Comment by evolve2k | Hacker News Reader

Comment by evolve2k | Hacker News Reader

Parent Full thread

As a onboarding hack I can see this as a great idea to help people get their first $100-$1000 on the market fast.

But the chance of an eventual margin call is almost certain in the long run (as has happened here).

It’s time to talk ethics in tech, this was a design decision to not unwind this once the user was embedded or otherwise clarify this upfront.

Margin call risk totally must be disclosed and is legally required (in Australia where I am) to be disclosed by any investment professional you paid to setup this sort of arrangement. I’d be fairly confident the same applies to US investment advisers.

It’s totally the sort of ‘feature’ that the user could have been advised of around say the 30 day mark. “We’ve set you up a margin account that’s valid for your first $1000, please now confirm if you’d like to continue to carry a margin call risk otherwise were converting you to a standard account.”

It’s also super common for margin facilities to allow investors carrying the risk, 24-48 hours to contribute to retain the position, auto-selling out is a last resort.

It’s not just on-boarding. People expect to make a transfer from their bank account and have insta-credit to their RH tradable cash balance. This is a core feature of their app.

That is possible in many countries without margin (using faster payments and open banking).

Australia has had real time transfers on our reserve bank's "New Payments Platform" since 2018. Transfers are finalized in a few hundred milliseconds.

And we're actually half a decade behind most of Asia and Europe.

This is not specific to margin accounts and is not what is meant by margin. Cash account with any broker (that I know of) would also give you the same feature -- that is you have access to the cash for trading before the transfer is complete.

If they are letting you trade with instant credit, then under the hood there ARE margin loans going on. To be compliant with SEC regulations the broker must be pulling on short term margin loans from a bank to cover the securities being bought without hard cash in hand.

No they are exposed to you as a credit risk. They trust you that you intend to transfer the money in good faith. As long as the transfer is complete at no point they make a loan to you because trade settles at T+2, i.e. cash is not required on the date of trade. It is the loaning aspect that is regulated. Free riding is forbidden by Reg-T of the FRB. Your broker's settlement risk is not considered a margin loan either. It is a credit risk that they satisfy by depositing funds with the DTCC for a tiny fraction of the notional value.

The difference between the credit risk and the margin loan is that in the vast majority (say > 99%) of times the credit risk does not become a loan. You don't need to punish all the people acting in good faith for the action of a few. The regulation on free riding comes from a money supply perspective. You are not allowed to create money without taking out a loan.

It's time the US got instant wire transfers. Most of the rest of the world has it. Being able to wire money to a friend and 5 seconds later their phone goes 'ding' and they can spend that money is really a requirement of basic functional banking.

The US does have instant wire transfers. But banks usually charge for sending them, so people prefer to send payments with the cheaper ACH network.

The system you mention is the same. Clearing is done at the end of the day.

All that is exchanged during the day are IOUs (debt) and if one player in the chain goes bankrupt during the day the central bank might cover its debt up to some limit.

We haven't had any major crisis since those instant pay apps were put into place. So those aren't really battle tested systems and I guess we'll only effectively discover how resilient they are during the next crisis...

For those trying to follow along. Margin lending occurs when part of the funds put on the market are funded by a debt mechanism. Classically I might invest say $10,000 and the debt facilitate would say provide a $10,000 loan and I’d have $20,000 invested in the market in my name, with a 50% loan to value ratio.

If the investment dropped far enough.. say to $12,000, the margin call facility works like this.

It considers the remaining money is always the lenders, so now the lender is exposed for $10,000/$12,000 eg 83% of the exposure is theirs.

They then ask you to top back up your contribution so they are less exposed (within 24-48hrs), or they auto-sell stock to ensure they are not exposed further.

In the case of Robinhood, the margin lending arrangement is always fully backed once the cash is processed. Which I’m guessing is always reliably a few days after it’s deposited.

So it’s crazy to trigger margin calls as all the debt is quickly fully backed.

It would be expected that Robinhood would have negotiated an instrument that never left them with margin calls on cash contributions like this. This is totally on them.

Reply on news.ycombinator.com