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Comment by jasode | Hacker News Reader

>I have no idea how necessary their actions were

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...

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"Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell. It wasn't a symmetric freeze - it was a deliberate action that could only have one outcome on the stock price.

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.

> "Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell. It wasn't a symmetric freeze - it was a deliberate action that could only have one outcome on the stock price.

Because Robinhood didn't have enough margin to keep buying GME.

But if you sold GME, that reduced the margin Robinhood had to keep.

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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.

I'm not confused why they did what they did. I understand the situation they were in. I'm saying they shouldn't have done it, and that there is an obvious conflict of interest when there's a short squeeze on hedge funds going on, and Robin Hood's paying customers are hedge funds.

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.

They only did what they were forced to. Making an active choice to arbitrarily restrict selling as well would have been an insane move -- who are they to tell their customers they cannot sell something they own?

>who are they to tell their customers they cannot sell something they own?

To be fair exchanges do that all the time (ie. trading halts).

I wonder if Robinhood could have changed their GME margin requirements? Not sure if that's allowed, but surely that would have allowed them to unwind some (margin call everyone who is leveraged long), and some customers who were willing to put up 100% to cover their GME buys could keep buying.

As mentioned in my other comment, they can't use customer funds to fund collateral requirements.

https://news.ycombinator.com/item?id=31209268

No, the clearinghouse wasn’t going to change margin requirements, because those exist so transactions are completed………it’s the entire purpose of a clearinghouse.

This subject is infuriating to discuss, nobody understands the basics of why it happened!!

> I'm saying they shouldn't have done it

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.

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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).

> 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.

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.

> 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.

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.

I am aware of that, and that is Robinhood being unable to manage their collateral requirements in order to continue trading GME. There were other brokers that managed to do it just fine. Robinhood messed up here. Really I think the DTCC is who messed up, but that's a much larger discussion.

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.

Personally speaking, I blame the customers.

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.

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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.

IB might not be the best example, as they also restricted GME option trading to liquidation only.

> option 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.

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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.

Yes, but the end result was still the same: customers couldn't trade what they wanted to, because the broker couldn't or didn't satisfy their collateral requirements.

I think many brokers had these restrictions, so what is the point of this discussion

> Except they do. All the time when bubbles pop and other crisis form.

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.

> Market halts are completely different from what we are discussing

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.

Then what you're saying makes even less sense. Because what happened with Robinhood is they turned off the buy button, but still people could sell (which means there were buyers from other brokers or outside retail).

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.

>Because what happened with Robinhood is they turned off the buy button, but still people could sell (which means there were buyers from other brokers or outside retail)

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.

Wait... What? You are blaming customers for being... customers? You have repeated multiple times that Robinhood essentially ran out of money. But then finally you mentioned why people are leaving... Because they don't trust Robinhood. It doesn't matter why they stopped trading, it simply matters that they did.

The customers aren't to blame, but it's a little unfair to blame Robin Hood for what amounted to a black swan event. One of the main reasons they ran out of capital in this case was not because of the volume of trading, it was because of the one sidedness of the trades (lots of buys) and all being on one stock. RH's margin requirements skyrocketed because so much of their liability was concentrated in one stock. Risk (and this margin requirements) go up the more the risk is focused into a single point of failure.

They shouldn't have trusted Robinhood to begin with.

https://www.sec.gov/news/press-release/2020-321

Robinhood was all kinds of shady long before the GME events.

> There were other brokers that managed to do it just fine.

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.

Y'all are actually arguing two different things. You're saying it's unavoidable and understandable for a company of Robinhoods size. Let's also avoid calling retail stock buyers "meme-stock buyers", now a year removed from that whole event it's plain to see that many of those people were acting altruistically.

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-...

It's not that bad of an analogy. When a toy store runs out of Furbies, that doesn't mean there's no Furbies available on the world market anymore. It just means that at that specific toy store you can't get any Furbies anymore. When they get resupplied (posted additional collateral, in the case of Robin Hood), you can buy from them again.

Unrelated, but when Furbies came out, my brother and I waited in line for some and we both got one.

I had a furry white one and it was awesome.

You're saying they'd sell it to the next customer, but Robhinhood wouldn't sell it to the next customer - so that's where this seems to break down. When a RH user placed a sell order why couldn't the buy side of their order book add that?

Because there were more buyers than sellers within Robinhood.

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.

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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.

There's a big difference between a stock freeze imposed by an exchange, and a broker prohibiting its clients from trading a given stock. If you're actively preventing your clients from selling the stock they own, that costs them actual money if the stock goes down and can very well end in expensive lawsuits. If you prevent them from buying more stock, they only lose the opportunity cost, which is generally much harder to recover by legal means.

If a broker that handles a very large portion of retail trades suddenly blocks purchasing a security that retail trading has driven the price up then it stops retail pressure and the stock price will obviously drop.... you could say Robinhood cost retail money by removing the upward pressure on the stock. The SEC report on the incident mentions the price rise was mostly due to retail FOMO, and not the suspected short squeeze that got the early folks attention.

A laymen would look at what Robinhood did and think Robinhood cut the fuse to the short squeeze bomb.

The problem with this analysis is that Robinhood didn't choose to block buy orders, they were forced to because they were no longer able to fulfill them. You can argue about whether Robinhood should've been better prepared for the volatility that arose (and that could be an interesting conversation by itself), but they weren't. GP claims "they shouldn't have done it", but continuing wasn't an option. The only other choice they had was to suspend trading in GME all together (both buy and sell orders), but I don't see how that wasn't strictly worse for them and their clients.

it might have made robinhood look better to uninformed retail traders if they disabled both the sell button as well as the buy button.

No it wouldn't have. People who knew they could sell in theory and couldn't in practice would complain to and maybe sue for damages (justified or not) the correct option would have been to let users "lend" robinhood the money for 2 days to process the transaction and have this be explained in the interface.

> the correct option would have been to let users "lend" robinhood the money for 2 days to process the transaction and have this be explained in the interface

As explained elsewhere in this thread, regulations don't allow this.

Not doing it would have resulted in Robinhood being declared insolvent and entered into receivership at the close of trading day. All investment accounts would have been frozen for at least a year as the insolvency is unwound. Financial firms (including brokerages) don't go through "bankruptcy" like other corporations. They are liquidated during the nightly clearing process.

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).

Maybe I'm missing something here, but it seems to me that freezing selling as well as buying would have screwed their retail customers even worse? Temporarily halting all trading is something an exchange can reasonably do, sure. But for an individual retail brokerage to do it (instead of only halting buying) seems like something that straight-up shouldn't be legal.

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.)

> Maybe I'm missing something here, but it seems to me that freezing selling as well as buying would have screwed their retail customers even worse?

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.

OK, thanks for the validation.

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.

> 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?

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...

This is another way of saying Robinhood did not have the capital reserves required to fulfill their obligations as a broker-dealer to their customers.

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.

> This is another way of saying Robinhood did not have the capital reserves required to fulfill their obligations as a broker-dealer to their customers.

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.

> It's also unreasonable to have 100% of deposits as cash on hand on the unlikely chance that occurs.

Indeed, that's the whole point of fractional reserve.

> 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.

Collateral in this case is just a fancy word meaning "money".

You're missing the point on behalf of some other people that are missing the point. If they didn't have the conflict of interest it would have been obvious to them that they needed to disable sells as well as the buys. Just freeze the stock, instead of only considering the freezing of the buys as a mere technicality while being pushed towards the convenience of keeping sells open. The point is for them to think of their users and balance decisions with what users would think.

> If they didn't have the conflict of interest it would have been obvious to them that they needed to disable sells as well as the buys.

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.

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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.

Broker level stock halts happen all the time too, it was an option.

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.

You'll have to forgive me, but my opinion of the cabal of GME-pumpers hyping the hell out of the stock on Reddit/WallStreetBets is not a group of conspirators I have much faith in.

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.

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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.

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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.

Disabling sells and not letting someone exit a position is infinitely worse then not letting someone buy to enter a position. The latter is only theoretically harmed and has no case to sue; the former is provably harmed and can sue.

It is hard to say the latter is only theoretically harmed when the rising price was caused by retail FOMO (according to SEC report) and Robinhood managed the majority of retail orders....

It is a theoretical harm. Securities law focuses on "obviously lost money" such as not being able to sell at the highs when you own the stock. This is very different from the theoretical price ceiling caused by retail FOMO. Otherwise every person on earth could sue to claim they were harmed by not being able to buy.

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.

If majority of retail was blocked out of buying during this period, then who was on the other end of the transaction and why do you think they would be buying when retail has the buy button turned off and the stock is 'severely disconnected from reality'? 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?

It seems big money was conspiring against retail and makes it difficult to trust the current opaque system.

a) "big money" -- (such as retirement accounts or other institutions) -- don't care about "retail." They have to follow certain risk regulations and plans and will follow them, and that's it. Market makers will try to drive ahead of the market in an effort to provide liquidity (and make money to live and prosper in the process).

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.

Yes but it could give users the option to lend money to Robinhood to perform the transaction or have no transaction.

> If majority of retail was blocked out of buying during this period

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.

It's bizarre to me how many people really seem to have sided with Robinhood on this and blame the consumer's for being "too dumb to understand the reality of what happened."

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.

They've been pretty open actually. They did not have enough cash on hand to support the buy volume. They have said this repeatedly. They have also said if incoming bank transfers from retail investors had settled faster they would have had enough cash. The "instant deposit" feature of letting people buy stocks with cash deposits they had only initiated but had not settled meant they didn't have the cash on hand to support more buying.

January 27th, 2021 Robinhood sent me an email warning that "In an effort to help reduce risk, we've begun implmenting certain restrictions for GME and AMC options trading". They explain some restrictions being made to options. They don't provide any sort of warning that completely removing the ability to buy the underlying stock for all of their users was even a possibility.

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.

> inform people of the risks of purchasing stocks that they are running out of collateral

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.

That's pretty reasonable.

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.

I sold GME for a tidy profit on RH while buying was disallowed. Not hypothetically; I really did. Are you saying RH should have forced me to hodl? How would that have been a better customer experience?

In another reality Robinhood did not turn off the buy button and short hedge funds get margin called and the squeeze occurs... allowing you to hit a grand slam as opposed to being happy with your home run.

No at all how that other reality where they didn't "turn off the buy button" would've worked out.

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.

> "Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell.

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.

They had enough money to cover users' trades in securities other than GME, though, right? If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? If I send them a bank transfer for $10k, they should have that money as soon as it clears right?

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.

>they should have that money as soon as it clears right?

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...

FYI to anyone reading: gruez and I had an exchange a while back where I tried to pin down what the collateral is accomplishing and why the customers couldn’t buy even with settled funds.

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.

https://news.ycombinator.com/item?id=27693578

Here's what I gather from that thread.

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.

But that wouldn’t make sense as being a constraint that the Robinhood’s upstream counterparties would demand, since the collateral is purportedly to protect them. No one has ever argued this point in terms of “oh we just wanted to make sure no one took your money without giving shares”, or, if they did, they are really bad at communication.

Edit: note that this other authoritative explanation claims the failure mode is RH holding the bag for a client not depositing funds as promised.

It makes perfect sense for a regulation that intends to protect the retail customer's interests. I suspect Robinhood would put customer money up for collateral if they were allowed to do so.

What is that responding to? The problem is the lack of a consistent threat model for whom you're protecting and what you're protecting them from. Half the time it's "the consumer could reneg on the purchase" and half the time it's "the shares could be stoken from the consumer". And 100% of the time, the super-confident, I-get-this-and-you-don't explainer doesn't realize the inconsistency.

I'm not sure what you're driving at. The sibling clearly outlines a scenario where the collateral is lost. But it almost doesn't matter so long as you assume the clearinghouse isn't some vestigial intermediary.

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.

>I'm not sure what you're driving at. The sibling clearly outlines a scenario where the collateral is lost.

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.

I never claimed to know anything about the subject and I don't see how you got from what I said to "check your tone". I read the thread you linked and shared my own conclusions.

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.

Here's a concrete example why that rule might be wanted:

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 don't know what that has to do with a customer who put up (100% of) $10k to buy $10k of stock and is prevented by their broker from backing out.

Because there are two distinct layers to the system, the clearinghouse to its members, and its members (brokerages) to their customers. All the clearinghouse cares about is that the member can put up the collateral on the day of trade, and on the day of settlement they show up with the rest of the money. Whether the clearinghouse member's customer paid for their stock in cash or on margin doesn't concern them. There isn't a mechanism for robinhood (or any other brokerage) to tell the clearinghouse "hey this trade is 100% good because the customer is buying it with settled cash in his account, so waive the collateral requirement".

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).

This is a copy of the previous thread. As before, this latest reply just prompts the question: how can a broker promise that the collateral is good, but not the initial funds for the purchase? [1] Apparently, they have a way to say “oh no these funds are good, you can trust them” … but only for the collateral, not for customer funds that have lived for years in the same account.

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

>how can a broker promise that the collateral is good, but not the initial funds for the purchase? [1]

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?

> does that have different collateral implications to selling GME to buy GME an hour later?

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.

>> just stop letting customers trade with unsettled funds.

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.

You can't trade with unsettled funds, it's an SEC violation

Only in cash accounts. Margin accounts (which I think all robinhood accounts are?) don't have that limitation.

Instant deposits are definitely not settled funds from your account -> Robinhood perspective.

RH defaults accounts to margin accounts to support their "instant deposit" feature.

> I can think of nothing an app-based brokerage could do that would anger customers more.

Disagree, I think this would have angered customers less than what actually happened..

> If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later?

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.

Ah TIL that the requirements would be different per-stock. It still seems to me that Robinhood should be able to fulfill orders for customers who had fully settled funds in the account. If I have money in my account (fresh from my bank account) that money is enough for 100% collateral.

Assuming that the average meme-stock chaser trades with settled funds, though.

Right, that's my point. Why stop trading with settled funds, when it was only unsettled funds causing the issue?

They can't use customer funds for collateral to the clearing house, they must use their own funds

Might be missing something, if I deposit $100 and use it to purchase stock, they cannot use my $100? What does that even mean given that money is fungible?

Money is fungible but how its accounted for isn’t. I’m not an expert in the regs around margin accounts but have worked in other spaces where my company was holding money for others.

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.

When you deposit $100 dollars in Robin Hood they must keep that $100 in a bank account. If you later use those dollars to buy a stock they must post collateral to the clearing house but not the $100 dollars you deposited (those must sit in the bank account still). Your account however is being credited with the stock instantly. In two days when the trade settles they transfer the $100 dollars to the clearing house and get their colatteral back.

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.

They can't take it for collateral however they could ask to have it lend to RH to serve as two day collateral.

>Stock trades don't settle instantly

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.

> If I sell GME to buy AMZN, does that have different collateral implications

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.

The formula for reserve requirements includes volatility as a variable. Before the meme stock frenzy, GME only required <5% of cash collateral before settlement. When volatility surged, this went to close to 100% cash collateral. RH didn't have enough cash.

The problem isn't that they blocked the trades but rather the lack of transparency surrounding it. Robinhood took multiple days to put out a comprehensive explanation of the event. They have a user-alert system. They easily could have expressed apologies at the time instead of begging for forgiveness later.

I don't know, not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement, it's the normal way the system works.

RH failed to adequitely plan for a surge in activity, which seems like an odd thing to blame retail trader ignorance on.

> normal operations

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.

Can't help but say, elevator's are designed to handle jumping, even many people jumping.

There's a good chance you'd trigger the failsafe though, right?

Specifically a failsafe that temporarily halts the operation of the elevator ;)

They gave safety modes as well even things get out of ordinary.

> I don't know, not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement, it's the normal way the system works.

Yeah, but the high volume of people buying a specific stock, and that stock being exceedingly volatile (which meant higher collateral requirements) was unknown.

The collateral requirements increased significantly overnight as a result of the dramatic surge in trading.

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.

What happened last year was FAR from normal operations in the markets. What happened last year wasn't even a "surge in activity"; it was a hurricane.

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.

Is it really necessary for real productivity that we have instant transfers and trade on crazily priced equities?

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.

> Not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement.

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.

The real issue to me is that Robinhood said they were halting GME trading to "protect users" or something along those lines. The CEO of one of their direct competitors, Webull, came out and was honest with people, and straight up told them that the clearinghouses raised collateral requirements to 100% for GME trades. Not sure how Webull's revenue did in comparison, but I'm hoping their policy of being honest was better for them than Robinhood's lame PR lies.

It had nothing to do with retail traders being dumb: the CEO was interviewed and he didn't explain that the clearing houses needed more deposit. He could have published all the inner working details so that retail investors can review them, but he didn't do it.

Robinhood should either fullfill the abstraction, or be clear about when and how the abstraction breaks down.

I forget, weren't there others that did the same? Were they also in that same boat (not enough funds on hand to cover trades)?

Yes.

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?)

> so the easier narrative to believe is that Robinhood was part of a conspiracy theory to screw the little guy.

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.

They market themselves as helping and serving the little guy, because of their commission-free trades.

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.

Nitpick. They aren’t selling trade data to high frequency traders, they are selling the right to trade with you to high frequency traders. Payment for order flow is the term of art if you want to learn more.

Doesn't the customers' money in their account provide the collateral for the trade?

I don't know that I'd lay the blame at retail traders not being sophisticated enough to understand this. I'd lay the blame with the company that had such poor risk controls that they allowed this to happen in the first place.

>I don't know that I'd lay the blame at retail traders not being sophisticated enough to understand this.

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.

Maybe I'm missing something, but isn't the answer to simply have more collateral? Given that RH was able to raise emergency funds around this time it seems really likely that they could have been better capitalized before the turbulence started, and gotten the money on better terms than an emergency deal.

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.

In a way I sympathize with RH. If they were truthful that they didn't have enough money, they would have had to publicly admit they couldn't cover the purchases, which could have led to a run on them and everyone pulling out of Robinhood at once. In some ways, pulling the buy button was the best option they had. Too bad they didn't account for the fact that it would spawn a thousand conspiracy theories.

It’s the classic “do you lie or do you cause a stampede” dilemma. Similar to the masks shortage debacle in the early pandemic.

I do as well to a degree, in fact those clearing houses turned the absolute _screws_ to Robinhood, increasing the collateral requirements quite above and beyond what is normal. Robinhood was stuck between a rock and a hard place, squeezed from both sides, but unfortunately they chose to stay "silent" and stonewall their users, the wrong move imo.

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.

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