Robinhood, in Need of Cash, Raises $1B from Its Investors | Hacker News Reader

Robinhood, in Need of Cash, Raises $1B from Its Investors

nytimes.com

641 pointscoloneltcb462 comments

"To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation."

Non-zero chance had they not haulted trading on those symbols they would've been insolvent by close of trading today, depending on the size of their credit line.

I watched the CEO on CNN tonight, and while I found him pretty difficult to watch, this is a very difficult position to be in. If you admit on TV that your company is experiencing liquidity issues -- even if temporary in nature such as with clearing custodianship requirements -- you run the risk of triggering a greater panic through customer withdrawals/redemptions.

This could turn into a run on the brokerage pretty quickly, and probably already has in some measure, especially after a day of massively lost customer trust. He certainly didn't help it by going on TV and lying about their liquidity issues. They probably would've been better off by issuing a statement and keeping him off TV.

I’m not keeping my money with a financial institution that lies to me. End of story. Transfer initiated on my cash, and I’ll deal with moving stocks in the morning.

Would you have kept it with a near insolvent one?

I suspect they lost you as a customer either way.

>I suspect they lost you as a customer either way.

yes

They’ve had a number of technical issues over the past year, and I’ve given them the benefit of the doubt. This is the last straw for me personally.

Yeah, well, there are more competent players in the space. We owe them nothing.

Do users actually lose the stocks, if something that happens to the Robinhood itself? I live under assumption that it is not happening. In any case stocks should stay belonging to the folks who purchased them.

That is normally what happens if the broker goes bankrupt the stocks should still be yours.

Yes, but it can be a messy process:

https://www.investopedia.com/articles/investing/050515/what-...

Stocks don't belong to you, unless you have the actual physical stock. Everybody borrow them from 3rd party who borrow them from 3rd party who borrow them from 3rd party, who actually lended them multiple time to short the stock, who borrow them from a 3rd party, who actually have the physical piece of paper in a vault somewhere.

I am not even joking.

And it's the same for transactions or your bank balance. The bank doesn't keep your money and give it back to you. At least, for banks, they are backed by the government and IMF. For stocks and gift card balance, I am not so sure.

If I understand correctly, it's actually even stranger: "Nobody owns stock. What you own is an entitlement to stock held for you by your broker. But your broker doesn't own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co., which is a nominee of the Depository Trust Company, which is a company that is in the business of owning everyone's stock for them." - https://www.bloomberg.com/opinion/articles/2015-07-14/banks-...

Which system evolved partly to make it more straightforward for custody to be resolved when a broker goes out of business

I doubt users will lose the stocks. This will be really weird. Worst case, you will be given some time to transfer your stocks to another brokerage and perhaps RH will make that process a lot faster than the nominal 2-3 days it takes now.

Well something weird happened already so I dobut it's that hard for them to loose your shares

In practice, share lending is backed by (over)colateralization ( e.g cash or highly liquid short term debt). The worst case for you would be to receive cash instead of the he stock itself.though this doesn't give relief to the broker not to fulfill its obligations.

Robinhood is a SIPC member. It rarely comes into play, but my understanding is that SIPC is there to ensure securities get back to their rightful owner in the event that something weird happens to the brokerage.

The issue is when?

If that takes several weeks or months in a highly volatile market its basically life or doing a flip.

They are only covered up to $5 billion for the entire brokerage industry, it may be like 2008 and they all get turned into FDIC insured banks over night if tons of margin accounts fail.

And a max of $100k per account.

Yeah we'd be looking at losses much bigger than that if the short-sellers go under due to a squeeze.

If the stocks are still there, then you are entitled to get them.

Unfortunately, there is no way to check if the stocks are really there. RH showed you some pixels on the screen saying they hold stocks for you. If RH maliciously or by mistake lost them or never bought them, then there is no third party that will make you whole.

Failure to deliver on borrowed/shorted stocks would be a conpletely plausible scenario during a short squeeze.

I hear your stocks can get lent out for shorting by others, which means you might not actually have them even while Robinhood is alive when you think you do...

Only if you have a margin account and made purchases on margin.

Instant deposit & instant settlement both open a margin account though. And purchasing with unsettled funds requires margin. Which I would bet a huge number of people have enabled on their accounts, if not actively use.

This is why I prefer my money be with IBKR.

I already know when it comes to volatility, they are going to choose IBKR over my account which is good because usually "my account" is fine but its the others who are doing really crazy things.

I know IBKR will be around in the morning. That's why I love them.

IBKR's highly visible and active risk management-- e.g. their proactive increase in margin requirements in advance of recent political events-- is a major positive point in their favour.

Exactly. And it turns out, if you are a good trader, you can negotiate your margin.

I am a big fan of IBKR, but if you want someone who will be there in the morning... Pick someone bigger. Fidelity, for example, is Too Big To Fail. They will get bailed out if something happens. Not 100% sure that Interactive brokers will be.

Does Fidelity have an API?

My rep at fidelity said they don’t really have the same offerings.

Have you seen the CNBC interview [1] with IBKR chairman, basically saying "once the stock goes back to the price we want we'll let retail investor trade it again"?

[1] https://www.youtube.com/watch?v=7RH4XKP55fM

Just saw the interview, looks about what I'd expect from IBKR and why I use them.

So you are ok with your broker restricting your investment options, because one of hedge funds they sell your order flow to made a bunch of dumb decisions which put the whole market into very fragile position?

FYI: IBKR Pro doesn't do PFOF, only IBKR Lite

https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...

FWIW, this is how the market works more or less.

There is a fixed amount that is deposited into a varaiety of accounts, let's say the total is T and individual accounts are T_i.

There are also consistent monthly inflows into a variety of T_i's that are dwarfed by T. These mostly go into scheduled investments (ETFs, etc). Call these TM_i.

The majority of T is invested and not traded. The total amount available for short term trades is T_t which is perhaps (in my estimation) 20% of T. That's still a large amount. Howver, this 20% sets the price. Everything happens at the margins.

Trading is the act of taking from one T_i into another T_i. That's it.

That's the job of clearinghouses. Each broker has to settle up at some point but also has to have collateral deposited in order to make sure that they can settle up. This collateral fluctuates depending on volatility.

The worry was that given the obscene run, brokers would not be able to settle up.

IBKR did the right thing to keep a catastrophic problem from developing.

Of course, shorting 130% of a stocks float is a problem that needs to be resolved as well as this is the root cause. If it were just 20-30% then this would never have happened.

So where was IBKR when people were shorting 130% of stocks?

Your guess is as good as mine but my guess is that _their_ risk management, which is very good, handled this reasonably well in their little bubble and they could have potentially been punished by the actions of other people and decided that this was not a risk they were willing to take.

Tough thing to resolve but by talking about it, I think it can be resolved well.

Root cause: somehow, you can short more than the float.

I’m not keeping my money with a financial institution that lies to me.

I know for a fact my bank lies. They've been fined hundreds of millions of dollars for money laundering (it's HSBC). A few years ago I looked in to moving to a more honest bank, but I couldn't find one that also met basic criteria like having access to cash points in the UK and having a half decent mobile banking app. Literally every major bank that operates in the UK has stories of doing frankly awful things.

Since then I've joined Monzo, who do seem to be genuinely above board, but finding an honest financial institution is really hard.

Starling or Monzo?

Starling

Starlink is the space internet from Musk

Auto correct what can I do.

Of course I meant Starling, they were the first challenger bank to offer business accounts as well and I’m very happy so far.

Starling is neat except you need to request a special exemption from them for EVERY payment you send over £25,000.

Only takes them an hour or so to approve it for you, but it gets pretty old having to do it 3-5x per week.

It's actually quite unusual to be making 3-5 payments over £25k in a typical week. Not saying it isn't a real problem for you, but I suspect only a very small fraction of potential users will be bothered by that particular point of friction.

Not ranting, but as you asked "what can I do" here are few ideas:

Couldn't you turn off autocomplete or check what you/it wrote before you hit "reply" button?

Santander is 100% less shit than HSBC. That’s my only input. I’m sure someone is better but their front end services are mostly fit for purpose.

Really diversifying your funds across multiple banks is a wise move. I’ve got Halifax, NatWest, Santander and HSBC accounts still.

Santander were fined £32m for failing to deal with 40,000 accounts when people died. (https://www.fca.org.uk/news/press-releases/santander-uk-plc-...). They were also fined £58m for failures around consumer credit (https://www.ftadviser.com/investments/2019/02/27/santander-h...). In the US Santander paid out $550m because of dodgy car loans (https://www.reuters.com/article/us-usa-autos-lending/santand...). That's from one Google search for "Santander fined".

This is the problem though. I'm still with HSBC because, while HSBC is pretty terrible, the rest of the banks are also terrible.

On the flip side one of the heirs to the Santander empire tried to smuggle a Picasso out of Spain on his yacht, which is kind of cool... https://news.yahoo.com/santander-heir-gets-44m-fine-20351628...

They were also caught discriminating against... well, you can probably finish this sentence.

https://www.reuters.com/article/us-santanderbank-mortgages-i...

> It also refused loans to 30 percent of low-income applicants, compared to the aggregate rate of 18 percent

Why refusing to loan money to low-income borrowers is supposed to be discrimination?

If someone has minimal income they are far less likely to repay loan, why this is supposed to be indicator of some discrimination?

If someone earn 30k per year and someone earns 3000k per year then it is not surprising that loan of 200k would be far more likely given to person with higher income.

Banks are typically extremely awful, but why that specific part is supposed be indicator of something wrong? And it seems likely that other statistics mentioned are result of that.

They were doing it significsntly more than their competitors.

Monzo appear to be more interested in showing of their hipster tech stack than anything else.

I've been using Monzo for 2 years and I have no complaints. The app is fantastic and they have integrations for international transfers, and business banking that just work.

I’ve been using Monzo for around the same time and have had nothing but good things to say right up until they decided to start pushing their Premium/Plus accounts onto customers via in app ads. With all the rumours of them struggling to become profitable it’s made me consider a move to Starling, who seem to be in a better position in that regard.

I use Starling for my business (Monzo didn't have business accounts at the time). The app is much worse than Monzo. However they do have better export facilities, and you can do transfers via website, so for business I think it is more practical.

What a strange comment. Their "hipster stack" works really, really well. It's the best banking UX available by far, and I've moved all my primary banking to it.

So you dislike Stripe too?

Nationwide?

What about this bank?

https://www.triodos.co.uk/

Supposedly good (I know someone who works for them). However, bizarre fact:

> The bank was founded as an anthroposophical initiative and continues to honor the work of Rudolf Steiner as the inspiration for its approach to banking.

As far as I know they don't routinely bury cow horns to magically improve returns.

Triodos is fine, has an unusual sustainability ethos. They also have business accounts, though will only accept business with similar values.

For our personal and business banking in UK and NL, we chose:

* UK personal banking - Nationwide for primary current account, Tridos UK as secondary. Left HSBC because service was terrible and they kept on declining our card txns.

* UK business banking - Tried Tide but moved to Starling on discovering Tide didn't support joint account holders. With Starling also have a EUR account. It works seamlessly with the only disadvantage that transfers from the Starling EUR account to NL banks are overnight.

* NL personal banking - Triodos NL, after years with ABN Amro. Triodos is friendly, sustainability focus.

* NL business banking - Knab, which has been good so far. Wanted to use Triodos NL but there is a two month backlog approving new business customers.

I have the same issues with HSBC in France.

Calling their app "decent" is charitable to say the least.

The only good part is the call center, where operators are actively trying to be helpful.

I've got Revolut and Barclays, I confess I don't mind the Barclays App too much. Lets me do anything I want to do and I don't like Revolut trying to push insurance and crypto.

I worked in HSBC for 6 months a few months and their IT systems are scary. It's a patchwork of various international banking systems where each one has different views and funding.

They are completely incapable of coordinating such a political landscape. I made some cash and ran away from that trainwreck as fast as I could.

There are lots of consultancies embedded making good money out of the confusion.

I read once that in Islam taking interest on loans is forbidden, therefore Islamic banking operates based on some kinds of cooperatives. Is switching to an Islamic bank maybe an option?

For those in Germany I recommend GLS bank. They have an ethical charter on whom they invest in and their loans are fully backed.

Can't find the source now, but I read that while Islam (and Judaism, at least in the past) forbids usury and this sort of extends to low interest too, the concept of interest is useful enough (or at least in demand) that people developed all kinds of practices that work almost exactly as interest.

A Jew is allowed to charge interest to anyone outside the Jewish, Christian or Muslim faiths.

The whole reason that the Jewery got a bad rap in mediaeval days is that they were the only people who could charge interest, and people find it very easy to be turned against The Other who is also making money from them.

Handelsbanken has a good reputation or you could use a building society like nationwide.

The cost of that reputation though is fees on pretty much every single action you might want to take with your money.

Handelsbanken is a mixed bag in the UK and depends very much on both your local branch and your expectations.

In Switzerland there's a non-profit-oriented bank called ABS (Alternative Bank Switzerland) where I've been a happy customer for a few years now. They belong to a group of financial institutions that strive for "ethical banking", together with others like GLS. There are some others listed here: https://en.wikipedia.org/wiki/Category:Ethical_banking Another resource might be the Global Alliance for Banking on Values: http://www.gabv.org/the-community/members/banks

This reads like an ad, and Monzo is super popular in the UK, like it would be the obvious recommendation for anyone looking to bank in the UK with a smartphone...

Eh, I doubt it's an ad - I left hsbc many of the same reasons. Final straw was trying to get my data from them, which they are obligated to provide in some sensible format and simply wouldn't. Indeed after a couple if escalations they were insisting that all data internally was only kept on pdf beyond a six month horizon, which was blatantly wrong for a whole cavalcade of reasons. Unethical in the large and useless at a retail level, never want anything to do with them.

Did you report them to a regulator?

While Monzo is popular it's not profitable, and their latest annual accounts stated that they may not be able to continue as a going concern.

Starling is the only challenger bank that's profitable ATM (and it's only just profitable)

You didn’t look at Nationwide or the other handful of building societies that offer current accounts? Or Triodos if you want to go the full way.

i've used:

1. revolut - these guys are complete jokers. closed after being asked to provide the proof of funding 3 times in 3 months.

2. hsbc/first direct - somewhat decent. but i only use it to top up my other accounts. i try to avoid them, as they're just too big.

3. starling - simple, no-nonsense banking from a startup.

4. revolut business - had my account closed down by the "bank" because they didn't want my business. no reasons given. again, complete jokers.

5. freetrade - decent investing platform, but very very amateurish.

6. saxo bank - professional investing. they're a huge company, never had issues with them. and yes, they of course accept me buying gme and the like, plus they also support options. unfortunately it costs. a lot.

7. metro bank - what can i say. it feels like a 20th century bank with a nice app. had many issues with them, including a transfer that went missing for 2 weeks, and a EUR account that forced me to go to their branch every time i wanted to do a transfer.

8. ing bank nv - depending on the territory you're opening the account, they might be either really bad or somewhat bad.

9. rabobank - bank was constantly getting hacked and all account ops were blocked while the hacking was happening. also, the hackers managed to empty my account and the bank representative had to use a special card to withdraw some funds so that i could continue living.

later edit:

10. transferwise - very slick, minimal fees, used them from before they were a bank. no issues so far.

11. monzo - i'm not in their target market unfortunately. their features are not useful to me.

If you need a EUR account with a good app, TransferWise, who power Revoluts multicurrency action on the backend, are pretty decent. Horrid luminous green card though.

I'm an investor in Revolut due to their aggressive growth strategy, but I wouldn't use them personally.

As for Monzo, I like their app but missing features like being able to view your full CVV number in app, or link the app to all your other bank accounts on the free tier, basically prevent me from using them as my primary bank

To expand on my last paragraph: Revolut actually do spending analytics across all your linked accounts. on the free tier.

TransferWise aren't a bank so the financial protects are slightly different

I use them for some of my overseas customers, my only challenge with them is the limited number of currencies they support e.g. had to open a Revolut account to get payment from a Canadian customer

TW have all the functional features of a bank lots of people care about. A debit card, direct debits, standing orders etc. I of course recognize they aren't a fully licensed bank, but for EUR balances they are worth a look

The reason a Bank is strictly defined is that TW does not guarantee any cash that you have stored with them.

With a bank you have up to £85,000 insured and guaranteed e.g. if the bank fails

IIRC TransferWise holds all your money in escrow (as opposed to investing it or w/e), so they don't need to guarantee it. I'm not sure off hand if that's just what they claim, or if they actually make a legal promise to that effect.

Aw I kinda like the brutally green card :D

I set up a revolut account for currency exchange in 2018 and finally moved to use them as my primary bank in 2020. Never had any significant issues. Recently I was setting up a Revolut Business account and I didn't get a notification email requesting additional evidence. Me not getting an email is something they could improve, but the need for a thorough identity verification is understandable given their global ambitions.

Edit: I'd like to add that revolut was very helpful after most of my valuables were stolen in 2019. While my other bank took three weeks to deliver a new debit card, a virtual card issued by revolut worked immediately via NFC.

I have been also using Revolut as my primary bank since 2017 and no issues at all. On the contrary, great customer service (I was a Metal customer and now Premium customer). Now I even do my trading through them.

all banks/co's are great until you face an issue. to me that's the defining moment.

and again, for me revolut was a disaster and i will not recommend them.

YMMV of course - my experience with revolut has been nothing but positive. While I’ve had silly issues with my normal bank (like inability to close an account due to “technical reasons”), interacting with revolut has been stellar.

Customer support, features roll out, chargebacks etc - all way better experience than the local banks.

They singlehandedly forced all the banks in my country to implement apple pay / google wallet. For years nobody bothered, the moment Revolut entered the market, with apple pay support, the banks scrambled to add it themselves.

One time I even had my card stolen while traveling abroad - got a new card within two days, global delivery. I was very pleasantly surprised.

But I also understand the risks and don’t really use them for long term asset management for now. Just as a front for all of my expenses - their analytics are just awesome.

Are these all platforms for investment in stocks? Or you talking about banking services generally?

all are banking, some offer trading/investments. i was replying to a monzo question, a banking startup.

for trading/investments it really depends on your situation and location.

(for example: some countries offer 0% taxes on capital gains for trading if done using special products, but not all available platforms will have them...)

I can second the problems with Revolut. Weird and dodgy, and they spend every second of your use of their app trying to sell you shitty addon services like mobile phone insurance.

Starling, however, has been magic. I swapped my primary banking over to them and the only issue I've had is their dislike of rooted phones. That's only a minor inconvenience every few months when I forget to upgrade Magisk before the Starling app, though.

Transferwise I've used many times to transfer money for larger purchases in Europe. No complaints, but haven't tried the banking side of it.

My daughters have Starling accounts as their "day-to-day" accounts. They are very happy with them, as is a friend in my local Go Club.

Have you tried Schwab? Somewhat limited in what they offer as a bank, but I've only ever had positive experiences. Their web/app aren't wonderful but they get the job done.

Try Starling - I am an HSBC customer currently, but am migrating.

In France, a lot of banks are cooperative banks. While not everything is perfect, their attitude is way different than banks under different status. My bank was never involved in some money laundering scandal, investment scandal or other, and their customer service was always very good. They also tend to have a more "local" focus. For example, one of their saving account is used to finance local entrepreneur.

If you can find a cooperative bank, I would definitely advised that you try them.

This is true of “credit unions” in the US which are (probably?) similar as a legal structure. They exist as a service for a group or community - e.g. a union of policemen for example, or any citizen of a city.

Often their loan rates are generous, their fees low, and perhaps most importantly, they do not join into the blacklists that commercial banks use which prevent people from ever using a bank at all.

If you can qualify for a credit union I would definitely recommend that you try them.

When I had some bad times and gone for unplanned overdraft three times in one month (all below £50 and paid off few days later) they closed my account and I also had to deal with changing the bank during those times. Absolutely awful. In my opinion one must be a drug lord to get a good treatment from HSBC.

You might want to look a bit closer at Monzo, there was an entire episode of BBC's Watchdog [0] about them closing accounts and keeping people's money. Mine was frozen for well over a year with about three grand in it, no explanation, no apology. I only got it back in the end by involving the financial ombudsman via a website [1] specifically set up to help people who Monzo have scammed, because there are literally tens of thousands of them. Even then, no apology, no explanation - just an email one day telling me they were closing my account but at least giving me the option to transfer my own money out.

[0] https://www.bbc.co.uk/programmes/articles/2qS0HM6nBkcPMx0W8t...

[1] https://www.resolver.co.uk/freeadvice/companies/monzo-compla...

This x100. A few months ago Monzo froze my account without warning or any reason. Thankfully they de-froze it after an hour, but I've spent months since then in a kafkaesque nightmare trying to get an explanation for their actions. "It was a mistake" ... "the law says we cannot tell you why" ... "if it was a mistake why does a law protect you from having to explain?" ... "the law says we don't have to answer that" ... "which law?" ... "the law says we can't tell you which law".

Absolutely demented. Apart from that they refused to send me a machine-readable copy of their response to a DPA request for my records and the support team behind their app literally ghosted me when I kept politely pointing out the inconsistencies in their arguments.

Bonus: when I complained they used someone else's name when responding to it. When I complained again they sent me their response to _a totally different person's complaint about a totally different thing_.

Eventually I went back to First Direct (which is owned by HSBC). Avoid Monzo like the plague.

The law is probably related to anti-money-laundering, sanctions compliance, etc. If they detect something possibly criminal, it's illegal for them to "tip off" the owner of the account.

This is true of basically any financial institution.

Of course, it is a problem that Monzo had a bug that caused your account to get flagged for this.

Very much mirrors my experience, and that of several friends.

I (US citizen, freshman at a UK university) tried to set up a Monzo account a few months ago. They refused to give me an account, and refused (both in their app and over email) to tell me why. Left a bad taste in my mouth.

Ended up going with Nationwide, who are a bit behind tech-wise (they do this weird thing where they ask for 3 digits of a 6-digit PIN I'm supposed to memorize, which seems far less secure than a long random password in my password manager), but generally have been great. I tried to sign up for their student account, got told no and redirected to their no-credit-check account with no issues. (That's probably also an indication of what went wrong with Monzo.)

Monzo refused because of FATCA. That happens with banks outside the US to “US persons” all the time. They should have told you that, but you can blame FATCA for the cause (passed during the first two years of the Obama administration.)

I'd be surprised if that were the case. Their sign up path seemed to know about and handle US citizens (asked for my SSN), and I can't imagine they'd go to that trouble if they were just going to silently and mysteriously deny me.

Nationwide aren't a bank, they are a Building Society, (similar to your "Savings & Loans").

I "bank" with them. Sensible. Reliable. Well run. That's preferable to the latest flashy technology when you are talking about people's hard-earned and long-saved money.

I guess they don't have credit unions in the UK?

"HSBC" + "decent mobile banking app" made me laugh (though my experience with it is 2016/2017)

> A few years ago I looked in to moving to a more honest bank, but I couldn't find one that also met basic criteria like having access to cash points in the UK and having a half decent mobile banking app. Literally every major bank that operates in the UK has stories of doing frankly awful things.

I sense a common theme coming.

credit unions?

Yeah, lying is probably on the lower end of bad things HSBC has done... https://www.reuters.com/article/us-hsbc-usa-idUSKBN1E50YA

> I’m not keeping my money with a financial institution that lies to me. End of story.

So you're keeping cash under the mattress then i assume?

Couldn’t be your own mattress, obviously. You’d have to find a robot with a bed and use that.

Your bank actually has to lie to you to remain solvent. All banks do. The Central Bank also encourage it.

Last year you saw both that banks were 'forced' to withhold dividends and they were perfectly capitalised. Both cant be true of course.

If they hide it from you your money and everyones money is safe. If they tell the truth everyone loses, so it is actually the best outcome for you and everyone else. The fractional reserve system relies on not everyone withdrawing their money at once.

That's why there should be no banks, only money market funds. Every deposit is an investment decision. You may as well reap the rewards if you take all the risks of lending and cut out the middleman.

I've been using a brokerage account for banking for years.

Taking those risks has trade offs most people aren't prepared to make.

The online P2P lending boom here in the UK from financial crisis onward gave people this opportunity.

The end result, 10+ years in, has been subdued returns (relative to e.g. stocks) and crippling illiquidity, as you are exposed to all those late payments, defaults, and have no access to a functional secondary market.

Honestly you're lucky if you can get most people to even use a separate savings account. I know many people who keep 100% of their savings in their current (checking) account.

Lying in what sense?

Fractional reserve.

Lying about the fact that your money is actually there. Individually, the money in each account is at the bank. You can go withdraw all of the money in your account without any issue. But collectively, all of the money in all of the accounts is definitely not there.

Thank you for the clarification.

I've never considered that a lie, because I've never encountered a bank the claims to be holding all the money. They merely claim that I will be able to withdraw my money, and that's on average true.

I consider that claim to be in the same category as the grocery store claiming I'll be able to buy toilet paper today. Sure, unless there's a pandemic. But usually? No pandemic.

Hint: every broker will do this. If you think any broker (let alone retail) will let the client's risk taking threaten their existence, you are deluding yourself. It's a little bit like insurance: as long as most clients take diversified risks and don't push the system to it's limits, the system works. When a significant portion (majority?) of the clients all pile into an increasingly hairy position, the broker will step in and prevent the clients exacerbating the situation further.

Ditto. Shutting down my account. Enough is enough.

Robinhood has proven its intentions by its actions all the other things they say is just marketing and PR bullshit

Chamath would agree with you: https://twitter.com/chamath/status/1354947541125611526?s=20

I'd be more concerned with how illiquid Robin Hood apparently is here.

Since finance itself is a socially convenient system of alignment fabrication, you might as well start subsistence farming.

It's turtles all the way down. You could say trust emerges when people agree to believe in a shared lie.

Are brokerage deposits / holdings protected by insurance? I'm genuinely fearful of losing my holdings in Robinhood at this point.

Your holdings in cash or your holdings in shares?

Both. I suspect there is some kind of FDIC-like insurance but not sure of the specifics.

Yes, it's called SIPC, you're fine unless you have over $500,000 in robinhood.

With the (potentially huge) caveat that any losses you suffer due to not being able to sell your stocks in the period where you SIPC claim is being processed is not covered.

Yes, it's called SIPC and is (kind of) equivalent to the FDIC for banks. However it only covers up to $500k, only covers cash, stocks, bonds, CDs, and (I think) mutual funds. It does not cover options or future contracts.

Also it will only attempt to return the securities you 'lost' not their cash value. If you lose a lot of money due to not being able to sell your stocks for several days, that is not covered. So if you held 2000 stocks of GME, the SIPC will (eventually) give you back 2000 stocks of GME, not the cash value of those stocks when Robinhood went bankrupt.

It covers less than $500K if SIPC itself fails (after $5 billion in payouts it is insolvent).

True, it is still an open question if the government would step in in that case or not. As it stands they have no obligation to do so.

You can transfer your stocks to another brokerage without having to sell them.

You can. However, it tends to be a rather manual and long (days to weeks) process.

A brokerage run? Unlikely for an SIPC insured institution.

It would be more of a run based on principle and fear rather than practicality. I can see why an investor would move to a competitor after seeing that RH can just stop anyone from trading, anytime.

OK, how hard it is to increase your credit line in real time. We are not talking 100s of billions here. Had RH reached out to the likes of Chamath or Musk, they would have gotten a credit line in minutes.

This is no excuse for screwing retail investors. Horrible management. I mean, I am some random dude who can think of these, these are professionals running multi billion dollar enterprises, c'mon.

If you are just some "random dude," then perhaps there are issues with your suggestion that the professionals know about and you do not?

This looks like a preparation for defense against the lawsuit(s) for disabling trading for a couple of stocks. They will use the "We were not manipulating the market, we were trying to stay afloat!" excuse.

I don't understand their PR strategy though. The Webull CEO has been much more transparent about the kind of collateral requirements their exchange was dealing with via DTCC. RobinHood could have explained the same - it's not their fault for having insufficient liquidity when the DTCC's collateral requirements go up.

> He certainly didn't help it by going on TV and lying about their liquidity issues.

Aren't there laws against lying to investors?

Making an app and running a brokerage - who would have thought they are two different things.

> Non-zero chance had they not haulted trading on those symbols they would've been insolvent by close of trading today, depending on the size of their credit line.

Perhaps you can help me understand something.

In the absence of margin trading, if I deposit $100 of cash at my brokerage, then I order my broker to buy $100 worth of Stock A, how does credit and the possibility of bankruptcy enter into the transaction at all?

After all, if I give my kid $5 and send him to the store to buy some milk, he doesn't need to find 'liquidity' or a 'credit line' or risk bankruptcy.

Not an expert by any means, but I know in the world of trading there is often the requirement of guarantees before transactions are accepted. It's like your kid, at the store, was asked to show he actually had $100, before his $5 could be accepted and milk handed over.

In RH everyone who opens an account starts as an Instant amount.

The Instant means any security sold you can immediately use that cash.

Normally you can't go that. You have to wait 3 days for it to settle in the clearing House. The Instant accounts are using margin to make the cash instantly available.

Another small example. Robinhood gave me one share of GE when I joined. I didn’t want it, so I sold it and withdrew the money. I initiated the withdrawal request yesterday for $10.69. It’d be amusing to me to find they would have been fine if I only withdrew $10.68.

Based on my very limited knowledge, it is my understanding that banks/brokers don't actually consider the deposit to be valid until several days after the transaction. Even if you deposited cash they would probably find some way to delay letting you use the funds pending some 'internal checking'.

So in Robinhood's case if there are many people depositing dollars to buy stock then that could be their reason or excuse to not have funds available for trading. Just a guess.

Yeah I forgot about a credit card payment that was due a number of years ago, before I had online banking. I went in 2 days before it was due and paid it cash. I still got a late penalty added brcause cash takes three days to clear.

A bill under £2 and got hit with a fee of £20

In the UK, cash paid at the institution in question clears the same day. If bundled with a cheque (rather than as two separate transactions) it will clear at the same time as the cheque.

I had something similar happen to me many years ago. I took ATM cash from another account, plus what I had in my house and wallet, to make up the amount that an auto-paid credit card bill due on that same day would have sent me overdrawn.

I avoided the overdraft penalties.

The most absurd thing was that the bank, RBOS, callee me few days after about the late fee asking me if i was having money problems... It was a bill under £2 that had just slipped my mind. If they had checked any of my other accounts they would have seen that i had about £50k with them.. . But no a £2 bill has them calling me almost sounding like they were shaming me over an inconsequential amount of money!

The people using Robinhood are to some degree trading on margin, that means that they are trading with money they don't have in their account, which means that Robinhood also does not have it, at least not from you. They need to have a buffer of money to deal with the borrowing, which in this case they almost ran out of.

Is that knowingly trading on margin, or just how it works behind the scenes? If the latter, why?

The financial system is slow. ACH can take days before you can be sure things won't be reversed, trades take two days to settle, there's various anti-money-laundering policies everywhere that generally take the form of holding on to money for a bit to make shady things easier to track and detect.

So, anyway, for lots of reasons, things that users think should be instant, aren't. And that's really bad UX, especially for a platform that depends so much on emotional stuff: "deposit $200 bucks and buy 3 shares of X, leaving you with a $30 cash deposit which RH can then earn interest on" is probably how a large amount of RH's balances come into being. That breaks if it's going to be a 1-day gap between someone depositing their money and then buying the shares.

So everyone papers over holes like this with margin.

It's amazing that we still accept financial transactions taking days to actually "clear." Surely there's a market opportunity for someone to invent a way to do these anti-money-laundering things without delaying transactions. It's astounding that in 2021, it takes multiple days to increment a number in one database whilst decrementing that number in another database.

In this case, it has nothing to do with trading on margin and everything to do with Robin Hood having to cover 10% with the NSCC per the Dodd-Frank rule. [0]

[0]: https://www.zerohedge.com/markets/cash-strapped-robinhood-sc...

Apparently DTCC raised that to 100% for a few of the meme-stocks (GME).

Trades aren't immediate they take T+2 to clear. During that time frame, Robinhood has to put up collateral.

Correct. And more to the point, RH cannot use customer funds to cover that timeframe.

It must be its own funds. And the requirement of funds to be covering (collateral) can change on them with very little warning

Who determines the collateral required?

It’s federal law, part of the Dodd-Frank reforms in the wake of the 2008 financial crisis. I recommend this: https://twitter.com/kralctrebor/status/1354952686165225478?s...

The NSCC sets the framework, but it is spelled out in Dodd-Frank that they have to do so by law.

There are some other items, but that's the basic idea - full details are here: https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co...

If you want to dive further i recommend this thread :

https://mobile.twitter.com/KralcTrebor/status/13549526861652...

I only knows how it works in otc derivatives and then the collateral is equal to the cost of taking an offsetting position, and is calculated inter-day. But I would guess it is something similar on the stock market.

In this case, the NSCC, or the NAtional Securities Clearing Corporation.

This is the right answer. And with the amount of volitility GME was seeing, and the amount of trades of it, created lots of money for the user, but RH was still days away from the transactions actually settling, thus they didnt have the cash from the sale yet.

They have to have a certain amount to cover the value of all the stocks held by their clients so when 50% of their account holders have a stock that suddenly gains 2-20x value things get tight. In your analogy the price of the milk is relatively stable in the case of gamestop the value of the milk is fluctuating wildly between the time you sent the kid, when he got to the store, when he picked up the milk, etc etc. except the kid is legally required to deliver the milk or make you whole.

> They have to have a certain amount to cover the value of all the stocks held by their clients

Huh? I don't understand this. What do they have to hold and why?

I presume it's a safety mechanism required by the financial apparatus so that they can make their investors whole if they ask to withdraw all at once. Something that given the current circumstances is actually quite possible. But being candid, that's just a guess.

It's a Dodd-Frank rule apparently. [0]

[0]: https://www.zerohedge.com/markets/cash-strapped-robinhood-sc...

It’s an SEC rule to guard against brokers going insolvent. Trades are not instant transactions so there’s a lot of credit being floated for days. Good thread explaining this, though still complex: https://mobile.twitter.com/KralcTrebor/status/13549526861652...

It feels like slow movement of money in our financial system causes a lot of these problems. Customer deposits take several days to settle (during which time Robinhood has to front the funds). Settlement of the stock trades / transfer of collateral to the DCC likely takes several days, etc.

This sounds like a problem that might actually be solved best by blockchain.

Honestly, just the utilization of stablecoins for interbank transfers would help with a ton. I acknowledge that it's technically possible to update the existing system to just support faster settlement, but given how long we've been waiting, I find it unlikely.

As a user, I'd love to be able to deposit and withdraw stablecoins at banks - this would enable essentially instantaneous transfers, and provide an interface that anyone (including non-banks) could interface with.

The mismatch between the speed of trading and the speed of settling can under extreme circumstances cause problems, evidently.

> It feels like slow movement of money in our financial system causes a lot of these problems

I'd turn that around and say that the hyper fast trading causes a lot of these problems, and in particular creates more problems than it solves.

Introducing a Tobin Tax and replacing continuous trading with frequent auctions (maybe with stochastic end times, to limit sniping) would alleviate a lot of these problems, and put the rent-seeking HFT traders out of a job, while not impeding the important price discovery and capital allocation functions of the market much at all, I think.

What's a Tobin tax?

Oh, sorry, it's this very simple idea that every trade is subject to a tiny fee (a few basis points). Totally irrelevant if you buy for the long term, but utterly destroys the business model of HFT.

https://en.wikipedia.org/wiki/Tobin_tax

EDIT to add: Appropriately enough, Wikipedia says:

> Another term for these broader tax schemes is Robin Hood tax, due to tax revenues from the (presumably richer) speculator funding general revenue (of whom the primary beneficiaries are less wealthy)

The real reason is as follows:

You cannot use customer funds to cover dtcc collateral terms.

Your milk example does not work, because you are not settling up the milk buy 2 days after. You settle your milk purchase on the spot.

Huh I didn't know that. The firm I worked for did self-clearing, and we had no customers (prop trading). I guess that means these requirements didn't really matter for us because everything was ours?

even if you self clear , you are still a broker clearer and you end up touching the DTCC.

This is exactly what Robinhood is doing too.

This twitter user explains, although it gets quite technical:

https://mobile.twitter.com/wallstcynic/status/13550134381546...

Look at the tweet at 7:41PM EST.

" But if RH takes in 500m of new money and 300m buys GME, then at minimum they are looking at posting 30m+ from just that exposure at NSCC. They cannot use client money - RH has to use their own resources to post. And if GME stock drops, RH has to post the loss pre-settlement."

Last I heard, the DTCC have raised collateral requirements on GME from 1-3% to 100%. Seriously. That's the real reason clearing houses stopped accepting new orders on GME from brokers.

Is there a way for a regular person to see the current DTCC collateral requirements for a particular stock?

I believe this is only available in the Collateral Monitor dashboard that institutions that must post collateral have access to.

So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”?

I’m still not understanding how robinhood lost money in the first place.

That's an accurate enough analogy.

When you sell a stock on Robinhood, it takes ~2 days to "clear" the transaction. So, Robinhood credits your account, but Robinhood doesn't see that money for 2 days. They don't allow you to withdraw the money from Robinhood until its cleared, but you can purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don't self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of "float" to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is.

Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they're in the app, they're probably using the Instant Deposits feature to trade on up-to $1000 they've started transferring but which hasn't cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float.

If that float hits zero, that's basically like, imagine your company's bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn't go up. In fact, people couldn't even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can't. They're angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm's reputation.

IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn't actually "lost" money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid.

But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.

“But, the deeper issue is the US financial system and its molasses speed of moving money around.”

Sorry, I’m going to be That Guy here and point out that when people accuse Bitcoin of having slow transactions, this is what they should be comparing against, not Visa card transactions. Actual settled transactions. Bitcoin takes 10 minutes. US financial system takes days.

I do think, if more people knew the extent to which the US financial system is a house of cards, cryptocurrency would be even more popular. Not necessarily concerning fundamentals, as the US is still fundamentally strong. Primarily concerning the edges of the system and the institutions we interface with every day.

I know Robinhood, and other firms, are trying to downplay what happened yesterday (and is continuing to happen right now!). Its possible their version of the story is accurate. It feels more likely that its not the whole truth.

We were treading really close to a 2007-level market event yesterday, though not due to bad ratings, rather liquidity. It wasn't just robinhood that was impacted; robinhood and IB both said that they made the decision internally, but WeBull said they were instructed by their clearing house to cease trading, and even large firms like TDA started enforcing limits. It was very close to going systemic, and not because of bad fundamentals, not because of an economic downturn, all because an unprecedented number of Americans wanted to join in on the stock market they're entitled to join in on, but our financial institutions were not ready for it.

When you lay out the reality of our system; that money moves so slow that every single institution who wants to handle money, for nearly any purpose, needs a bank account billions upon billions of dollars large just to be able to move as fast as people expect the system to move, and if that bank account gets too low the problem near-instantly spreads to the next bank in line; the system is very fundamentally broken, and people need to demand change, because our financial system runs EVERYTHING.

Moreover; if WSB's theory on this is correct, and if these WSB stocks like GME/NOK/BB/etc don't reduce in value; we missed a meteor yesterday, but a second one is still coming. This isn't just about bankrupting a hedge fund. When the margin calls on these short positions start coming in over time, the price of these stocks continues to rise, and eventually, the current "diamond hands" (as WSB call them) will sell their shares. We're talking about billions of dollars here; that's a massive liquidity spike that our institutions are still not ready to handle. Granted, as always, its the IDIOTIC institutions who got us into this by taking out the INDEFENSIBLE short positions in the first place, but they're systemic; they know they can do whatever the hell they want and get away with it, because if they go down they take every American with them.

Except you misunderstand one important part in the system, and that is credit drives the wheel of growth. Cryptocurrencies, while transactions settle much faster, are designed around a "hard-money" ideology. You know what's worse than inflation? Deflation. Now, there are pushes for credit in the cryptocurrency world, but as of now, it doesn't seem widespread.

Of course credit systems have their own problems, like debt growing so large that it's impossible to pay back. But usually a nice reset does wonders.

Since credit systems and money is created by governments, they have the power to do such resets and have done so in the past many times in the last 5000+ years.

If the credit systems collapse into a cryptocurrency hard money world, there will be a new emergence of desperate people, slavery, and war.

Credit absolutely can, and actively does, exist in the crypto world. If I have 10 bitcoins, I can lend them to whoever I want. I have to rely on the legal system to get them back in the case of a bad actor, but there are other emerging coins which encode the idea of credit into the blockchain itself. I doubt they'll work very well; the legal system is still critical to ensuring credit functions, and that doesn't have to go away with crypto.

Credit systems are not created by the government. Sure, the government is the biggest player, but at the philosophical level, credit systems are created by anyone who has an asset but doesn't need it right now.

The bigger thing that crypto does actively do away with is actively managed monetary policy. The populace hates on the people in power (banks, funds, government) for their quest for wealth and power, but for all the wrong that happens, monetary policy has been the single biggest driver in providing creature comforts and a modern lifestyle for the average citizen of the planet.

There absolutely is a substrate of "holy shit nothing is actually anything" at the very core of our economy. We print money to pay off loans given to us by other countries bought with their printed money. Nothing actually is anything. But, computers aren't cool with that; there is very real, hard math in the deepest parts of cryptocurrencies. You can take one of two sides in this argument, and I'm not sure either is absolutely correct (partly because, I'm not even sure there is a definition for was "correct" means in this context): Either you believe that substrate should be hard math, and modern economics is a farce, or that you believe monetary policy is the only way to ascend an economy beyond trade and barter, that we need men in suits at the top pulling levers and twisting dials to keep this machine running another day.

Maybe its alright that nothing is actually anything, and it can stay that way forever, chasing infinite growth as we expand into the cosmos. Or, then, maybe someone hacks our computer and changes the value of the Blemfark from One of its itself to Zero of itself.

Here's what I do know; whether or not it would be better, people seem to increasingly desire less top-level control and less delegation of so much power to wall street firms. Crypto is going to continue to get more and more popular, even if its against the best interests of the people, because our government and wall street underestimated how much influence the 300 million people that aren't them actually have. That's the cost of democracy and a free society; it sometimes takes the wrong path.

Credit systems are absolutely created by the government if they involve the dollar (or other sovereign currency). There is not a bank in the modern world that lends money. Banks don't lend out existing assets.

I'm sure there are crypto systems that create this kind of credit, but "lending out your bitcoin to someone" is very different than how Banks create credit.

A Fed Wire is a settled transaction, and it is settled in seconds. The only reason they're not used more is that they cost about $10. OTOH a Bitcoin transaction has been more than that recently, and it doesn't settle in seconds.

Just my two cents.

I created a Robinhood account on Wednesday evening and transferred $1000 via Plaid. My account is still not active and AFAIK that $1000 is in limbo.

The app tells me "We're reviewing your application and your deposit is pending. Application approval may be delayed. We'll notify you when you can begin trading."

IIRC this is a new thing in order to limit exposure to the positions above.

Note that if you start being able to use those funds before several weeks have passed, you're almost certainly going to be trading on margin even though you made a "cash deposit", because ACH funds will not settle for up to a month.

These are 2 different things

(1) Credit risk - this is what you describe

(2) Counterparty risk - this is collateral. This is different.

The 2 are interlinked insofar that the counterparty (2) may react to the perceived credit risk (1) , however these are 2 separate risks at play.

** To go back to the milkman, the correct analogy would be:

Your son wants milk. You go to the farmer's market - but you can't hand over cash to farmer. Remember, his milk is spoiling, there's a huge line to buy, and he just doesn't have time to count bills, square exact change, or screen for potential fake bills. He only accepts bank transfers, and you dont have a bank acct. So you buy milk on credit, and agree to settle when he's not too busy (as you have always done).

Now, the farmer has been noticing you are buying a lot of milk for your son, and the empty milk bottles you left with him on deposit ("float") are not sufficient to carry all the milk you are buying....so he's now asking for many more bottles, which are expensive. He refuses cash collateral - he will only take more bottles, because he's concerned about all the cash you seem to be handling recently.

You don't have extra cash of your own, for bottles. You can't commingle funds. So therefore, you stop taking milk requests from son...and the other 10M children

So if RH would just make you wait 4 days before you could trade again, then there wouldn't be any problem? But then it would be a lot less attractive / addictive app.

This is not a Robinhood thing; every single brokerage does this. Robinhood is a bit unique with their instant bank deposits feature, that's something traditional banks don't generally do, but its really just a minor extension of this same idea.

Robinhood is accessible, so it has serviced the bulk of the retail investor spike that happened this week. Additionally, I expect that their net liquidity is far, far lower than a traditional bank, just given their age and diversification of business. They needed money, so they went to JP Morgan. Plenty of people also trade with JP Morgan, but (and I can't believe I'm saying this) JP Morgan actually, to some degree, knows what the fuck its doing. Robinhood doesn't; Robinhood is basically a teenager who just got a new car, wanted to show off to some friends, crashed it, and is now crying on the phone to daddy.

Which, to be fair, is exactly the same thing every bank had to do in 2007, except daddy was the US Government.

You do realize that their Instant bank deposits feature is a fiction? Until the money clears you are trading with their float - they just paper that over.

I just checked in on this from yesterday and this is just fantastic. Such a clear explanation of T+2 and all the extra stuff specific to Robinhood that's probably a further drain on their cash position. So thanks SO much for this.

Also, it should probably exist somewhere a bit more first-class than buried in an HN thread, because it's just unbelievably educational.

"I watched the CEO on CNN tonight, and while I found him pretty difficult to watch, this is a very difficult position to be in. If you admit on TV that your company is experiencing liquidity issues -- even if temporary in nature such as with clearing custodianship requirements -- you run the risk of triggering a greater panic through customer withdrawals/redemptions."

A Bankrun!

The key difference is that Robinhood isn't a bank. Bank runs are bad because banks are assumed to be massively liquid---in the average case, if you walk in and provide the proper ID, they can hand you the cash you're asking for. If they can't, one of their primary value propositions is at risk and people start demanding their money out because the bank isn't able to provide the services of a bank.

This is not (and is not expected to be) true of stock brokerage. Nobody generally has an expectation of moment-to-moment liquidity (or even closure of deals), even in a stock with significant availability. However, a brokerage deciding independently "You're not allowed to buy this one stock" is unusual, and can cause people to start backing towards the exits.

This dude allowed only selling of GME, not a full freeze. People would be mad but not livid if he hadn't done that, which stinks of corruption.

"The first rule of having a liquidity problem is dont talk about your liquidity problem"

"Guys, we had to lie to everyone! It was for PR!"

And why exactly did they have to let people sell GME shares? In light of the current situation, it sounds to me like the responsible and impartial thing would have been for them to temporarily suspend all trading of GME - not just buying.

Robinhood is a joke. Not just because of these shenanigans, but because their lack of technical stability and customer service is unacceptable. They reliably crash on every major trading day. And there's no US based support.

Never ever use a broker where you can't pick up the phone and talk to a real human being. They all have zero commissions now so there's no excuse.

They're also a joke because they are, as far as I'm concerned, not a "brokerage". They are an app designed to convince people that they understand how to trade stocks, in order to sell them stocks.

A real brokerage should, in my opinion, and some sort of duty to act in the best interest of its clients.

A brokerage should not have huge backlash because its users got margin called, and those users didn't even know what a margin call was.

They should not have huge backlash because its users stop-loss orders were triggered, and then executed at a lower price.

This is just confusion that shouldn't exist, because a reasonable brokerage shouldn't be luring people into these risky positions just to make a buck on the sale.

Getting margin called is one thing. Being prevented from buying a stock is something completely different.

Being prevented from being able to buy a stock if the brokerage can not afford to legally sell it to you is the expected outcome. If you want to argue that Robinhood should have been bigger, and thus had more flexibility and been able to handle this, sure. Why not. But then you're complaining that the company you're dealing with isn't big enough to float your risky position.

Would you have preferred the alternative where Robinhood risks exploding, has no liquidity, triggers a rush where everyone tries to get their stock out of Robinhood at the same time, fails, and every Robinhood customer is stuck waiting on SPIC for some undetermined amount of time?

Or would you have preferred the alternative where Robinhood didn't allow you to sell either? And then it the stock went down during that time, you can't try to get out?

Robinhood is a shitty company for a lot of reasons, but preventing themselves from being over-extended into bankruptcy isn't really one of those reasons.

> float your risky position

Nobody is complaining Robinhood disabled naked calls/puts on volatile stocks.

How is not illegal for Robinhood to disable cash accounts from buying stocks?

Your cash is transferred and deposited. If the stock price crashed, it crashed, investors still own the stocks with their cash paid.

A large part of Robinhood's entire product is papering over the difference between a cash account and a margin account, and hiding the intracacies and timing of the underlying market.

> Your cash is transferred and deposited.

When you open a new account, and start a transfer from your bank, that is not instantaneous. "Cash" doesn't magically appear in Robinhoods' account. Until that deposit clears, you are effectively operating on margin.

If you recently sold something on Robinhood, and want to buy something else, "cash" isn't in your account yet, because that original sale hasn't settled. Robinhood is papering over that as well. This one in particular I'm not saying they shouldn't paper over, since I believe it's less of a risk.

But each of these "Robinhood covering your unsettled positions" adds a little bit of risk. This risk adds up.

The suggestion of Robinhood only letting people trade with cash that is fully settled into their accounts would completely swap the underlying paradigm of Robinhood's product.

Even so, new trades you want to make would have to settle. And as discussed elsewhere, Robinhood has to funds and deposits to cover potential risk associated with those trades until they settle.

There is a lot under the hood that is abstracted away by Robinhood, and now those intricacies are leaking out (and completely mis-understood, because one of the premises of Robinhood's product is that you shouldn't have to understand, or even know about, them)

You have many misunderstandings and I am happy to clear them.

1. No, not all Robinhood accounts are margin accounts, a simple google search tells you that: https://robinhood.com/us/en/support/articles/robinhood-accou...

2. Yesterday, all Cash accounts were disabled from trading GME, that’s a fact and please defend that again.

3. Trading with a margin accounts and trading on margin is different. I can have a margin account and borrow $0 on margin to trade.

> No, not all Robinhood accounts are margin accounts,

I don't think I said that; I said that Robinhood papers over the differences in a way such that the end user doesn't explicitly interact in a hugely different way, and it's not explicitly clear what kind of account you have.

I did imply that new accounts are all technically margin accounts. The link you provided seems to prove that?

> When you sign up for a new account, you’ll automatically start with a Robinhood Instant account, which is a margin account.

> 2. Yesterday, all Cash accounts were disabled from trading GME

Yes, but I didn't say that this was because they were "margin". I said that this appears to be because Robinhood, as the broker, still requires additional cash on hand to cover these positions until they settle. This is a different thing than the margin issue.

> 3. Trading with a margin accounts and trading on margin is different.

Yes you're right. But a new user that just signed up may be thinking they are using a cash account, but it's actually a margin account. It also appears that you have to manually downgrade from an "Instant" (margin) account, to a "Cash" account[0], and I highly suspect that most people didn't do that, and thus are still using a margin account.

[0] (yes, it is really bad that this link is broken at the moment) https://robinhood.com/us/en/support/articles/downgrading-fro...

I will not argue with you about what Robinhood did to any of the margin accounts, if people borrowed money to trade stocks and Robinhood think that's risky, they have the right to close positions as part of standard risk management.

But I am against what they did to the cash accounts (and margin accounts not borrowing money to trade). It seems that you think it's a small portion of all of the accounts, which I disagree.

Even if it's only a small portion, what Robinhood did to these cash accounts was unprecedented and unacceptable as a broker.

For point 2, I think you are referring to the clearing process. Brokers were liable to cover if clearing houses do not[0]. But that is Robinhood's liquidity issue and not does justify Robinhood disabling cash accounts from buying stocks.

[0]https://www.youtube.com/watch?v=7RH4XKP55fM&feature=youtu.be

I'm not spending the time to watch some Youtube video you're posting, especially if you don't link to a specific timestamp/context. I highly suspect that the link you're saying is that a broker would be responsible to cover loses on trades they made if the clearing house does not; not that the brokerage is required to accept unlimited risk just because someone wants them too.

> But that is Robinhood's liquidity issue and not does justify Robinhood disabling cash accounts from buying stocks.

Robinhood having a liquidity issue 100% justifies them not offering services that they may not be able to actually cover. Because the alternative is way, way worse. You want Robinhood to just... make up money that they owe people but don't actually have? I'm fairly confident that financial institutions can't just make up numbers in order to manipulate their way into compliance.

I very much dislike Robinhood as a company, but what you're suggesting doesn't make sense.

> services that they may not be able to actually cover.

That’s exactly the point the parent commenter is making: there is nothing to cover for stock purchases on accounts with a balance. No liquidity issues can arise from that. You can say it’s easier to just turn off everything at once, but there is no actual reason to prevent stock purchases without margin, the buyer bears all risk.

Except for rules put into place by Dodd-Frank make that a legal requirement for all brokers (to remove systemic risk from DTCC). You can argue that it doesn't make sense for fully covered cash accounts - but it's not a decision Robinhood could make on their own - they are mandated by law to post that collateral from their own operating capital, and not use client assets (like the cash in their account).

You are papering over the fact that even cash accounts require Robinhood to have sufficient cash to cover amounts liable until the trade is actually settled. There is an entire web of relationships between DTCC, robinhood, bank LOCs, etc. that make robinhood's capital requirements explode when GME stock explodes 1000% up and becomes the most traded share in the entire universe of stocks.

GME’s market cap is still in the low billions after the bubble, it’s not even .1% of the market.

In a volatile market - a single share may trade many times a day - and Robinhood has to have enough to cover each trade (not share) - so the market cap is not a ceiling. It's likely RH didn't have enough money to adequately cover the levels of volatility (or they projected they wouldn't, soon).

Apple alone had a volume of 170M on Friday, for a total of $0.9B cover required, GME had 50M or $10B cover needed at ~$200.

There would have to be an insane ratio of meme-stock trading vs SP500 for GME alone to impact their cash requirements - if that’s the case it seems they dug their own grave...

Dodd-Frank and rules around trade settlement - in particular brokers have to post collateral based on complicated calculation to the clearance firm (DTCC) until the trade clears (usually T+2). Unfortunately it looks like DTCC increased that percentage to 100% for a few names (like GME) - https://twitter.com/KralcTrebor/status/1355172567242469377

A brokerage being unable to perform its sole function is, by definition, a shitty company.

Sure, app crashes undermine confidence in Robinhood.

But, if you're a buy and hold investor, it shouldn't be an issue.

If you're a buy and hold investor... why in god's name would you use Robinhood?

Serious question, why would you not? It's designed to be incredibly convenient and the trades are zero commission. Why not use Robinhood to buy and hold, if you're just making simple plays (buying ETFs etc) and don't need high performance (ie executed immediately etc) trades?

> Serious question, why would you not?

My gut feeling is that RH is designed to maximize the number of trades people make, as a core "engagement" metric. A few examples: 1) The UI is designed to induce in the user the feeling that something is happening, always - the graphs are not to scale, so small swings in price appear bigger than they really are. 2) The "Top 10" and community trends feed will trigger FOMO, and again will likely result in more day-trading.

In all, RH has too much "clutter" and noisy notifications for a buy and hold investor. Most platforms are now commission-free.

Would it make sense for these companies to make bets against their customer's trades?

My guess it that the customers are wrong most of the time.

https://xkcd.com/2270/

How could they trigger a "run"? Surely they have the money to repay every single customer what's in their account and you're not implying they're doing a Mt.Gox? Some customers may leave, but that won't hurt the remaining customers, will it?

I pulled my settled cash out yesterday and will be pulling out the rest of my cash ASAP.

They lost my trust yesterday.

They wouldn't have been insolvent, they just wouldn't be able to process additional transactions until previous transactions had settled.

The trade-off was suspending trading on some stocks vs suspending trading on everything when they hit their limit.

The CEO just gave 3 interviews tonight and denied this was at all related to liquidity issues for the company in all 3 when pressed. Terrible look.

I’d imagine liquidity issues are the least of their concerns right now. At least, they would be to me.

Why? For a brokerage it's an existential concern. And they can't publicly admit it's a problem either, because that would likely trigger the brokerage equivalent of a bank run. (Of course, odds are they're already grappling with that as well.)

I had a neutral to negative view toward this product before today.

In part due to the product’s UX having to change after a customer killed themselves and cited the app in their suicide note. [1]

I noticed that before but bad stuff happens, I had not heard of further issues and it was likely a series of contributing factors.

That said, this bind broke the entire concept of the branding of the product. I’d never install this thing now.

If they have broken the brand and lost trust of users, no amount of short or medium term liquidity will save the company.

[1] https://news.ycombinator.com/item?id=23578794

https://suicidepreventionlifeline.org/

They've lost the trust of people YOLOing on meme stonks. I'm sure it's a noisy part of their userbase, but still only a part.

It would be interesting to see stats on how many people use RH for long-term investments (buy and hold, DCA, etc), and how many use it as a form of gambling (day trading, leveraged options etc).

The people YOLOing on meme stocks is what makes their orderflow so valuable to Citadel. Why would they be willing to pay so much for it if not for that flow? (At least until the past few weeks, where maybe now it's considered toxic)

> people YOLOing on meme stonks

This is all that day trading is. Regardless of whether the traders even know what a meme subreddit is. Why would any day trader want to use a platform that’s going to do stuff like cut you out of an epic short squeeze? If a non-professional investor had sensible ideas, they wouldn’t be day trading.

There's day trading, and then there's taking out credit card cash advances to buy leveraged call options on a stock that's already gone up 1000% in a month. Both are risky, but the day traders I've known wouldn't touch the latter with a barge pole.

Would the day traders you know be happy using a brokerage who’s liquidity issue mean it’s had to ban trading certain securities? Even if they don’t want to YOLO like a maniac, why would you trust a company that’s had so many very public blunders with your money? It’s not like there aren’t more reputable zero-fee brokerages out there.

...which all did the same thing, no?

Schwab/Ameritrade didn’t.

At least special margin requirements have always existed, and usually day traders know to avoid them or how to deal with the special requirements with a broker that allows you a more sophisticated view of the market. e.g. for Interactive Brokers, you look at this list and know you're going to have a pain trading these stocks:

https://www1.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2F.....

Because RH abstracts those details away to make the interface easier, the only hammer they could use was to ban trading in those securities.

You couldn’t buy any of the stocks with settled cash. Why keep bringing up margin and leverage and credit cards? Several other brokers did halt buying after Alpha Clearinghouse said they couldn’t fulfill them — but that block from the clearinghouse lasted a few hours on a few securities. Robinhood blocked a lot more securities for the entirety of the day.

There’s this need to paint retail investors as incapable of understanding margin and leverage to bias the conversation and make them seem in need of being rescued from themselves — but robinhood hurt a lot more than just those over-leveraged people (not that they would be justified in hurting any of them).

I had small positions in the app for the last year after starting an etrade account — none of them in memes and none of them on margin, none of them blocked by RH’s actions - and I will be joining the people exiting and closing their accounts.

If you’re looking for a casual broker that doesn’t behave unethically and incentivizes safe and informed investing for newbies, take a look at Public[1].

[1]: https://medium.com/the-public-blog/a-note-on-access-with-res...

I'm not sure about this. If there's clear and blatant market manipulation on the part of the broker (which will likely get them hauled in before the SEC btw) then I imagine many investors/traders looking at this from the sidelines will be pulling their accounts as well, whether they're involved in this directly or not.

> likely get them hauled in before the SEC

More or less likely than enabling or collaborating with the crowd to massively pump a stock for the sole purpose of disturbing the market?

This, to me, looks like their stay-out-of-jail card.

I think it will depend on furore that remains after the dust has settled. It seems to have become a bipartisan issue (when last did the US have one of those?) which means if people stay angry enough they will still be pulled before SEC. Civil class action lawsuits have already been filed against RH and the like.

If the SEC could they would probably pull the stock pumpers as well, but you can ask Hollywood how easy it is to pull a random crowd of Internet disruptors in front of any kind of court in practice. Very difficult to prove coordination in a case like this as well, although not impossible

That's like 50 percent of their user base apparently, according to reports that 50 percent of Robin Hood accounts own gme.

Those reports were later found to be made up.

Most Robinhood users were holding GME in the past few days.

Why does it matter whether the user is using it for long-term or YOLO-ing meme stonks.

Is American Airlines a meme stock? They were halted too? Think there were any admirable long term investors wanting to buy it today? I dont know, but what I do know is that they wouldnt have the choice if they were using Robinhood.

I think the main point people are upset about is that it just feels gross when the rug can and as we saw today WILL be pulled out from under you at the discretion of a few people within their brokerage.

I tend to think that it's become too common to dabble in shares. And I know this is me being a bit snotty. But there's real risk there and when I started out, I didn't use an app. I went to an office with broker and did the orders. There's a certain risk with an app, and an echo chamber. A lot of people can make silly mistakes. And that's part of the market too, but that customer killing themselves over a bad trade is a tradgedy.

And right after saying they don't have any liquidity problems said, "We're #1 on the app" while retail investors were losing millions because of expiring options/stocks. Absolutely tone-deaf.

Not denying that all securities have risks, but that was a bad response imo.

Retail investors lost millions because of an inability to buy?

I guess the theory from some people is that if they could have kept buying then the stock would go up (and trigger the squeeze).

Not sure I buy it (esp with the amount of call options that are just going to magnify the move up but also the move down).

This has been happening every day for a few days before the stop (perhaps a few weeks at a lower rate).

Why don’t you “buy it”?

At the very least the price wouldn’t’ve have dropped 70%. That was an attack by institutional investors who sold relatively small amounts of stock at very low values. Normally retail users would’ve snapped it up cheap, but they can’t do that when their trading platform makes it impossible to buy.

It will scare people off triggering a sell

I believe some margin positions got called and closed, which might not have been if more people continued to pump the stock by buying more.

An inability to buy means an inability to squeeze the short harder, and depending on how hard you have squeezed that can affect the overall success of the squeeze.

Also they apparently forced sale on some accounts, which combined with an inability to buy more, definitely affected stock prices.

But you won’t lose. Right?

They forced sale on stocks at an earlier (lower) price. Some people were literally forced to make a loss.

Imagine buying a lottery ticket from me. I run the lottery. I print it out, look at it, oooh, you know what, I can't sell you this one. Of course you don't need to pay. Goodbye. Did you lose money?

you completely missed the point. the fact that the squeeze fails means that it fails to squeeze the shorts of the hedge fund, which is the one that will be coughing up billions to pay all the retailers. So yes, the retailers that are buying shares at higher prices will indeed lose actual real money if the short squeeze fails. And it will be due to what is likely to be market manipulation (ie screwing over its clients) by Robinhood

I think that’s GPs point.

it's not. Here's an example

Scenario 1: 1. Client buys share for $400 2. Hedge funds get short squeezed (because trading is not restricted by Robinhood) 3. Stock shoots up to $1000. Client made $600

Scenario 2: 1. Client buys share for $400 2. Robinhood restricts buying the shares (so the short squeeze doesn't happen) 3. Shares plunge to $50 because the short squeeze failed to happen (ie the hedge fund did not have to purchase the shares at higher prices, which is where the capital that the traders would share amongst themselves would come from) 4. Client lost $350

comboy is saying that the lottery ticket buyer is being kept from participating in a winning strat, which is what's happening to retail investors right now, which is the same thing you outlined. You're both saying the same thing. Not downvoting you btw.

it's not the same because many retailers do lose money because the short squeeze fails to execute. They dont just not make money, they buy shares for $300 and have to sell them for $100

AFAIK the forced sales were margin calls.

No proof either way, with many accounts claiming and sharing screenshots of margin trading being disabled in their accounts, and it's more likely that these forced sales were due to the delay between RH and the banks, rather than being a normal margin between RH and the clearance house.

The people who probably would have lost their money anyways (because they were waiting for more suckers to push the price higher) now have an excuse (other retail buyers couldn't open new positions). People who realized those were the suckers stomached selling while it wasn't as high as yesterday but still astronomical.

The anger at Robinhood reminds me of when the government in Nigeria cracked down on MMM ponzi scheme. People were furious because they all assumrd they wouldn't be the bag holders at the end. But here there's been a full day to close positions so I'm fairly sure the people who aren't doing it now wouldn't have done it whenever the stock starting going down in other circumstances

Except, as SI/Float was at 139%, there was a guaranteed sucker to buy it off them at basically any price - unlike in a Ponzi scheme where you never know if there’s going to be another sucker.

Hasn't SI/Float been around there for more than a year? I'm not an expert on this.

Source: https://www.ortex.com/symbol/nyse/gme/short_interest

Seems like the 100% line was crossed in Jun 2019 - and it does indeed mean that going long since that point, at almost any price was fundamentally sound investment and not ponzi;

It is a pyramid, but the base layer of “suckers”, those that end up taking the losses in a standard ponzi/pyramid are already determined ; they are the most finance literate people in the market, and they did it willingly. WSB is just adding layers in the middle which is rational.

The short sellers knew their risks perfectly well and did it willingly. They just didn’t expect anyone will figure out how to take advantage of the setup they created.

Investment ? Not sure about that

As much as that term can apply to buying stocks, it does.

Whether buying stocks should be considered investment or gambling - is an entirely different distinction.

Well the original shorts claim to have already closed their position and as it went up I think people are probably jumping on that side of the bet as well. Short interest doesn't mean it's going to go up forever this thing is just moving up on ponzi energy not short math

CNBC reported Melvin Capital closed the shorts, and then it turned out they didn’t.

This is very likely criminal market manipulation, but I’d be surprised if it ends up with more than a slap on the wrist to anyone.

And ... at the time I wrote that, si/float was still more than 100%, so - no, they most definitely not. (Am on phone now, will check later)

The idea that the shorts are for sure going to pay a higher price is super misleading and is the fuel for this ponzi. Everyone already knows the value of Gamestop is a tiny fraction of its price, so even if some shorts have to close, others will open short positions. To the people who believe they won't be the bag holders because of high short interest, this basically means the stock will always go up, and when enough people realize that's not true, the party is over and the ones opening short positions or closing long positions recently will be the only ones walking away with actual money.

Yes, but that’s not more ponzi than e.g. Snapchat which expected to never make money in its filing. When you buy it, you expect to sell it to a bigger fool, or for a miracle. GameStop is the same; they are both doomed, and will be worth 0 sooner or later unless a miracle happens.

The only reasonable valuation for either is (assets-liabilities), or liquidation value. All other value is based on a belief something will happen. In GameStop, it’s the belief that there are buyers of last resort who would pay almost any price - which is likely true for some of the shorts. Whether it is 1% or 10% or 100% is what these people are betting on.

And the call from industry to pause trading to regroup against Reddit indicates it’s likely a lot more than 1%

Yes, blocking half of your order book with cause the price to fall.

Yes, they are forced to sell and other robinhood users could not buy. It means they allowed selling and restricted buying that will eventually make stock goes down because no other person even if they want to can't buy.

So the market price which is made from all transactions from all brokers will drop because robinhood users could not buy.

That makes no sense to me. If they really wanted to buy they could use another broker? If the market really is dropping then tough luck. You can lose all your money investing in the stock market. If you're leveraged you can lose even more (which might explain why some accounts were closed).

As I said, stocks are inherently risky and should not open positions thinking you’ll strike it rich overnight; what I am saying is that robinhood swiftly stopped retail price action ( because most retail volume is from RH) which caused the price to plummet. Volume for amc and gme also got split for the day yesterday compared to Tuesday (which can be blamed because other brokers also eventually stopped trading these stocks later in the day).

>That makes no sense to me. If they really wanted to buy they could use another broker?

That's assuming you have multiple accounts in brokerages, and multiple other ones also have blocked buys (for example Interactive Brokers).

Market will be dropping if significant number of people who want to buy are unable due to third party actions, that's exactly what's market manipulation.

Robinhood, apart from holding a big chunk of the market, were not the only brokers freezing buys on GME, AMC and others -- Trading 212, eToro, CashApp, and more I forgot by now froze it as well. Your only options were "non-app" brokers, like a bank stock portfolio, which no one could really open on the same day.

It takes days to get approved with another broker and transfer money there. As we saw, the damage was already done. Most retail investors only use Robinhood, why have 2 different brokers?

why have 2 different brokers?

Days like this are exactly why you should always have more than one bank and more than one broker !

I think you are naive and don’t know what’s happening. GME is emotional and hype play. They got so much coverage and all the retail people were driving prices up have robinhood platform.

You cannot open the account within same day even if people wantto buy. Robinhood played with people physchology. After seeing the price drop everyone wanted take profits out because even if people want to buy they couldnot.

It was logical short squeeze which could drive price of GME significantly up but due robinhood manipulation it stopped.

Except people didn't take profits, WSB saw right through it, they/we urged everyone to hold, remove stop losses, and buy with cash/not margin.

The people held and the volume was low.

> Robinhood played with people phschology

I disagree. They've offer a way to trade like other platforms. Other platforms did the same thing and blocked trading.

The question you need to be asking is why did they ALL block trading?

They're competitors to each other, so why did they make the same decision? Remember that these firms make money on every trade done. They want to take your trades. BUT they have to manage risk. They lose money if the client can't pay. They're there to facilitate but they are taking risk themselves if they provide leverage. They, like banks providing mortgages have to have limits set. If would be unprofessional and irrational to do otherwise. These firms are there to make money in a highly competitive environment. They are professionally run to ensure that they stay in business.

The comments here are of the theme 'RH has screwed us to make money'. No, what they've most likely done is made a decision to take no more risk to ensure that they remain in business. EVERYONE is speculating though. If that's the case these arguments that the clients are somehow being screwed over is really unfair and shows a lack of understanding. Clients need to understand the risks of what they're doing, and need to understand the risks associated with executing via one broker. It's a professional environment and drive by retail unfortunately are mostly unaware of the true risks.

Examples: 1. Traders have multiple brokers to trade via because there are technical issues

2. If something is too good to be true, it probably is.

3. If you're betting against some professionals, you need to ask what they know that you don't. Why are they comfortable taking on the risk. The professionals will try very hard not to be emotional and have more info that a retail customer will.

4. The retail investor need to understand the business model of the brokers. Why are they in business and what are their limits?

I see the real problem here is that it is easy to put a trade on. It is difficult to know how to risk manage it and understand the risks. This squeeze has identified a limit in the market that wasn't considered.

If you sell something and there is no buyer, what happens to the price?

There is a buyer: the shorters are desperately trying to close their positions (i.e. buying), and they are not buying through RobinHood.w

But in a more normal position, if there is not buyers at current offering prices, you try to sell at a lower price. Thus, the price drops.

Yes. Low volume means you can launch a short attack and drop the price because there is nobody capable of buying. I saw my portfolio losing > 50% of equity during the attack.

When the inability to buy itself triggers a 50+% drop in the stocks you hold within minutes then yeah, it does.

It looks like deliberate market manipulation by the broker, to their own advantage and apparently also to the advantage of some Hedge Funds with close connections to them.

A clip from one of those interviews:

https://twitter.com/ChrisCuomo/status/1354994000294522881

In the entire interview there's no real answer to any question.

> In the entire interview there's no real answer to any question.

You know, I've been on many job interviews this past year, and when that happens, I immediately know not to go further with that person (and if it persists, the company).

His first answer was reasonably polished and okay. Then it all goes to shit. I guess he didn’t expect the third degree?

He just deflects

How does he deflect? He clearly states that the deposits at the clearinghouse became a problem. That does not hurt the immediate liquidity of the company itself, but does put a strain on credit lines for those deposits.

If it's all truthful, I don't understand why he doesn't just speak concretely. Eg, "For every $300 share of GME, based on the volatility, we were required to deposit $50/share as collateral. We expected 1,000,000 shares to be bought and don't have $50m we can post." Also, if true, shouldn't other brokerages would be able to confirm/deny this as they would be subject to the same depository requirements?

"We have no liquidity issues. We just need more liquidity." Reminds me of "depends on what your definition of 'is' is".

I don’t understand how all of a sudden the shift was made onto the insolvency of RH and that the discussion is less about the original conditions that led up to this.

I just finished watching a video from Louis Rossmann [1] as well as one from Bruce Fenton [2]. In his video, Rossmann covers the technicalities and systems behind actually __making__ a trade with an app like RH. The videos were very informative and I learned quite a lot.

With the exception of his recent interviews, it isn’t exactly clear what Robinhood was supposed to do differently. If my understanding is correct, clearing houses required more money up front to perform trades - RH didn’t have it so they stopped the trades unidirectionally. People got upset that they couldn’t buy but could sell which made it seem like RH wanted to manipulate the price - but isn’t it better than the alternative, the inability to both sell and buy would seem to me worse than what was done. Imagine them closing both and preventing people from selling if a crash occurs. The discussion would simply be « Robinhood stole our gains and wouldn’t let us move our funds ».

Now, should it be the case that more money is required up front, intuitively it makes sense, I mean, who is supposed to front the bill on those 5000% returns? The hedge fund that just went bankrupt? Where exactly does this money come from?

Isn’t RH just trying to play within the realities of the current system?

Genuinely curious.

[1]: https://m.youtube.com/watch?v=MAqxQe0l4g0&feature=youtu.be

[2]: https://m.youtube.com/watch?v=RQTC5f_VR9I&feature=youtu.be

To be honest, it doesn't really matter. This isn't about whether Robinhood technically must or must not do what they're doing, but that the system is setup in such a way that all these claims of "supporting the people" are fundamentally 100% bullshit.

Robinhood tanked their credibility by letting the mask slip and people are on that like hyenas because of the irony. Really though, the focus on them is a distraction from the much larger slip by the entire financial system.

> Really though, the focus on them is a distraction from the much larger slip by the entire financial system.

Exactly. I also watched the recent CNBC interview with Chamath Palihapitiya [1]. I would like to it, but CNBC keeps taking it down.

In any case, the host really doesn’t seem like he’s there to « get to the bottom of things or to understand » but to push the idea that the problem is anything other than the preconditions that led up to this.

Chamath was spot on.

[1]: CNBC Chamath Palihapitiya Interview January 27th, 2021

This one? https://www.youtube.com/watch?v=wgYZk9Mc804

I have found the whole interview on Reddit - https://vimeo.com/505445024

> these claims of "supporting the people" is fundamentally 100% bullshit.

what a world where a free platform takes an action to stay solvent and in business and its a bullshit claim that theyre helping their customers. i guess they shouldve done the more helpful thing and gone bankrupt, illegally allowing trades they cant cover.

They were dismissive enough of retailers that it didn't even enter their feeble minds that they might need to be able to cover the costs of a real market manipulation, the kind that institutions do all the time without having these kinds of problems.

They were always working for their hedge fund investors. They just got a hard slap to the face by the people they claimed to be working for.

And honestly, I'm not very impressed by anyone who would defend them.

> They just got a hard slap to the face by the people they claimed to be working for.

youre saying WSB making a stock so volatile that a brokerage cant afford to keep it on its books is a moral victory? what morals are you basing this on?

> And honestly, I'm not very impressed by anyone who would defend them.

we're commenting on an article about how RH had to borrow billions to stay afloat AFTER they already took action to minimize their exposure. they couldve gone under, and were probably insolvent. im not exactly doing mental gymnastics here.

> youre saying WSB making a stock so volatile that a brokerage cant afford to keep it on its books is a moral victory? what morals are you basing this on?

The person has already answered it:

>> the kind that institutions do all the time without having these kinds of problems.

What a world where people are more concerned about a single company going under than the fact that the working class is finally doing something against the rigged capitalist system.

actually im glad you said this. this is the core problem with this WSB/RH/GME event.

a certain percentage of people in WSB only want to light a pile of their money on fire for the sole purpose of bankrupting some hedge funds. they expect no returns and only want to cause pain to people with more money than them that they dont like.

another percentage of people (i think this group is much, much larger than the first) think bankrupting the short positions is gonna make them huge returns. they think theyre all david collectively fighting a goliath as the proletariat rises up. most of these people are sorely mistaken and will lose everything, but some will make money.

the RH trade halt (EDIT: only buying was halted, a "trade halt" technically means both) is allowing the shorts to unwind more gracefully, making the first group of people angry. theyre not getting their witchburning, or public execution, or lynching - however you want to frame it.

the problem is the second group of people think theyre being defrauded out of huge returns by an artificial exit from the short squeeze. these people are wrong to begin with. most of them were never going to make huge returns. even if they successfully bankrupted the shorts, most of them are left holding stock they bought for $100, $200, $300, or $400 a share (WSB was memeing share price was gonna go into the thousands) that is worth <$90. those people were always going to lose, they just didnt know it. but now they have a scape goat, even though they were on the wrong side of the trade to begin with.

Wait a minute, I've read that they and other brokers did not halt trade, they stopped or limited purchasing but not selling. Not only that, some of their customers apparently were informed about this beforehand (as alleged by insiders on Twitter).

People argue that this is criminal market manipulation.

> I've read that they and other brokers did not halt trade, they stopped or limited purchasing but not selling.

you are correct, I used the term "trade halt" incorrectly. i clumsily meant the portion of trading that was has halted, which is neither clear nor an appropriate usage of the term.

> People argue that this is criminal market manipulation.

shrug. some people wouldve said that if it WAS a full trade halt - if people can't sell to get their gains before a crash, thats illegal market manipulation right?

regardless, it seems clear that RH couldnt cover more volatile stock buys so they halted volatile stock buying. maybe they shouldve taken different actions, but they have well-known legal and contractual requirements about liquidity and cash-holdings for the volatile stock trades they broker.

> left holding stock they bought for $100, $200, $300, or $400 a share (WSB was memeing share price was gonna go into the thousands) that is worth <$90

Many people said the same thing about TSLA before it stabilized at higher levels. I bought at under $40 and sold around $80 because I thought fundamentals mattered. Turns out they don't right now.

Everyone talking about what GME is 'actually worth' is spouting bullshit. The fact is, no one knows. Because it's up to the market.

>Everyone talking about what GME is 'actually worth' is spouting bullshit. The fact is, no one knows. Because it's up to the market.

youre right in that no one, least of all me, can predict future stock prices, but i think youre missing the point. even if GME stabilizes at $150 - which is an unlikely tripling of value - most of the people involved are going to lose most of their investment.

the fundamental principal is that a short-squeeze HAS to end in a pricing crash. its the whole mechanism by which the squeeze occurs in the first place. the final price isnt really relevant, the point is that most people have to absorb large losses by definition. I think a lot of the players dont understand this; they think its free money, and are gonna scream bloody murder because they think they only lost because RH did something illegal. RH actions are irrelevant, legal or not, because the trade was bad in the first place.

the only way this doesnt happen is if the original market was wrong about GME to the tune of 1000%. maybe the short squeeze happens and GME never crashes, it peaks and stays at $350 and then beats the S&P 500 by 10% YoY for the next decade and everyone that bought long just makes money. if you believe that then well, good luck.

> the only way this doesnt happen is if the original market was wrong about GME to the tune of 1000%

The reason I used TSLA as an example is because this is pretty close to what happened there! The future scenarios 'priced in' to that company now are several degrees beyond ludicrous. I don't think I'm missing the point at all, which to me is: massive swaths of the entire market are super irrational right now, and have been for a while, with no end in sight.

> no one, least of all me, can predict future stock prices

This seems more true to me today than it ever has been. After all the shit I've seen happen with stocks in the past few years (2020 especially), things I used to consider impossible I no longer do. None of this makes any sense any more. I don't really have the stomach for it, honestly, the whole thing makes me nauseous. But if I want my meager savings to do anything other than lose value, I still have to try to evaluate what's going on to weigh my choices.

> massive swaths of the entire market are super irrational right now, and have been for a while, with no end in sight.

good point. youre making me second guess myself, but i think in the end GME's case is just too extreme. it mightve been undervalued at $20, but i just dont see the volume of positions >$200 as defendable or profitable. even if the gamma drives the price bananas high today, the end result will just be an even larger crash at the end.

TSLA was included into the S&P because they had a profitable business - GME makes net losses so the S&P won’t be bagholding it.

>I thought fundamentals mattered. Turns out they don't right now.

Fundamentals never matter "right now". Fundamentals are about long-term investing and growing money over time.

Day trading is about speculation, not investing. WallstreetBETS has nothing to do with market fundamentals or investing money. This is the point of the Keynes quote "The Markets Can Remain Irrational Longer Than You Can Remain Solvent" - Markets don't rely on the the "fundamentals" in the short term, only in the long term.

>Everyone talking about what GME is 'actually worth' is spouting bullshit.

That's because in the long term, GME's value hasn't changed. GameStop the company is just as valuable as it was a month, meaning it's basically worthless. Which means before too long the stock is going to crash and the majority of people who bought it are going to lose a lot of money, while the few who bought earlier will make out.

Whether it's the legal definition of "pump and dump" is pretty irrelevant, because in practice it's a pump and dump scheme, and is going to leave the majority of people involved with a lot of regrets.

> Fundamentals are about long-term investing and growing money over time [...] Day trading is about speculation

What you call 'day trading' has turned into week trading, has turned into multiple-month trading, and I would argue even beyond a year now in a lot of cases. Plenty of stocks have been pumped far beyond what their 'fundamentals' would justify. In some cases, that has changed the trajectory of companies and even entire sectors.

> in the long term, GME's value hasn't changed

This is entirely debatable. The investors just changed it, and new people are on the board who could potentially turn it into an eSports empire, or the next Valve, or who knows what else. Not at all likely, I know, but money changes things and there is some amount of 'true believer' investment happening, like we saw with Tesla.

Honestly, I don't like all this volatility one bit. I am increasingly concerned about not ending up homeless when I'm elderly. But the fact is, the market appears to be changing, and so-called 'retail investors' may be gaining new prominence in the greater order of things. Valuations based on hopes for what could happen 30 years out instead of how much paper profits got jacked up over a 3-month period. It's scary and I don't like it. But who knows, in the long run it could be a good thing? I don't think you, or I, or anyone else can say from here.

It starts with PR. If there was one moment for a company to be brutally honest, it was for Robin Hood yesterday. They didn't get in front of this story, they didn't explain the issue in detail - instead, they blocked the trades, posted a bullshit information-free blogpost, and have their CEO doing rounds on the news smiling and spewing zero-information noise.

This isn't a business model problem, it's customer relationship management problem. They screwed it up big time. Like corporations usually do with their ISO standard PR, but then usually there isn't a critical mass of angry customers looking for blood (some of which are really angry, because they're already operating in the "I'll YOLO what I have on a chance to make Wall Street pay for the pain they inflicted on my parents in 2008" mode).

> They screwed it up big time.

because people are mad at them? you think they shouldve gone public during a high-volume, high-volatility feeding frenzy with tens of billions flying around and said "we're insolvent, but its ok we're taking action to recover our position"?

it looks to me like their actions were totally rational and at least a good-case scenario, if not best-case. platforms have been deleted in the past due to circumstances like these, and i think the CEO going on TV and saying theyre on the verge of massive legal and financial problems is suicide. keeping their business alive is supporting their customers. no if, ands, or buts.

calling this a PR problem is a bit obnoxious. its like saying theres no technical problem, but people think there is, so the company has to not only continue providing their free services but also make their users feel good while doing so. RH had to navigate dangerous waters, with bankruptcy to the left, bankruptcy AND lawsuits on the right, and only lawsuits ahead. im not sure how they couldve done better.

> you think they shouldve gone public during a high-volume, high-volatility feeding frenzy with tens of billions flying around and said "we're insolvent, but its ok we're taking action to recover our position"?

Sure, why not? Everyone knows the situation is extremely unusual and not indicative of RH's ordinary performance. This way, they'd stay on the friendly side of everyone.

> its like saying theres no technical problem, but people think there is, so the company has to not only continue providing their free services but also make their users feel good while doing so.

I'm not saying they should've allowed people to continue buying GME and other meme stocks. I'm saying they should've honestly communicated the actual reasons behind their decision.

> Sure, why not?

because if youre having liquidity problems, telling everyone that creates an incentive for them to liquidate on your platform and leave, creating a death spiral resulting in the destruction of your company and preventing everyone from liquidating in the first place. a bank run, but for RH and their clearing firm(s).

in other words, they were and are doing whats best for their customers.

What much larger slip ? Risk management practices?

"Retail trading" is not even remotely close to "the entire financial system." And it's that kind of casual but enormous misunderstanding that leads to casual, ignorant participation I. retail trading itself.

I need to watch your videos and learn more, but to continue your train of thought:

If the clearinghouses didn't put these requirements on RH, or ask brokers to stop buying of these shares, I assume they themselves are at risk of going under? (As you said, who's supposed to front those 5000% returns?) If that happens, would it not lead to a cascading failure of both clearinghouses and brokers going under? The end result being a major market crash?

The IB CEO seemed to be hinting at something like this on TV yesterday. It seems like there actually may be a lot at stake here, but I imagine that the clearinghouses and brokers will just shut it down again before any of that happens.

These means that the WSB narrative is sort of correct. It isn't direct collusion, but all these Wall St. firms are so reliant on each other that they'll always get each others back - if they don't they themselves are likely to go down.

EDIT: I just started watching the first video you linked and the CEO of WeBull is basically saying exactly what my comment does, so I guess I should've just watched that first.

Just to be clear, there aren’t multiple clearinghouses for US equities. There’s one, the DTCC. They handle effectively all of the US equities trades’s settlement cycle. If there’s any kind of doubt that they don’t have enough collateral and they need to take losses, it could cause a lot of chaos. Initiating the kind of “stop all trading” you refer to, is a lot more complicated than it sounds. You would get a sort of a stock market equivalent of a bank run.

On the flip side, (1) they’re known to ask people to post more money than necessary, because they like to err on the side of caution, and (2) if they ask you for money, you just post it, or you risk being kicked off from trading US equities for a long time.

They still shit the bed as a brokerage, which is premised on providing individuals the ability to buy and sell stocks.

Not being able to meet the terms of a lending agreement is likely a legitimate reason for altering the services available to their customers, but it is also a massive failure.

I don't understand why they couldn't just disable margin trading instead of buying the individual stocks. Margin trading was the real problem for them.

RH limited 13-14 tickers, while most other brokers limited 0-2. Now, they probably had more comparative exposure to them but also the volatility and price changed massively due to their move.

More importantly they didn't communicate any of this in advance - they must've known this was coming yet suddenly stopped all buying and auto-sold everything on margin. It's hard to believe they couldn't have e.g. halted just margin trades a day before, given a warning etc. Instead they pretended everything was fine up until it blew up, and then as their first explanation claimed they are doing it to protect investors. It was only after a lot of outrage and filled lawsuits that they hinted at the real issue. So yes, they could've played this a lot better.

>Isn’t RH just trying to play within the realities of the current system?

If RH had been upfront about it to begin with I think most would understand. The Webull CEO made similar interviews, and explained why they stopped trading; if the RH CEO had done similarly I wouldn't be so suspicious.

So, every broker is on margin with DDTC, they don’t have to have 100pct cash for the dollar amount of the buy orders they send to DDTC, as long as they will have the cash in 2 day. Some brokers like fidelity have hoards of 401k money and more likely to have 100pct cash for their orders. Trading brokers like IBKR RH keeps the minimum possible amount of cash with DDTC, and their automated systems adjusted up the minimum.

This is more or less like the futures market, except futures trades settle at end of day (when CME closes for an hour at 5pm, and next day starts at 6pm lol) and DDTC is the equivalent of CME

Who’s irresponsible here? DDTC for their lax cash requirements? Individual brokers that only keeps the minimum required cash? Futures cash requires 10pct or less, but no futures trader would only keep that much in their account, unless they don’t mind being wiped out and liquidated at end of day settlement (and then deposit more money the next day to trade again). Brokers cannot risk being wiped out at all.

Doesn't regular Robinhood require settled cash to trade?

Edit: Nope, looks like Robinhood "Instant" is now the default, margin account, but still limited to $1000 per account:

https://robinhood.com/us/en/support/articles/robinhood-accou...

1000 x13 millions users...

I think it doesn't matter, as they can't use the client's cash on it until the stock is delivered at the end of the T+2 settlement period.

This is about settlement on the back end.

It's not clear to me that anyone is irresponsible here. Let's say that everyone on reddit got together and decided to turn every single appliance in the house onto full at exactly 5am. The electricity grid wouldn't be able to spin up capacity fast enough and would have to shed load, causing black outs everywhere. Do we say the energy company is irresponsible for not having enough capacity on hand at all times to handle an immediate spike to 100% usage? No, that would be ridiculous and insanely expensive. In the same way there are reams of regulations around the minimum requirements and the risks associated with these events.

It's not even clear that continuing to allow low margin on these high volatility stsocks would've been good for consumers. The price would've got driven up further, the shorts would go bankrupt, the companies that loaned the shorts the stocks would recover pennies on the dollar, likely forcing them to sell off their position in GME to cover the losses driving the price through the floor, at which point all those RH traders who don't have quick accecss to the market would be left holding worthless stock, wiping out both their initial investment and probably getting margin called.

So, every broker is on margin with DDTC, they don’t have to have 100pct cash for the dollar amount of the buy orders they send to DDTC, as long as they will have the cash in 2 day.

I'm assuming you mean the DTCC? This actually isn't true now, as the DTCC have reportedly upped their margin requirements for GME orders to *100%*. That's according to the CEO of WeBull. That's why these clearing houses, and by extension brokers, cannot afford to sell GME stock to retail traders.

I wonder if Robinhood is preparing for the possibility that its margin book gets blown up when GME inevitably crashes. Crashing price creates cascading margin calls and they can't liquidate their customers' positions fast enough and end up having to cover their losses, rendering them insolvent.

Sequoia, thinking that the fundamentals of the company are still solid long term and that they can wash their hands of this in an IPO in the near future, extends them a lifeline at absolutely brutal terms.

Did their customers all buy on margin?

I believe you can also increase your leverage.

https://learn.robinhood.com/articles/4UWpxUy5G0KNDSbcMRs6WE/...

RH are closing out some margin calls to decrease the risk of this happening afaik.

They already liquidated everything on margin yesterday without giving users any choice or warning.

It was part of what caused the drop in combination with the no buying.

Is it just me or is the involvement of VCs here really strange? If Robinhood was anything like a traditional broker (or bank/broker combination) Venture Capital firms would not have been anywhere on the list of places to get emergency money.

Although I'm glad that RH has driven the price of trading down for everyone, this is one more reason why most people should keep their money with a more boring financial institution.

Reminds me of when RH launched a "checking" account and claimed it had deposit insurance and then in about one day regulators said "absolutely no it does not": https://www.forbes.com/sites/ronshevlin/2019/01/02/the-robin...

Most "real" brokerages can get access to billions if not trillions of cash for overnight/three days for settlement purposes.

They say WallStreetBets is "4chan found a bloomberg terminal" - Robinhood is Silicon Valley masquerading as a real broker; perhaps even the Juicero thereof.

I only have a small amount of play money there, and I continue to draw it down. TD Ameritrade and Vanguard serve as my real brokers.

Side note: I kinda wonder what Bogle would have to say about all this if he were still alive; probably would have killed him.

I would never use a brokerage started by SV hucksters

> I kinda wonder what Bogle would have to say about all this if he were still alive;

The next best thing is Warren Buffett, has he said anything on this?

My first reaction to any news from a large company that people question the legality of is "I'm sure they have a team of highly qualified lawyers who signed off on this plan."

But then I remembered about the RH checking account that clearly wasn't approved...

Prediction: Robinhood loses class action and is bought by Schwab for pennies after founders plea bargain for 3 months prison and $20M in fine each and disappear into the ether like Adam Neumann.

That would actually become antitrust at that point.

After today, Id love to see RH get picked up for pennies on the dollar by Schwab treating it as a trade in at a Gamestop.

I would actually love if some actually reputable brokerage bought Robinhood and just offered it as an (optional) interface to their current trading platform. It's no doubt that part of Robinhood's success is that the UI is much better than a lot of current trading platforms.

One interesting thing that happened today as I was selling my AMC stock/options is that they executed lightning quick. Normally Robinhood (especially this morning) takes time to sell these options, yet they were immediately picked up.

Would be crazy to think short sellers were buying up all the sell side stocks/options while retail were panic selling, to hedge against their shorts.

This feels so likely when only retail investors were banned from buying. Who exactly is buying up all these shares then? Fingers only seem to point in one direction.

Dear Hollywood,

Please make a movie out of this.

It all happened remotely, so they could make it now while we are socially distancing.

The Squeezed Short

Edit: If you haven't watched "The Big Short" yet, watch it! Tonight!

WSB proposed "the retarded short" (they affectionately call themselves retards)

I read something like "The dogs on main street" and thought it was funny.

Honestly I’m so happy there’s a “mainstream” place on the Internet where people use the terms retarded and autistic affectionately. It feels like a breath of fresh air next to the language police of everywhere else.

Rick: Here, your sister's boss gave me a microscope that would have made me retarded.

Morty: Ooh, oh boy Rick, I don' think you are allowed to say that word, you know.

Rick: Morty, I'm not disparaging the differently abled. I'm stating the fact that if I'd used this microscope it would have made me mentally retarded.

Morty: Yeah, but I don't think it's about logic, Rick. I, I think the word has just become a symbolic issue for powerful groups that feel like they're doing the right thing.

Rick: Well, that's retarded.

My vote goes to "The Big Squeeze" ... although, it kind of sounds like an adult entertainment movie.

We need a Michael Lewis book on this.

They did.

Trading places.

This is some material for Internet Historian

The Big Squeeze

Darn, that name is already taken. :(

https://www.imdb.com/title/tt0115680/

The Big Short Squeeze.

Movie titles are not protected. This is why there are so many remakes when the exact same name. No licensing fee required.

Found this out the hard way with Changeling (1980) and Changeling (2008).

Then, going by the WSB vernacular, "The Squeeze That Squoze".

The Other Big Short

and please get funded by some hedge fund...

More like "proceeds from this movie will be donated to save affected hedge funds". :)

Squeezy McSqueezeFace

Best part is that I don't even think we're out of the first act yet.

I get that the settlement plumbing constraints led to stock halts, but still trying to figure out why $DOGE stopped being tradable a few hours ago*

Edit, removed some tin foil.

*I don’t use RH so it could be back by the time you read this comment.

Not sure I understand:

High volume causes sudden operating expenses up to a billion? Like, they're launching more EC2 instances?

Or is that because they suffer from slippage? And if so, why don't they adjust the spreads?

And if it's slippage, why would they still allow selling but not buying?

Color me skeptic, but this makes no sense.

For now I believe they just come up with some story to mask their obvious, IMO criminal, market manipulation by being a victim themselves.

The billion is probably for the lawsuits.

Can someone with a deeper knowledge chime in as to what could have happened so that it fits their narrative?

I think this is a good thread that answers some of those questions - https://news.ycombinator.com/item?id=25951475 . Also curious if there were other ways though.

As I understand it, stock trades take days to settle and the brokerage is on the hook if the customer doesn't pay for some reason. When the market is so volatile, Robinhood's trading partners demand more collateral.

It’s NSCC who demands it, the central clearinghouse for all these trades.

DTCC

https://www.dtcc.com/about/businesses-and-subsidiaries/nscc

Did you consider they RH us trying to start a run by spreading fear that they are going to be bankrupt soon?

It’s not for expenses, it because stocks don’t actually settle (i.e. exchange cash for shares) until a few days later. But Robinhood lets customer trade again immediately.

They are financing this turnover. When volumes go huge and turnover increases, they have a lot more capital tied up in this process.

Bloomberg explains the reason being the transactions clearance premium, which was increased due to the stocks volatility.

https://www.bloomberg.com/news/articles/2021-01-29/for-robin...

Also, don't card companies pay net30/60? So even if customers were able to pay their orders, Robinhood only receives the money in 30 days but has to pay to the clearinghouse in two days. That would wreck RH in a volatile period like this.

The trades are made with margin - aka borrowed money. Money borrowed from the broker. The broker runs the risk of being stuck with the bill for the money the lent out if clients cannot pay it back. The key issue is that rh gave margin to people with no clue, and should never have allowed margin trading to these accounts in the first place.

In other news: Janet Yellen Paid 800 GRAND From Hedge Fund Linked To Robinhood Scandal. https://www.youtube.com/watch?v=eY85f9V6ySM

So they put a halt on opening new positions not to protect their customers, but because it was straining their own liquidity position. They're certainly not the first broker to choose lying to the public over confessing to liquidity issues -- although I would say they're much more likely to weather this storm than their predecessors.

I mean - it has been revealed to be a shitty broker but I'm not sure if those two things are that different?

If this afternoon Robinhood didn't have 1B secured how could it have taken the orders without violating every trading regulation in the book? They would either have had to lie to the people they were buying from or lie to their clients.

Or they could just come clean and tell the truth..

They sent an email yesterday:

"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today."

and at the same time their own CEO made statements that they dont have liquidity issues. They also sent that communication well after the market closed. They should have sent a much more detailed explanation right at market open thursday

It can be argued that they don't have liquidity issues - they have collateral deposit issues (Due to the massive user growth, and the delay between when an ACH transfer to Robin Hood clears the banking system (a few days), and the time they permit you to trade on your account (less than a few days))

They blocked regular buys though. If you have money in your RH account, this is a big problem.

As I understand it, even for executing regular buys, the settlement houses require RH to maintain a large deposit of dollars as collateral.

This collateral requirement goes up when a stock becomes heavily traded, or more volatile.

Because of the insane volume & volatility of GME, RH's cushion of collateral was exhausted (And they've now replenished it, by borrowing & raising money.)

The reason that sells were permitted to execute was because each sell by one of their users reduces the collateral requirements in their settlement accounts. (So the settlement houses allowed sell orders to go through.)

The tl;dr is - when you are trading through a discount broker, you get a discount service. Serious brokerages, that are used by institutional investors don't have these problems, but they also charge a lot more for their services.

My serious money is invested through Morgan Stanley. They have institutional investment services I do not qualify for, but I'm on their registered investor account, and it's usually $7 to $15 for simple trades. It's not that much more if you're actually planning on executing in volume.

So this seems like a pretty easy way to stop a stock - change the collateral requirements.

From what I heard from the WeBull CEO, what you described sounds right. And he said the whole market could not function.

So in order for other stocks to trade (which have much lower requirements) they had to shut down several stocks.

So I'm sure the big shorts would know that if they get super screwed (price going higher and higher) this collateral requirement would cause this (and the stock to drop big like it did to $112 the other day)?

And this is basically all because of the risk that some hedge fund may not be able to pay (which causes collateral requirements to change)? Seems like the rules should change for these big shorts.

No, the risk is that Robinhood's users won't be able to pay, which would put Robinhood on the hook. The settlement house will only trust Robinhood as far as Robinhood has collateral.

This is not a problem for most stocks, because they have a balanced flow of orders (for every one of RH's customers buying, there's another one selling, which raises and then lowers their collateral requirement.) This is not a problem for bigger brokerages, who have larger cash reserves, to keep as collateral.

The tl;dr is that if you're going to do an uncoordinated mob short squeeze, with unprecedented volume and volatility, don't use a discount broker to do it.

The CEO smirked on the CNBC interview. Maybe he knew the $1B raise was in the bank.

If the commenters here mostly can’t understand that explanation how are even more regular people going to ? Instead they will just “not buy” the explanation and look for conspiracies

They should have disabled at some point new sign ups maybe? Why they didn't do that instead, probably tons of people first time to sign up with them to join the banter.

To understand why this is happening, you need to understand the person that started it all: u/deepfuckingvalue

https://www.reddit.com/user/deepfuckingvalue

He posted updates regularly of his positions. Scroll all the way down and see how much money he made over time.

As he started becoming more successful, more and more people wanted to replicate his success, eventually creating the movement that you hear about today.

He takes pride on holding no matter what.

Spoiler alert: he went from ~100k to 33m USD.

Most interestingly, he's at $14m cash after this week by selling a fraction. Looks good. Like any sane person, some gains are secured in actual money (hopefully he can move that to an insured account or investment if possible(?))

I read somewhere that u/deepfuckingvalue is this guy[0], but can't confirm it.

[0] https://www.youtube.com/watch?v=GZTr1-Gp74U&ab_channel=Roari...

That's very possible.

https://www.reddit.com/r/wallstreetbets/comments/kk0g0f/gme_...

Can anyone answer me this question: if they needed to cover themselves from the margins that people were using, why didn't they keep enabled the ability to buy shares with cash?

So apparently, a buy trade takes two days to clear. It just looks instant on the app. During the time it takes for your cash to go to rh to dtc to the other end, robinhood has to put up a collateral for some guarantee that the cash for the transaction will exist.

Usually this collateral is between 1-3%. Because of how volatile gme is at the moment, dtc upped the percentage to 100%. So for every buy, rh has to put up cash collateral equal to the price of the purchase of gme.

Obviously this isn't a big deal if gme is at $50. This is a big deal if gme is at $350. This is an even bigger deal if robinhood is doing this for millions of trades a day.

The reason these mechanics exist is if you sell your stock, you should be guaranteed to get your money for the stock. Whether that money comes from a user of RH, or RH, or dtc, does not matter. Someone will give you the money for your stock. Therefore, sell trades are not restricted. Buy trades are because they require collateral.

Some firms have cash on hand to cover the collateral. That's why some firms are letting you buy while others like RH aren't. RH paused buying of gme, took out a billion dollar loan and got hundreds of millions from investors, and will now enable buying again now that they have more cash on hand for collateral.

Anyone please feel free to correct me on anything. This is my understanding from WeBull's CEO.

Full video: https://youtu.be/4RS4JIEVyXM

So in left pocket RH has $200 from me, cash. And RH can't make a buy order for $200, because they need $200 in right pocket as collateral? Why not just use my cash as the cash collateral?

I still don't see how they need a billion-dollar cash hoard for non-margin buyers.

Lots of things can happen to the cash in your account between the time you hit buy and when that cash finishes transferring to DTC. DTC is trying to guarantee that the person selling the stock that you are buying is going to get their money. DTC does that by telling Robinhood to have collateral in case something happens to the cash that you are using to buy the stock. Something like Robinhood going bankrupt, for example.

Because what happens if Robinhood can't, for whatever reason, put up the cash for the buy transaction? Some one still has to pay up. The problem is that eventually these failures start piling up moving up the system until eventually the government has to step in and hand out bailouts again. Collateral is a way of trying to prevent that. If Robinhood goes bankrupt, and they're dealing with this highly volatile stock, well at least they have enough collateral to cover transactions and the failure stops with Robinhood instead of moving up the system.

This is all info I've gathered from reading around and I'm not an expert. Please anyone feel free to correct anything I'm saying.

Also you kinda saw a hint of this when there was that Robinhood bug with infinite leverage. People turned $5,000 into tens of thousands via the glitch, and at the end of it all, Robinhood was one the that had to pay up for these glitches. Then they had to start hunting people down to try and recover the debt.

Someone, at the end of the day, is going to pay for any of these transactions. DTC is just trying to ensure that the bag holder stops with Robinhood.

My understanding on how collateral works is wrong. This is more accurate: https://twitter.com/KralcTrebor/status/1354952686165225478

thanks a lot, that makes perfect sense.

Previous relevant comment

https://news.ycombinator.com/item?id=25951475

I don't have a horse in the race re: GME but this spooked me - transfer initiated to another brokerage

If a brokerage is having issues like this wouldn't it have been better for them to notify the exchanges who would decide whether to completely halt trading or not?

Crippling half the order book just can't be right.

Is it just me, or did that article end... weird? Like, scrolling more, expecting it to continue. I'm sure we've been conditioned to such articles having a typical arc, that this one... didn't?

Honestly the pacing and structure of NYT articles is so weird. Sometimes I read an article and after a few well structured paragraphs it seems that they just add random additional info, go down rabbit holes and just end abruptly.

As if your grandmother wants to tell you a story and weaves in random info of every participant’s relation to your family.

NYT writes for the Newspaper - and that means column inches. Articles get a space on the paper and are written so that they can be cut at different places to fit that space without major edits.

Interesting point. But I have never experienced this with other newspapers who publish the traditional articles online. And the NYT should have a higher quality than most.

Well the story is still developing.

https://archive.is/FxNUg

What happens to the retail investors if Robinhood became insolvent?

"Is there any reason to believe Robinhood is worth $1B?"

Liquidated RH assets in 2020 and parked it in another app.

Glad I did that!

FYI, just disable JS to disable the paywall.

For Chrome, open dev tools, ctrl/cmd+shift+p, "disable javascript".

The narrative seems to fit a little too comfortably...

That is just called something being true in many cases.

Example?

Robin Hood is the real life Pied Piper - people think they are changing the world but really they're leading people around in circles.

So much for the conspiracy theory about Robinhood changing policies to favor institutional traders over retail investors. Speculation is healthy but I am surprised to see so many educated people fall for social media fear mongering to the point that they decided to drive down Robinhood’s app reviews. Many of my friends who ate up all the outrage are the same people who laughed at QAnon conspiracy theorists, but here they are drinking the same koolaid.

Whenever we dislike or mistrust someone, people tend to overattribute that someone's failings or inconvenient actions to malice.

This is nowhere near the same koolaid.

>Speculation is healthy

I've never seen somebody say speculation is healthy but rather the opposite. Care to elaborate?

What I meant was that speculation and challenging the existing narrative plays a role in seeking the truth. So it has value and can be healthy. But it has to be treated for what it is - speculation. In this case, the actions of brokers should be investigated, and regulatory requirements should be scrutinized. But taking speculation as a foregone conclusion and resorting to an extreme reaction as such, is not healthy.

It's not an extreme reaction to see a company like Robinhood bending to the will of its real customers, aka Citadel, and concluding that they were both running out of liquid money because they allow instant trading for new users AND that they protected their customers from getting wiped out by limiting the ability of retail investors to buy GME.

Billions of dollars were on the line.

Without speculation there wouldnt be new theories. But ofcause its more risky than argueing in proven ground. Sometimes the risk materializes. At othertimes the speculation is a win.

So you’re putting a theory about pedophiles that run the world so they can drink the blood of children is somehow on par with the theory that billionaire hedge funds would try to exert undue pressure to preserve their wealth... Get the fuck out of here with your false equivocation

It’s not on par in that one is more absurd and unrealistic than the other. So I acknowledge your critique. But my point was more that the psychological root causes of both are similar. It comes from a tendency to latch onto a self-serving or pleasing or favorable explanation. An unproven or unrealistic or outright false narrative will do if it makes us comfortable. Ultimately, I see this example with broker collusion theories as a sign that no one is holier than others or above these very human tendencies.

I think it’s fine to speculate, even wildly, while also seeking the truth. Especially if the truth isn’t out. It sounds like you are describing rejecting the truth, which isn’t what I think most people are doing here. Of course facts are always emerging and there will be lag time, so you and I may just be perceiving reactions differently

Robinhood has been known to be sham for a very long time. Anyone with money there is willfully ignorant.

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

> Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty.

A) SEC should remove the option of "without admitting or denying" this time

B) The CEO is choosing to speak in double speak because anything he says will violate the antifraud provisions after already being slapped for violating the antifraud provisions. (isn't the point of a law for the punishment to be a little more than agreeing not the violate the law? circular civil suit that should have been referred to the DOJ)

C) Refer current actions to the DOJ and this prior settlement that was violated.

I mean the fraud here is fairly eh. They gave a smaller price improvement (but still beat nbbo) relative to other discount brokerages. The lie was that they delivered same great price as other discount brokerages. However, most of their clients were small and still net-saved money by not paying the flat fee. The practice ended in 2018.

yeah they lied about revenue sources and why they were able to offer low prices. would have been better if they just shut up and didn't try that hook.

Sure, but as far as frauds go it is fairly victimless. Their users were likely winners in the aggregate for using RH

Moving back to my actual point, the SEC and DOJ should leverage this prior settlement to enforce stricter sanctions.

The mere existence of the prior action makes them cannon fodder. Hit them.

Sanction them for what? What they did today was caused by following the rules. They couldn’t do anything else.

If they did restricted selling it would be “fair” but it would be illegal because only regulators can halt sales.

Ok, its a good question.

I think outside of specific sanction any resulting regulation should be a comprehensive restriction on payment for order flow, as part of the already ongoing populist trend of valuing data and considering it users property with its own property protections.

But payment of order flow directly benefits retail traders. They get better spreads because of it. Why would you limit that?

It’s not a scam it’s just a pretty mediocre broker with a fancy ui. Lest we forget they introduced many traders to options, for better and worse. They are/were WSBs broker of choice. They changed the fee landscape in trading US-wide.

It’s hard to say they weren’t impactful, though we can disagree on the positivity of the impact itself.

>a fancy ui.

it's flashy and sort of stylish, but it's really woefully under-featured compared to just about any other broker e-trading software out there.

> it's really woefully under-featured compared to just about any other broker e-trading software out there.

Alternatively phased:

It is easy to use even for people who are new to investing.

I think that it makes it worst even for new investors... maybe better for computer-illiterate people, but that, I don't know if it is still a thing.

Can you point to any above average, or dare to say, good brokers?

Always depends what you're looking for.

I personally use IBKR because their margin interest rates are less than 1%, they have excellent fills and order routing, access to an overwhelming amount of products (equities, equity options, index options, futures, futures options, foreign markets, bonds, etc.) and features. Their portfolio margin feature lets you trade with a margin maintenance rate as low as 15%.

If you don't want them to sell your order flow (and offer you the industry's best margin rates by far) IBKR Pro is your thing.

A lot of people like Think or Swim, Schwab, Fidelity. If you compare, you'll see what I mean about fees though!

Yep IBKR, although I’m biased. They’ve been the only ethical company in the business for decades.

> It’s not a scam it’s just a pretty mediocre broker with a fancy ui.

That's what it is. But what really matters is how it is perceived.

Their pitch is quite literally "We’re on a mission to democratize finance for all. At Robinhood, we believe the financial system should be built to work for everyone. That’s why we create products that let you start investing at your own pace, on your own terms." [1]

It's a lofty mission. And it does so in two major ways: (a) Building a platform - application, knowledge base,... - that simplifies trading stocks and (b) offering bottom pricing for brokerage. The idea is to get as many people to the stock market as fast as possible.

RH saw an gap in the market for financial brokerage and took a plunge.

Their business model isn't that different from other brokers: capturing as much trading volume as possible. However, instead of making money off commissions, they earn millions on the back-end by charging fees on routing orders, or making interests off of cash payments in customer accounts.

> It’s hard to say they weren’t impactful, though we can disagree on the positivity of the impact itself.

There are two big issues with RH.

The first is that it only offers the bare minimum of information on financial trading on their knowledge base and through their app. In fact, on their website, the "risk disclosure" link on their first sales pitch is just a pop up with literally just 1 line: "Investing involves risk, including the loss of capital. Investors should consider their investment objectives and risks carefully before investing." [2]

Sure, the application provides restrictions through automated profiling, but at no point do you talk to a knowledgable human up front who can assess whether you should be using RH, let alone trading on the financial markets, in the first place.

At the end of the day, no matter how this gets spun, the trader is - quite literally - left to their own device to decide whether or not trading on RH is a good idea in their specific situation.

The second is their brand / image. RH gained some brand notoriety as it was first adopted by a young population with a bit of cash on hand but not enough to invest in anything meaningful or stable like a home or a family. The "democratizing financial markets" pitch resonates with an audience / generation whose general outlook on the world and the future isn't all that positive to begin with.

Over the past year, RH gained further traction through the fundamental economic and social changes caused by the pandemic. A community like WSB embraced e-brokers like RH and further boosted their notoriety / brand image / narrative. Moreover, an online community like WSB is another clear example of like-minded people clustering together and how a shared collective identity galvanizes in a surprisingly short time frame.

Over the past months, RH lost control over the public's perception, partly by their own pitch, partly because of the sudden change in circumstances. This wasn't an issue as long as the nature and the volume of the trading fitted within the existing assumptions of other, traditional / incumbent stakeholders in the financial markets.

That changed over the past 2 months as speculative investing via RH, WSB, online ivesting,... went "viral" overnight.

But that's all it really did.

RH is just one of many more actors that provide access to the markets. And their audience of day trading investors represents only a tiny fraction of the total volume of trading on the financial markets. RH had about 13 million users in 2020. [3] Consider the hundreds of million of people and companies who are vested in the financial markets through pension funds, mortgages, household debts, business loans, saving accounts and so on.

An e-broker like RH with their particular brand, the audience that it accrued and the emerging culture / identity could only become as popular as it did because of inequities and sudden shifts elsewhere in the economic system. Their story lays all of that bare for everyone to see, including policy makers and finanicial regulators.

Personally I see this story more as an expression of a particular zeitgeist rather then a driver in itself for fundamental long term change.

[1] https://robinhood.com/us/en/about-us/ [2] https://robinhood.com/us/en/about/#our-products [3] https://www.businessofapps.com/data/robinhood-statistics/

Sham not scam. (Although that’s arguable as well.) The lack of attention to detail I would expect from Robinhood users.

Why are there so many HN posts about Robinhood right now? I've seen 3-4 posts in the past 24 hours and it seems like every comment thread I read also mentions Robinhood in some respect.

It feels like HN is in the middle of an invasion by people trying to draw attention to it, but there could be a coincidence? Is it just the buzz around this GameStop action?

My guess is that it’s the simplest explanation: lots of people that frequent HN are invested in the story, both figuratively and literally.

It is, as far as I know, an unprecedented event with potentially far reaching consequences, not matter how it ends up. A huge market manipulation by a massive amount of retail traders, enabled by Robinhood and similar brokers, that has the potential to cause a lot of established players billions in losses.

How can and will the SEC react to this market manipulation; it seems unlikely they can pursue the millions of retail traders individually, so can we expect some new regulations instead? Can companies like RH exist in the same form in the future? The fact they stopped people from buying stocks may or may not have been legal, but it certainly distorted the action price. Again, I think this is pretty unprecedented, at least on this scale, so the financial landscape after all of this settle down might be significantly altered. Finally, if the short squeeze happens, what will be the consequences? Are we in for another huge financial crisis?

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