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.
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.
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.
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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.
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.
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.
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.
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?
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.
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. 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.