Robinhood maxed out credit line last month amid market tumult(bloomberg.com)
bloomberg.com
Robinhood maxed out credit line last month amid market tumult
https://www.bloomberg.com/news/articles/2020-03-10/robinhood-maxed-out-credit-line-last-month-amid-market-tumult
118 comments
Why wouldn't the Prime Broker just force you to sell it, instead of blocking all trades? I understand that they could dislike the position because it's moved enough to bankrupt you already, or unloading it could move the market even more against you, but that's gotta be better than just holding on to it longer.
> Why wouldn't the Prime Broker just force you to sell it
One, that could result in a fire sale. Freezing is safer than forcing liquidation. If your liabilities outweigh your assets, the latter are the PB's; getting pennies on the dollar instead of dimes is against their interest.
Two, the client may be able to post collateral. You don't want to lose an institutional relationship because you were trigger happy.
Three, you might have made a mistake. Freezing the position until you get your facts straight is prudent in most markets.
One, that could result in a fire sale. Freezing is safer than forcing liquidation. If your liabilities outweigh your assets, the latter are the PB's; getting pennies on the dollar instead of dimes is against their interest.
Two, the client may be able to post collateral. You don't want to lose an institutional relationship because you were trigger happy.
Three, you might have made a mistake. Freezing the position until you get your facts straight is prudent in most markets.
They can't force you to close the position - they "Don't Know" (DK) the position. ie there is a dispute with you for whatever reason that you actually have that position and nothing can be done either way until this is clarified.
If they are right, making you put on a trade to close the position they don't think you have will actually put you into a position of equal size in the other direction.
eg:
You are my pb and I think I'm long 20 S&P e-mini futures. You don't know that trade so think I'm flat. If you make me "close" my position and you're right then I'm actually now short 20 futures.
This type of situation can happen a lot more easily than you might think especially in markets where there are multiple trading channels (eg voice and electronic) and settlement instructions etc can go wrong.
One place I worked we had a trade be DKd because the instructions were sent by fax and needed to be confirmed by voice. The pos Solaris printer driver used to leak memory so one day it leaked so much memory that it just fell over and died and one of the trade confirms wasn't printed out, therefore the human who had the shitty job of picking them up off the printer and calling the other side to confirm the trade didn't confirm. 5m dollars right there.
If they are right, making you put on a trade to close the position they don't think you have will actually put you into a position of equal size in the other direction.
eg:
You are my pb and I think I'm long 20 S&P e-mini futures. You don't know that trade so think I'm flat. If you make me "close" my position and you're right then I'm actually now short 20 futures.
This type of situation can happen a lot more easily than you might think especially in markets where there are multiple trading channels (eg voice and electronic) and settlement instructions etc can go wrong.
One place I worked we had a trade be DKd because the instructions were sent by fax and needed to be confirmed by voice. The pos Solaris printer driver used to leak memory so one day it leaked so much memory that it just fell over and died and one of the trade confirms wasn't printed out, therefore the human who had the shitty job of picking them up off the printer and calling the other side to confirm the trade didn't confirm. 5m dollars right there.
I was doing "devops" for Scottrade's order management system during the exact same time as the Knight implosion. If I remember correctly, the Facebook IPO was a larger mess we had to mop up for our client base...ahh the memories...glad to be out of consumer / retail finance these days.
Remember when we thought the Twitter IPO was going to wreck us and it turned out to be a big nothingburger
This is exactly what I liked about consumer finance. The problems were absolutely fascinating, and when dealing with transactional data it was at a near real-time scale that you don't see anywhere else.
Given your knowledge of the industry, which retail broker(s) do you think is the absolute safest place to trade + hold equities? Interactive Brokers? Fidelity/Schwab? One of the big banks?
Recently-ex-sell-side here: retail investors generally don't need to worry about this at all. There's a lot of protection. Your assets are held separately from the firm's assets, you have SIPC insurance, and there are enormous amounts of regulation in place to try to prevent you from even needing to rely on those two mechanics. Really the worst that could happen is it might be a headache to get to your stuff for a small period of time while something is figured out as to where your assets are going if your brokerage just up and poofs.
That aside, I generally trust the discount brokerages a bit more than people like BofA/Merril and Wells Fargo and JP Morgan, just because I feel like the discount brokerages are a bit more content to just sit on deposits and earn interest (interest accounted for > 50% of schwab's revenue last year) rather than get up to highly leveraged hi-jinks or open fraudulent advisor accounts.
That aside, I generally trust the discount brokerages a bit more than people like BofA/Merril and Wells Fargo and JP Morgan, just because I feel like the discount brokerages are a bit more content to just sit on deposits and earn interest (interest accounted for > 50% of schwab's revenue last year) rather than get up to highly leveraged hi-jinks or open fraudulent advisor accounts.
IB for sure, it’s not even a question.
Any chance you can explain some of the reasoning, even if it's a bit esoteric? One thing that's keeping me from going 100% IB is the lack of a transparently-stated fraud guarantee, like Schwab/Fidelity have. Other than that, IB seems like the best.
Totally talking out of my butt here, I have no finance knowledge. But just as a matter of general game theory stuff I understand that sometimes you have to push all your chips in on a position, but that doesn't seem sustainable? Like how often is it reasonable for a big bank to have a position in a single security that could bankrupt them?
For some companies, every single night!
Money chases the sun. At the end of trading in New York you make a swap with a company in Japan that at the end of trading in Japan does the same with London then back to New York. Any money not swapped doesn't make money overnight.
This is called the overnight repo market. But if you don't get your money back in the morning, you've got a problem.
Money chases the sun. At the end of trading in New York you make a swap with a company in Japan that at the end of trading in Japan does the same with London then back to New York. Any money not swapped doesn't make money overnight.
This is called the overnight repo market. But if you don't get your money back in the morning, you've got a problem.
Is it possible to quantify how much "active" vs "passive" money/capital there is?
I doubt that it is possible to properly quantify how much capital there is, let alone to classify it.
http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivati... is nearly 20 years old, but Warren Buffet's criticism of how we account for the value of derivatives is as true today as it was then.
http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivati... is nearly 20 years old, but Warren Buffet's criticism of how we account for the value of derivatives is as true today as it was then.
Great question! Realized I was mixing different company sizes in the original post.
This would most likely be hitting smaller to medium sizes firms (e.g. Hedge Funds) that are holding a larger position in a security. The small/med firms don't "self clear" so they tend to depend on a larger firm to do that for them.
I should also point out: I used the example of one big position but it could also be a bunch of medium sized positions and then the PB says "Hmmm, we don't agree with 1 or more of those positions so we are stopping trading with you on all of them."
This would most likely be hitting smaller to medium sizes firms (e.g. Hedge Funds) that are holding a larger position in a security. The small/med firms don't "self clear" so they tend to depend on a larger firm to do that for them.
I should also point out: I used the example of one big position but it could also be a bunch of medium sized positions and then the PB says "Hmmm, we don't agree with 1 or more of those positions so we are stopping trading with you on all of them."
It's never reasonable although it doesn't stop people from doing it. History has shown us the folly of this (eg read "When Genius Failed" for a great history of the LTCM collapse). Due to multiple failures, large banks are to a greater or lesser extent prevented from doing this, but smaller financial players do get themselves into trouble.
The London whale, Long Term Capital Management, etc etc.
“We determined it was prudent to draw on our credit line during the week of Feb. 24 in light of market volatility. That capital was returned in full last week.”
Headline should read "Robinhood used credit that was available to them and paid it back"
But that wouldn't generate the desired panic or clicks now would it
Headline should read "Robinhood used credit that was available to them and paid it back"
But that wouldn't generate the desired panic or clicks now would it
> “Companies don’t tap their credit line unless they need to,” said David Ritter, an analyst at Bloomberg Intelligence, who spoke generally about the issue without commenting directly on Robinhood. When companies do, it’s “perhaps not a good signal with regard to their cash burn, which could make creditors nervous.”
It's yet another sign that this company is teetering on the edge of collapse. That isn't irrational panic. They were completely offline for an entire day during the biggest market rally in over a decade, and have had smaller outages during other recent volatile trading days.
This company deserves to crash and burn. Anyone who still keeps a balance there is insane. People have lost millions and are going to continue to lose because Robinhood is run by amateur clowns.
It's yet another sign that this company is teetering on the edge of collapse. That isn't irrational panic. They were completely offline for an entire day during the biggest market rally in over a decade, and have had smaller outages during other recent volatile trading days.
This company deserves to crash and burn. Anyone who still keeps a balance there is insane. People have lost millions and are going to continue to lose because Robinhood is run by amateur clowns.
> Anyone who still keeps a balance there is insane.
Robinhood accounts are protected by the SIPC. Although with other discount brokers introducing free trading, I would tend to agree with you that continuing to use RH with its simplistic interface and appalling execution is pretty silly.
Robinhood accounts are protected by the SIPC. Although with other discount brokers introducing free trading, I would tend to agree with you that continuing to use RH with its simplistic interface and appalling execution is pretty silly.
I switched to TD Ameritrade when they dropped commissions, I figure if I get a .01 better fill (than RH) on an option contract, the 0.65 per contract is worth it.
> Robinhood accounts are protected by the SIPC
This is correct. But SIPC reimbursement can take months. For non-trivial balances, one may need a lawyer to prove ownership.
After that, an accountant would likely be needed to reconcile records, including for tax purposes. (Tax forms are not automatically generated for brokerages in receivership.)
This is correct. But SIPC reimbursement can take months. For non-trivial balances, one may need a lawyer to prove ownership.
After that, an accountant would likely be needed to reconcile records, including for tax purposes. (Tax forms are not automatically generated for brokerages in receivership.)
We have a similar insurance for cash deposits in Canada. I've always imagined that for some balance (perhaps in thousands of dollars), you're better off just letting it go if the company goes down. Now that you mention taxes, I think letting go may not even be an option.
Yeah, I should have said "trades there"; I didn't mean literally keeping a cash balance. I wouldn't worry about losing cash or shares, but about losing the ability to trade during important market events. SIPC isn't going to help you if you were unable to trade.
For the wallstreetbets folks that like to post account charts: Why in God's name would you use a service that has no values on its y-axis. Doesn't everyone realize that makes the chart meaningless? Every time I see those meaningless charts it makes my skin crawl.
But, I'm sure that Robinhood must be omitting those values on purpose, and the only reasoning I can come to is that they want their users to be less educated because it is more profitable for them.
But, I'm sure that Robinhood must be omitting those values on purpose, and the only reasoning I can come to is that they want their users to be less educated because it is more profitable for them.
Usually the point is the account balance and gains at the top above the chart. It's been a few months since I used RH but I believe you have to touch and drag to see the point you're touching be labeled. The real problem with the screenshot is the lack of labels on the X-axis. It might at least be interesting to see what dates the spikes corresponded to.
You are completely unknowledgeable about how finance works. If RH were worried about credit spreads widening, which actually happened, then drawing on the credit before while you can and having cash at hand makes a lot of sense before the banks won't accommodate your request. What they did sounds like a great strategy.
From what I heard they weren't the only brokerage with an issue. Maybe they had the worst issues, but I think it's also that their customers are more vocal than others.
> their customers are more vocal than others
And their haters. There's a very vocal group of traditional investors who hate Robinhood (and its users) for a variety of (mostly trivial) reasons. Robinhood's service problems over the past couple weeks are finally a legitimate reason for them to air their hate and they would love to see Robinhood fail.
And their haters. There's a very vocal group of traditional investors who hate Robinhood (and its users) for a variety of (mostly trivial) reasons. Robinhood's service problems over the past couple weeks are finally a legitimate reason for them to air their hate and they would love to see Robinhood fail.
I don't hate them, and prior to this week I'd have considered using them for simple equity trading. But they're clearly in over their heads, and simple risk management should lead people to find a safer venue.
It's true that many other brokers from bit players to top-tier firms occasionally have trouble during intense market days. I've worked in finance on and off for decades, for brokerages, hedge funds, and market makers. I've written systems that process real-time market data and trade directly on exchanges. I'm well aware of the challenges in trade processing systems, and Robinhood simply hasn't built enough testing, redundancy, or scalability into their systems, as we're now seeing.
It also happened on leap day, and there's speculation that their systems were simply unable to handle that. Robinhood denies it, but they also had problems on leap day 2016.
There's no reason that a company like Robinhood can't succeed, and someone in that space will succeed. It may very well end up being Robinhood. But are you willing to bet your own money on that right now?
It's true that many other brokers from bit players to top-tier firms occasionally have trouble during intense market days. I've worked in finance on and off for decades, for brokerages, hedge funds, and market makers. I've written systems that process real-time market data and trade directly on exchanges. I'm well aware of the challenges in trade processing systems, and Robinhood simply hasn't built enough testing, redundancy, or scalability into their systems, as we're now seeing.
It also happened on leap day, and there's speculation that their systems were simply unable to handle that. Robinhood denies it, but they also had problems on leap day 2016.
There's no reason that a company like Robinhood can't succeed, and someone in that space will succeed. It may very well end up being Robinhood. But are you willing to bet your own money on that right now?
My apologies if it sounded like I was implying that you hated them. I was just speaking in general. Particularly on r/wallstreetbets there are a lot of people who shame others who use robinhood and make jokes that don't reflect reality. Some of that is the 'bets sense of humor too of course.
Yes, the European low-cost broker DeGiro had an outage on the same day. I happily cancelled my new subscription and was thankful for not getting locked up in this issue while enjoying the volatility. Only for-money good-reputation brokers from now on for me.
So would you judge money losing startups as harshly? What about YC darling Dropbox that has never made a profit? Netflix is borrowing billions of dollars trying to create and license enough content to stay competitive.
judgement is still out on them but potentially. At the end of the day you have a service that is being subsidised by VC. Vis. Uber, Lyft, WeWork, The Warby Parker clones...
The real question to come is if a drying up of liquidity is going to torpedo lots of ships. It is simply not possible for a loss making entity to continue losing money forever (unless you are the US Government)
The real question to come is if a drying up of liquidity is going to torpedo lots of ships. It is simply not possible for a loss making entity to continue losing money forever (unless you are the US Government)
Dropbox going down for a day is unlikely to cause the loss of literal millions of dollars for most use cases. You can probably come up for some use care where WELL AKSHUALLY it will, but for the average person not being able to trade on a hot market day is a direct link to either potential or actual losses if you're, say, options trading.
Not an OP, but saying that company A is broken doesn't mean that companies B and C aren't broken.
Once free money dries up, a lot of darlings will go down.
Once free money dries up, a lot of darlings will go down.
The article touches on why the draw is significant irrespective of paying it back (albeit the source of the commentary is from the same parent company):
> “Companies don’t tap their credit line unless they need to,” said David Ritter, an analyst at Bloomberg Intelligence, who spoke generally about the issue without commenting directly on Robinhood. When companies do, it’s “perhaps not a good signal with regard to their cash burn, which could make creditors nervous.”
> “Companies don’t tap their credit line unless they need to,” said David Ritter, an analyst at Bloomberg Intelligence, who spoke generally about the issue without commenting directly on Robinhood. When companies do, it’s “perhaps not a good signal with regard to their cash burn, which could make creditors nervous.”
Revolving credit lines are usually revocable. Depending on what Robinhood drew the cash for, and the degree to which they have liquidity-source redundancy, it could imply their having been closer to an edge than was apparent.
If you're going to quote the article, perhaps you should quote the rest:
“Companies don’t tap their credit line unless they need to,” said David Ritter, an analyst at Bloomberg Intelligence, who spoke generally about the issue without commenting directly on Robinhood. When companies do, it’s “perhaps not a good signal with regard to their cash burn, which could make creditors nervous.”
“Companies don’t tap their credit line unless they need to,” said David Ritter, an analyst at Bloomberg Intelligence, who spoke generally about the issue without commenting directly on Robinhood. When companies do, it’s “perhaps not a good signal with regard to their cash burn, which could make creditors nervous.”
Or "Robinhood's CFO is doing their job right"
Or hes afraid of there being no one willing to lend to him tomorrow
Why not “used all credit that was available to them”? Without “all” it would be confusing what was even being pointed out.
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As a small investor (investing around few thousand USD), how do I know which app to trust?
There is Robinhood and Stash for ETFs and Stocks and then there are robot-wealth mangers like WealthFront etc.
Should I always stick to big firms like Vanguard or Fidelity? Thing I don't like about firms like Vanguard and Fidelity is that you cannot buy fraction of a unit which Robinhood/Stash allow you to do.
Any advice?
Should I always stick to big firms like Vanguard or Fidelity? Thing I don't like about firms like Vanguard and Fidelity is that you cannot buy fraction of a unit which Robinhood/Stash allow you to do.
Any advice?
Haven't both Vanguard and Fidelity started supporting fractional shares? E.g. https://www.fidelity.com/trading/fractional-shares
M1 is the only one that has full support for fractional share trading, I believe.
Fidelity has started to offer fractional shares, but it has some limitations: Only market and limit orders, only trades through the basic trade ticket in the mobile app, limited to NYSE/NASDAQ stocks, etc. [1] Another thing to watch out for is that fractional shares can't be transferred; they must be liquidated if you want to switch brokers.
Schwab has said they'll be launching fractional shares over the summer.
Note that most brokers already support fractional shares indirectly through DRIP [2], but that's unrelated to trading.
[1] https://www.fidelity.com/trading/fractional-shares
[2] https://www.investopedia.com/terms/d/dividendreinvestmentpla...
Fidelity has started to offer fractional shares, but it has some limitations: Only market and limit orders, only trades through the basic trade ticket in the mobile app, limited to NYSE/NASDAQ stocks, etc. [1] Another thing to watch out for is that fractional shares can't be transferred; they must be liquidated if you want to switch brokers.
Schwab has said they'll be launching fractional shares over the summer.
Note that most brokers already support fractional shares indirectly through DRIP [2], but that's unrelated to trading.
[1] https://www.fidelity.com/trading/fractional-shares
[2] https://www.investopedia.com/terms/d/dividendreinvestmentpla...
> Another thing to watch out for is that fractional shares can't be transferred; they must be liquidated if you want to switch brokers.
What happens if I buy .5 shares of AAPL every week for 53 weeks? Do I have 26 undivided shares that can be transferred and one half-share that has to be liquidated, or do they treat it as 53 half-shares that all must be liquidated?
If the latter, seems like a great way to keep people locked-in. But the former could be a headache for basis reporting, especially if you could transfer to a brokerage that doesn't natively support fractional shares.
What happens if I buy .5 shares of AAPL every week for 53 weeks? Do I have 26 undivided shares that can be transferred and one half-share that has to be liquidated, or do they treat it as 53 half-shares that all must be liquidated?
If the latter, seems like a great way to keep people locked-in. But the former could be a headache for basis reporting, especially if you could transfer to a brokerage that doesn't natively support fractional shares.
I don't know for sure, but I'm pretty sure they're combined behind the scenes. Fractional shares are really abstractions over an underlying instrument. The broker is the actual owner of the shares, and you have an indirect ownership. Among other things, it leads to a situation where you cannot take part of normal shareholder activites such as voting. The broker still needs to keeps records of the cost basis of each fraction you purchased, of course.
I know Vanguard does on Vanguard ETFs and MFs when you have dividend reinvest on, but I don't know about other scenarios.
Interactive Brokers is a professional brokerage that has a free tier now and just added fractional shares as well.
Vanguard, Fidelity, Schwab, TD Ameritrade are all legitimate operations as well, but IB is what professionals use.
Vanguard, Fidelity, Schwab, TD Ameritrade are all legitimate operations as well, but IB is what professionals use.
Yes, IB is what I use too. Their paid individual account tier is only $10 a month and provides SDK's with robust support for Python, Java, and C++.
Does their paid tier include free options trading? That’s what’s attractive about Robinhood, but they cost me $7k on Monday so I’m dumping them.
Only US Exchange-Listed Stocks / ETFs are commission free.[1] Honestly though, the commissions are extremely low. Definitely lower than that $7k. Just keep in mind, you get what you pay for.
[1] https://www.interactivebrokers.com/en/index.php?f=45500
[1] https://www.interactivebrokers.com/en/index.php?f=45500
Their fees are something like 10 cents if you’re trading an option. Completely irrelevant.
Fidelity offers fractional shares now: https://www.fidelity.com/trading/fractional-shares
Oh Great! thank you!
I recommend Vanguard for their very low overhead and fees. I am a customer of theirs and Robinhood, and Vanguard's relative conservatism is a huge plus when you're investing a lot of money.
I've been very happy with Betterment (one of the first "robo-advisors", as far as I know). I'm not aware of any options for manually trading through it (not that I really want to mess with that anyway), but for automatic-management the feature set/apps/fees all seem really good.
I'm very very happy with Wealthfront. They make automatic investing incredibly simple and explain every step of choosing your risk tolerance. I've used Robinhood extensively and I think it's just too much work and invites you to be too active/reactionary.
As a small investor, you don't want individual shares, let alone fractional ones. Stick to vanguard and their excellent etfs. Don't try to time markets, if they're down, trade tomorrow or next week.
Pretty much anything else is just gambling.
Pretty much anything else is just gambling.
I'm an M1 finance guy, but that might not be good enough for most people.
Why would they have needed to draw down their credit line and then pay it back over a two week period? I don't have an answer to this question.
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I can't get past the paywall, so maybe the article answers this question. But, in case not, one major reason could be margin. If you pay Robinhood $5/month then you have access to borrow money from them to buy stock. The first $1000 is interest free and additional "margin" incurs interest.
When the stock market plunges, some people will see that as an opportunity to buy more stock at a reduced price. If they don't have any liquid funds in their account, borrowing money from the broker is instantaneous (assuming you've previously enabled it). I don't know what happened, but I could see their line of credit getting eaten up very quickly if enough investors decided to leverage their available margin.
If investors sold those shares within two weeks, they could pay back the credit line.
When the stock market plunges, some people will see that as an opportunity to buy more stock at a reduced price. If they don't have any liquid funds in their account, borrowing money from the broker is instantaneous (assuming you've previously enabled it). I don't know what happened, but I could see their line of credit getting eaten up very quickly if enough investors decided to leverage their available margin.
If investors sold those shares within two weeks, they could pay back the credit line.
I hope they aren't insolvent yet, there's a 3-6 business day waiting period for transferring your positions/balances to a different broker with ACATS.
Does anyone know what happens to any open positions in the event that they do become non-operational?
Does anyone know what happens to any open positions in the event that they do become non-operational?
What would even lead you to believe they are in danger of becoming insolvent? They had some severe technical issues and a ridiculously long downtime yes, but at the end of the day their company is still operating just the same as before.
There are a lot of unhappy customers which are probably trying to get all of their money out of Robinhood ASAP, myself included. It's not unthinkable that they may run into problems and become insolvent due to the unexpected outflows.
It might be a naive question, but if you buy shares through Robinhood then don't you just own those shares? It might take some time to transfer them to your preferred broker, but I don't understand why you'd lose anything in an insolvency. Plus any cash you had would be held in a customer account, so again it's simply a matter of dividing up that cash between customers according to their balances. (Note: I've never used Robinhood, so I'm assuming they're a regular stockbroker with added Silicon Valley hype, rather than something else)
I think that is indeed the case for actual shares (I was certainly able to participate in Rite-Aid's most recent Board of Directors election, solely based on the shares I bought through Robinhood), but I'm curious about how it'd apply to cryptocurrency, since Robinhood (last I checked) doesn't expose the private keys for the underlying wallets or otherwise offer a mechanism to transfer crypto assets out of Robinhood.
Not that it really matters for the, what, $2 I put into Dogecoin, but still.
Not that it really matters for the, what, $2 I put into Dogecoin, but still.
You're underestimating the value of convenience for most folks. I'd venture a guess that a lot of Robinhood's users are typical retail investors, some pretending to be day-traders.
Most will talk big about leaving and then end up staying put anyway because it's easier than jumping ship.
Most will talk big about leaving and then end up staying put anyway because it's easier than jumping ship.
They may have had users with margin and/or option sellers whose positions they were unable to force close.
SIPC insurance protects you from any brokerage insolvency, up to $500k I believe. (not to mention a pile of laws and regulations to prevent risks of insolvency)
I would suppose drawing on a credit line like that would have something to do with maintaining adequate funds in various accounts for settlement of funds transfers and stock transaction as well as the various margin products that brokerages have during a usage spike – without touching corporate accounts for raised funds and various other capital sources. I have no knowledge of the situation but it seems like they pulled in cash from a credit line created for this exact purpose to act as a buffer.
Under the hood of all of these banks and brokerages are a series of settlement periods and bank accounts shared at different firms. You end up needing buffer cash because nothing is instant, you want to keep that to a minimum, and during a usage spike you have to add to the buffer to make sure nothing goes negative. Just the underlying mechanics of banking which has nothing at all to do with the firms financial health.
I would suppose drawing on a credit line like that would have something to do with maintaining adequate funds in various accounts for settlement of funds transfers and stock transaction as well as the various margin products that brokerages have during a usage spike – without touching corporate accounts for raised funds and various other capital sources. I have no knowledge of the situation but it seems like they pulled in cash from a credit line created for this exact purpose to act as a buffer.
Under the hood of all of these banks and brokerages are a series of settlement periods and bank accounts shared at different firms. You end up needing buffer cash because nothing is instant, you want to keep that to a minimum, and during a usage spike you have to add to the buffer to make sure nothing goes negative. Just the underlying mechanics of banking which has nothing at all to do with the firms financial health.
https://en.wikipedia.org/wiki/Securities_Investor_Protection...
If covered by SIPC, you get up to $500,000 back.
If covered by SIPC, you get up to $500,000 back.
In a worst-case scenario, how long would it take to get the money back if SIPC needs to step in and administer the disbursements?
Your positions are safe in segregated accounts. Of course, that's what everyone thought about MFGlobal too.
Personally, I'd get my funds off the meme brokerage and on to a real trading platform.
Personally, I'd get my funds off the meme brokerage and on to a real trading platform.
They should make it illegal to gamble with your customers' balances and risk going insolvent.
Robinhood makes money by tailgating your orders and selling your trade history to hedge funds et al. If they make too many risky moves, it's possible that they could run out of money very quickly. That, combined with the panic from the 3 days of outages sounds like a very bad recipe to me.
EDIT: changed frontrunning -> tailgating.
EDIT: changed frontrunning -> tailgating.
> frontrunning your orders
That's a pretty serious criminal allegation, do you have any more info?
> and selling your trade history to hedge funds
I have not heard about this either, do you have more info?
The main way that I'm aware of that Robinhood makes money is payment for order flow. The idea is that HFT firms want make risk-free money by providing liquidity without taking a position (via the bid/ask spread). The problem in the larger market is that every once in awhile the price will move against the HFT firm because some other market participant knows something they don't, and so they get caught holding equities that they didn't want to hold. Instead, they pay Robinhood to send them order flow from retail customers who are unlikely to actually know anything and should have approximately even/random orders on either side of the bid/ask spread.
Orders still have to be executed at the best possible price though, they can't send your order to Citadel and have Citadel charge you $0.02/share more than what you could get from someone else.
That's a pretty serious criminal allegation, do you have any more info?
> and selling your trade history to hedge funds
I have not heard about this either, do you have more info?
The main way that I'm aware of that Robinhood makes money is payment for order flow. The idea is that HFT firms want make risk-free money by providing liquidity without taking a position (via the bid/ask spread). The problem in the larger market is that every once in awhile the price will move against the HFT firm because some other market participant knows something they don't, and so they get caught holding equities that they didn't want to hold. Instead, they pay Robinhood to send them order flow from retail customers who are unlikely to actually know anything and should have approximately even/random orders on either side of the bid/ask spread.
Orders still have to be executed at the best possible price though, they can't send your order to Citadel and have Citadel charge you $0.02/share more than what you could get from someone else.
It's not criminal in any way, it's actually pretty common for brokers to do this, particularly the free or low-cost ones. Call it market making if you want, but it's essentially the same mechanics.
Robinhood got in trouble (FINRA) for not taking the requirement to get the best price seriously though.
It is common to pay for order flow, but it appears that Robinhood turned out to be exactly the sort of crooks that their customers assumed all the rest of the brokers were.
It's instructive how you can be cynical, and believe that equates to sophistication, and end up conning yourself.
It is common to pay for order flow, but it appears that Robinhood turned out to be exactly the sort of crooks that their customers assumed all the rest of the brokers were.
It's instructive how you can be cynical, and believe that equates to sophistication, and end up conning yourself.
Are you sure you're not confusing it with tailgating, which is legal but sometimes frowned-upon?
Front-running: Broker gets order, broker buys for self, broker executes order. (illegal)
Tailgating: Broker gets order, broker executes order, broker buys for self. (legal)
Front-running: Broker gets order, broker buys for self, broker executes order. (illegal)
Tailgating: Broker gets order, broker executes order, broker buys for self. (legal)
Isn't what they do this:
Broker gets order, sends it to their best buddy instead of normal market, buddy takes other side of order (at the same price as market would have given).
The assumption being that someone who crosses the spread on the general market may have some good info they are trading on. But a robinhood trader who crosses the spread is basically just trading randomly, and is giving away the spread for nothing.
Broker gets order, sends it to their best buddy instead of normal market, buddy takes other side of order (at the same price as market would have given).
The assumption being that someone who crosses the spread on the general market may have some good info they are trading on. But a robinhood trader who crosses the spread is basically just trading randomly, and is giving away the spread for nothing.
Yes, that's what happens, although "best buddy" is really "company that pays us the most for the orders."
I am not sure if you meant it this way but "best buddy" implies that something shady is going on. If you want to pay Robinhood more for their order flow than Virtu & Citadel I'm sure they would be happen to send you all the orders you could fill.
I am not sure if you meant it this way but "best buddy" implies that something shady is going on. If you want to pay Robinhood more for their order flow than Virtu & Citadel I'm sure they would be happen to send you all the orders you could fill.
It's essentially using a sub-tick size price improvement (but paid to the broker to cover trading fees) to jump the queue at the market.
It arguably undermines the existence of price ticks. I think you know this but for the lurkers, the purpose of price ticks is to make the market first-come-first-serve. Without them people can raise the bid by 0.0000000001 to get first in line, making the market last-come-first serve.
But as far as shadiness goes, it's a very light shade of gray.
It arguably undermines the existence of price ticks. I think you know this but for the lurkers, the purpose of price ticks is to make the market first-come-first-serve. Without them people can raise the bid by 0.0000000001 to get first in line, making the market last-come-first serve.
But as far as shadiness goes, it's a very light shade of gray.
Yes I think you're right. I will edit my posts.
I'm a fairly new stock investor so these are honest questions. Actual front-running is illegal as far as I can tell, no? What is the difference between what they're doing and illegal front running?
The canonical case of front-running is that your customer calls you up, says "I want to buy 100 shares", and then you go out and buy 50 shares for yourself before buying their shares. Then their purchase makes the price go up and you've made a free profit at either their or the market's expense.
The canonical case of market-making is that you think "you know, I think people are going to ask me to buy 100 shares this afternoon, so I'd better buy 50 this morning to hedge". (Or "you know, I've just bought 100 shares for a customer, I'd better buy 50 for myself".) There's a core similarity here - you're buying shares based on your customers' trades - but I think it's also clear that you're not really taking advantage of anyone.
The canonical case of market-making is that you think "you know, I think people are going to ask me to buy 100 shares this afternoon, so I'd better buy 50 this morning to hedge". (Or "you know, I've just bought 100 shares for a customer, I'd better buy 50 for myself".) There's a core similarity here - you're buying shares based on your customers' trades - but I think it's also clear that you're not really taking advantage of anyone.
Is this not a prohibited practice?
https://www.law.cornell.edu/cfr/text/17/38.152
https://www.law.cornell.edu/cfr/text/17/38.152
Do you have a reference for that claim? Or are you repeating something that you read on a forum?
> I hope they aren't insolvent
This smells like an unexpected collateral call. Their maxing out the line is material for estimating operational continuity. But given the market's volatility, I wouldn't read it as a solvency problem per se.
> Does anyone know what happens to any open positions in the event that they do become non-operational?
The SIPC [1] insures deposits up to $500,000.
[1] https://www.sipc.org
This smells like an unexpected collateral call. Their maxing out the line is material for estimating operational continuity. But given the market's volatility, I wouldn't read it as a solvency problem per se.
> Does anyone know what happens to any open positions in the event that they do become non-operational?
The SIPC [1] insures deposits up to $500,000.
[1] https://www.sipc.org
Almost the same thing, but this seems like existing collateral requirements being met for exceptional usage/volume (and pulling it from a purpose-created credit line instead of a corporate account with a different purpose)
> this seems like existing collateral requirements being met for exceptional usage/volume
Brokerages, particularly discount brokerages, are leveraged beasts.
When prices move, they have to post collateral. The brokerage has to then make up that deficit by calling customers' capital and/or liquidating securities. Between those two, the brokerage has to draw on reserves and, lacking that, borrow. If it can't, it goes into receivership.
Brokerages, particularly discount brokerages, are leveraged beasts.
When prices move, they have to post collateral. The brokerage has to then make up that deficit by calling customers' capital and/or liquidating securities. Between those two, the brokerage has to draw on reserves and, lacking that, borrow. If it can't, it goes into receivership.
It's almost always a prudent decision for a company to draw on loan facilities if they think things are going south. Draw while you still can and before you trip a covenant.
Let me reword some things in the article:
> and is now backed by venture capital firms including Index Ventures, Andreessen Horowitz and Sequoia
So these big players (aka "Smart Money") have granular access to everyone's personal & financial details, have access to trading information, are gaining deep knowledge on how Retail (aka "dumb money") operate/trade, their patterns, per age/gender/region/etc. That information is priceless, and then this happens: Sardine Feeding Frenzy: Whale, Shark, Dolphin and Sea Lions | The Hunt | BBC Earth https://www.youtube.com/watch?v=6zOarcL1BSc
> and is now backed by venture capital firms including Index Ventures, Andreessen Horowitz and Sequoia
So these big players (aka "Smart Money") have granular access to everyone's personal & financial details, have access to trading information, are gaining deep knowledge on how Retail (aka "dumb money") operate/trade, their patterns, per age/gender/region/etc. That information is priceless, and then this happens: Sardine Feeding Frenzy: Whale, Shark, Dolphin and Sea Lions | The Hunt | BBC Earth https://www.youtube.com/watch?v=6zOarcL1BSc
You think the VC investors of a brokerage get access to individual customer transaction data?
I'm sure it's happened before, but I have to imagine such a thing is incredibly rare and illegal if violating the stated privacy policy (due to GLB law).
I'm sure it's happened before, but I have to imagine such a thing is incredibly rare and illegal if violating the stated privacy policy (due to GLB law).
VC that have equity, yes. Because if they got equity and they own part of that business they sure as hell will siphon the data and nobody and nothing can stop them. It is like telling me that a Holdings company does not have access to a Subsidiary's client data.
I can go out and buy Schwab equity tomorrow. Will they turn over their data to me?
I recognise that's reductio ad absurdum, and I'm not saying it's impossible that data is misused. But the idea that equity holders of regulated financial institutions can just get whatever data they want out of that institution is... not true.
I recognise that's reductio ad absurdum, and I'm not saying it's impossible that data is misused. But the idea that equity holders of regulated financial institutions can just get whatever data they want out of that institution is... not true.
I have seen this happening in every Bank I've ever worked in/with that was big enough to expand or small enough to be M&A-ed. When a bank buys out a significant part of an Insurance, Factoring, Securities, etc. company, the next day the clients get a nice letter (or email nowadays) about the news and that is that. And a few weeks later the vertical sales begin. All banks that grow through M&A (mostly As) do exactly that. I will assume RH to be Securities since they don't seem to be doing something else (give out loans, hold deposits). So, again, if those fine people that have £€¥$ to RH are JUST VCs the above is not happening. But if they DO have equity, and that would be north of 5-10%, and they BDO have some management over RH (BYOCommitees) it is naive (not mean to insult you or anyone) to think that they don't siphon data. It is like saying that MS didn't get a copy of LinkedIn the very next day, or that FB didn't get their hands on WhatsApp's phone numbers, or that a BANK who just bought a Securities company for which they are NOW LIABLE in the eyes of SEC did not get ALL the data to run KYC/AML/OFAC etc.
That company has a $1.7bn valuation where own funds where...? And three big players may own 60-70% of that?
I have seen this happening so many times.
And there are myriad ways to get the data. The easy ones is through their DWH where suddenly (with the correct mapping) all reports etc work on day1 with the new data.
If you know this from experience (ran due diligence pre M&A, worked with the DWH post M&A) or have some other experience on the matter, feel free to share names. I will only share two SocGen and BofA and leave it at that.
I have seen this happening so many times.
And there are myriad ways to get the data. The easy ones is through their DWH where suddenly (with the correct mapping) all reports etc work on day1 with the new data.
If you know this from experience (ran due diligence pre M&A, worked with the DWH post M&A) or have some other experience on the matter, feel free to share names. I will only share two SocGen and BofA and leave it at that.
The irony of credit is that it's least likely to be available when you really need it.
Misleading headline from Bloomberg, at least in effect.
credit is so cheap nowadays. i'm sure their creditors were happy for the business
> Robinhood said last week that a confluence of factors -- record account sign-ups along with highly volatile and historic market conditions -- led to unprecedented stress on the firm’s infrastructure.
> That heavy load caused the so-called Domain Name System, or DNS, to fail.
Not a developer. Is it not customary just to hard-code IP addresses instead of domain names when the app is communicating with your own servers? I would assume that would make every interaction faster and is something that would be done anyway.
> That heavy load caused the so-called Domain Name System, or DNS, to fail.
Not a developer. Is it not customary just to hard-code IP addresses instead of domain names when the app is communicating with your own servers? I would assume that would make every interaction faster and is something that would be done anyway.
Certainly not. DNS is a good way to decouple logical service names from actual machines. This is particularly useful with containers so that you can put your services wherever the orchestrator wants them. It can also be used for load balancing and resiliency.
Many services use DNS to distribute requests across regions or to balance load or for failover purposes. An IP address is less flexible for those purposes.
Not if you're using something like AWS since the IP is not guaranteed.
If you're managing your own server farm though, yes, you can statically allocate IP's and cut out DNS in it's entirety. A practice to this day I do not understand why more places don't. Then again, I was always comfortable with memorizing phone numbers and the like.
If you're managing your own server farm though, yes, you can statically allocate IP's and cut out DNS in it's entirety. A practice to this day I do not understand why more places don't. Then again, I was always comfortable with memorizing phone numbers and the like.
https://docs.aws.amazon.com/AWSEC2/latest/UserGuide/elastic-...
Much quicker to remap an elastic IP than wait for DNS changes to propagate.
Much quicker to remap an elastic IP than wait for DNS changes to propagate.
No. You usually use service discovery and it's often DNS based. You can do that if you use Consul and stuff like that and it allows you to bring in new things on the fly.
Straight ip addresses can't have tls certs afaik.
It cannot be the common name(the main domain), but can exist as a SAN name and work just fine.
No, especially if DNS-based service discovery is being used.
We hired the Global Head of Clearing [0] from a big bank and on their first day they were giving a presentation on their background and how financial clearing works.
Someone asked "What is your nightmare scenario?"
The response:
We have a large overnight position in a security. Our Prime Broker (PB) [1] comes back and says "We disagree with you on the position so you can't trade." Even if it turns out that the PB is wrong, by the time it all gets sorted out, the market has moved so much in that security that it bankrupts us. I've seen it happen to other firms and it's not pretty.
I also started at Knight right after their big outage. [2] People like to talk about the big tech outages sinking financial firms but it can just as easily be plain old issues with bookkeeping that can blow up a firm.
0 - https://www.investopedia.com/terms/c/clearing.asp
1 - https://www.investopedia.com/articles/professionals/110415/r...
2 - https://www.thestreet.com/investing/stocks/knight-capital-sh...