracies?
The conflict of interest is that Citadel is their primary customer who gets all the trade data from robinhood's user. Citadel infused capital into Melvin which was the main fund Robinhood's users were trying to target because of Melvin's short position in Gamestop. The shadowy cabal conversation never needs to occur. Robinhood reacted to the DTCC collateral requirements, they should have reacted to their users as well, having a little drop of emotional intelligence to say "oh yeah this is reason to do a stock halt" instead of an asymmetric one.
They create a boogieman who doesn't exist ("The big banks") without actually defining who the hell they are. All the while, they're literally conspiring to Gamma Squeeze the stock up to $1000.
Then they get mad at their crappy brokerage for being crap. (I mean... maybe Robinhood shouldn't have been crap. But everyone knew it was a subpar brokerage built on hype and plenty of SEC complaints before the GME-event of January 2021).
Then one of them named Roaring Kitty gets incredibly rich from the whole situation, sells off a huge chunk of their stocks, goes quiet for a while and apparently is the good guy. A few days in Congressional hearings later, it becomes blatantly obvious that no one knows what they're talking about and here we are now today.
------
I absolutely see a group of conspirators here. And its not "the big banks". I'm not sure what the legality of the whole exercise was (apparently it was legal?), but I'm not exactly seeing much altruism on the "buy buy buy" crowd.
And no. Buying a terribly priced stock when everyone else is buying it isn't "saving the stock market". Its just rocking the boat and pumping the stock price higher. If that's what people want to do with their money that's their business, but don't pretend its some kind of noble effort.
I'm not necessarily going to call the /r/WSB group "evil". But they're certainly not "good" either. And their obsession with finding boogiemen to yell at is dangerous mob-like rhetoric.
------
I get that it was a big social event, that large crowds moved and coordinated together, and they all felt very fun to the participants. But guess what? So was the Anti-COVID19 Trucker Convoy as well as Occupy Wall Street.
It was a spontaneous mob, coordinated thanks to modern social media. That's all I see the event as honestly. It did some weird and interesting things to some smaller scale brokerages who couldn't handle the buy/sell orders, and it taught me a few things about the nature of exchanges and brokerages. But it wasn't some kind of altruistic event or heroic effort.
Thanks to modern social media, I expect these spontaneous crowds to erupt into other forms and other locations... be it online or in meatspace (as per "Twitter Flash Mobs", which were probably their prototype when Social Media was younger).
Maybe it was your first spontaneous internet mob, but it wasn't mine. I've seen them before and I know they'll come again.
From the SEC's POV, a single brokerage stopping buying still means there was an open market. Robinhood FOMOers used margin accounts and instant deposit feature to drive the price up until Robinhood could no longer afford the loans they were offering. Fidelity never stopped allowing buys because they could afford the settlement collateral.
It seems big money was conspiring against retail and makes it difficult to trust the current opaque system.
b) Robinhood was "blocked" because it decided to not do any serious risk management. And by blocked we mean it didn't have the cash that the clearinghouse required to service them.
c) No the collateral is for the clearance. The margin you refer to is what Robinhood lends you the customer. They are handling (mishandling in the case of Robinhood) their own equivalent side to be able to provide you with those stock trades.
What you see as a successful trade is only the execution of the trade -- that is someone has agreed to buy or sell at the price you asked/bid for. Next someone (broker + clearing house) needs to clear (Robinhood fucked up here) and then needs to settle. The clearing house takes the risk in case one of the counterparties falters or becomes insolvent, to ensure transactions do happen. It takes 2 days to trade (execution to settlement) non-options in most systems I am aware of these days.
c') Robinhood was just blind sided when its clearinghouse said "Hey, you know you actually just have way more buys that are more volatile than normal to the point of issues at clearing is 1, so increase your collateral." Robinhood said:"No money." Clearinghouse: "No worries, no trades, until you change your risk profile."
(Here is a quick link (just googled, couldn't find a better article I like) outlining the process https://thismatter.com/money/stocks/settlement-and-clearing.....
P.S. (@Edit): Also the brokers can not legally touch the customers' "hard cash" money and post it to cover their own obligations -- that would be commingling and let us say it is not good. I am not going to even begin imagining the issues, but people continuously get screwed due to commingling of funds.
They weren't. IB halted options but the actual stock GME kept trading. I myself made a buy/sell order on TD Ameritrade in that time period and I got the receipts to prove it.
It was just a few exchanges: Robinhood and some other one, that turned off GME buys.
> Could Robinhood have disabled margin accounts and only allowed people to purchase with settled cash as a way to keep the margin requirements in check?
No. Because it takes 2 days for funds to settle, and Robinhood couldn't afford to get any more stock from their partners.
You understand that when you buy a stock on Robinhood, Robinhood has to _FIND_ that stock for you from somewhere, right? Generally speaking, it is from a seller somewhere else. If those sellers aren't giving Robinhood any shares, then Robinhood can't give any shares to their customers.
> It seems big money was conspiring against retail and makes it difficult to trust the current opaque system.
It was Robinhood's fault for not having enough collateral, and it was Robinhood's customer's fault for placing their trust in such a crappy company.
This wasn't the first time Robinhood screwed things up, and it won't be the last.
Situations occur, and usually customers are receptive if they are given heads up and a reason why. But Robinhood just completely subverted their customer's expectations rapidly and unexpectedly. The entire purpose of their app is TO abstract away the complicated world of stock trading - and they failed to live up to that goal during the GME saga. So I don't get why people are going against the customers whose expectations were set by Robinhood and coming to the defense of Robinhood themselves.
Robinhood offered a product. They clearly showed they can't deliver on the expectation most consumers desire. People vote with their money, and are leaving Robinhood (I cancelled in favor of Fidelity in February 2021). It's fine, it's how capitalism works.
I think it sshould be part of their fiduciary duty to inform people of the risks of purchasing stocks that they are running out of collateral for.
People weren't allowed to purchase those stocks so I'm not sure what risks you are talking about. There was no (additional) risk from purchasing from RH versus anywhere else. You could always sell. Not allowing people to buy doesn't have anything to do with fiduciary duty. A broker doesn't have to let you buy whatever you want.
Not allowing people 'out' is a pretty extreme measure and could cause serious financial distress.
Not allowing people to 'buy'? Then 'buy' somewhere else.
Behind the scenes issues aside, it's not an unreasonable policy.
Being 'Sold Out' of some hot commodity because of supply chain problems is a thing. You have to go next door to buy that thing. Returns? That's allowed.
I don't think they ever should have been in that position but I don't see the policy as deeply unfair.
In that other reality you are proposing, Robinhood gets declared insolvent and enters into receivership at the market close. Your entire investment account gets frozen for a year or so, until the insolvency process is finalized, and you can finally get your assets back.
That’s because the clearinghouse margin requirement would be lowered if people sold GME, it wasn’t a nefarious plot to destroy the share price.
There was a massive buy side imbalance on GME which required enormous amounts of cash margin at the clearinghouse. Sales of GME would lower the margin required. Do I need to restate that a third time so you understand?
Melvin Capital shuttered their fund recently anyways, the apes won.
Do Robinhood have big guys as customers?
Their name suggests they should serve the little guy. If they cannot do that, then there is no reason for little guys to use them.
As with most things that are free, one needs to realize that if you're not the customer, you're the product. Robinhood makes its money on the interest in customer's accounts, margin lending, and selling trade data to high frequency traders.
Only one of those is "little guy" neutral - margin lending is extremely dangerous for inexperienced investors, and HFTs aren't the little guy.
Robinhood should either fullfill the abstraction, or be clear about when and how the abstraction breaks down.
I think it's more likely that Robinhood's rapid rise was fueled by COVID boredom and a wonky stock market where it felt like everyone was getting rich from stocks and options.
Now that the market is cooling off and a lot of their new users got burned when they learned that the market doesn't always go up, I suspect a lot of them are losing enthusiasm for frequent trading.
They did their IPO at just the right time.
We need to consider who would use Robinhood to begin with and how likely are they to know be exposed to the whole GME saga.
Personally I stopped using it. Had it for trying out new things / prototyping crazy ideas (yeah yeah disposable income and first world problems I now). From that point on I am using only a legit broker. When I want to trade I want to be able to trade. If you as a broker cannot do that - even under weird conditions - I will NOT use you.
Also, at a meta level, the problem is that RH massaged the truth and didn’t straight up explain what was going on. If they did the right thing in keeping everyone in the loop this could have been a golden opportunity to consolidate their position.
Agreed. The half dozen people I know who were kind of on the back end of this before they locked up trading made some money off it. Not a lot, but nothing to sneeze at either. Once the whole saga went nuclear, they decided to close out their accounts. Most waited for everything to settle out, sold off all their positions and cashed out.
They haven't been back. It feels a lot like a normal trading cycle. I'm sure the same thing would've eventually happened where people found something else that caught their attention, but the whole GME saga I think speed up a lot of people into other things.
COVID had a weird effect where people found a lot of things to do they normally would not have been doing. Now that things have subsided somewhat, people are moving on from those things and going back to the activities and hobbies they were doing pre-COVID.
But actually helping retail investors isn't particularly sexy.
They would’ve been a failed brokerage if they kept allowing GME trades without being able to post the required margin, the SEC would’ve taken it over and people would’ve had to wait weeks/months to ACATS their shares and cash to another brokerage.
Does that sound like a better outcome for Robinhood users? I didn’t think so.
Take the GME short squeeze, which a lot of people still fundamentally misunderstand. RH allowed (allows?) you to sign up, promise to deposit funds and trade on credit, essentially, until those funds arrive (typically in no less than 3 days). That settlement process dind't go away. RH just abosrbed the risk.
That's fine when the market is normal. Some people might buy GE and others might sell GE so it all evens out. By this I mean the default risk to RH is mitigated (but still real).
The problem with GME is everyone was buying in a short space of time to the point RH had to borrow billions to cover the collateral requirements to the point it was risking making the company insolvent. That's how extreme it was. So what happens if people sign up, buy GME on credit and then GME crashes? RH is left holding the bag. That was the problem. It's also why GME blocked further purchases bu tallowed sales because sales decreased their overall risk no matter where they came from.
But no, how things actually work is ignored in favor of the system protecting hedge funds.
Personally I don't use any free brokerage because of the order flow issue, which is to say that all your orders are sold to hedge funds and that's where RH makes it's money. Just like with free online services that sell advertising: you are the product. It's so wild to me that people bitch about the evils of advertising but accept without question the selling of order flow, which is directtly taking money from your pockets. Crazy.
It's even crazier when you consider that the aforementioned evil hedge funds supposedly protecting GME short sellers are directly funding and benefitting from RH order flow but they get no flak for that.
You can only get away from not knowing how the underlying thing works. It'll eventually come back to bite you in the ass.
Payment for order flow is a complex topic, mostly because the incentives are tricky, but at the end of the day, unless you are doing gigantic block trades (which you’d hire a specialist to do) you are almost certainly paying less in slippage with PFOF than you are in fees.
[1]: https://www.investopedia.com/terms/p/paymentoforderflow.asp
I did a manual audit of the top 10 US brokers in 2019 and all of them participated in PFOF. The only caveats we’re that IB let you pay to opt out and Vanguard only engaged in PFOF in options. Every other broker I looked at used PFOF. Admittedly there could have been small brokerages that didn’t but it was such a small percentage I didn’t look.
Except they cut off buys even if made with settled funds.
Edit: to avoid retreading ground, here’s where I had the exchange before. Just tell me what you would say differently: https://news.ycombinator.com/item?id=27693578
I am not wealthy, but I have more stock than the average person. I moved all of it out of RH. Will never trust them again.
I am sure there was thousands of little guys like myself that bailed.
The idea that they blocked sales just long enough for the r/wsb crowd to panic sell and then restore buying was pretty suspect. I know they claimed liquidity problems, but it sure seemed to benefit groups that bet on the other side of the GME bubble.
Note I am not bitter about losing money on GME. I didn’t.
And having your investment platform be basically synonymous with wallstreetbets isn’t that great.
The new app seems to only offer sending money to money market settlement, before waiting two days to transact.
A real pain of a change, unless I'm missing a way to do it.
They then let me buy whilst the money is inflight.
Good.
Looking at the scwhab 2020 pdf i could find quickly they added ~4.6mm new brokerage accounts between 19 and 20. Wonder what the recent stats are.
Article says robinhood lost 1.8mm if i'm reading correct.
Fits my use. I did a small amount on robinhood when i first came out. Now have that small pot for active trading (compared to people here i'm sure) in schwab.
I am also considering moving the larger savings i have in wealthfront to schwab. But i'm afraid of my impulsivity. About 10% of my savings are in a schwab account i actively trade on. Down like 20% over the last 360 days lol. Despite 1% fee my IRA is like doubled - though a much longer timeframe. I did put my 2021 tax IRA into new account on schwab. 80% medium risk ETFs. and just bought ttt and some bull levered etfs. lol. too impulsive.
If schwab had a setting to automate or place holds so I couldn't sell for ___ in my IRA I would move it all. Maybe i'll open a second account different login so it doesn't show up on the app/website.
Add in mistrust from your users (GME, AMC, et al) and increasing competition from the more "reputable" services that have made trading on mobile easier and it doesn't look great.
There's similarities to casinos and bookmakers, except those folks controlled the odds and could entice customers +/- as needed to bring in traffic. Robinhood doesn't have that option.
Access to detailed MorningStar analysis for just $5/mo.
(May be other brokerages have started matching Robinhood but the one I use ETrade still takes 2 full days to settle and then another 3 days to withdraw cash. It also takes 2-3 working days to deposit cash. So if you spot a buying opportunity you can't. Or, you'd always keep cash lying around and ready in the account.)
My TD Ameritrade lets me buy from deposit instantly, and doesn't "show" margin usage as it clears, even though it's clear from the amount I can buy that it's just the margin on the account.
Withdrawals are basically instant, too though the ACH takes its normal time.
I went to search that up and got
>the unauthorized party obtained a list of email addresses for approximately five million people, as well as full names for a different group of approximately two million people. We’ve determined that several thousand entries in the list contain phone numbers
https://blog.robinhood.com/news/2021/11/8/data-security-inci...
I'm not trying to say the incident is okay, but calling a leaked email/name list a "major" breach is a stretch.
What I know is this would not happen to me at Vanguard. And if it did I would switch.
These things are the same. Different front end UX, maybe, but if you are taking WSB advice then these two things are the same.
That means no transfer times between banks and an exchange. Deposit and sell crypto, instantly spend fiat on their debit card. Deposit your paycheck ACH, withdraw crypto to your own wallet. Lack of a stablecoin is its only current blind spot.
It’s a game changer and very few people are understanding this, including in the marketing department at Robinhood. They need to plaster “Now an exchange, with a bank account.” ads on crypto news sites.
[1] Square Cash almost counts but I discount them due to only supporting BTC - a fault of their founder’s BTC maximalism belief.
It's mostly an issue with people making multiple trades each day who won't spring for the premium plans.
I've used TD Ameritrade for over a decade and haven't paid a fee to them for trades in nearly as long.
If an asset manager wants to buy treasuries for hedging purposes, or an ETF manager wants to buy equities to rebalance, they are also uninformed from the perspective of a market maker.
They certainly try to, but they do experience some delta in the short run. They are definitely scared of wild swings that happen between them filling an order and flattening their delta.
Now, I find out from my bank, that Robinhood leaked my SSN, Drivers License#, Address, and Email to the dark web.
WTF!!!!
Is there any recourse here? My SSN is now all over the dark web.
Freeze your credit reports at the 3 bureaus. And start checking your credit report on a regular basis at: https://www.annualcreditreport.com/