Why Robinhood disabled buys but not sells(stu2b50.dev)
stu2b50.dev
Why Robinhood disabled buys but not sells
https://stu2b50.dev/posts/why-robinhood-d3580b
711 comments
I don't think there's a conspiracy, but I also don't think they get a free pass on this. They're going to lose much of their base, and they deserve to – if your whole thing is retail traders, and everything stops working when it matters most, then people are going to look elsewhere.
The CEO lied on TV about the reason, there's rumors that their investors asked them to stop it (I mean, they got $1Bn relief... of course it was at least a topic of conversation), and they make a ton of money ($100M/Q I've seen) from one of the big players in this (Citadel).
I'm not saying there's a conspiracy, exactly... but I am saying when it came down to making hard choices, it doesn't take a full-blown conspiracy for them to make some of the decisions they made that erred on the side of benefiting institutional investors.
All their cash (via both raising capital and selling data to funds) comes from institutional investors rather than average retail investors, and that was recently made clear to a lot of people.
The CEO lied on TV about the reason, there's rumors that their investors asked them to stop it (I mean, they got $1Bn relief... of course it was at least a topic of conversation), and they make a ton of money ($100M/Q I've seen) from one of the big players in this (Citadel).
I'm not saying there's a conspiracy, exactly... but I am saying when it came down to making hard choices, it doesn't take a full-blown conspiracy for them to make some of the decisions they made that erred on the side of benefiting institutional investors.
All their cash (via both raising capital and selling data to funds) comes from institutional investors rather than average retail investors, and that was recently made clear to a lot of people.
"I don't think there's a conspiracy" followed by hints of conspiracy.
I think Robinhood didn't do anything wrong (or even incompetent), but they are screwed because the prospect of losing money (actually just the potential of more money, they haven't lost any yet if they close now since the mania isn't done) is emotional and triggers outrage and a need for someone to blame.
I think Robinhood didn't do anything wrong (or even incompetent), but they are screwed because the prospect of losing money (actually just the potential of more money, they haven't lost any yet if they close now since the mania isn't done) is emotional and triggers outrage and a need for someone to blame.
>I think Robinhood didn't do anything wrong (or even incompetent)
Sure they did. The CEO of Robinhood went onto CNBC and lied about why they restricted trading.
https://www.msn.com/en-us/money/companies/robinhoods-ceo-den...
Also, here is their history of other recent fuckups:
https://www.cbsnews.com/news/robinhood-sec-fine-65-million/
"Robinhood Financial fined $65 million by SEC for misleading users"
Stop making excuses for liars.
Sure they did. The CEO of Robinhood went onto CNBC and lied about why they restricted trading.
https://www.msn.com/en-us/money/companies/robinhoods-ceo-den...
Also, here is their history of other recent fuckups:
https://www.cbsnews.com/news/robinhood-sec-fine-65-million/
"Robinhood Financial fined $65 million by SEC for misleading users"
Stop making excuses for liars.
It's amazing to me there isn't a system that we can automatically pull from, of trusted channels, that will bring into view these more "hidden" narratives - that get crowded out by the current mainstream media and journalism trying to respond quickly without doing their homework or with doing more quick reads that keep to a narrow scope of a narrative instead of a longer read that requires attention, which in fact will quell the reader's excitement or over excitement - likely leading to less viral sharing due to losing readers who aren't patient enough to read more thorough content.
"It's amazing to me there isn't a system that we can automatically pull from, of trusted channels..."
I like it, but who gets to decide which sources are trusted?
I like it, but who gets to decide which sources are trusted?
The people visiting the service decide that for themselves; they decide if they think the provider is trustworthy. You personally have to trust the person / people deciding which sources on a matter/story are trustworthy. It's a chain. That trust gets built up over a long period of time ideally, starting typically from a very modest beginning. It's worth noting that sources are often not consistent, they can be trusted on one thing and then get another thing wrong, so it certainly won't be a simple matter of dictating that This Source is good and That Source is bad (for everything).
More challenging than earning that initial trust, is maintaining it, not allowing a perversion to occur over time (where the service becomes biased, irrational). For every service that gains initial trust, most inevitably lose it over time; keeping it long-term is far harder.
More challenging than earning that initial trust, is maintaining it, not allowing a perversion to occur over time (where the service becomes biased, irrational). For every service that gains initial trust, most inevitably lose it over time; keeping it long-term is far harder.
It's a chain, it's a hierarchy, it's leadership, governance and accountability systems - protocols and processes - and transparency towards results/outcome. It's why "historically" good brands can get taken over by relative bad actors, perhaps "just" greed, and pillage the good reputation and reach a brand has - and because they already have the resources, processes, and reach - they can maintain it more easily; it's far harder to break through the noise to create a new brand with mass mindshare than to acquire, and why acquisitions happen and conglomerates form - as a form of suppression and to continue maintaining control.
Whatever network(s) or leadership within the system you subscribe to.
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There are good sources on this, like Matt Levine's column "Money Stuff" at Bloomberg.
[I just imagine a finance guy after Heartbleed or Stuxnet complaining "woe betide me, the IT coverage on CNN and Foxnews is so bad... I wish there were trusted channels to discuss these, you know, hacker news!"...]
Yes, a meta system that would have the best channels available per topic (HN, Money Stuff, The Aviation Herald/PPRUNE, etc.) would be great, but I imagine it would pretty soon be exploited and overrun... Maybe it has advantages that they are generally somewhat out of the limelight?
[I just imagine a finance guy after Heartbleed or Stuxnet complaining "woe betide me, the IT coverage on CNN and Foxnews is so bad... I wish there were trusted channels to discuss these, you know, hacker news!"...]
Yes, a meta system that would have the best channels available per topic (HN, Money Stuff, The Aviation Herald/PPRUNE, etc.) would be great, but I imagine it would pretty soon be exploited and overrun... Maybe it has advantages that they are generally somewhat out of the limelight?
If the good leaders aren't exploitable, and they maintain unique channels of gaining momentum and attention - say via word of mouth or succeeding at gaining attention in the news or good at piggybacking on existing amplification systems (e.g. Andrew Yang running as a Democratic, otherwise would have run as Independent, due to understanding the duopoly and mainstream media's amplification of only those two main narratives), eventually the best leaders will outshine whatever bullshit takeover and noise pollution that may try to overtake the system; that still doesn't mean there won't be attempts for manipulation and narrative capture, suppression tactics used, etc.
Do you have a link to the full interview? That first article is just a bunch of short quotes, some incomplete, some seemingly out of context. Some of the quotes address the clearing house deposit requirements. The article doesn't actually give his response AFAICT as to why they paused trading.
I just can't understand how that article supports the accusation of lying.
I just can't understand how that article supports the accusation of lying.
> The CEO of Robinhood went onto CNBC and lied about why they restricted trading.
I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients; and they suffer more than if the run had not happened. So, what you portray as a huge nefarious plot here is just a CEO of a startup trying to keep things going until they calm down again (which, incidentally, seems to have worked).
Next, the other issue with the $65m fine. As it happens, this has been discussed in depth by Matt Levine in his excellent "Money Stuff" column [1], and it's not quite as nefarious as you portray it either.
Brokerages make money from a couple of sources: 1) interest on customers' cash balance (which they might pass on or not), 2) borrow fees from lending out stock to short sellers, 3) commissions, and 4) payments from market makers for order flow [2], which basically constitute a discount on the bid-ask-spread.
Most brokers used to charge commission (3), but passed on most of the discount (4), giving clients a very good bid-ask-spread. What Robinhood did is charge less commission (3) (namely zero), but keep more of the discount (4), giving clients a worse bid-ask-spread.
If you have small orders, you're better of with the Robinhood model of smaller fixed cost, and a somewhat higher (and hidden) proportional cost, namely a higher bid-ask-spread (ie slightly worse price). But for customers with big orders, a different broker with a small fixed fee, but a better discount = smaller bid-ask-spread = better price might have been better.
(Note, btw, that everyone got prices equal to or better than the national best bid offer! It's just that you got more or less further discount on top of that.)
I agree with Matt Levine that Robinhood had a compelling offer, and should have just positioned it a bit better.
But again, that $65m fine was basically for not telling big clients that btw, with your size you might be better off at the competition where you pay a fixed fee but might get a better price. Yeah, not exactly Mother Theresa, but hardly egregious.
There really really is enough disgusting rent seeking going around in the financial sector (student loans, payday loans, credit cards & merchant fees, HFT, ...) that you should save your ire for that.
[1] section Robinhood(1) https://www.bloomberg.com/opinion/articles/2021-01-07/the-ip...
[2] market makers pay for retail order flow (aka "dumb money") because it tends to be small and uncorrelated and "uninformed", ie not specially predictive on price direction; so they like it better than institutional "informed" flow which might leave them with positions that lose money subsequently (adverse selection). However! As this episode showed, retail money might not be small and uncorrelated and uninformed anymore, so we'll have to see how that shakes out - I as a market maker wouldn't want to pay brokers more for sending the WSB hordes my way instead of hedge funds.
I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients; and they suffer more than if the run had not happened. So, what you portray as a huge nefarious plot here is just a CEO of a startup trying to keep things going until they calm down again (which, incidentally, seems to have worked).
Next, the other issue with the $65m fine. As it happens, this has been discussed in depth by Matt Levine in his excellent "Money Stuff" column [1], and it's not quite as nefarious as you portray it either.
Brokerages make money from a couple of sources: 1) interest on customers' cash balance (which they might pass on or not), 2) borrow fees from lending out stock to short sellers, 3) commissions, and 4) payments from market makers for order flow [2], which basically constitute a discount on the bid-ask-spread.
Most brokers used to charge commission (3), but passed on most of the discount (4), giving clients a very good bid-ask-spread. What Robinhood did is charge less commission (3) (namely zero), but keep more of the discount (4), giving clients a worse bid-ask-spread.
If you have small orders, you're better of with the Robinhood model of smaller fixed cost, and a somewhat higher (and hidden) proportional cost, namely a higher bid-ask-spread (ie slightly worse price). But for customers with big orders, a different broker with a small fixed fee, but a better discount = smaller bid-ask-spread = better price might have been better.
(Note, btw, that everyone got prices equal to or better than the national best bid offer! It's just that you got more or less further discount on top of that.)
I agree with Matt Levine that Robinhood had a compelling offer, and should have just positioned it a bit better.
But again, that $65m fine was basically for not telling big clients that btw, with your size you might be better off at the competition where you pay a fixed fee but might get a better price. Yeah, not exactly Mother Theresa, but hardly egregious.
There really really is enough disgusting rent seeking going around in the financial sector (student loans, payday loans, credit cards & merchant fees, HFT, ...) that you should save your ire for that.
[1] section Robinhood(1) https://www.bloomberg.com/opinion/articles/2021-01-07/the-ip...
[2] market makers pay for retail order flow (aka "dumb money") because it tends to be small and uncorrelated and "uninformed", ie not specially predictive on price direction; so they like it better than institutional "informed" flow which might leave them with positions that lose money subsequently (adverse selection). However! As this episode showed, retail money might not be small and uncorrelated and uninformed anymore, so we'll have to see how that shakes out - I as a market maker wouldn't want to pay brokers more for sending the WSB hordes my way instead of hedge funds.
> I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients; and they suffer more than if the run had not happened. So, what you portray as a huge nefarious plot here is just a CEO of a startup trying to keep things going until they calm down again (which, incidentally, seems to have worked).
I dunno. The webull ceo discussed why they had to shut down buying, and his explanation actually made sense. He explained the T+2 system and why that was causing them to run into issues. The Robinhood ceo could have said something similar, and it wouldn't have caused a bank run + it wouldn't have felt like the ceo was hiding something from us (arguably even worse).
I dunno. The webull ceo discussed why they had to shut down buying, and his explanation actually made sense. He explained the T+2 system and why that was causing them to run into issues. The Robinhood ceo could have said something similar, and it wouldn't have caused a bank run + it wouldn't have felt like the ceo was hiding something from us (arguably even worse).
WeBull may have had a less dangerous solvency issue.
Either way it’s Monday morning quarterbacking to say RH could have been blunt. They may have been within hours of bankruptcy.
Either way it’s Monday morning quarterbacking to say RH could have been blunt. They may have been within hours of bankruptcy.
"We were hours away from going bankrupt, that's why we lied publicly"
I'm pretty sure that that is not going to go well for them in front of a judge.
I'm pretty sure that that is not going to go well for them in front of a judge.
It’s gonna go fine in front of a judge. They will say look at our terms of service, what we did is explicitly allowed. The judge will immediately rule for them and no public interviews of the CEO/Founders will ever be an issue.
Not only is what they said vague, but they had a very clear responsibility not to provoke a run on the bank.
Not only is what they said vague, but they had a very clear responsibility not to provoke a run on the bank.
> I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients
I'm sorry, but "we lied to you for your own good" is still lying.
I'm sorry, but "we lied to you for your own good" is still lying.
Why be sorry?
Fact.
Conflating an explanation that says why a lie was necessary somehow with the idea of that making it all not a lie happens a lot.
Fact.
Conflating an explanation that says why a lie was necessary somehow with the idea of that making it all not a lie happens a lot.
If he had said that Robinhood put those restrictions in place because of a liquidity crisis, he just lost every Robinhood customer all their money. That’s because Robinhood gets forced to increase collateral with everyone they do business with, everyone try’s to pull their funds out, and Robinhood files an instant bankruptcy. Meaning customers get paid a fraction of their accounts years from now.
He didn’t lie, he mislead. And he did it for you.
Edit: Actually to correct myself, Robinhood accounts are insured, so customers accounts are at no risk in a bankruptcy. It may have meant you couldn’t sell your shares for months, while GME slowly works its way back to $20, so I think the point about bankruptcy hurting customers stands.
He didn’t lie, he mislead. And he did it for you.
Edit: Actually to correct myself, Robinhood accounts are insured, so customers accounts are at no risk in a bankruptcy. It may have meant you couldn’t sell your shares for months, while GME slowly works its way back to $20, so I think the point about bankruptcy hurting customers stands.
That's my point. I don't think there's a conspiracy, where the CEO of Wall Street called the Robinhood CEO and said "shut it down now" and they did.
Rather, I think everyone acted in their own self-interest, and a lot of random retail investors found out that their best interests were the only ones that didn't align with everyone elses.
A lack of a conspiracy doesn't mean the results were any different.
Rather, I think everyone acted in their own self-interest, and a lot of random retail investors found out that their best interests were the only ones that didn't align with everyone elses.
A lack of a conspiracy doesn't mean the results were any different.
IMO, it's similar to something like institutional racism. There probably are very few people who are openly and unashamedly racist at the highest levels of power (although sadly not zero) - but all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system. Basically what MLK described in his Birmingham jail letter. (and to be clear, I think both of us are on the same page)
But I would say - their underlying intentions are absolutely and totally irrelevant to the discussion. The only thing that matters is that they acted in a way that boosted Wall Street at the expense of retail traders, and thus they are perpetuating a corrupt system, whether they feel like they are or not.
But I would say - their underlying intentions are absolutely and totally irrelevant to the discussion. The only thing that matters is that they acted in a way that boosted Wall Street at the expense of retail traders, and thus they are perpetuating a corrupt system, whether they feel like they are or not.
> all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system
I’ll entertain this topic
Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger. If you ask them, they’ll assume its because the black passenger lives in Brooklyn or some other not-Manhattan place and that the driver wont get a good tip and wont be able to get fares at the destination, making it less economical.
The cotton and tobacco trade was also economical.
Economics is never a good reason to make an exception for discrimination.
But an individual may not have specific feelings about race, while they perpetuate a system of discrimination regardless.
It still requires empathy to be able to relate to all parties in an articulate way, to see what needs to change to provide service and access to everyone.
(To the person I replied to, there is nowhere that I’m disagreeing with you, in case you’ve been conditioned to look for that)
I’ll entertain this topic
Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger. If you ask them, they’ll assume its because the black passenger lives in Brooklyn or some other not-Manhattan place and that the driver wont get a good tip and wont be able to get fares at the destination, making it less economical.
The cotton and tobacco trade was also economical.
Economics is never a good reason to make an exception for discrimination.
But an individual may not have specific feelings about race, while they perpetuate a system of discrimination regardless.
It still requires empathy to be able to relate to all parties in an articulate way, to see what needs to change to provide service and access to everyone.
(To the person I replied to, there is nowhere that I’m disagreeing with you, in case you’ve been conditioned to look for that)
> Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger.
A good example for folks on news.yc, instead, would be to look at hiring in tech: In particular gate-keeping by screening in only the traditionally White/Asian universities: https://twitter.com/shaft/status/1355696154990628864 Such institutionalised behaviour has ripple effects of all kinds including people from under-represented backgrounds finding it increasingly difficult to make it in tech.
In India, similar situation plays out with hiring and fund raising: https://twitter.com/arnav_kumar/status/1354780261158801409
Coming back to Robinhood, it isn't far-fetched to really view their decision, subsequent lying, and the follow-up CMA stories to be construed as "don't care about the little guy as much as the big guys" behaviour.
A good example for folks on news.yc, instead, would be to look at hiring in tech: In particular gate-keeping by screening in only the traditionally White/Asian universities: https://twitter.com/shaft/status/1355696154990628864 Such institutionalised behaviour has ripple effects of all kinds including people from under-represented backgrounds finding it increasingly difficult to make it in tech.
In India, similar situation plays out with hiring and fund raising: https://twitter.com/arnav_kumar/status/1354780261158801409
Coming back to Robinhood, it isn't far-fetched to really view their decision, subsequent lying, and the follow-up CMA stories to be construed as "don't care about the little guy as much as the big guys" behaviour.
Robinhoods actions were all about saving themselves, and the little guys, ie their customers.
Had nothing to do with benefiting anyone else, because it didn’t benefit anyone else.
Had nothing to do with benefiting anyone else, because it didn’t benefit anyone else.
That's the very problem, in this case, it _did_ benefit the institution -- the hedge funds. By restricting buys, retail was unable to drive the demand and put shorts into margin calls (we discuss the ethics of this until the cows come home). In this very case, an unknowable amount of money should have been transferred from hedge funds to retail investors but didn't because buyers were unable to buy.
Robinhood is just one part of stock retail demand, and overall a tiny one. And institutional demand is huge, I guarantee you there were Hedge funds buying GME hoping to provoke margin calls for the shorts too.
There is no monolithic blocks here. The conspiracy crap is doo doo.
There is no monolithic blocks here. The conspiracy crap is doo doo.
yeah, in the US it is ironic as the intelligence and defense agencies and contractors do recruit software engineers from other universities, including universities made that were originally made for minorities, most of which are closer to the capitol. this results in encryption standards proliferation and exploits and much more, which shows competence.
"big tech" keeps saying "pipeline problem" while not even touching the universe of possibilities.
"big tech" keeps saying "pipeline problem" while not even touching the universe of possibilities.
You have to solve this problem at a higher level. Why are black passengers more likely to live in poor and far away places?
Obviously it will take time to resolve that. Generations at the least. But we have to do something in the mean time, or we'll be perpetuating the negative effects of social bias. We should change the short term economics using taxes and regulation as much as possible, while clearly telling people why we're doing that.
Obviously it will take time to resolve that. Generations at the least. But we have to do something in the mean time, or we'll be perpetuating the negative effects of social bias. We should change the short term economics using taxes and regulation as much as possible, while clearly telling people why we're doing that.
Honestly, Lyft and Uber mostly solved that while being completely unrelated to that specific cause.
It was a “UX problem” solved by a different program.
It was a “UX problem” solved by a different program.
Unfortunately, they don't appear to have solved it at all.
https://www.theatlantic.com/business/archive/2016/10/uber-ly...
https://www.bloomberg.com/news/articles/2019-11-22/ride-hail...
https://www.theatlantic.com/business/archive/2016/10/uber-ly...
https://www.bloomberg.com/news/articles/2019-11-22/ride-hail...
the older article is practically supplanted by the newer bloomberg article
your bloomberg article starts off with nothing nearly as extreme as “at all”, specifically using “egalitarian in some ways” such as in the case of exactly the problem I detailed
Introducing new problems and shifting where the bis occurs and for different populations than just people of color
Thank you for the insight, good to know about. I have never thought about overlaying social causes in my profile picture at all let alone on ride hailing apps, but I can see many people doing that
your bloomberg article starts off with nothing nearly as extreme as “at all”, specifically using “egalitarian in some ways” such as in the case of exactly the problem I detailed
Introducing new problems and shifting where the bis occurs and for different populations than just people of color
Thank you for the insight, good to know about. I have never thought about overlaying social causes in my profile picture at all let alone on ride hailing apps, but I can see many people doing that
Yes, they show that the problem has persisted over time. Black or Hispanic people still wait longer for a car, which is the problem you described.
yes you're right
> Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger. If you ask them, they’ll assume its because the black passenger lives in Brooklyn or some other not-Manhattan place and that the driver wont get a good tip and wont be able to get fares at the destination, making it less economical.
This isn’t an example of institutional racism, just regular racism. Institutional racism would be something like legacy preferences for college admittance. Most universities and colleges either explicitly or implicitly banned or discouraged black students from attending for many decades. So, a disproportionate number of legacy students are white because a disproportionate number of past generations allowed to attend were white. Giving preference to legacy students disadvantages black students, not because anyone is being explicitly racist, but because the system is set up in a way that ends up disadvantaging them. No is looking at a black applicant and saying they don’t want them or a white applicant and saying lets pick this person, but the pattern of passing down preferential admittance to the children, grandchildren, etc. of whites who were able to attend because they were white is institutional. Legacy students are just acting in their own self-interest by using the preference system. The school is acting in self-interest by promoting the legacy system as a benefit to attending that will benefit your future children.
This isn’t an example of institutional racism, just regular racism. Institutional racism would be something like legacy preferences for college admittance. Most universities and colleges either explicitly or implicitly banned or discouraged black students from attending for many decades. So, a disproportionate number of legacy students are white because a disproportionate number of past generations allowed to attend were white. Giving preference to legacy students disadvantages black students, not because anyone is being explicitly racist, but because the system is set up in a way that ends up disadvantaging them. No is looking at a black applicant and saying they don’t want them or a white applicant and saying lets pick this person, but the pattern of passing down preferential admittance to the children, grandchildren, etc. of whites who were able to attend because they were white is institutional. Legacy students are just acting in their own self-interest by using the preference system. The school is acting in self-interest by promoting the legacy system as a benefit to attending that will benefit your future children.
> This isn’t an example of institutional racism
Never said it was
Both of our examples highlight the exact same thing that all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system.
this is the most productive aspect to highlight than semantical distinctions that will dilute how much anybody cares.
Never said it was
Both of our examples highlight the exact same thing that all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system.
this is the most productive aspect to highlight than semantical distinctions that will dilute how much anybody cares.
> semantical distinctions
I would disagree that it is nothing more than semantics. Your example is someone seeing a black person and applying negative stereotypes to them. That is easily recognized as racist. My example does not require anyone to even know the race of anyone involved. Explicit racism is obvious to anyone around it and is low hanging fruit. Institutional racism can often only be identified through actual study of complex interconnected systems and their history.
> This isn’t an example of institutional racism
> Never said it was
You responded to a comment saying “it's similar to something like institutional racism. There probably are very few people who are openly and unashamedly racist at the highest levels of power (although sadly not zero) - but all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system”, clearly saying they are not talking about explicit racism, but people acting in self interest not related to race or racial stereotypes. Then you respond with an example of someone that is explicitly racist. That is not what was being talked about and is not a relevant example of what the commenter you are responding to was saying. Discriminating against others, racial or otherwise, for economic self interest is racist and bad. But the point of institutional racism is it can happen without any individual discriminating against anyone based on race.
I would disagree that it is nothing more than semantics. Your example is someone seeing a black person and applying negative stereotypes to them. That is easily recognized as racist. My example does not require anyone to even know the race of anyone involved. Explicit racism is obvious to anyone around it and is low hanging fruit. Institutional racism can often only be identified through actual study of complex interconnected systems and their history.
> This isn’t an example of institutional racism
> Never said it was
You responded to a comment saying “it's similar to something like institutional racism. There probably are very few people who are openly and unashamedly racist at the highest levels of power (although sadly not zero) - but all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system”, clearly saying they are not talking about explicit racism, but people acting in self interest not related to race or racial stereotypes. Then you respond with an example of someone that is explicitly racist. That is not what was being talked about and is not a relevant example of what the commenter you are responding to was saying. Discriminating against others, racial or otherwise, for economic self interest is racist and bad. But the point of institutional racism is it can happen without any individual discriminating against anyone based on race.
They acted in the only way that saved themselves and their customers from a painful bankruptcy.
It did nothing to boost Wall Street at all. And has zip to do with “corruption”.
It did nothing to boost Wall Street at all. And has zip to do with “corruption”.
> Rather, I think everyone acted in their own self-interest
Read the article. Robinhood arguably acted against their own interest, since they get paid for order flow (and telling customers they cant execute trades they'd like to make wont be good for customer retention either). Robinhood acted in a way that was contractually required, according to formulas set up long in advance of any of the latest market action.
Read the article. Robinhood arguably acted against their own interest, since they get paid for order flow (and telling customers they cant execute trades they'd like to make wont be good for customer retention either). Robinhood acted in a way that was contractually required, according to formulas set up long in advance of any of the latest market action.
Sometimes you’re caught between a rock and a hard place. That doesn’t absolve you of the direct consequences of the actions you take. Perhaps a better question to ask is how did they allow themselves to end up in this position where they have absolutely no choice but to make a poor decision in the first place? Were there no adults at the wheel leading up to this? Is this not a sign of an entirely broken system?
You are starting with the assumption they've been forced to do something wrong, I think you have to explain what that is first
All indications are that they promoted themselves as "democratizing finance" and being "for the people" (quotes are the exact words used by Robinhood to describe themselves). But as you mentioned, they were still contractually beholden to larger powers, and when push came to shove, they acted entirely within their own self interest. They lied to our face to gain business. Not only that, but they continue to lie to the media (not making it clear that this was a liquidity issue). Sure, in retrospect, it's evident that it was heading this way all along, but just because a fraud is perpetuated out in the open doesn't make it any less of a fraud.
Everyone is beholden to something to some degree.
Robinhood users grouping together in a sufficiently large and unusual trade to (nearly) take down a hedge fund is unusual enough to mean some things that they didn't anticipate having to do have occurred.
Robinhood users grouping together in a sufficiently large and unusual trade to (nearly) take down a hedge fund is unusual enough to mean some things that they didn't anticipate having to do have occurred.
It’s about as wrong as grocery stores running out of a product to sell you.
Maybe (maybe...) they did nothing against the 'rules' but that's not going to help them much when their angry customers transfer their accounts to other brokerages.
In my book, "really pissing off your customers" is "doing something wrong" which is why if you absolutely must do something that will make your customers angry you absolutely must explain yourself as quickly and as transparently as possible.
In my book, "really pissing off your customers" is "doing something wrong" which is why if you absolutely must do something that will make your customers angry you absolutely must explain yourself as quickly and as transparently as possible.
They did something wrong, like giving everyone a margin account without asking, when they didn't have enough capital to do so. It is in their business model that this would happen. They were just quite cavalier about it!
> they make a ton of money ($100M/Q I've seen) from one of the big players in this (Citadel).
No. Citadel Securities (the market maker) is a separate entity than Citadel Investments (the hedge fund). Citadel Securities is making money hand over fist from GME. As they always do during periods of high volume and volatility. Robinhood shutting down trading in GME almost certainly cost Citadel Securities a fortune in lost profits.
Nor is there even any real evidence that Citadel the hedge fund has a very significant exposure to GME. For the entire month of January the main funds have only lost 1% in GME and 3% total.[1] Probably less in total than the amount Citadel Securities has made off the trading.
[1]https://www.bloomberg.com/news/articles/2021-01-31/the-citad...
No. Citadel Securities (the market maker) is a separate entity than Citadel Investments (the hedge fund). Citadel Securities is making money hand over fist from GME. As they always do during periods of high volume and volatility. Robinhood shutting down trading in GME almost certainly cost Citadel Securities a fortune in lost profits.
Nor is there even any real evidence that Citadel the hedge fund has a very significant exposure to GME. For the entire month of January the main funds have only lost 1% in GME and 3% total.[1] Probably less in total than the amount Citadel Securities has made off the trading.
[1]https://www.bloomberg.com/news/articles/2021-01-31/the-citad...
There are two separate corporate entities, I understand they have the same ownership.
https://en.wikipedia.org/wiki/Citadel_LLC
https://en.wikipedia.org/wiki/Citadel_LLC
> No. Citadel Securities (the market maker) is a separate entity than Citadel Investments (the hedge fund).
I see this line trotted out a lot. Don't disrespect your fellow HN'ers. We're not fools. I have two balls, I can throw them both in whatever direction I want. I have two cars, I can have them driven where ever I want. I have two companies, I can make them do whatever I want.
Citadel Sec and Citadel Inv represent the same people and have the same goal... to make as much money as possible for those people.
I see this line trotted out a lot. Don't disrespect your fellow HN'ers. We're not fools. I have two balls, I can throw them both in whatever direction I want. I have two cars, I can have them driven where ever I want. I have two companies, I can make them do whatever I want.
Citadel Sec and Citadel Inv represent the same people and have the same goal... to make as much money as possible for those people.
There's a legal mandated Chinese firewall between the organizations. They have entirely different employees and reporting structures. If the two were coordinating, it would have to be a conspiracy involving dozens of people in different roles across the groups.
Moreover, even if you assume that they didn't care about breaking the law and going to jail, it'd be stupid. Citadel Securities makes $6 billion a year.[1] Citadel's position in Gamestop represented a less than 1% loss to its hedge funds. At $35 billion AUM and 20% incentive fees, the impact of the Gamestop shorts on Citadel Investment's net income would be about $70 million.
You're telling me that Citadel management decided to risk jail time and a $6 billion/year franchise to save $70 million?
[1]https://www.bloomberg.com/news/articles/2021-01-22/citadel-s... [2]https://www.bloomberg.com/news/articles/2021-01-31/the-citad...
Moreover, even if you assume that they didn't care about breaking the law and going to jail, it'd be stupid. Citadel Securities makes $6 billion a year.[1] Citadel's position in Gamestop represented a less than 1% loss to its hedge funds. At $35 billion AUM and 20% incentive fees, the impact of the Gamestop shorts on Citadel Investment's net income would be about $70 million.
You're telling me that Citadel management decided to risk jail time and a $6 billion/year franchise to save $70 million?
[1]https://www.bloomberg.com/news/articles/2021-01-22/citadel-s... [2]https://www.bloomberg.com/news/articles/2021-01-31/the-citad...
> There's a legal mandated Chinese firewall between the organizations.
You don't seriously believe this nonsense works, do you?
What's legally mandated is irrelevant unless the CEO of each organisation is constantly tracked, their every personal conversation recorded by government at all times.
If I own those companies, I can have lunch with one of my CEO's today, and the other one tomorrow. Now they both know what's expected of them, without there ever being a written record of anything.
These people didn't reach the pinnacle of Wall St by giving a shit about what some lawmakers scratched on paper and told them they had to follow. You're in dream land if you think the honour system works to keep Wall St. bosses honest.
You don't seriously believe this nonsense works, do you?
What's legally mandated is irrelevant unless the CEO of each organisation is constantly tracked, their every personal conversation recorded by government at all times.
If I own those companies, I can have lunch with one of my CEO's today, and the other one tomorrow. Now they both know what's expected of them, without there ever being a written record of anything.
These people didn't reach the pinnacle of Wall St by giving a shit about what some lawmakers scratched on paper and told them they had to follow. You're in dream land if you think the honour system works to keep Wall St. bosses honest.
That seems to me an important point, that the amount of losses here -- or even their entire stake in GME -- is actually kind of just peanuts to them. Even regardless of legal firewall, it's peanuts. When people are discussing it as if it's an existential threat to them.
(Also, guess what, no CEO or MBA is likely to lose a single multi-million dollar house over any of this, despite memes taking delight in suggesting they already have... that's not how it works for the rich, they can lose billions, especially of other people's money, and still be rich without even impaired job prospects).
(Also, guess what, no CEO or MBA is likely to lose a single multi-million dollar house over any of this, despite memes taking delight in suggesting they already have... that's not how it works for the rich, they can lose billions, especially of other people's money, and still be rich without even impaired job prospects).
>Citadel's position in Gamestop represented a less than 1% loss to its hedge funds.
So far.
So far.
You don't need to think one way or another. There's a process called "Discovery" and we'll likely get to it and find out what happened. Or they'll settle and we won't find out. Given the number of class actions this will happen.
> They're going to lose much of their base, and they deserve to
Where are they going to go? Even with their problems, the RH app is pretty good - especially for the first time trader with a few hundred dollars. My primary brokers app and website works, but is very cumbersome. The closest thing out there might be ToS from when I used to use TDA.
Where are they going to go? Even with their problems, the RH app is pretty good - especially for the first time trader with a few hundred dollars. My primary brokers app and website works, but is very cumbersome. The closest thing out there might be ToS from when I used to use TDA.
IBRK has a great app, and API access so you can write your own frontend. The explanation of trades isn't as idiot-proof, though, and it won't let you trade options unless you complete a knowledge test.
> and it won't let you trade options unless you complete a knowledge test.
This is honestly for the best, and is a feature I'm surprised Robinhood has not implemented.
This is honestly for the best, and is a feature I'm surprised Robinhood has not implemented.
The issue with robin hood has nothing to do with options. People were going long on stocks.
IBKR is great but they have fucked up before as well. When oil futures went negative early last year, IBKR's software could not handle a negative sign and led to traders not being able to close their positions. Luckily, IBKR took it to the chin and compensated more than $100 million in losses anything their clients owed below $0.
Source: https://www.bloomberg.com/news/articles/2020-05-08/oil-crash...
Source: https://www.bloomberg.com/news/articles/2020-05-08/oil-crash...
[deleted]
How is this even a question?
Online brokerages are from the first dotcom boom. They are over 20 years old. There are many well establish reliable brokers.
And many of them have cut their transaction fees to $0.
All Robinhood seems to have done is layer a fun UI over a weak trading back end and pretend to be empowering their users.
Online brokerages are from the first dotcom boom. They are over 20 years old. There are many well establish reliable brokers.
And many of them have cut their transaction fees to $0.
All Robinhood seems to have done is layer a fun UI over a weak trading back end and pretend to be empowering their users.
And the apps are still not very good. E-trade, one of the classic ones, works fine on the web but the app was still problematic the last time I used it.
UI/UX matters. RH's core demographic is also more likely to be app first. In some ways this is a standard HN response that completely dismisses the UI/UX.
UI/UX matters. RH's core demographic is also more likely to be app first. In some ways this is a standard HN response that completely dismisses the UI/UX.
Hmm I've seen on r/wsb that many are going to Fidelity, while a few are trying weird apps like Webull.
But maybe a better way to put it would be "they're going to lose the trust of much of their base", which might be fine short-term but long-term isn't great for them.
But maybe a better way to put it would be "they're going to lose the trust of much of their base", which might be fine short-term but long-term isn't great for them.
These days there are a number of alternatives out there. Others have mentioned Fidelity, IBRK, TD Ameritrade (Thinkorswim), and WeBull. I'd also recommend looking at ETrade, Tradestation, Schwab, Tastyworks, or Dough.
But some of those other options did the same thing in this instance per the article. WeBull and ETrade both did the same thing as RH and halted buys. TDA and Schwab halted options. The problem RH faced wasn’t a problem unique to them other brokers who didn’t stop buys were just fortunate enough to either have more cash on hand and/or have fewer trades on GME.
You're right. I only meant to shine a light on the alternatives that one has to using Robinhood.
I wouldn't move off of Robinhood for this issue, but there are a number of other reasons that I would advise others from using the platform, including poor order fills[1], constant outages, and overall lack of features.
1. https://www.sec.gov/news/press-release/2020-321
I wouldn't move off of Robinhood for this issue, but there are a number of other reasons that I would advise others from using the platform, including poor order fills[1], constant outages, and overall lack of features.
1. https://www.sec.gov/news/press-release/2020-321
I use Schwab. They have the things that are actually important for someone getting started: ~free trades and fractional shares, but the app and website aren't as slick (though it does feel like a serious tool), and they make you go to more effort to get options trading or a margin account--I've never seen them actively promote either.
I switched to Vanguard. It seems to be fine to me.
crypto.
Anywhere but there. Who would seriously use them for their savings or investments after this? Who cares about their UI when they don’t have your best interests at heart.
That's kind of how markets work though - when things are going most in your favour it's hardest to capitalise on it as price going your way means few people want to take the other side. And there's more things going into a price than just forecast of future prices - there's also liquidity, credit risk, operational issues, etc.
They get a free pass from me. They behaved as expected (thus predictably), and saved their company. There has to be a feedback loop that limits Robinhood's (and any company's) abilities to handle meme trades. I didn't need any explanation from the CEO, because what was happening was obvious to me (and I know nothing about finance --- only that money isn't free and that there has to be a feedback loop).
What is a meme trade? How do you know?
It’s in Robinhood’s interest to speak in ways that indirectly support the conspiracy message.
They don’t get implicated in the conspiracy statements, but benefit from attention seekers like the Barstool guy screaming and hand waving. That distracts from the pretty obvious reasons why Robinhood is an awful and dangerous business and business model.
Now the mob is moving on to crypto and other scams, so the Robinhood PR strategy is perfectly executed and frankly, genius.
They don’t get implicated in the conspiracy statements, but benefit from attention seekers like the Barstool guy screaming and hand waving. That distracts from the pretty obvious reasons why Robinhood is an awful and dangerous business and business model.
Now the mob is moving on to crypto and other scams, so the Robinhood PR strategy is perfectly executed and frankly, genius.
> Robinhood is an awful and dangerous business and business model.
That's why I scratch my head over this. It's not difficult to open a Vanguard or Fidelity account and be able to get better pricing on retail trades, even if you're paying a little up-front for certain trades. Nobody who's trying to invest in the stock market can sincerely believe the Robinhood trades are "free."
And Fidelity (for example) allows for other things that Robinhood can't. You can choose to lend your shares for shorts:
From https://www.investopedia.com/fidelity-vs-robinhood-4587945
> Fidelity can also earn revenue loaning stocks in your account for short sales—with your permission, of course—and it shares that revenue with you. Fidelity tells us that for two months of lending certain hard to borrow securities, 38% of accounts earn $100 or less, another 37% earn between $100 and $1,000 and the remaining 25% earn over $1,000. Robinhood retains all the income it generates from loaning out customer stock and does not share it with the client.
That's why I scratch my head over this. It's not difficult to open a Vanguard or Fidelity account and be able to get better pricing on retail trades, even if you're paying a little up-front for certain trades. Nobody who's trying to invest in the stock market can sincerely believe the Robinhood trades are "free."
And Fidelity (for example) allows for other things that Robinhood can't. You can choose to lend your shares for shorts:
From https://www.investopedia.com/fidelity-vs-robinhood-4587945
> Fidelity can also earn revenue loaning stocks in your account for short sales—with your permission, of course—and it shares that revenue with you. Fidelity tells us that for two months of lending certain hard to borrow securities, 38% of accounts earn $100 or less, another 37% earn between $100 and $1,000 and the remaining 25% earn over $1,000. Robinhood retains all the income it generates from loaning out customer stock and does not share it with the client.
They are just another discount broker, except they attract unsophisticated newcomers with growth hacker bullshit, accomplished by offering margin trading their customers don’t understand.
>Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any new purchases using those proceeds are done on margin.
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. And so, enshrined in law, we have this bolted-on system where you have to put up extra collateral just to be confident of something that shouldn't need said collateral.
There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.
In this case, they had to add that collateral, even when buying with money that pretty obviously was there (had been deposited years ago).
Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
[1] https://yudkowsky.medium.com/r-wallstreetbets-is-trying-some...
[2] Incidentally, people like to ridicule Bitcoin for taking an hour to settle since you have to wait an hour to get six confirmations. But that's actually fast compared to this (centralized!) system, since you have to compare to the time after which you can "take the stock/cash and run".
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. And so, enshrined in law, we have this bolted-on system where you have to put up extra collateral just to be confident of something that shouldn't need said collateral.
There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.
In this case, they had to add that collateral, even when buying with money that pretty obviously was there (had been deposited years ago).
Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
[1] https://yudkowsky.medium.com/r-wallstreetbets-is-trying-some...
[2] Incidentally, people like to ridicule Bitcoin for taking an hour to settle since you have to wait an hour to get six confirmations. But that's actually fast compared to this (centralized!) system, since you have to compare to the time after which you can "take the stock/cash and run".
> There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.
Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good. Imagine rebuilding ythe core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. You also need to meet heavy government regulation and comply with oversight.
There is a whole shit ton of reasons this process hasn't been updated to T+0. It was t+3, now t+2, and I've heard (from the CEO of Webull on bezinga power hour yesterday) wanting t+1 this year.
Edit - to be clear I'm not saying dropping the current system for a new one is the only option. I'm saying improving the system at all (or rebuilding it) is arguably one of the most challenging software tasks one could undertake and there are serious reasons financial markets are not anywhere near what is "technically possible".
Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good. Imagine rebuilding ythe core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. You also need to meet heavy government regulation and comply with oversight.
There is a whole shit ton of reasons this process hasn't been updated to T+0. It was t+3, now t+2, and I've heard (from the CEO of Webull on bezinga power hour yesterday) wanting t+1 this year.
Edit - to be clear I'm not saying dropping the current system for a new one is the only option. I'm saying improving the system at all (or rebuilding it) is arguably one of the most challenging software tasks one could undertake and there are serious reasons financial markets are not anywhere near what is "technically possible".
When one realizes that in January 2021, some major financial institutions are still settling transactions via CSV files sent on basic FTP, the scope of the problem becomes clear!
<< laughs with tears and a devilish look in eyes >>
Regardless of the fact that most of the banking sector is still stuck on IBM mainframes from the 60s-80s running COBOL:
I have seen accountants who's only job it was to come in every day and do the same sums on Excel.
I've seen people insisting on a calculator and a printout so that they could sum up columns of an Excel table and send the results back via email.
There are valid reasons to move slowly. Transition costs to new systems are usually immense and the process is a nightmare for banks, but none of what I described fell into that category. It was just people refusing to change their ways. A report for treasury could've been instantaneous with a super simple live updating dashboard. But no. Instead, the CEO got an Excel file emailed to them every week that was put together by 40 people – many of whom entered the numbers manually.
In the industry we have come to call people involved in these tedious processes "hamsters", because they might as well be going up and down the escalator all day.
I don't think many people understand how excruciatingly slow banks move and how inefficient they are.
/cathartic rant over
Edit: (I should add for context that this was a fairly large bank in continental Europe)
Regardless of the fact that most of the banking sector is still stuck on IBM mainframes from the 60s-80s running COBOL:
I have seen accountants who's only job it was to come in every day and do the same sums on Excel.
I've seen people insisting on a calculator and a printout so that they could sum up columns of an Excel table and send the results back via email.
There are valid reasons to move slowly. Transition costs to new systems are usually immense and the process is a nightmare for banks, but none of what I described fell into that category. It was just people refusing to change their ways. A report for treasury could've been instantaneous with a super simple live updating dashboard. But no. Instead, the CEO got an Excel file emailed to them every week that was put together by 40 people – many of whom entered the numbers manually.
In the industry we have come to call people involved in these tedious processes "hamsters", because they might as well be going up and down the escalator all day.
I don't think many people understand how excruciatingly slow banks move and how inefficient they are.
/cathartic rant over
Edit: (I should add for context that this was a fairly large bank in continental Europe)
Certainly, there are many inefficiencies in banking (and other industries that have been around forever). And the mismatch between trading and settlement here obviously caused some problems (note, though, only at the hip fintech brokers, not at the old fashioned brokers that insist that your trades in a cash account settle before you trade again).
However, may I suggest that the better solution to this mismatch is not to speed up the settlement infrastructure (well, that too, to an extent), but to slow down trading??
A couple of auctions every day instead of continuous limit order book trading and a Tobin Tax on trades would eliminate a lot of rent seeking, simplify lots of things, and hardly affect the fundamental functions of the capital markets at all (maybe improve them).
However, may I suggest that the better solution to this mismatch is not to speed up the settlement infrastructure (well, that too, to an extent), but to slow down trading??
A couple of auctions every day instead of continuous limit order book trading and a Tobin Tax on trades would eliminate a lot of rent seeking, simplify lots of things, and hardly affect the fundamental functions of the capital markets at all (maybe improve them).
It's actually TSV via SFTP and well over 50% of American wealth operates this way.
I'm pretty sure we broke one of our bank client by telling them that data import will be exclusively with SFTP. We ended up allowing FTP (and thus our security certification was voided).
It was a Euro bank though, but it was barely two years ago.
It was a Euro bank though, but it was barely two years ago.
SFTP if they're "compliant." FTP is still in the wild.
Tons of businesses exchange data like this (e.g. drop ship product availability, etc). Platform independent and easy to read over if things go wrong. I don't see the issue.
So they do move with times. /s
Actually a large part of financial operations goes through Excel sheets automated by mountains of VBA code.
Hilarious. It's definitely out of the if it works then don't touch it idiom.
Hilarious. It's definitely out of the if it works then don't touch it idiom.
I still use wooden sticks for roasting marshmallows. That tech stack is ancient! Can you elaborate on your objection to CSV for record transmission? What would you suggest as a replacement?
SFTP, I hope.
na85(1)
> Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good.
OP talked about how 'this is absolutely possible', but you're responding to him by saying "but we can't just drop everything and move to the new system".
You're right but that doesn't make OP's point any less correct. Generally in a legacy system we migrate by building all new features onto the new system. For instance, if the company wants to move their legacy jQuery based banking app to Vue.js, they can start by building a more orthogonal component in the new technology, so it doesn't affect the other thing. Eventually once enough things have migrated (possibly years later), the benefits of the new system justify the cost of migration even more.
Stock of an existing company like GE is different than a company which is yet to launch (say Coinbase). The best way (perhaps the only way) to migrate is to start launching new IPOs on this new system. We did migrate from being on paper to computers, I'm sure we can do it again (and hopefully with better technologies in the future...again).
OP talked about how 'this is absolutely possible', but you're responding to him by saying "but we can't just drop everything and move to the new system".
You're right but that doesn't make OP's point any less correct. Generally in a legacy system we migrate by building all new features onto the new system. For instance, if the company wants to move their legacy jQuery based banking app to Vue.js, they can start by building a more orthogonal component in the new technology, so it doesn't affect the other thing. Eventually once enough things have migrated (possibly years later), the benefits of the new system justify the cost of migration even more.
Stock of an existing company like GE is different than a company which is yet to launch (say Coinbase). The best way (perhaps the only way) to migrate is to start launching new IPOs on this new system. We did migrate from being on paper to computers, I'm sure we can do it again (and hopefully with better technologies in the future...again).
What are the “whole shit ton of reasons” why shorter settlement periods are so difficult?
In particular, I’m curious why we didn’t jump straight from T+3 to T+1. Even if T+0 is especially challenging, what would make T+1 substantially harder than T+2?
In particular, I’m curious why we didn’t jump straight from T+3 to T+1. Even if T+0 is especially challenging, what would make T+1 substantially harder than T+2?
As with all these changes, it's mostly about coordination and legacy systems.
Just as Y2K was a challenge and just as the 2038 date will be a challenge, it's all about pushing changes through legacy systems. ascii->unicode, ip4->ip6, python 2->3. We all know the drill. We've all lived through these things.
It's rarely a technical problem. It's about coordination across firms, domains, people, and systems that may not be known ... until they break.
Just as Y2K was a challenge and just as the 2038 date will be a challenge, it's all about pushing changes through legacy systems. ascii->unicode, ip4->ip6, python 2->3. We all know the drill. We've all lived through these things.
It's rarely a technical problem. It's about coordination across firms, domains, people, and systems that may not be known ... until they break.
Yes. I used to work at an investment bank. When the market moved from T+5 to T+3 it was a major project for all internal systems to be adjusted. It wasn't just a matter of changing a SETTLEMENT_DAYS macro in a header file. And even afterwards, it wasn't that, because there were different systems written in different eras and in different languages.
Multiply this by however many thousands of firms, all with their bespoke back-office systems. and it takes time.
Multiply this by however many thousands of firms, all with their bespoke back-office systems. and it takes time.
What language was this written in? Did it stay in the same language? If it's say, FORTRAN, I wonder if there's value in learning it soon.
Back office system in the financial sector? You're probably looking at COBOL, although I know Caché gets used as well.
Coordination problems can become technical problems - or be caused by technical decisions.
Moving a system/network of actors from one system to a new, incompatible system? You need to coordinate the switch so it all happens at once. Can’t coordinate? Then you need a compatibility layer between the two systems.
Moving a system/network of actors from one system to a new, incompatible system? You need to coordinate the switch so it all happens at once. Can’t coordinate? Then you need a compatibility layer between the two systems.
My understanding is that the delay is due to humans in the loop. Most of the clearing is automated, but if the numbers don't add up, humans still intervene to figure out how to reconcile the differences.
Other comments have claimed that the humans in the loop are because people insist on hand calculating everything. Not for when it goes wrong, but in the first place.
I find that hard to believe, the sheer volume would overwhelm a human.
>Trillions of dollars are moved in these markets
...and they jammed when a single subreddit decided to buy GameStop shares. Just think about what that means.
...and they jammed when a single subreddit decided to buy GameStop shares. Just think about what that means.
The market was not jammed, only Robinhood was jammed. I could still buy GME on Schwab if I wanted
"GameStop and AMC trading restricted by TD Ameritrade, Schwab, Robinhood others "
https://www.msn.com/en-us/money/personalfinance/gamestop-and...
"Some users are experiencing issues with trading platforms Vanguard, TD Ameritrade, and Charles Schwab due to heavy volume"
https://www.businessinsider.in/tech/news/some-users-are-expe...
Not to mention that the market is made up of all platforms and several of them were downright prohibiting GME buying. Some are listed in the article. Robinhood alone has more than 13 million users.
https://www.msn.com/en-us/money/personalfinance/gamestop-and...
"Some users are experiencing issues with trading platforms Vanguard, TD Ameritrade, and Charles Schwab due to heavy volume"
https://www.businessinsider.in/tech/news/some-users-are-expe...
Not to mention that the market is made up of all platforms and several of them were downright prohibiting GME buying. Some are listed in the article. Robinhood alone has more than 13 million users.
The restrictions at Schwab (and I'm pretty sure TD) were different than Robinhood, they only restricted shorting, buying on margin, and selling naked options. Buying and selling GME/AMC with cash were available the entire time (I could do it).
... or Fidelity or Vanguard or Wells Fargo or Citibank or ...
I had heard that Schwab and TD Ameritrade suspended GME trades as well, was that not true?
They did not. They did introduce restrictions: https://www.tdameritrade.com/td-ameritrade-trading-restricti...
Theres a site for that: https://www.wherecanibuygme.com/
I was unable to look up the GME quote on TDA Thursday. In their UI, the quote is the place with the Buy button.
I used TDA via the ThinkorSwim app and it had no issues on Thursday. If you are at a PC and using the site, I'd suggest getting the TOS desktop app as it seems to be a lot more stable. It is NOT user friendly though so it may take a tad to get used to.
Related but separate. Robinhood has an internal clearinghouse which halted trading for Robinhood.
Apex is a large third-party clearinghouse used by M1 and others that restricted buys for all (most?) of its clients. TDA and Schwab both have their own internal clearinghouses so far as I know.
Apex is a large third-party clearinghouse used by M1 and others that restricted buys for all (most?) of its clients. TDA and Schwab both have their own internal clearinghouses so far as I know.
What? A few (new) trading platforms that are deliberately trying to shake up the market 'jammed'. The market itself was fine.
>Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good.
Which is why I didn't say anything like that. Just, that settlement time should have improved with our protocols for validating ownership, not been frozen in time.
Which is why I didn't say anything like that. Just, that settlement time should have improved with our protocols for validating ownership, not been frozen in time.
It has. It used to be T+5 [business day] settlement until 2004, then T+3 until 2017, and is now T+2.
I meant, improved proportionally.
To be fair, That's nothing. High frequency traders have been on the order of microseconds for years. everyone trades under the assumption that the system is faster than it is. This is going to be an unpopulair opinion but wall street is esentially a government-like entity built by the elite. troughout history any scheme that destroyed market assumptions have been met by the SEC under the guise of protecting the fair, orderly and efficient market. No thought is given to actually fix design flaws in the open market. Just prosecute anyone who manipulates it incorrectly.
Russia called it a modernization when they moved off T+0 to T+2 because people wanted more slack to complete their payments.
To be fair - the issue with demanding immediate settlement is that fund transfer settlements aren't instantaneous.
I mean you can still offer credit in T+0 settlements but the real challenge (I think) is setting up an industry-standard margin pledge facility for trades to happen without immediate availability of liquidity.
Here's DTC's whitepaper from 2018 discussing some issues with real-time gross settlement: https://www.dtcc.com/~/media/Files/downloads/Thought-leaders...
TL;DR: Market makers using a netting mechanism to settle trades at the end of the day, and they often don't have the funds necessary to settle trades in real-time.
Here's DTC's whitepaper from 2018 discussing some issues with real-time gross settlement: https://www.dtcc.com/~/media/Files/downloads/Thought-leaders...
TL;DR: Market makers using a netting mechanism to settle trades at the end of the day, and they often don't have the funds necessary to settle trades in real-time.
>>Imagine rebuilding the core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software.
That is a bad analogy, MS takes years to change the core because it require INSANE levels of backwards compatibility. Apps written for windows 2000 still work and need to work today...
This would not need to be the case with this type of system, there are a whole host of political reasons why the system is built the way it is, part of it is the desire to control it (and in this case the wrong people where doing things they were not suppose to)
I am sure you will call that "conspiracy", but the reality is that the investment system is setup to be slow and opaque not because of the need for backwards compatibility, or security it is that way so the "correct people" control it plain and simple
That is a bad analogy, MS takes years to change the core because it require INSANE levels of backwards compatibility. Apps written for windows 2000 still work and need to work today...
This would not need to be the case with this type of system, there are a whole host of political reasons why the system is built the way it is, part of it is the desire to control it (and in this case the wrong people where doing things they were not suppose to)
I am sure you will call that "conspiracy", but the reality is that the investment system is setup to be slow and opaque not because of the need for backwards compatibility, or security it is that way so the "correct people" control it plain and simple
In fairness, stock exchanges care even more about backward compatibility and so it would be at least as much an issue for them.
Edit: Sorry, I say it way too much, but this merits a repeat of the one-liner: "The reason God was able to finish the earth in only six days is that He didn't have to worry about backward compatibility [or legacy system integration, or satisfying an installed userbase]."
Edit: Sorry, I say it way too much, but this merits a repeat of the one-liner: "The reason God was able to finish the earth in only six days is that He didn't have to worry about backward compatibility [or legacy system integration, or satisfying an installed userbase]."
Sure, but there's no real reason why ALL companies need to have their stocks compatible with each other on the same exchange.
> [T]here's no real reason why ALL companies need to have their stocks compatible
I think it would be way harder to trade a basket of stocks (e.g. pairs trading, going long one and short the other) if you had to worry about mismatched settlement dates across the different stocks; it would be like trading spot against a one-day forward.
I think it would be way harder to trade a basket of stocks (e.g. pairs trading, going long one and short the other) if you had to worry about mismatched settlement dates across the different stocks; it would be like trading spot against a one-day forward.
You've just defined exactly what high frequency traders do to make money. They balance all stock exchanges in order to make tiny profits on the stock differences.
They don't, there are hundreds of exchanges and plenty of competitors for listings - CSDs & clearing are a pinch point.
But in some ways exchanges also function as a natural monopoly; especially for primary issuance. e.g. look at AMEX's IPO slate compared to the big two, where the market is right now - it's insignificant, and they are the #3 exchange in the US. People want to list to make money, and that means going where the liquidity is until there's a really good reason not to, like with NASDAQ's move to electronic trading in the '70s.
But in some ways exchanges also function as a natural monopoly; especially for primary issuance. e.g. look at AMEX's IPO slate compared to the big two, where the market is right now - it's insignificant, and they are the #3 exchange in the US. People want to list to make money, and that means going where the liquidity is until there's a really good reason not to, like with NASDAQ's move to electronic trading in the '70s.
I think even Win95 apps work on Windows 10, not just Windows 2000 :-)
Think about all the flak they're getting for Settings/Control Panel. It's a multi-decade process to rewrite all of Control Panel, because Control Panel supports custom integrations plus it's such a central piece of software that looking at the code the wrong way probably breaks some client doing some crazy stuff with it :-)
Think about all the flak they're getting for Settings/Control Panel. It's a multi-decade process to rewrite all of Control Panel, because Control Panel supports custom integrations plus it's such a central piece of software that looking at the code the wrong way probably breaks some client doing some crazy stuff with it :-)
> We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2].
We know who owns almost all the shares. It's Cede & Co. They own almost all the shares of all the publicly traded companies. But if you sell shares that aren't owned by Cede & Co, it takes longer to process them, because corporate transfer agents are sloooooow; supposed to deliver in T+2, but more like T+7.
My understanding is a brokerage is only allowed to lend your shares if you have a margin account; and possibly only if you have an open margin position. Of course, Robinhood pushes a margin account on everyone, and that turns purchases with unsettled cash into a margin position; apparently RH doesn't allow that in cash accounts, even though most established brokers do.
At this point, I'm not sure why anybody would choose RH as a brokerage. They seem less reliable, their UX is bamboozling, most established brokerages charge the same $0 comissions and give more of the payment for order flow to clients, established brokerages (tend to) have much more excess capital on hand to meet increased collateral requirements, established brokerages can enable settings to limit risky (to the brokerage) trades in volitale stocks without blocking all trades, and RH is decidedly non-transparent.
We know who owns almost all the shares. It's Cede & Co. They own almost all the shares of all the publicly traded companies. But if you sell shares that aren't owned by Cede & Co, it takes longer to process them, because corporate transfer agents are sloooooow; supposed to deliver in T+2, but more like T+7.
My understanding is a brokerage is only allowed to lend your shares if you have a margin account; and possibly only if you have an open margin position. Of course, Robinhood pushes a margin account on everyone, and that turns purchases with unsettled cash into a margin position; apparently RH doesn't allow that in cash accounts, even though most established brokers do.
At this point, I'm not sure why anybody would choose RH as a brokerage. They seem less reliable, their UX is bamboozling, most established brokerages charge the same $0 comissions and give more of the payment for order flow to clients, established brokerages (tend to) have much more excess capital on hand to meet increased collateral requirements, established brokerages can enable settings to limit risky (to the brokerage) trades in volitale stocks without blocking all trades, and RH is decidedly non-transparent.
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days.
It's worse in crypto. Try to get cash out of a crypto exchange by T+2.[1]
[1] https://news.bitcoin.com/coinbase-withdrawal-delays-leave-us...
It's worse in crypto. Try to get cash out of a crypto exchange by T+2.[1]
[1] https://news.bitcoin.com/coinbase-withdrawal-delays-leave-us...
Coinbase IBAN transfers go through in 5-10 minutes for me, even weekends. Faster than Bitcoin!
Crypto doesn’t have clearinghouses or the same notion of settlement. If you and I agreed to trade a Bitcoin, we could settle ~immediately by getting a transaction onto the blockchain. It’s not so straightforward with stock.
I use Gemini, which has been happy to wire me money that shows up the same day in the other bank’s checking account.
Again the problem is not in the crypto side but the cash (fiat) side
Nobody is really a fan of the SEC breaking trades, but many view it as a necessary evil to promote stability of the system in the face of fallible humans and potentially buggy systems.
Shortening settlement reduces the time window where the SEC can reliably intervene. Take the example I gave earlier[0] of a pension fund manager fat-fingering an order with a hypothetical 1-minute settlement window. With one-minute settlement, by the time anyone realizes the pension fund has made a 10 million USD mistake, that money may be spread across a charity, a new baseball stadium, and thousands of stock trades indirectly via an ETF arbitrageur indirectly via an options market maker's delta hedging. It's a fictional tale, but it's not far fetched in a world of rapid settlement.
Hopefully some day we have much more reliable automated systems and humans further from the loop, but until then, slow settlement increases the window to take corrective action.
[0] https://news.ycombinator.com/item?id=25953459
Shortening settlement reduces the time window where the SEC can reliably intervene. Take the example I gave earlier[0] of a pension fund manager fat-fingering an order with a hypothetical 1-minute settlement window. With one-minute settlement, by the time anyone realizes the pension fund has made a 10 million USD mistake, that money may be spread across a charity, a new baseball stadium, and thousands of stock trades indirectly via an ETF arbitrageur indirectly via an options market maker's delta hedging. It's a fictional tale, but it's not far fetched in a world of rapid settlement.
Hopefully some day we have much more reliable automated systems and humans further from the loop, but until then, slow settlement increases the window to take corrective action.
[0] https://news.ycombinator.com/item?id=25953459
If you pay someone by mistake, there is already well established law for getting your money back.... And you can do it anytime within some number of years.
Theres no reason to slow the original payment down when there is a process for getting mistaken payments back.
Theres no reason to slow the original payment down when there is a process for getting mistaken payments back.
With fat-finger trades, you're often dealing with huge amounts of money, and the counter parties are often shell corporations.
A friend of mine was actually one of the defense attorneys for a hedge fund that had the legal entity for one of its funds go bankrupt on some electricity trades where the clearinghouse's margin requirements weren't large enough. The clearing house tried to recoup its losses from a sister fund under the same hedge fund. If I recall correctly, the bankrupt fund actually lost a bunch of money to its sister fund. The clearing house ended up losing in court.
Another friend of mine runs an electricity trading fund, and was pretty upset at the ruling. After the court loss, the clearing house needed to recoup its losses by raising fees.
Once trades have actually cleared, the only recourse is often a messy court battle.
A friend of mine was actually one of the defense attorneys for a hedge fund that had the legal entity for one of its funds go bankrupt on some electricity trades where the clearinghouse's margin requirements weren't large enough. The clearing house tried to recoup its losses from a sister fund under the same hedge fund. If I recall correctly, the bankrupt fund actually lost a bunch of money to its sister fund. The clearing house ended up losing in court.
Another friend of mine runs an electricity trading fund, and was pretty upset at the ruling. After the court loss, the clearing house needed to recoup its losses by raising fees.
Once trades have actually cleared, the only recourse is often a messy court battle.
> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
That is how short selling works and it is not a controversial process. It is normally transparent or invisible to the owner of the shares, eg you still get your dividends and can sell the shares at will. My understanding is that if the short seller goes bankrupt and cannot repurchase the shares, the brokerage provides the shares to the owner and takes the loss themselves.
That is how short selling works and it is not a controversial process. It is normally transparent or invisible to the owner of the shares, eg you still get your dividends and can sell the shares at will. My understanding is that if the short seller goes bankrupt and cannot repurchase the shares, the brokerage provides the shares to the owner and takes the loss themselves.
> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
That's how your "free" trading account is paid for. If you don't like it, fine! Just be prepared to pay per trade and per month.
That's how your "free" trading account is paid for. If you don't like it, fine! Just be prepared to pay per trade and per month.
Other brokers lend out your stuff too.
> TD Ameritrade earned about 4.1% and E*TRADE earned 3.5% from securities lending. Schwab’s is upper bounded at 2.2%. Interactive Brokers was an outlier at about 9.7%. (These are all net of payments to clients; Schwab, notably, passes the fee revenue for their mutual funds to the fund shareholders.)
https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
All RH did was figure out there’s enough money sloshing around to do away with commissions and disrupt them.
After RH, other brokers cancelled commissions without going bankrupt.
I’d be using RH if I could too. So many $s spent on commissions that were just a profitgrab.
> TD Ameritrade earned about 4.1% and E*TRADE earned 3.5% from securities lending. Schwab’s is upper bounded at 2.2%. Interactive Brokers was an outlier at about 9.7%. (These are all net of payments to clients; Schwab, notably, passes the fee revenue for their mutual funds to the fund shareholders.)
https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
All RH did was figure out there’s enough money sloshing around to do away with commissions and disrupt them.
After RH, other brokers cancelled commissions without going bankrupt.
I’d be using RH if I could too. So many $s spent on commissions that were just a profitgrab.
But... 2-day latency for purchases of interest in companies sounds perfectly reasonable given the notional purpose of those transactions. Isn't the real scandal that we've built a huge trillion dollar industry around this idea of "trading" that has nothing to do with the asset being purchased?
We do know who owns the stock. That's how dividends are distributed.
The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; first you trade, then you settle the trade. It just works on a T+2 basis.
> people like to ridicule Bitcoin for taking an hour to settle
What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; first you trade, then you settle the trade. It just works on a T+2 basis.
> people like to ridicule Bitcoin for taking an hour to settle
What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
>The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well;
If what you were saying is true, we wouldn't be the problem under discussion. The fact that it's not true is why we do. If we could have such certainty in the moment over who owned what stock, then we wouldn't need to put up collateral to hedge against the possible failure-to-deliver.
>>people like to ridicule Bitcoin for taking an hour to settle
>What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
The question is about latency, not throughput. That is, Nasdaq might throw up $300B/day worth of tentative transfers, but you still have to wait 2 days to "take the assets and run".
And two-day latency is still bad when, unlike Bitcoin, you can take advantage of centralization and lack of anonymity.
If what you were saying is true, we wouldn't be the problem under discussion. The fact that it's not true is why we do. If we could have such certainty in the moment over who owned what stock, then we wouldn't need to put up collateral to hedge against the possible failure-to-deliver.
>>people like to ridicule Bitcoin for taking an hour to settle
>What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
The question is about latency, not throughput. That is, Nasdaq might throw up $300B/day worth of tentative transfers, but you still have to wait 2 days to "take the assets and run".
And two-day latency is still bad when, unlike Bitcoin, you can take advantage of centralization and lack of anonymity.
According to [0], Bitcoin has a volume of ~54B in the past 24 hours (from posting). So it’s not the same, but it’s a damn massive amount. It’s less than an order of magnitude.
[0]: https://coinmarketcap.com/currencies/bitcoin/
[0]: https://coinmarketcap.com/currencies/bitcoin/
Fun fact; back when I worked in finance (2015-2017), forex trades including Bitcoin actually settled slower than anything else by about a day. Our pipelines had to detect crypto trades in order to fix the expected settlement date.
Why did they settle slower?
Not clear to me. I wasn’t involved in settlement; it was just my job to make sure the system reflected external reality. In the case of BTC trades we were just told what the system did, not why. It also was a relatively simple “crypto trades settle in 2 days” algorithm which didn’t require a lot of investigation on our part.
I will say that a lot of finance stuff is driven by norms and history, and it can be surprisingly hard to change things. My favorite example is the British “gilt” bond. Most government bonds have “coupon” days where interest is paid out, and obviously the traders of these bonds like to calculate the accrual of interest between them when trading. Gilt bonds, so named from the gilded edge the paper used to have, pays out the coupon to whoever has the bond a few days before coupon day because in the 1600s it took a lot of effort to figure out who actually had the physical bond paper. Back when I worked in finance they still had this system from nearly 400 years ago. Obviously the ability to sell a bond and still collect the coupon wreaks absolute havoc with the interest calculation.
I will say that a lot of finance stuff is driven by norms and history, and it can be surprisingly hard to change things. My favorite example is the British “gilt” bond. Most government bonds have “coupon” days where interest is paid out, and obviously the traders of these bonds like to calculate the accrual of interest between them when trading. Gilt bonds, so named from the gilded edge the paper used to have, pays out the coupon to whoever has the bond a few days before coupon day because in the 1600s it took a lot of effort to figure out who actually had the physical bond paper. Back when I worked in finance they still had this system from nearly 400 years ago. Obviously the ability to sell a bond and still collect the coupon wreaks absolute havoc with the interest calculation.
> stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
A great thing that helps keeping the fees down, and understood by everyone in the industry, and (thanks to elaborate and battle tested systems) hardly ever a problem. Just like overbooking on airplanes.
There are enough problems in the financial industry; this is not one of them.
Next, brokerages are not allowed to use customer money as collateral, that's why they don't use "money that pretty obviously was there (had been deposited years ago)."
Regarding "people like to ridicule Bitcoin": the equity markets have many orders of magnitude more transactions per day than crypto can handle.
A great thing that helps keeping the fees down, and understood by everyone in the industry, and (thanks to elaborate and battle tested systems) hardly ever a problem. Just like overbooking on airplanes.
There are enough problems in the financial industry; this is not one of them.
Next, brokerages are not allowed to use customer money as collateral, that's why they don't use "money that pretty obviously was there (had been deposited years ago)."
Regarding "people like to ridicule Bitcoin": the equity markets have many orders of magnitude more transactions per day than crypto can handle.
Yes. DTCC and their T+2 settlement are the villains here. It's a ridiculous legacy system that needs to go.
DTCC is not a villian. You would have the same problems for any settlement greater than T+0 and in the limit T>0 the problem actually increases as you eliminate the possibility of netting positions.
How does the problem increase if settlement is measured in milliseconds instead of days? Retail brokerages could just wait for trades to settle instead of trying to maintain this fiction that trades are done before they settle.
What problem does moving from T+2 to T+0 solve exactly? Aren't the capital requirements the same, and hence the outcome would've been the same? I'm no expert on this topic so I could be wrong.
The entire point of collateral is to hedge against you not being able to provide the money in two days, when the share actually is exchanged for cash. If, instead of collateral, you got the cash, capital requirements would be reduced as you would get the money from sales immediately, and wouldn't need to keep a pile of money to collateralize buys while waiting on the income from your sales.
It (effectively) eliminates counterparty risk if you can move money & stocks fast enough. That (theoretically) drives capital requirements down to 0 to settle trades.
The absolute speed/latency of trading is not relevant; what is relevant is the speed of trading decision relative to the speed at which information propagates to all involved.
We're not talking about trade execution here. Trade execution is already fast. We're talking about settlement.
Their legacy system is kinda the villain though. It's optimized for large institutional clients who don't have immediate liquidity to settle trades.
Unlike Bitcoin, stock trading errors can be corrected. The review process isn't automatic.
I think ethereum showed us that the blockchain can be corrected when they screw up.
Just depends how important the people are that lost.
https://www.wired.com/2016/06/50-million-hack-just-showed-da...
If I fat finger something on TD Ameritrade, nobody is going to rescue me.
Just depends how important the people are that lost.
https://www.wired.com/2016/06/50-million-hack-just-showed-da...
If I fat finger something on TD Ameritrade, nobody is going to rescue me.
It seems they might under certain circumstances, but you need to ask for a correction within 30 minutes? I don't know how you'd do that on Ameritrade.
I'm guessing this isn't about the normal UI that most customers use, though. I imagine it's possible to submit bids and asks at any price, and someone could fat-finger that. So, someone who put in a bid at 222 for a stock that's trading around 22 might have a reasonable case that it's a typo for 22.2 and should be reversed.
https://www.investopedia.com/terms/e/erroneous-trade.asp
I'm guessing this isn't about the normal UI that most customers use, though. I imagine it's possible to submit bids and asks at any price, and someone could fat-finger that. So, someone who put in a bid at 222 for a stock that's trading around 22 might have a reasonable case that it's a typo for 22.2 and should be reversed.
https://www.investopedia.com/terms/e/erroneous-trade.asp
Wait until you find out that stock can be traded even though it doesn’t actually exist
The reason for this is the fact that large businesses profit from being the middle-man here. Moving towards automated settlement on a blockchain reduces cost and increases efficiency,it's a win-win for everybody except the middle-man
There's nothing in fast, cheap, automated settlement that requires a blockchain. A centralized system should cost less, at least compared to a proof of work blockchain, due to energy costs.
Also, stock markets are heavily regulated. In a centralized system, it is relatively easy to enforce regulations. How do you do that in a blockchain based system?
Also, stock markets are heavily regulated. In a centralized system, it is relatively easy to enforce regulations. How do you do that in a blockchain based system?
Blockchain is the biggest "solution looking for a problem" of our time and because it looks like we've entered the meme age, I'd not be surprised if everything was reimplemented with blockchain regardless of the fit.
There is a massive overlap between /r/wallstreetbets, Elon Musk fan-boys and crypto enthusiasts I bet, and this mess has something for all of them: gaming, FOMO, evil short-sellers, beating the system, lots of diagrams with arrows and an app that's easy to use and easier to blame.
Having the stock market emit 325.95 kg CO2 per transaction [1] is one of the few ways I've ever heard to make the stock market significantly worse for society -- irrespective of your current feelings about it.
[1] https://digiconomist.net/bitcoin-energy-consumption/
[1] https://digiconomist.net/bitcoin-energy-consumption/
There’s more to crypto than Bitcoin.
Why would a blockchain be better than a traditional database for this? Making it decentralized is a non-goal, so what would the advantages be?
The real issue is not the specific technology, it's that it's an ancient hodge podge.
The real issue is not the specific technology, it's that it's an ancient hodge podge.
No. The issue is that you have no central ledger of ownership of stock, but instead many firms' individual ledgers. You also have various kinds of risk of fraud, etc.
T+2 is an atomic commitment algorithm that leaves enough time for humans to make phone calls and discuss the implications when there's going to be a failure to deliver or another anomaly from fraud or globally inconsistent state.
T+2 is an atomic commitment algorithm that leaves enough time for humans to make phone calls and discuss the implications when there's going to be a failure to deliver or another anomaly from fraud or globally inconsistent state.
It's far more centralised than you think, dematerialization isn't 100% complete but Cede and Co. hold the ledger of who owns what - at least to the extent that is possible.
https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
https://en.wikipedia.org/wiki/Cede_and_Company
https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
https://en.wikipedia.org/wiki/Cede_and_Company
Blockchains are about decentralisation and removing the need for trust. But neither is necessary in the case of stock settlement. If you accidentally have the DTC send someone a bunch of your shares, you politely ask that person for them back and you’ll likely get them. Try doing that with a blockchain (especially if you accidentally send them to a nonexistent address)
Blockchain does not do anything a database cannot. It's a pointless application of the technology.
Who do you think "the middle-man" is here, exactly?
I’m not very familiar with stock settlement, but I’m quite familiar with the settlement of some other, less regulated instruments. These often also have two-day settlement but seem less dysfunctional. So I’m not convinced that the T+2 settlement is the problem per se. To the contrary, T+2 settlement gives people a chance to correct errors, if any, before anyone takes the money and runs.
I can imagine a two-day settlement system that works better. Specifically, all parties would need to post cash with the clearinghouse before buying and to post stock before selling. Customer funds would be expected to be used for this purpose — no broker should ever go bust because their customers bought stock too fast. And, critically, unsettled receipts would be valid collateral, possibly with a small haircut. So, if you sell one stock, you can immediate use (most of) the proceeds to buy something else without needing to come up with additional collateral.
In effect, this would be immediate settlement plus two-day escrow.
I can imagine a two-day settlement system that works better. Specifically, all parties would need to post cash with the clearinghouse before buying and to post stock before selling. Customer funds would be expected to be used for this purpose — no broker should ever go bust because their customers bought stock too fast. And, critically, unsettled receipts would be valid collateral, possibly with a small haircut. So, if you sell one stock, you can immediate use (most of) the proceeds to buy something else without needing to come up with additional collateral.
In effect, this would be immediate settlement plus two-day escrow.
That's literally exactly what currently happens. Every stock has a margin requirement, you post cash with the clearing house as a percentage of order flow. When a particular equity becomes highly volatile, the amount of margin you need to post goes up. In GME's case, to 100 percent. So when somebody on Robinhood uses instant deposit, Robinhood has no access to your funds for a couple days, but when you buy GME, they need to put up 100 percent collateral on your behalf when they submit your order request. They simply didn't have the liquidity to cover all of that.
As I understand it, Robinhood cannot use customer funds to satisfy their collateral requirement, nor can they use the proceeds from sales that have not settled. And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.
The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.
So no, I don’t think the market already works the way I proposed.
The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.
So no, I don’t think the market already works the way I proposed.
>Robinhood cannot use customer funds to satisfy their collateral requirement
Of course they can. That's literally what they're for. When I buy 100 shares of SPY, the brokerage requires that Robinhood attaches a percent of required margin to submit the order to the settlement clearing house. Ideally, that's a percentage of my money, or their money, or whatever.
>And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.
Naked shorting is illegal. You cannot sell shares you aren't able to locate and purchase. The GME clusterfuck happened because people bought GME and sold them short to somebody who turned around and sold those same shares short again.
>The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.
They need to come up with cash due to the fact that they don't require your funds to settle before you trade with them. Basically they're fronting the settlement fee for you assuming that your money will clear before the settlement clears. ACH takes 24 hours, trades settle in T+2, there's some time for it all to happen. When the clearinghouse required 100 percent margin, it meant that Robinhood needed to put up 100 percent of the cost of the share you purchased before they had a single penny of your money. It's not that they won't settle at some point, but RH has to float large sums of money for a few days in the interim.
Of course they can. That's literally what they're for. When I buy 100 shares of SPY, the brokerage requires that Robinhood attaches a percent of required margin to submit the order to the settlement clearing house. Ideally, that's a percentage of my money, or their money, or whatever.
>And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.
Naked shorting is illegal. You cannot sell shares you aren't able to locate and purchase. The GME clusterfuck happened because people bought GME and sold them short to somebody who turned around and sold those same shares short again.
>The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.
They need to come up with cash due to the fact that they don't require your funds to settle before you trade with them. Basically they're fronting the settlement fee for you assuming that your money will clear before the settlement clears. ACH takes 24 hours, trades settle in T+2, there's some time for it all to happen. When the clearinghouse required 100 percent margin, it meant that Robinhood needed to put up 100 percent of the cost of the share you purchased before they had a single penny of your money. It's not that they won't settle at some point, but RH has to float large sums of money for a few days in the interim.
It is not a conspiracy but the system is broken.
Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear.
The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread.
In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb.
Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them.
A lot of this is explained by the webull ceo in this video: https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be
Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear.
The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread.
In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb.
Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them.
A lot of this is explained by the webull ceo in this video: https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be
Your argument relies on the assumption that hedge funds haven’t been margin called, and that they haven’t closed their early short positions. Many funds have claimed they closed early shorts.
The piece people seem to misunderstand the most is that total short interest won’t tell us if specific shorts were closed out. New shorts can replace old shorts at the higher price.
It’s like arguing that nobody could have lost their job or got a new job because the national unemployment rate was unchanged. Aggregate numbers don’t tell us about specific shorts.
Is it really so hard to believe that people would want to short the downside of an obvious short-term market bubble?
The piece people seem to misunderstand the most is that total short interest won’t tell us if specific shorts were closed out. New shorts can replace old shorts at the higher price.
It’s like arguing that nobody could have lost their job or got a new job because the national unemployment rate was unchanged. Aggregate numbers don’t tell us about specific shorts.
Is it really so hard to believe that people would want to short the downside of an obvious short-term market bubble?
Yeah. I find it hard to believe that any serious money is shorting anything remotely close to a meme stock right now. Who the hell would want to risk their career on a trade with infinite downside when it seems like the prevailing market sentiment is crush the shorts?
Don’t forget that this is a market where most people believe TSLA is vastly overvalued.
Don’t forget that this is a market where most people believe TSLA is vastly overvalued.
I mean, I'm not willing to risk my money on a short (and I wouldn't recommend anyone else to either), but I would be intensely surprised if the stock is not below $50 at the end or February. If the current price is north of $300, and holding costs on a short for a month aren't too bad, there's like $200+ of movement there to capture. Pump and dump is going to dump at some point. The market can stay irrational for a long time etc, but I suspect that's less true when everyone knows it's being irrational.
I'll just leave everything in my three-fund portfolio though, cause boring is the right fit for me.
I'll just leave everything in my three-fund portfolio though, cause boring is the right fit for me.
On the contrary, as the gap between the current price and the range everyone knows it will fall to eventually grows, the stock is becoming more and more attractive to short to people with "serious money" and a little appetite for risk.
Meme stock just makes it look more like a huge opportunity on both sides and in the long run everyone knows which direction it goes from here so the opportunity is clearly more on the short side if they size their position so they can hold it long term. Even if there is the chance for further squeeze, I'm sure enough people will still feel this is a huge shorting opportunity that short interest will not go down much from here, and the higher it goes the more people will feel that way.
Meme stock just makes it look more like a huge opportunity on both sides and in the long run everyone knows which direction it goes from here so the opportunity is clearly more on the short side if they size their position so they can hold it long term. Even if there is the chance for further squeeze, I'm sure enough people will still feel this is a huge shorting opportunity that short interest will not go down much from here, and the higher it goes the more people will feel that way.
The share capital of the company isn't fixed... The company could issue more shares, and invest the money raised, turning the business around.
That wasn't a possibility before, but it is now. Given that, I don't think "the range everyone knows it will fall to eventually" is a foregone conclusion.
That wasn't a possibility before, but it is now. Given that, I don't think "the range everyone knows it will fall to eventually" is a foregone conclusion.
They're not in a promising sector and there's nothing to suggest raising a bunch of money is going to allow them to turn into the kind of company a market cap of $20 billion suggests.
But if they could raise $1 Billion by selling 5% more shares, they could pivot into an entirely new sector using some of their existing assets.
For example, they could make an online gaming platform using their relationships with game studios, or they could move into 'gaming cafes' using their retail space, or start designing games themselves using their storefronts for marketing.
For example, they could make an online gaming platform using their relationships with game studios, or they could move into 'gaming cafes' using their retail space, or start designing games themselves using their storefronts for marketing.
Sure that could happen, but it's just as likely as giving anyone a billion dollars and expecting them to become a company that justifies a $20 billion valuation very quickly. The timing is important too because at the end of a mania like this that is entirely based on a quickly rising price, as soon as enough people decide this isn't going to continue rocketing up, there will be a rush to take their profits or to stop their losses.
Considering how unpleasant it is to talk to a GameStop employee (they upsell you on like 5 different things a purchase), starting a business where people stay longer and talk to them more doesn’t sound appealing for the customer.
they could even become a hedge fund !
> The company could issue more shares
It could, and GME trying to capitalize based on insane stock performance would be a real test of nerve, because it's one thing that could focus the news off the WSB vs institutions narrative and back on the business fundamentals of business, which still suck.
Maybe it works, maybe it just collapses the whole house of cards.
It could, and GME trying to capitalize based on insane stock performance would be a real test of nerve, because it's one thing that could focus the news off the WSB vs institutions narrative and back on the business fundamentals of business, which still suck.
Maybe it works, maybe it just collapses the whole house of cards.
> The company could issue more shares, and invest the money raised, turning the business around.
It’s a retailer that sells video games. They’re not going to turn it around while Steam, PlayStation store, Amazon, etc exist.
It’s a retailer that sells video games. They’re not going to turn it around while Steam, PlayStation store, Amazon, etc exist.
With enough capital, they could retool and and do something completely different, like setup a network of local-market-optimized ghost kitchens (or some other completely different business model responding to current opportunities that has nothing to do with what GME does today.) It’d be potentiallty more expensive than building a similar operation from scratch, but if them using the stock price to capitalize doesn't immediately collapse it instead of providing them money (which, to be fair, is far from guaranteed) it's free money that a new business trading on its business plan and not someone else's market manipulation games wouldn't have, so why not?
The game has gotten sufficiently big enough that long-sided whales haven entered and are snapping up shares and abosrbing short attacks. See the long buying at Friday market close, institutional volume aimed at boosting close price to inflict pain on short via higher maintenance margin.
The shorts are in a corner now, their positions are underwater on paper and long whales have an incentive to keep it there.
The shorts are in a corner now, their positions are underwater on paper and long whales have an incentive to keep it there.
1. Even if some shorts are in trouble (you don't know whether or not it's the same people as at the beginning of the run), others are willing to take their places.
2. Long whales also have plenty of incentive to sell. Namely they can bank their profits on a stock that is likely to collapse quickly
2. Long whales also have plenty of incentive to sell. Namely they can bank their profits on a stock that is likely to collapse quickly
There hasn't been enough volume for the shorts to be closed.
Why do you say that? The total free float is about 47M shares; I understand short interest was about 150% of float but volume on GME last week was over 500M, wasn't it?
Shorts covering is expected to move the price way more that it has. That 500m vol is people/algos trying to profit of intraday movements keeping the price relatively stable (for GME)
You have literally no way of knowing that.
A hedge fund covering a short pays exactly the same price in the market as a meme-following Redditor or an intraday trading algorithm.
A hedge fund covering a short pays exactly the same price in the market as a meme-following Redditor or an intraday trading algorithm.
A more succinct explanation:
Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back.
Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay.
DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund).
Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position.
Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!
Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back.
Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay.
DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund).
Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position.
Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!
That's a succinct but false explanation. DTCC does not care if a HF is about to lose a bunch of money and maybe even put a prime brokerage on the hook. Hedge funds make and lose hundreds of billions every week. No prime brokerage would let Melvin end up near insolvency before issuing liquidation margin call and even if there wasn't enough post-liquidation to cover losses, prime brokerages have a collective market cap of more $1 trillion and are easily able to absorb a several billion dollar shortfall. It's obvious to anyone who knows what they're talking about that you are a financial neophyte inventing nonsense conspiracies.
Can you explain why the collateral required is higher (if no one has any insolvency issues)?
If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic?
I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?
If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic?
I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?
A lot of that crowd here, at least on wsb people don't take themselves so seriously!
>Meanwhile, they have no problem margin calling retail.
Presumably because hedge funds have more lenient margin agreements than retail. After all, it's easier to collect from a hedge fund with billions AUM compared to a bunch of millennials living paycheck to paycheck with $50k of student loans.
Presumably because hedge funds have more lenient margin agreements than retail. After all, it's easier to collect from a hedge fund with billions AUM compared to a bunch of millennials living paycheck to paycheck with $50k of student loans.
Yes this is true, and sometimes they don't even need to collect because they can write off the small loss (this is explained in the video from the webull ceo).
But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.
But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.
> The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay.
If anything wasn't the market worried that RH would go bankrupt (when the GME inevitably crashes)?
Unlike retail, hedge funds and market makers have risk modelling, and they got out of trades they can't afford (plus all the shorts had collateral, if they can't afford it the broker closed it).
If anything wasn't the market worried that RH would go bankrupt (when the GME inevitably crashes)?
Unlike retail, hedge funds and market makers have risk modelling, and they got out of trades they can't afford (plus all the shorts had collateral, if they can't afford it the broker closed it).
> Keep in mind that Robinhood also gives everyone a margin account by default.
While this is technically true, it is not a typical margin account. People cannot invest more money than they put into their Robinhood account. In order to do that, they need to switch to RH Gold.
RH Basic: I put $100 into the account, I can buy $100 worth of stock before my funds clear. (Robinhood Instant)
RH Gold: I put $100 into the account, I can buy $200 worth of stock. (Actual effective margin)
While both of these are technically margin accounts, most people associate the term "margin investing" with the latter model which requires $2000 in the account and a deliberate choice to upgrade.
While this is technically true, it is not a typical margin account. People cannot invest more money than they put into their Robinhood account. In order to do that, they need to switch to RH Gold.
RH Basic: I put $100 into the account, I can buy $100 worth of stock before my funds clear. (Robinhood Instant)
RH Gold: I put $100 into the account, I can buy $200 worth of stock. (Actual effective margin)
While both of these are technically margin accounts, most people associate the term "margin investing" with the latter model which requires $2000 in the account and a deliberate choice to upgrade.
There’s a very specific legal definition of what a margin account is.
Robinhood accounts are Regulation T (aka Reg T) margin accounts by default. They have limits, yes, but they are very much margin accounts. That’s how they make their UX work.
The point is that typical user activity will be performed on margin, transparently. The flurry of synchronized activity caused a larger than normal draw on their margin, which further strained their working capital.
Robinhood accounts are Regulation T (aka Reg T) margin accounts by default. They have limits, yes, but they are very much margin accounts. That’s how they make their UX work.
The point is that typical user activity will be performed on margin, transparently. The flurry of synchronized activity caused a larger than normal draw on their margin, which further strained their working capital.
Yes, there is a specific legal definition (I did elude to that in the post you replied to).
Most people don't understand that definition and when they hear "Margin account" they assume people are making leveraged transactions which is not the case. Even Robinhood's FAQ and documentation uses the more commonly understood definition of margin. One of the primary "Features" of Robinhood gold is "Access to investing on margin". https://robinhood.com/us/en/support/articles/gold-overview/
Most people don't understand that definition and when they hear "Margin account" they assume people are making leveraged transactions which is not the case. Even Robinhood's FAQ and documentation uses the more commonly understood definition of margin. One of the primary "Features" of Robinhood gold is "Access to investing on margin". https://robinhood.com/us/en/support/articles/gold-overview/
This is getting a bit pedantic. The reason people are specifying that RH accounts are margin accounts by default is because it’s relevant to the financial situation. Functionally, they are margin accounts even if the end user isn’t entirely aware of it.
> Yes, there is a specific legal definition (I did elude to that in the post you replied to).
Allude, not elude. You indirectly drew attention to it, not let it get away :)
Allude, not elude. You indirectly drew attention to it, not let it get away :)
sure thanks for the explanation. at the end of the day the user is trading with borrowed money, which is the problem.
IMO the "problem" is that RH doesn't tell you that (or at least their marketing makes it confusing at minimum). The way they describe it as an "instant bank transfer", not "we give you margin until your transfer clears". The former gives you the impression that its your money that you're trading with, while the reality is it's a margin account.
That's why a lot of people were angry. They were forced to sell GME because they were technically using margin and it got called, but they thought it was their own money from their own bank account. The optics are that RH forced them to sell GME when they didn't want to.
That's why a lot of people were angry. They were forced to sell GME because they were technically using margin and it got called, but they thought it was their own money from their own bank account. The optics are that RH forced them to sell GME when they didn't want to.
Well someone took their own life because they showed him a real data for the moment and it was in red and it was all over news. Either way they target amateur market.
If you do any trading at all, you want a margin account so you don't have to wait for settling before making another purchase. While technically the money is borrowed for the 2 days to make your trade, I would never considered it borrowed in the typical use of the word margin.
Yeah, this is exactly my point. What Robinhood is doing isn't particularly uncommon in the industry.
i agree, but given the number of new users onboarding to robinhood, it's very possible that they don't have enough liquidity to cover the borrowed money, even if it is slated to be 100% by cash in 2 days
>Everyone assuming a conspiracy theory needs to read this.
I'm not sure of your point here. Anyone that assumed there's a conspiracy theory is pretty much right. Now, if you mean the 'Brokerage X is in cahoots with this particular hedge fund theory', then yes, it's fair to argue that's debunked.
But the overall conspiracy theory of "there are forces conspiring against the natural supply/demand market forces", well, they've pretty much all had the nerve to come out in the open and admit it.
It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events and instead of facing the music they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise and exposing themselves further.
To be clear, the rest of your comment seems that we're in agreement, expect that I would go further to call a spade a spade, it's absolutely a conspiracy.
I'm not sure of your point here. Anyone that assumed there's a conspiracy theory is pretty much right. Now, if you mean the 'Brokerage X is in cahoots with this particular hedge fund theory', then yes, it's fair to argue that's debunked.
But the overall conspiracy theory of "there are forces conspiring against the natural supply/demand market forces", well, they've pretty much all had the nerve to come out in the open and admit it.
It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events and instead of facing the music they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise and exposing themselves further.
To be clear, the rest of your comment seems that we're in agreement, expect that I would go further to call a spade a spade, it's absolutely a conspiracy.
It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events and instead of facing the music they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise and exposing themselves further.
The availability of liquidity in the market at any price & at any time is an illusion. It’s an illusion that holds most of the time, but nevertheless it isn’t real.
When the market is under stress, the illusion falters & the plumbing starts poking through the gaps. If you want to be able to buy and sell shares with very fast confirmation at the prices quoted in the market then you need intermediaries who can extend the credit that enables that transaction to happen. When the market is under stress, that credit becomes more expensive & liquidity falls away. This isn’t a conspiracy or the result of collusion, it’s a consequence of the structure of the market.
The availability of liquidity in the market at any price & at any time is an illusion. It’s an illusion that holds most of the time, but nevertheless it isn’t real.
When the market is under stress, the illusion falters & the plumbing starts poking through the gaps. If you want to be able to buy and sell shares with very fast confirmation at the prices quoted in the market then you need intermediaries who can extend the credit that enables that transaction to happen. When the market is under stress, that credit becomes more expensive & liquidity falls away. This isn’t a conspiracy or the result of collusion, it’s a consequence of the structure of the market.
> it's absolutely a conspiracy
I think a "conspiracy" requires some sort of actual coordination. A bunch of actors doing the same thing for the same underlying reason isn't a conspiracy. Lots of people going to sleep when it gets dark isn't a conspiracy.
I think a "conspiracy" requires some sort of actual coordination. A bunch of actors doing the same thing for the same underlying reason isn't a conspiracy. Lots of people going to sleep when it gets dark isn't a conspiracy.
Who, specifically, do you claim is conspiring? And to what end?
These collateral requirements were implemented to reduce systemic risk of the system failing under extreme volatility. It was designed to prevent collapse, requiring government bailouts. It wasn’t designed to break a consumer-facing investment app that didn’t even exist yet.
These collateral requirements were implemented to reduce systemic risk of the system failing under extreme volatility. It was designed to prevent collapse, requiring government bailouts. It wasn’t designed to break a consumer-facing investment app that didn’t even exist yet.
>Who, specifically, do you claim is conspiring? And to what end?
I'm happy to retract the conspiracy definition on the basis that there isn't explicit coordination. If you'll allow me to move the goalposts a bit I'll settle on the fact that my frustration is in the excuse-making that these actions are just regular checks and balances, instead of being the nefarious acts they are, unfair interference in the markets to the detriment of retail investors.
When you have heads of brokerages coming on talk shows (my memory of who isn't great) recently claiming that they'll open things up "when things settle down", and actually claiming "this is a $17 stock" (nothing wrong with the opinion, it's just unfair for a marketplace to be wielding their influence like that), we're living in bizarro world when the media isn't calling them out on it.
Then you have the CEO of nasdaq saying they'll consider halting trading if they can match social media chatter to movements (as if it's possible to prove causation anyway) so that large institutions get time to adjust?? When does the retail investor with their pension on the line ever get time to adjust?
>extreme volatility.
It might be extreme but it's not unpredictable. The helpless "how could we have seen this coming?" from institutions rings hollower each time throughout the decades that it's used.
The answer here is to stop the interventionalism that tries to hide natural volatility. Do you think social media is causing volatility and leaving pump and dump bagholders? Fine, let it happen on the small scale more frequently and sooner or later people will learn through frequent exposure that you can lose your shirt.
However, if you constantly intervene? You're hiding the volatility until a large event is allowed to hide in plain sight and deliver a liquidity crisis for many.
I'm happy to retract the conspiracy definition on the basis that there isn't explicit coordination. If you'll allow me to move the goalposts a bit I'll settle on the fact that my frustration is in the excuse-making that these actions are just regular checks and balances, instead of being the nefarious acts they are, unfair interference in the markets to the detriment of retail investors.
When you have heads of brokerages coming on talk shows (my memory of who isn't great) recently claiming that they'll open things up "when things settle down", and actually claiming "this is a $17 stock" (nothing wrong with the opinion, it's just unfair for a marketplace to be wielding their influence like that), we're living in bizarro world when the media isn't calling them out on it.
Then you have the CEO of nasdaq saying they'll consider halting trading if they can match social media chatter to movements (as if it's possible to prove causation anyway) so that large institutions get time to adjust?? When does the retail investor with their pension on the line ever get time to adjust?
>extreme volatility.
It might be extreme but it's not unpredictable. The helpless "how could we have seen this coming?" from institutions rings hollower each time throughout the decades that it's used.
The answer here is to stop the interventionalism that tries to hide natural volatility. Do you think social media is causing volatility and leaving pump and dump bagholders? Fine, let it happen on the small scale more frequently and sooner or later people will learn through frequent exposure that you can lose your shirt.
However, if you constantly intervene? You're hiding the volatility until a large event is allowed to hide in plain sight and deliver a liquidity crisis for many.
All the people angry about this were delighted when Dodd-Frank passed promising to reduce volatility risk.
> It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events
Those risk models were added into the system by law because the prior risk models said that there was no way anything could go wrong so that when things did go wrong during a "rare event," the entire financial system seized up practically overnight.
This time, the only people who are complaining are the people who think they're driving the people shorting Gamestop out of business, while the rest of the financial system and the greater economy looks on in merry amusement.
Those risk models were added into the system by law because the prior risk models said that there was no way anything could go wrong so that when things did go wrong during a "rare event," the entire financial system seized up practically overnight.
This time, the only people who are complaining are the people who think they're driving the people shorting Gamestop out of business, while the rest of the financial system and the greater economy looks on in merry amusement.
They did not follow the risk models required by law. They went beyond that and jacked up the collateral requirements on meme stocks to 100%.
My understanding is that the components on the model that caused the collateral requirements to jump are actually enacted by regulation.
No, the point is that while the model would have caused the collateral requirements to jump, that's not all the DTCC did - they enacted a 100% collateral requirement on specific stocks, which is not something the models required.
How do you know? Do you write the risk models? There aren't many stocks that swing from +100% to -3% in a day.
> they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise
What's your basis for attributing this intent to the discount brokers? It may have that effect, but as explained in the article it's fully accounted for by their need to conserve capital.
What's your basis for attributing this intent to the discount brokers? It may have that effect, but as explained in the article it's fully accounted for by their need to conserve capital.
I didn't. I said it was the clearing infrastructure. (Although it all flows down to the brokers as a consequence).
And also: it happened at nearly at the same time, in the middle of the week were volume was getting lower to the days before. The price crashed just after, and the next day we have news that a lot a short positions were closed[0].
[0] https://twitter.com/ihors3/status/1355234358194556928?s=21
[0] https://twitter.com/ihors3/status/1355234358194556928?s=21
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The problem with this theory is that it wasn’t just Robinhood. There were literally like a dozen or so firms that halted buying. Some of which were well known long established firms (Merrill, etrade).
These firms should have had no problem continuing allowing purchasing.
These firms should have had no problem continuing allowing purchasing.
> These firms should have had no problem continuing allowing purchasing.
Their costs increased 50x overnight - so they definitely should have had problems. DTC required a few percent collateral, and then overnight required 100% collateral on $GME. No business (well, fidelity and a few others weathered it) is able to increase short term liquidity 50x overnight.
Their costs increased 50x overnight - so they definitely should have had problems. DTC required a few percent collateral, and then overnight required 100% collateral on $GME. No business (well, fidelity and a few others weathered it) is able to increase short term liquidity 50x overnight.
Couldn't they just add a requirement that GME can only be purchased with settled funds? That seems like it would solve the issues mentioned above
Settled funds means two days that is longer than the whole situation. It was mainly new money anyway so the accusations and anger would be the same?
The article discusses this- excess buys and market volatility lead to increased capital requirements by clearing houses, so it wasn't necessarily specific to robinhood.
When powerful people need to bend the rules, they don't do it outright. They find cover. And if there's any discretion in how much liquidity clearinghouses require, that's what they'll modify.
You'll see similar things when influence is sold. Speakers are given huge fees for basic speeches and then they know what they should do. Nothing is spelled out, because that would be dumb.
You'll see similar things when influence is sold. Speakers are given huge fees for basic speeches and then they know what they should do. Nothing is spelled out, because that would be dumb.
If you gave me a lot of money, I wouldn’t need to do anything for you because I’ve already got your money ;)
Are you saying that influence either isn't sold or is spelled out in explicit terms when it is? Why do pharm reps take medical residents out to expensive dinners in nice parts of town (pre-covid), are they just nice people?
Giving someone a nice dinner isn’t giving them a lot of money, though. You get influence by not paying people enough that they can leave, but making it seem like you might in the future.
And yes, most marketing spending is pointless, and that’s just another kind of marketing.
And yes, most marketing spending is pointless, and that’s just another kind of marketing.
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> There were literally like a dozen or so firms that halted buying
My understanding is these firms halted buying on margin. Did anyone else halt for non-margin accounts?
My understanding is these firms halted buying on margin. Did anyone else halt for non-margin accounts?
They halted buy on stocks(no margin) on Interactive Brokers which powers most of the retail apps in Europe. I think the other brokers did the same. If you listen to this guy it's pretty clear he'a protecting the hedge funds.
"If our customers loose money we have to put ours" https://m.youtube.com/watch?v=7RH4XKP55fM
"If our customers loose money we have to put ours" https://m.youtube.com/watch?v=7RH4XKP55fM
Looks more like he is trying to protect his company. ( If the Hedge fund or clearance house fails, the broker would loose a lot of money).
Yeah, better let the retailers loose..not market manipulation, just driving the stock to the right price where both the broker and the hedge wins. I wouldn't call this a free market.
Is your underlying theory that with no intervention the stock would have no choice but to go to the moon?
Seems pretty bogus to me, there's still liquidity (so that's nothing like VW squeeze, where 75% of the market was cornered by porsche and 20% was held by a german state, leaving only 5% available for shorts to rebuy). Also current shorts were likely made at a much higher level.
And GME could do like AMC and AAL and issue more stock (why wouldn't they, it's like free money).
Seems pretty bogus to me, there's still liquidity (so that's nothing like VW squeeze, where 75% of the market was cornered by porsche and 20% was held by a german state, leaving only 5% available for shorts to rebuy). Also current shorts were likely made at a much higher level.
And GME could do like AMC and AAL and issue more stock (why wouldn't they, it's like free money).
>> Is your underlying theory that with no intervention the stock would have no choice but to go to the moon?
If the retailers hold the line they will squeeze the shorters. They already did it but the bulk of the juice is still there. VW is not the only example. Tesla is a more recent one. Of course GME could issue new stock. Many executives liquidated/sold their positions. AMC already issued new stock. These are different issues.
Restrict the buying of any given stock(i.e Tesla), halt it intermitently and then announce that you are banning it because it's too volatile and speculative.
What's the expected result? I could bet its goes down and that's the whole point I'm making: the brokers and hedge fund managers collude to the drive the price down. They decided what the stock is worth or better said what the price should be at the expense of the buy side/retail investors. This is a predatory environment not a free market. Imagine if the brokers would suddenly liquidate the hedge funds shorts due the volatility.
If the retailers hold the line they will squeeze the shorters. They already did it but the bulk of the juice is still there. VW is not the only example. Tesla is a more recent one. Of course GME could issue new stock. Many executives liquidated/sold their positions. AMC already issued new stock. These are different issues.
Restrict the buying of any given stock(i.e Tesla), halt it intermitently and then announce that you are banning it because it's too volatile and speculative.
What's the expected result? I could bet its goes down and that's the whole point I'm making: the brokers and hedge fund managers collude to the drive the price down. They decided what the stock is worth or better said what the price should be at the expense of the buy side/retail investors. This is a predatory environment not a free market. Imagine if the brokers would suddenly liquidate the hedge funds shorts due the volatility.
> If the retailers hold the line they will squeeze the shorters.
As long as there's liquidity (and it seems like there is, the entire float is trading every day), sure some short position might give up because they lost their bet (assuming they're not hedged anyway), but there's always going to be someone else shorting at a higher and higher level, and in the end the shorts will inevitably win.
Even without any trading halt, it would end up like all pump and dump, with a few winners (those who dump or short at the top).
And in any case there's probably only a handful of hedge funds playing (and some will lose, other will win), and those being neutral in it (eg market makers) will win as well with all the trades.
As long as there's liquidity (and it seems like there is, the entire float is trading every day), sure some short position might give up because they lost their bet (assuming they're not hedged anyway), but there's always going to be someone else shorting at a higher and higher level, and in the end the shorts will inevitably win.
Even without any trading halt, it would end up like all pump and dump, with a few winners (those who dump or short at the top).
And in any case there's probably only a handful of hedge funds playing (and some will lose, other will win), and those being neutral in it (eg market makers) will win as well with all the trades.
EToro in U.K. halted it - no margin account, we have instant transfers of cash.
Managed to buy $beermoney worth in the end to say I was there, although that was at 20% higher than I tried to (not that it matters)
Managed to buy $beermoney worth in the end to say I was there, although that was at 20% higher than I tried to (not that it matters)
They’re a cfd broker aren’t they?
No, I have no margin on my e-trade account and was abruptly blocked from all GME-related trades without warning on Thursday. Plain old cash buying.
> The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.
This was my impression too, especially from RH CEO’s interview on Chris Cuomo. He tried to communicate that they were effectively getting margin called, but without explicitly saying it, vaguely referring to SEC and exchange rules and regulations, hoping the audience would read between the lines. But not giving a straight answer just fed the conspiracy theories.
In hindsight, considering RH raised $1B additional capital a day or three later [1], it would have been better for him to have just been explicit about it.
“Yeah Chris, here’s the problem. As you know RH enables no-fee trading and instant trading the moment you join. We maintain margin accounts with our exchange partners to risk manage this.
However, the massive rapid influx of new users combined with the unplanned-for three-sigma increase in volatility in these stocks caused us to hit our margin limits with the exchanges. We’re getting margin called at unanticipated levels and just don’t have the capital buffer.
We’re raising additional capital as quickly as we can to fund our margin accounts and re-enable trading, but until that’s accomplished we have no choice but to disable buys on these high-vol stocks.
We disabled buys and not sells for two reasons: 1) only buys require margin in our system, and 2) if you think traders are angry when you disable buys, they get even angrier when you disable sells and lock them into a position that could suddenly go against them.
To our customers, we’re terribly sorry about this and are working overtime to solve the problem. We’re raising additional capital to increase our margins with our exchanges, and are updating our risk models to better accommodate such black swan events going forward. We’re listening to complaints and suggestions and evaluating additional ideas we hear to improve our service.”
Something like that I’m sure WSB would have bought, and eventually forgiven them for.
[1]:https://news.ycombinator.com/item?id=25954539
This was my impression too, especially from RH CEO’s interview on Chris Cuomo. He tried to communicate that they were effectively getting margin called, but without explicitly saying it, vaguely referring to SEC and exchange rules and regulations, hoping the audience would read between the lines. But not giving a straight answer just fed the conspiracy theories.
In hindsight, considering RH raised $1B additional capital a day or three later [1], it would have been better for him to have just been explicit about it.
“Yeah Chris, here’s the problem. As you know RH enables no-fee trading and instant trading the moment you join. We maintain margin accounts with our exchange partners to risk manage this.
However, the massive rapid influx of new users combined with the unplanned-for three-sigma increase in volatility in these stocks caused us to hit our margin limits with the exchanges. We’re getting margin called at unanticipated levels and just don’t have the capital buffer.
We’re raising additional capital as quickly as we can to fund our margin accounts and re-enable trading, but until that’s accomplished we have no choice but to disable buys on these high-vol stocks.
We disabled buys and not sells for two reasons: 1) only buys require margin in our system, and 2) if you think traders are angry when you disable buys, they get even angrier when you disable sells and lock them into a position that could suddenly go against them.
To our customers, we’re terribly sorry about this and are working overtime to solve the problem. We’re raising additional capital to increase our margins with our exchanges, and are updating our risk models to better accommodate such black swan events going forward. We’re listening to complaints and suggestions and evaluating additional ideas we hear to improve our service.”
Something like that I’m sure WSB would have bought, and eventually forgiven them for.
[1]:https://news.ycombinator.com/item?id=25954539
But even once they did they still lowered the limit to 5 shares, then 3, then 2 then just a single share.
I imagine they have some function determining this, that correlates number of shares available per user, number of users, and RH’s own capital buffer.
When combined with the massive influx of users all wanting to buy the same stocks, their newly raised $1B capital buffer is getting diluted across a larger and larger pool of traders.
/r/wallstreetbets jumped from 1.7 million users to 6 million users in just a few days. Some portion of those either joined RH to buy GME, or already had a RH account and started using it to buy GME.
https://www.reddit.com/r/wallstreetbets/comments/l7u8h5/remi...
And GME only has 65 million shares outstanding in the first place, so max available shares per WSB trader alone is ~11.5. Factor in the broader market and it's less.
https://www.reddit.com/r/wallstreetbets/comments/l83va0/gme_...
When combined with the massive influx of users all wanting to buy the same stocks, their newly raised $1B capital buffer is getting diluted across a larger and larger pool of traders.
/r/wallstreetbets jumped from 1.7 million users to 6 million users in just a few days. Some portion of those either joined RH to buy GME, or already had a RH account and started using it to buy GME.
https://www.reddit.com/r/wallstreetbets/comments/l7u8h5/remi...
And GME only has 65 million shares outstanding in the first place, so max available shares per WSB trader alone is ~11.5. Factor in the broader market and it's less.
https://www.reddit.com/r/wallstreetbets/comments/l83va0/gme_...
They also didn't just do it for high volatility stocks - they are doing it for "competitor" stocks as well. IPOE is limited to one share now, right after their merger with SoFi (a Robinhood competitor).
This may be a perfectly good explanation, but if this is the case, why doesn't the Robinhood people release a statement explaining this instead of the puff piece the CEO did for PR.
After the CEO got caught lying on TV, that's unacceptable.
The "lied" bit is debatable because there's multiple ways of interpreting his statement. It could be "there's no liquidity issue [and we could have let GME stock trade freely without running into liquidity issues]" but also "there's no liquidity issue [anymore, because we stopped GME from being traded]". The former clearly favors WSB's narrative, so that's what everyone there believed, even though it's reading too much into the CEO's statement.
WSB users are known to exploit Robinhood problems for fun. There was one case a few years back where they found a way to evade margin requirements and get arbitrarily high leverage, for example. If I were Vlad Tenev, I'd be seriously concerned that a detailed description of which kinds of trades cause problems for Robinhood would be used to collect WSB accolades by knocking the company over.
Quite a brush to put all wsb "accolades" in the same bucket. I could say some very nasty things about some ycombinator "accolades" as well.
> WSB users are known
That's a dubious way to refer to people. There are 7.5 million users in the sub at the moment.
That's a dubious way to refer to people. There are 7.5 million users in the sub at the moment.
Because they are better at growth hacking than providing a service
More to the point... why didn’t Robin Hood simply make the buys in those tickers REAL buys instead of margin buys and explain the situation?
Because that's not actually the problem. If it was just ACH deposit clearing time, I'm sure they could have found bridge money rather quickly for that as their ACH failure rate has to be tiny.
The problem was clearing house margins. It went from a few percentage points every buy of GME to 100%. You cannot use customer money for these deposits, it must come from the brokerage firm's funds itself.
I think it really needs to be discussed that there were multiple "liquidity" crunches for RH here, one far more significant than the other.
You could have had every single buyer of GME locked and loaded with $100k of cash in their account for a month, but if they all bought GME last week for cash RH would still have the same exact margin requirement problem they have now with their clearing house. That they still had hundreds of billions of their customer's capital on deposit would have been irrelevant.
The problem was clearing house margins. It went from a few percentage points every buy of GME to 100%. You cannot use customer money for these deposits, it must come from the brokerage firm's funds itself.
I think it really needs to be discussed that there were multiple "liquidity" crunches for RH here, one far more significant than the other.
You could have had every single buyer of GME locked and loaded with $100k of cash in their account for a month, but if they all bought GME last week for cash RH would still have the same exact margin requirement problem they have now with their clearing house. That they still had hundreds of billions of their customer's capital on deposit would have been irrelevant.
Why can't you use my money as collateral on the securities I told you to buy for me? Is this a "funds transfers used to be very slow" thing between the broker and the clearinghouse?
This was the biggest issue of the article, if I buy a share with cash I already deposited with broker, the broker will use 100% of that cash to buy the share, whether as margin first or straight paying for the share. Can any explain to me why RH would need to put collateral/margin up for shares bought with successful customer deposits?
The other explanation is that they are running a b-book that is underwater due to the runaway success of GME and have big losses from that.
The other explanation is that they are running a b-book that is underwater due to the runaway success of GME and have big losses from that.
This has been difficult to find. It seemingly follows from Rule 15c3-3 . https://www.sec.gov/divisions/enforce/customer-protection-ru...
But that's something of a slog to read. The closest I've found is footnote 13 in this rule change, which notes that it was requested to change this requirement. I haven't found anything contradictory.
https://www.sec.gov/rules/sro/nscc/2013/34-69302.pdf
But that's something of a slog to read. The closest I've found is footnote 13 in this rule change, which notes that it was requested to change this requirement. I haven't found anything contradictory.
https://www.sec.gov/rules/sro/nscc/2013/34-69302.pdf
So the brokerage is always required to sit on the buyer’s money just in case they can’t readily get the securities or the collateral from the clearinghouse, and the buyer can’t even put up extra money to make sure the transaction can go through. Weird, but good find.
So much of Robinhood's product is built on the facade of a margin-account-not-being-a-margin-account that that would be impractical.
Doing so would have likely pissed people of more.
"New sign up to Robinhood? Just started a transfer? Awesome! I know all our marketting material says 'trade right away', but actually you have to wait 2 days right now."
"Just sell a bunch of other stock in order to buy GME? Well, unfortunately right now you can't use that money for 2 days. See you next week! Ps: thanks for the taxable event that you probably wouldn't have done if you understood that you'd have to wait!"
Doing so would have likely pissed people of more.
"New sign up to Robinhood? Just started a transfer? Awesome! I know all our marketting material says 'trade right away', but actually you have to wait 2 days right now."
"Just sell a bunch of other stock in order to buy GME? Well, unfortunately right now you can't use that money for 2 days. See you next week! Ps: thanks for the taxable event that you probably wouldn't have done if you understood that you'd have to wait!"
https://twitter.com/Camp4/status/1355701648182501378?s=19 presents an argument about how they should have and how it might've been done well
1) All accounts were banned from buying these shares, even ones whose accounts had cleared funds.
2) If margin requirements were the problem, why not inform the user that due to the unusual circumstances, the increased margin cost would be passed onto the buyer?
2) If margin requirements were the problem, why not inform the user that due to the unusual circumstances, the increased margin cost would be passed onto the buyer?
Margin is a red herring. Robinhood cannot use client money to meet its clearing fund deposit requirements. Whether the buys and sells came from margin or not doesn't matter.
And most importantly, why was only buying of meme stocks disabled? This argument doesnt hold up to any scrutiny
Because those are the ones that push up the required collateral with the settling firms. The meme stocks are buy-heavy and highly volatile. Stocks that are less volatile and have matched buy-sell rates don't. Halting buys of meme stocks meant that RH needs less collateral with settling firms. Halting other buys doesn't change a thing.
Robinhood has also halted 50 other stocks including arbitrary ones like AMD.
https://investorplace.com/2021/01/robinhood-bans-reddit-stoc...
There must be more to their internal situation they aren’t telling us because they probably just imploded their IPO
There must be more to their internal situation they aren’t telling us because they probably just imploded their IPO
The same outrage (or worse) would occur if they halted sells. Could you imagine if the price tanked and people couldn't exit their position? It is a lose-lose situation. And I think a lot of people would consider a full block to be worse.
Yeah I guess that makes sense. Maybe the takeaway is to not use meme brokers to buy meme stocks
They can’t halt sales because brokers aren’t allowed to halt sales.
And most importantly, why was only buying of meme stocks disabled?
You gave yourself the answer. The collateral is connected to the volatility. The meme stocks saw their price volatility increase massively, therefore the DTCC collateral demand was raised from 3% (low-volatility) to a whooping 100% collateral.
You gave yourself the answer. The collateral is connected to the volatility. The meme stocks saw their price volatility increase massively, therefore the DTCC collateral demand was raised from 3% (low-volatility) to a whooping 100% collateral.
It does appeal to the "oh they're still a startup" mentality, perfect for the HN crowd
Giving people who don’t understand margin a margin account is the easiest way to have them blow themselves up financially. Most people think that this leverage is free, it’s not, and it multiplies your risk. If you are wrong you’ll be twice as wrong. If Robinhood should be criticized for anything it should be this.
There’s a reason people have to usually apply for a margin account separately. Automatically handing them out is a recipe for disaster.
I’m all for empowering folks to do what they want with their money but it should be pared with some sort of education.
There’s a reason people have to usually apply for a margin account separately. Automatically handing them out is a recipe for disaster.
I’m all for empowering folks to do what they want with their money but it should be pared with some sort of education.
You have to pay for "margin" in the sense that most traders think of it (for leveraged purchases). The automatic margin that RobinHood gives you is only equal to your purchasing power according to your recorded deposits and trades to speed trading velocity and gloss over the underlying slowness of the US banking system.
Could you explain how it multiplies your risk in the case of RH?
It's secured against assets that may not be worth tomorrow what they are today. Imagine if you stopped paying your mortgage, and the bank sells your house, but they only make 5% of what you paid for it because the price of houses in ubercow's neighbourhood happened to plummet recently. Now somebody else has your house, but you still owe the bank almost all the money.
But the assets are always sold before you are allowed to use the funds from those sales on RH. I don't think that analogy works. In the end, if your assets plummet in value, you don't owe RH all the money because you have already paid them it, through a bank transfer or stock stale which is already completed at a known price before you could spend those funds.
It's like a mortgage with a 100% deposit. You might technically owe money at some point, but you have already covered it completely. And the bank isn't going to sell your house because they know the full value of the mortgage in cash is already on the way to them.
It's like a mortgage with a 100% deposit. You might technically owe money at some point, but you have already covered it completely. And the bank isn't going to sell your house because they know the full value of the mortgage in cash is already on the way to them.
MrMan(2)
>The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money.
IMO, this is why anyone wanting to "trade seriously" should NOT use Robinhood.
Robinhood is like the fast food of investing. It's designed for convenience, but makes you worse off in the end.
If you want a legit trading platform, then download Thinkorswim, Tastytrade, Schwab, Webull, Etrade, or Fidelity.
Any of the above will tell you way more information than Robinhood, give you significantly better charts, and various extras like News and Level II data for free (at least Thinkorswim does).
Honestly, just look around at the different offerings, maybe give them a test-drive, and choose whatever one suits you. Yes, you will probably have to learn the platforms, but that learning is valuable knowledge.
IMO, this is why anyone wanting to "trade seriously" should NOT use Robinhood.
Robinhood is like the fast food of investing. It's designed for convenience, but makes you worse off in the end.
If you want a legit trading platform, then download Thinkorswim, Tastytrade, Schwab, Webull, Etrade, or Fidelity.
Any of the above will tell you way more information than Robinhood, give you significantly better charts, and various extras like News and Level II data for free (at least Thinkorswim does).
Honestly, just look around at the different offerings, maybe give them a test-drive, and choose whatever one suits you. Yes, you will probably have to learn the platforms, but that learning is valuable knowledge.
> Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?
I don't think anyone is discounting this. The problem is that after going through so many of these problems with various pre-IPO startups, we appear to have not learnt our lesson.
- Facebook made us think it was safe to publish our real names and pictures online, and attach them to a public profile. When cyber-stalking and cyber-bullying became a thing, they feigned shock & ignorance.
- Twitter used to suggest anonymity and low-intensity were the main goals of their product. Then they doubled the character limit just as doxing and other forms of real-life intimidation began picking up steam on this platform.
- YouTube used to portray itself as a free speech video platform, encouraging users to upload any and all videos that don't explicitly break the law. Now YouTube polices its content to such an extent, and with such murky and ever-changing policies, that speech which is perfectly legal and protected by federal law is banned without explanation. It now even inserts itself into the conversation with a degree of authority that pre-Google YouTube would never have dared attempt.
I don't think anyone is discounting this. The problem is that after going through so many of these problems with various pre-IPO startups, we appear to have not learnt our lesson.
- Facebook made us think it was safe to publish our real names and pictures online, and attach them to a public profile. When cyber-stalking and cyber-bullying became a thing, they feigned shock & ignorance.
- Twitter used to suggest anonymity and low-intensity were the main goals of their product. Then they doubled the character limit just as doxing and other forms of real-life intimidation began picking up steam on this platform.
- YouTube used to portray itself as a free speech video platform, encouraging users to upload any and all videos that don't explicitly break the law. Now YouTube polices its content to such an extent, and with such murky and ever-changing policies, that speech which is perfectly legal and protected by federal law is banned without explanation. It now even inserts itself into the conversation with a degree of authority that pre-Google YouTube would never have dared attempt.
People create excuses all the time for everything. "You shouldn't hate Robinhood because they were new/incompetent/unprepared." Maybe. Maybe there's 10 different sources to they could have gotten the money from and they chose not to as well. Maybe there were actions they could have taken to solve the problem and chose not to because they were more aligned with the problem not being solved.
This is why I don't like this explanation. At face value it is a good excuse, but when you do an analysis from an ethics and alignment point of view:
Counterpoint, trading firms across the board were asked to alter behavior: If "You wouldn’t believe the shit going on behind the scenes right now. 10 hedge funds have fallen, and our clearing firm emailed to block ALL trading platforms from $GME, $AMC, and the like." is true, then that is quite literally a conspiracy. https://www.reddit.com/r/IAmA/comments/l81l3g/dan_pipitone_c...
This is why I don't like this explanation. At face value it is a good excuse, but when you do an analysis from an ethics and alignment point of view:
Citadel is in bed with Melvin.
Robinhood is in bed with citadel
Robinhood sells data to citadel (this almost certainly is at the direct cost of its users)
Robinhood does transactions through citadel (skimming some of the money off of users transactions)
*Robinhood is more aligned with citadel than retail*
Counterpoint, trading firms across the board were asked to alter behavior: If "You wouldn’t believe the shit going on behind the scenes right now. 10 hedge funds have fallen, and our clearing firm emailed to block ALL trading platforms from $GME, $AMC, and the like." is true, then that is quite literally a conspiracy. https://www.reddit.com/r/IAmA/comments/l81l3g/dan_pipitone_c...
> Citadel is in bed with Melvin.
> Robinhood is in bed with citadel
The underlying relationships don’t exist because the two companies named “Citadel” here are different companies.
> Robinhood is in bed with citadel
The underlying relationships don’t exist because the two companies named “Citadel” here are different companies.
They have the same name because they have the same owner. Many in finance know the firewall/chinese wall is only pretense, information flows pretty freely obviosly with 0 paper trail
I definitely think I am under informed.
Could you elaborate to help me understand?
Robinhood uses a company named Citadel Securities for some order flow, which is a spinoff of the other Citadel, but is a separate LLC and doesn't care what the other one does.
But it didn't matter even when they were the same company, because different departments of finance firms don't talk to each other by regulation ("Chinese walls").
But it didn't matter even when they were the same company, because different departments of finance firms don't talk to each other by regulation ("Chinese walls").
As a skeptic, why should I believe the regulation is effective? (I am asking in good faith, not rhetorically)
Wouldn't one Citadel entity affect the other? In 2008 didn't we learn that some companies are too big to fail (and therefore also too big to effectively regulate)?
Wouldn't one Citadel entity affect the other? In 2008 didn't we learn that some companies are too big to fail (and therefore also too big to effectively regulate)?
> As a skeptic, why should I believe the regulation is effective? (I am asking in good faith, not rhetorically)
It certainly isn't all the time. However, it does change over time and regulation right now is completely different from 2008 and a lot stricter. This situation where RH had to disable buys is actually caused by new regulations (some part of Dodd-Frank IIRC, and some private by DTCC but can't be arbitrarily changed) - as usual fighting the last battle causes new problems.
> Wouldn't one Citadel entity affect the other? In 2008 didn't we learn that some companies are too big to fail (and therefore also too big to effectively regulate)?
It's possible but their connection isn't that strong; we don't need to assume they'll affect each other just because they have the same name and some shared ownership. Their P&L isn't the same. Besides that, Citadel (the one loaning to Melvin) doesn't mind that Melvin lost a bunch of money, because it means they got to buy them at fire sale prices.
As for "too big to fail" it seems like a meme that prevents actual analysis of the situation. Big companies are actually easier to regulate than lots of small ones, and treat their workers better since small ones are exempt from discrimination laws and often pretty abusive. (This is Matt Bruenig theory.)
It certainly isn't all the time. However, it does change over time and regulation right now is completely different from 2008 and a lot stricter. This situation where RH had to disable buys is actually caused by new regulations (some part of Dodd-Frank IIRC, and some private by DTCC but can't be arbitrarily changed) - as usual fighting the last battle causes new problems.
> Wouldn't one Citadel entity affect the other? In 2008 didn't we learn that some companies are too big to fail (and therefore also too big to effectively regulate)?
It's possible but their connection isn't that strong; we don't need to assume they'll affect each other just because they have the same name and some shared ownership. Their P&L isn't the same. Besides that, Citadel (the one loaning to Melvin) doesn't mind that Melvin lost a bunch of money, because it means they got to buy them at fire sale prices.
As for "too big to fail" it seems like a meme that prevents actual analysis of the situation. Big companies are actually easier to regulate than lots of small ones, and treat their workers better since small ones are exempt from discrimination laws and often pretty abusive. (This is Matt Bruenig theory.)
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That's entirely possible and even likely, but that's still a huge market failure that should be corrected. You can't have a situation like this happening to some stocks exclusively.
Where were those increases in required DTC collaterals when TSLA/NIO/your favorite SPAC was going through the roof? The conspiracy just moves to whoever unilaterally decided to raise collateral requirements from 2% to 100% -- a 4900% increase, and nice and whole numbers that seem fully arbitrary. A situation in which people have settled in their accounts should not depend on some backdoor credit wizardry that ultimately damages retail investors.
Where were those increases in required DTC collaterals when TSLA/NIO/your favorite SPAC was going through the roof? The conspiracy just moves to whoever unilaterally decided to raise collateral requirements from 2% to 100% -- a 4900% increase, and nice and whole numbers that seem fully arbitrary. A situation in which people have settled in their accounts should not depend on some backdoor credit wizardry that ultimately damages retail investors.
Were those stocks moving +100%/-50% daily?
> The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.
All of the previous bits of your message don't matter because this right here killed any chance of "good faith" people might have in Robinhood. Even if there really is no conspiracy, I personally am moving 100% to Fidelity after this fiasco (in fact, I moved everything but my remaining GME that exists in Robinhood already). I honestly, at this point, have about 20% faith that Robinhood will allow me to liquidate that GME - instead they will probably remove the "sell" button at some point too.
I explicitly do not trust Robinhood anymore. It's one thing to say "we fucked up", or even "we can't handle this load anymore, we are going to need to remove the buy button". I'd be pissed but wouldn't want them scorched - at this point I hope the whole company goes bankrupt instead.
All of the previous bits of your message don't matter because this right here killed any chance of "good faith" people might have in Robinhood. Even if there really is no conspiracy, I personally am moving 100% to Fidelity after this fiasco (in fact, I moved everything but my remaining GME that exists in Robinhood already). I honestly, at this point, have about 20% faith that Robinhood will allow me to liquidate that GME - instead they will probably remove the "sell" button at some point too.
I explicitly do not trust Robinhood anymore. It's one thing to say "we fucked up", or even "we can't handle this load anymore, we are going to need to remove the buy button". I'd be pissed but wouldn't want them scorched - at this point I hope the whole company goes bankrupt instead.
> The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.
What I don't get is, why is the fear of a bank run relevant? It's a startup and most people seems pretty YOLO about using it. I don't know anything about investor sentiment so I'm genuinely curious - I thought the SIPC covers the FDIC equivalent for RH accounts that show any semblance of trading.
In this frothy market where a bunch of investors barely do due diligence, having collateral problems from too many customers joining too fast sounds like one of those rare "great problems to have," as evidenced by the line of credit they just got extended. Even with the added risk, investors are probably lining up. I was surprised that the CEO didn't go down that line of reasoning for the marketing effect.
What I don't get is, why is the fear of a bank run relevant? It's a startup and most people seems pretty YOLO about using it. I don't know anything about investor sentiment so I'm genuinely curious - I thought the SIPC covers the FDIC equivalent for RH accounts that show any semblance of trading.
In this frothy market where a bunch of investors barely do due diligence, having collateral problems from too many customers joining too fast sounds like one of those rare "great problems to have," as evidenced by the line of credit they just got extended. Even with the added risk, investors are probably lining up. I was surprised that the CEO didn't go down that line of reasoning for the marketing effect.
It might not be fear of a bank run, but of enforcement from the SEC or FINRA for not maintaining sufficient net capital.
If they did run afoul of these regulations, it's probably advisable to not admit it on televised interviews.
That would also explain why they accepted a $1 billion investment rather than expanding their credit lines, and continued to limit purchases of Gamestop stock.
Monday at open, when last week's option contracts are settled, is going to be interesting.
If they did run afoul of these regulations, it's probably advisable to not admit it on televised interviews.
That would also explain why they accepted a $1 billion investment rather than expanding their credit lines, and continued to limit purchases of Gamestop stock.
Monday at open, when last week's option contracts are settled, is going to be interesting.
The problem is the CEO specifically said they did not have a liquidity issue. That means one way or another, he's a straight up liar.
Read between the lines. They didn't have a liquidity issue after they disallowed the buying of stocks that had the 100% capital requirement from the clearing houses; hence, they no _longer_ had a liquidity issue.
If your business can't function normally (i.e. you have to disallow the buying of stocks that should otherwise be purchasable) because you don't have enough money, that is a liquidity issue. This is costing them a huge amount of bad publicity and losing them a lot of customers, so it's clearly an issue. If that issue is because they do not have enough cash on hand for normal business functions, then it's a liquidity issue.
That is still lying by omission. I’m really curious what motivates you to defend these liars?
There is no conspiracy theory. Simply put both the hedge funds and the brokers have a common interest to ripoff the retailer. It's not like they are hiding, at least the guy from Interactive Brokers
https://m.youtube.com/watch?v=7RH4XKP55fM
There's a little more depth to this. It's not just an influx of users or the margin they provide to fund accounts before user money arrives to RH's bank account.
Clearing houses, and clearing houses' clearing houses' have raised capital requirements for buying gme from 1%-2% to 100%. This has to be the brokers' capital. User capital doesn't count, so it doesn't matter that a user has fully paid for the share. This is unintuitive, but CEOs of several brokerages have confirmed.
That may let RH off the hook (even they they could have borrowed easily, to cover fully paid, unleveraged purchases), but it does push the "conspiracy" question downstream. Why did clearing houses make this call? After all, it's not RH's that's liable to be unable to pay. They've already paid.
At this point, there are enough credible reports confirming that clearing houses have been shutting down, or trying to, memestock buys at client brokerages. They probably do have market integrity reasons for doing so, but the specific mechanics are unclear.
Also regardless, this is a decision that changes the game/rules, affecting winners, losers, outcomes. Who was the power to make these calls. I guess it isn't a regulator.
Meanwhile, RH and other brokerages are responsible for whatever misunderstanding and conspiracies happened. "Because the stock is volatile and we're protecting our customers from volatility" is a naked lie. Start with a lie, and people will assume the worst.
FWIW, I think it's telling that the CEO of Robin Hood was willing to imply liquidity issues to avoid talking about market makers or clearing houses. I don't know what it tells, but I guess we'll find out in the coming weeks.
One thing that always comes out of these scandals is some insight into the wall street "infrastructure."
Clearing houses, and clearing houses' clearing houses' have raised capital requirements for buying gme from 1%-2% to 100%. This has to be the brokers' capital. User capital doesn't count, so it doesn't matter that a user has fully paid for the share. This is unintuitive, but CEOs of several brokerages have confirmed.
That may let RH off the hook (even they they could have borrowed easily, to cover fully paid, unleveraged purchases), but it does push the "conspiracy" question downstream. Why did clearing houses make this call? After all, it's not RH's that's liable to be unable to pay. They've already paid.
At this point, there are enough credible reports confirming that clearing houses have been shutting down, or trying to, memestock buys at client brokerages. They probably do have market integrity reasons for doing so, but the specific mechanics are unclear.
Also regardless, this is a decision that changes the game/rules, affecting winners, losers, outcomes. Who was the power to make these calls. I guess it isn't a regulator.
Meanwhile, RH and other brokerages are responsible for whatever misunderstanding and conspiracies happened. "Because the stock is volatile and we're protecting our customers from volatility" is a naked lie. Start with a lie, and people will assume the worst.
FWIW, I think it's telling that the CEO of Robin Hood was willing to imply liquidity issues to avoid talking about market makers or clearing houses. I don't know what it tells, but I guess we'll find out in the coming weeks.
One thing that always comes out of these scandals is some insight into the wall street "infrastructure."
> Clearing houses, and clearing houses' clearing houses' have raised capital requirements for buying gme from 1%-2% to 100%.
Was the requirement raised 100% in the past for other stocks.
Was the requirement raised 100% in the past for other stocks.
What about funded accounts with no clearance in progress?
This explanation only makes sense if RH allowed the above situations to buy, yet it seems they restricted globally.
This explanation only makes sense if RH allowed the above situations to buy, yet it seems they restricted globally.
> What about funded accounts with no clearance in progress?
Other comments have already mentioned that they can't use customer funds for the deposit, so they need to pay it out-of-pocket or borrow it.
Other comments have already mentioned that they can't use customer funds for the deposit, so they need to pay it out-of-pocket or borrow it.
I think this is only the case when the customer has sold something and immediately buys before clearance. I'm speaking about the standard case where you purchase stocks with funds in your account -- does that also require a deposit from the broker?
The stock trade still takes two days to settle. Apparently this is to allow for correcting errors before it becomes irreversible.
You're expecting a basic level of competence and maturity that RH doesn't have as evidenced by past problems.
The logical fix would be don't allow people to buy on proceeds that haven't settled yet. Other brokerages do this regardless of the security. But instead they specifically limited buying only certain securities that their hedge fund affiliates happened to have shorts in, thereby eliminating buy volume entirely and causing the stock price to go down. It's too coincidental to ignore when there was clearly a more precedented alternative.
This is a portion of a message sent to all users that IB sent out Friday afternoon:
We are seeing unprecedented volatility in GME, AMC, BB, EXPR, KOSS and a small number of other U.S. securities that has forced us reduce the leverage previously offered to these securities and, in certain instances, limit trading to risk reducing transactions. IBKR currently has no restrictions on trading shares in those companies, and customers can open or close positions in those shares. Like many other brokers, IBKR placed options on certain of those stocks in closing only earlier this week. The plan is to lift those restrictions in an orderly manner while closely monitoring market conditions. To be clear, IBKR has not restricted clients’ ability to close existing positions in any of the U.S. securities subject to market volatility, and does not plan to do so.
The limits IBKR has placed have applied to all customers and were not limited to “retail clients” or any other group.
We are seeing unprecedented volatility in GME, AMC, BB, EXPR, KOSS and a small number of other U.S. securities that has forced us reduce the leverage previously offered to these securities and, in certain instances, limit trading to risk reducing transactions. IBKR currently has no restrictions on trading shares in those companies, and customers can open or close positions in those shares. Like many other brokers, IBKR placed options on certain of those stocks in closing only earlier this week. The plan is to lift those restrictions in an orderly manner while closely monitoring market conditions. To be clear, IBKR has not restricted clients’ ability to close existing positions in any of the U.S. securities subject to market volatility, and does not plan to do so.
The limits IBKR has placed have applied to all customers and were not limited to “retail clients” or any other group.
I wanted to disable my margin account on RH but I didn't find how... luckily I no longer do business with them.
For what it's worth, there seems to be a link in their docs to downgrade to a "Cash" account.
But with that you lose pretty much all the functionality (instant transfers, instant settlements, etc) that makes Robinhood any better than any other non-margin alternative. Unless you're a huge fan of confetti. I hear Cash accounts still get the confetti.
But with that you lose pretty much all the functionality (instant transfers, instant settlements, etc) that makes Robinhood any better than any other non-margin alternative. Unless you're a huge fan of confetti. I hear Cash accounts still get the confetti.
hahaha, I never noticed the confetti... maybe I blocked the javascript... but thanks.
Is there room for the argument that Robinhood should have seen this coming days, possibly weeks beforehand, and been raising capital preemptively?
In addition, DTCC raised collateral for specifics stocks from 2-3% to 100%, is there not room for investigation why aside from "volatility"?
In addition, DTCC raised collateral for specifics stocks from 2-3% to 100%, is there not room for investigation why aside from "volatility"?
It’s also worth noting that’s a different model than a lot of the big companies.
For example you don’t get margin on fidelity unless you apply for it and sign waivers and attest you can cover it.
And any intraday trades will garner warnings if you don’t have the cash in account to cover. After a couple they will axe the ability.
Robinhood intrinsically allows a lot more leverage and risk for their customers by default. And this isn’t their first snafu. They had people exploiting their margin defaults for basically infinite leverage a year ago, leverage these 20 somethings would never be able to cover.
For example you don’t get margin on fidelity unless you apply for it and sign waivers and attest you can cover it.
And any intraday trades will garner warnings if you don’t have the cash in account to cover. After a couple they will axe the ability.
Robinhood intrinsically allows a lot more leverage and risk for their customers by default. And this isn’t their first snafu. They had people exploiting their margin defaults for basically infinite leverage a year ago, leverage these 20 somethings would never be able to cover.
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And yet if I recall correctly, they were quite deceptive and cagey about simply telling everyone the truth upfront. Instead they said it was for everyone's own safety.
The biggest problem isn't poor messaging, it's biggest problem is that it's running too lean if it can't cover unanticipated calls for collateral. This is a game that requires some deep reserves. Hopefully when this settles down and they're able to reduce collateral requirements with the clearing house they'll keep the extra on hand.
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I call BS. If margin were an issue, they could've easily paused that functionality. (just like how they magically paused trading on specific stocks)
I'll stick with Occam's razor here. They were trying to appease the hedge funds who pay them hundreds of millions of dollars a year.
I'll stick with Occam's razor here. They were trying to appease the hedge funds who pay them hundreds of millions of dollars a year.
>Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?
Why didn't the recent-ish pot stocks bubble or the dry shipping bubble cause the same restrictions?
Why didn't the recent-ish pot stocks bubble or the dry shipping bubble cause the same restrictions?
It's not just RH that has disabled buying, other brokers have as well. Most notably IB and Trading 212 (which uses IB) with the IB CEO going on TV telling how that benefited them. There's clearly more going on than just some collateral bullshit that RH is spewing...
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Isn't there also the related/same problem that WSB users on RH explicitely and intentionally want to ruin the short sellers which unavoidable would leave the middleman/RH holding the bag?
Suddenly your users, not customers those are the market makers, are your opponents.
Suddenly your users, not customers those are the market makers, are your opponents.
> Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?
This sounds more like an insurance issue which Robinhood didn't want to deal with.
This sounds more like an insurance issue which Robinhood didn't want to deal with.
I’m waiting for an explanation why Starbucks is on the restricted list. It’s not volatile.
The collateral requirements depend on net buys vs sells. I'm guessing RH was tapped to the limit, and the buy limits were applied to anything with unbalanced orders. That applied to a bunch of stocks then, some that were up, and some that were down and looked cheap. (SBUX and AMD were among those down after earnings last week.)
whatever the reason it’s clear they can’t handle whatever volume they are seeing right now. who would continue to use them at this point.
most momentum trades are crowded - this implies any new crowded trade will have to be restricted.
most momentum trades are crowded - this implies any new crowded trade will have to be restricted.
Keep in mind Robinhood could have just restricted said herd. If they did in fact have such huge liquidity issues, it's extremely irresponsible to allow tons more margin accounts to come online.
About a dozen brokers simultaneously halted buying, not just Robinhood.
Because the cost of collateral spiked in meme stocks in unison. They had to move money around to post the massively increased cost of collateral.
Everyone seems to be forgetting how fast this all happened.
Everyone seems to be forgetting how fast this all happened.
They could have simply banned buying the stock using unsettled cash or margin. Instead they banned all buys and did a terrible job explaining their reasoning.
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Great. Now care to explain how the same thing happened with TDA, IB and Schwab? All under-capitalized as well?
Why did this congresswoman, a champion of the marginalized and oppressed, call for a hearing? And why only for Robinhood, when several firms had the same policy? And why is the SEC not also the subject of her proposed "hearing?"
https://twitter.com/AOC/status/1354830697459032066
https://twitter.com/AOC/status/1354830697459032066
Because the people who feel robinhood wronged them are most likely to donate to her campaign. Not as many IBKR users in her fan base.
The sentence right after that, in her first reply to herself:
> Inquiries into freezes should not be limited solely to Robinhood.
> Inquiries into freezes should not be limited solely to Robinhood.
because it's mostly for show?
But... Wouldn't that mean they need to halt all buys? Why only the ones being targeted?
It sounds like the problem was sign-ups then, not trades.
There is no temporary lapse in Integrity.
prag you have been a warpath, I hope robinhood is paying you well for this
Lying (and hiding this type of information behind dodgy reasons is tantamount to lying) is illegal also.
Did they do a per-customer assessment?
Why did they not just close shop for the day? At least that would have been honest.
Did they do a per-customer assessment?
Why did they not just close shop for the day? At least that would have been honest.
>Lying (and hiding this type of information behind dodgy reasons is tantamount to lying) is illegal also.
Were they lying? They made carefully crafted statements that were true, which wsb proceeded to extrapolate to fit their narrative that something nefarious is going on.
>Did they do a per-customer assessment?
The deposit requirements are not dependent on the customer's credit abilities (see also: they can't use customer funds), it's directly dependent on what stock they're buying.
>Why did they not just close shop for the day? At least that would have been honest.
"I wanted to cash out last week but robinhood shut down! Robinhood caused me to lose 80% of my investment!"
Were they lying? They made carefully crafted statements that were true, which wsb proceeded to extrapolate to fit their narrative that something nefarious is going on.
>Did they do a per-customer assessment?
The deposit requirements are not dependent on the customer's credit abilities (see also: they can't use customer funds), it's directly dependent on what stock they're buying.
>Why did they not just close shop for the day? At least that would have been honest.
"I wanted to cash out last week but robinhood shut down! Robinhood caused me to lose 80% of my investment!"
Did they release the true information?
No. Like Bill Clinton, “they did never have sex with that woman”, which in a way of understanding is technically true.
Either the market flows with honest information or it is being rigged.
No. Like Bill Clinton, “they did never have sex with that woman”, which in a way of understanding is technically true.
Either the market flows with honest information or it is being rigged.
>Did they release the true information?
I guess?
* Did they shut down trading because of volatility? Yeah technically because the volatility was what caused their deposit requirements to go up.
* Were they having liquidity issues? No, because they shut down trading before it became an issue.
>Either the market flows with honest information or it is being rigged.
I'm having trouble imaginging how him lying cause the game to be "rigged". Specifically, how him lying caused material harm to the robinhood users. People saw trading was restricted, so they jumped ship to other brokerages. They'd have done that regardless of whether it was caused by gremlins in the server room or liquidity issues.
I guess?
* Did they shut down trading because of volatility? Yeah technically because the volatility was what caused their deposit requirements to go up.
* Were they having liquidity issues? No, because they shut down trading before it became an issue.
>Either the market flows with honest information or it is being rigged.
I'm having trouble imaginging how him lying cause the game to be "rigged". Specifically, how him lying caused material harm to the robinhood users. People saw trading was restricted, so they jumped ship to other brokerages. They'd have done that regardless of whether it was caused by gremlins in the server room or liquidity issues.
So they should penalize all their other clients who are not involved in trading GME? Everyone else should pay the price because DTCC raised collateral requirements to settle GME trades?
I want to believe you but then I see how the short sellers think about these kinds of situations: https://www.youtube.com/watch?v=VMuEis3byY4
Its in poor taste to call it a "meme stock purchase" when it legitimately has a chance to make (and for many has already made) investors a lot of money. While there are memes around the stock purchase (no different than with TSLA) it is a very legit investment strategy and market opportunity.
This was not Robinhood denying a couple redditors some meme material - it was a company denying many regular americans a once-in-a-lifetime investment opportunity (and in itself the practice may have suppressed the power of that investment)
This was not Robinhood denying a couple redditors some meme material - it was a company denying many regular americans a once-in-a-lifetime investment opportunity (and in itself the practice may have suppressed the power of that investment)
> Stock trades don't settle until T+2
This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba. They can do it in a matter of seconds. But the people up at the top of the stock market choose to not implement it. Why?
> on margin
What about high frequency trading instiutions on Wall Street? Who gives them their margins, and why is it that they are subject to much less interference than RobinHood users?
This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba. They can do it in a matter of seconds. But the people up at the top of the stock market choose to not implement it. Why?
> on margin
What about high frequency trading instiutions on Wall Street? Who gives them their margins, and why is it that they are subject to much less interference than RobinHood users?
>Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba
But that's actually not true though, it takes days to settle those transactions, the payment processors just provide the illusion of instaneousness by smoothing it over with their own fungible cash reserves.
But that's actually not true though, it takes days to settle those transactions, the payment processors just provide the illusion of instaneousness by smoothing it over with their own fungible cash reserves.
T+2 is an artifact from the days where there was paper trading and everything was done via open outcry. There's no technical reason it can't be done much faster. ATM transactions are atomic within 60 seconds. Credit cards are faster than that writing to their ledgers. And yes, while behind the scenes those transactions don't settle until next day via bank or credit card processor, there's no technical reason that they can't be done in near real-time.
In the US the reason we still have T+2 is that it benefits the financial institutions to do so at the expense of the individual. One of the many reasons I have zero empathy for the industry.
In the US the reason we still have T+2 is that it benefits the financial institutions to do so at the expense of the individual. One of the many reasons I have zero empathy for the industry.
Howabout KYC,Security,fixing errors? You're really saying that there are no downsides in doing this faster?
1. KYC done ahead of time.
2. Security? How is doing it faster less secure? If anything it would be more secure because of the reduced threat area, right?
3. Errors should not happen in an electronic system. That's a bug, not an error with the parties involved. If we can do T+3 in an era with zero computing power, it's obvious we can
do much faster in the year 2021.
Again, we do this in other areas where consumers demand it.
Yes, I'm really saying there are no downsides. Can you name one?
Again, we do this in other areas where consumers demand it.
Yes, I'm really saying there are no downsides. Can you name one?
It may well be that it does take payment processors t+2 days but I think the point remains that it should not.
Even if trades settled at T+0 (overnight) there are still rules against good faith and free riding violations in addition to liquidation issues.
The reasons are a combination of human factors. Technologically it is possible for atomic transactions to be completed far earlier, but commerce is a web of interactions between mostly real humans.
> it takes days to settle those transactions
The question is: why? There's absolutely no technical (e.g. nightly batch processing) or process (e.g. physical cross-country mailiing of paper stocks) reason any more. It's 2021 not 1960, technology should have evolved over the last decades. To wait days for money and stock transfers is ridiculous
The question is: why? There's absolutely no technical (e.g. nightly batch processing) or process (e.g. physical cross-country mailiing of paper stocks) reason any more. It's 2021 not 1960, technology should have evolved over the last decades. To wait days for money and stock transfers is ridiculous
I have always been impressed at the speed of financial transactions in Europe. Since SMS became a thing, I have watched in amazement, how people have been buying cars, houses, other goods, transferring money, with their cell phones. It all happens 'instantly.' Meanwhile, when we send money from bank to bank, or to Europe, or UK, it takes 3 days, or more!
Surely, it is set up by the system to collect interest during that time period? Multiply by thousands, millions transactions, that is a lot of interest collected.
Well... here in Europe the EU parliament passed laws that created the unified payment area (SEPA) as a first step and then forced the banks to offer overnight transfers. The current aim is instant payments, especially to reduce the dominance of Paypal.
you'd collect interest on money you loaned out. they'd have to be loaning out some amount of money, and even if it's just 'backed up' by all this 'inflight' money, that's not terribly safe. I think the majority of the slowness is just down to old/legacy systems, and the sheer volume of stuff that has to be touched to make upgrades. I'm not saying upgrades/changes never happen, but it's a big effort. Why do we still have relatively poor security around a lot of financial stuff? Because the cost of just writing off fraud is still usually much cheaper than the long-term effort of systemic upgrades.
Other countries didn't have as much infrastructure to upgrade, and have been able to leap frog the US in many ways.
Other countries didn't have as much infrastructure to upgrade, and have been able to leap frog the US in many ways.
>The question is: why?
legacy systems. Someone in another thread mentioned a lot systems still use the "move file to this ftp folder and we'll process it in the morning" method to process transactions.
legacy systems. Someone in another thread mentioned a lot systems still use the "move file to this ftp folder and we'll process it in the morning" method to process transactions.
Moving from T+3 to T+2 is estimated to have cost the industry over half a billion dollars in technology and process re-engineering.
Honestly, that's minuscule compared to the flows involved.
I think it is legacy thinking more than systems. If we wanted to we could have a system more like European one, but for whatever reasons we don't care enough. The behavioral side of this is far more interesting than the superficial technical issues.
If that's genuinely the case then it's no wonder people are angry. At the scale of money involved legacy tech just shouldn't be an acceptable excuse.
Maybe there are reasons other than technical ones.
> This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency.
The problem is, you have lots and lots of databases-- there's not one central ledger of every position. Settlement is effectively an atomic commitment protocol, so that if you are selling a stock you expect to receive from one firm to another, and someone else fails to deliver, you need to be able to unwind the downstream trades-- but also need all transactions to eventually become final.
The T+1, T+2, T+3 periods are convenient in human units, because sometimes it's desirable to have a human in the loop when unexpected things happen.
The problem is, you have lots and lots of databases-- there's not one central ledger of every position. Settlement is effectively an atomic commitment protocol, so that if you are selling a stock you expect to receive from one firm to another, and someone else fails to deliver, you need to be able to unwind the downstream trades-- but also need all transactions to eventually become final.
The T+1, T+2, T+3 periods are convenient in human units, because sometimes it's desirable to have a human in the loop when unexpected things happen.
If only a public shared ledger was available for these institutions to settle trades on.
People love knocking Bitcoin here, but this is why the technology exists. No reason to continue letting these institutions run smoke-and-mirrors with everyone's money
People love knocking Bitcoin here, but this is why the technology exists. No reason to continue letting these institutions run smoke-and-mirrors with everyone's money
Maybe eventually. Right now, there's a whole lot of problem with scaling for distributed ledgers. Big markets do 20M trades per day-- and that's just across the market itself.. This is like 50k TPS average (not peak) across a trading day; some distributed ledgers do better but compare to several transactions per second across Bitcoin and a few thousand TPS per second for most performance-oriented ledgers.
You might also not want to have a public ledger of all the ownership interests.
It also doesn't exactly solve the problem. You still have the prospect of double spend, etc, until commitment/ledger settlement. And for high stakes transaction you probably want humans in the loop talking about what to do when these things happen instead of some automated policy.
You might also not want to have a public ledger of all the ownership interests.
It also doesn't exactly solve the problem. You still have the prospect of double spend, etc, until commitment/ledger settlement. And for high stakes transaction you probably want humans in the loop talking about what to do when these things happen instead of some automated policy.
Don't get confused - other markets have end of day settlement, stocks are a different animal but its not because humans in NYC aren't familiar with databases and transaction processing.
That's the thing. If we were to start from scratch building a stock market or banking system today, we might take different approaches.
But there's a market that exists at substantial scale that was originally built around T+14 settlement (and then T+7, T+5, T+3, all the way down to T+2 which is really still brand new). And while there's substantial risks and costs that come from delayed settlement, there's also substantial benefits... and an entire global financial system that relies upon the properties we get from these settlement delays. Another equilibrium being perhaps slightly better overall doesn't necessarily justify reinventing the wheel.
I suspect we'll get to T+1 settlement for stocks and many banking transactions in a few more years (we're already there for options)... and then it may be time to discuss the benefits of various types of "instant" settlement for some subset of financial activity.
But there's a market that exists at substantial scale that was originally built around T+14 settlement (and then T+7, T+5, T+3, all the way down to T+2 which is really still brand new). And while there's substantial risks and costs that come from delayed settlement, there's also substantial benefits... and an entire global financial system that relies upon the properties we get from these settlement delays. Another equilibrium being perhaps slightly better overall doesn't necessarily justify reinventing the wheel.
I suspect we'll get to T+1 settlement for stocks and many banking transactions in a few more years (we're already there for options)... and then it may be time to discuss the benefits of various types of "instant" settlement for some subset of financial activity.
https://thismatter.com/money/stocks/settlement-and-clearing....
It’s shortened over time, but things across many parties still need to be sorted out, including buffets for fraud. Visa also doesn’t work the way you think it does, much like checks, ACH transfers, and wires also take days to clear.
It’s shortened over time, but things across many parties still need to be sorted out, including buffets for fraud. Visa also doesn’t work the way you think it does, much like checks, ACH transfers, and wires also take days to clear.
T+2 is not a database limitation, it’s a deliberate decision by clearing houses to provide a window for cancelling a trade in case there are problems - fraud, etc.
Or breaks due to executions that are nonconforming
Whether or not it is fishy, it is the literally, honest-to-God truth. Not only that, it is well-known within the industry. People have floated replacing the system with something that settles faster, but they haven't.
There's a Wikipedia page on it (last edit December 2019): https://en.wikipedia.org/wiki/T%2B2
There's a Wikipedia page on it (last edit December 2019): https://en.wikipedia.org/wiki/T%2B2
Stock trades can be corrected. I'm not sure when they will do it, but apparently you get 30 minutes to ask for a correction and they need longer to review it manually.
See: https://www.investopedia.com/terms/e/erroneous-trade.asp
See: https://www.investopedia.com/terms/e/erroneous-trade.asp
> Why?
Because it allows for more internal netting, and more time to reconcile discrepancies with the tape.
If you're familiar with computers, it's the same kind of tradeoffs as doing lots of rpcs vs. batching.
Because it allows for more internal netting, and more time to reconcile discrepancies with the tape.
If you're familiar with computers, it's the same kind of tradeoffs as doing lots of rpcs vs. batching.
Brokers! Provide short term funding. T+2 is a fact of life in North American equities trading.
,,Robinhood legally could not submit trades on $GME until they could muster the deposits for GME that they needed. ''
This sounds like a liquidity issue, but Robinhood's CEO said in the interview that there was no liquidity issue.
The why doesn't matter at this point because Robinhood CEO was caught lying by contradicting himself.
This sounds like a liquidity issue, but Robinhood's CEO said in the interview that there was no liquidity issue.
The why doesn't matter at this point because Robinhood CEO was caught lying by contradicting himself.
It's clear that Robinhood's comms approach was to avoid a bank run. They raised a billion dollars of emergency investment later that day and also drew down their credit lines. He may have been trying to say that they had plenty of money coming, but it wasn't available at the right time.
Their comms approach is the type of PR disaster that will be studied for years to come.
Their comms approach is the type of PR disaster that will be studied for years to come.
It's not exactly like a bank run in that there doesn't seem to be any question of solvency once trading is stopped. Customers could always get their money out.
It's more like a denial-of-service attack. Customer orders take server-side resources to execute. Except that the server resources taken up are literally money, and execution takes days. Blocking orders fixes the problem.
They didn't allocate enough server resources (money) to execute all requests under extreme load.
Customer money is a separate pool, not used for execution.
It's more like a denial-of-service attack. Customer orders take server-side resources to execute. Except that the server resources taken up are literally money, and execution takes days. Blocking orders fixes the problem.
They didn't allocate enough server resources (money) to execute all requests under extreme load.
Customer money is a separate pool, not used for execution.
It's funny that people were angry for Robinhood not allowing buying new options while Robinhood was afraid of just the opposite: everybody cashing out.
>They raised a billion dollars of emergency investment later that day
Kind of unrelated, but I think if "wall street" was really upset regarding what RH is doing, this wouldn't have been possible.
Kind of unrelated, but I think if "wall street" was really upset regarding what RH is doing, this wouldn't have been possible.
They had to access money for 3-4 days due to (1) surge in turnover in regards to GME including weekly option rollovers which by Wednesday had ballooned, and (2) influx of new accounts opened with instant access to buy meme stocks.
It was a liquidity issue but if he had come on TV and stated that, there would have been market collapse and utter chaos. I can’t understate how close we got to having a big liquidation event on the entire market, which we still may depending on how this week goes.
It was a liquidity issue but if he had come on TV and stated that, there would have been market collapse and utter chaos. I can’t understate how close we got to having a big liquidation event on the entire market, which we still may depending on how this week goes.
How would you define a "liquidity issue"? I would define it as "current liabilities in excess of current assets", using the accounting definitions of each. It's not clear that Robinhood was ever in that situation.
Not to defend the RH CEO, who I thought was very poor about communicating this, but I don't think that particular sentence was a lie.
Not to defend the RH CEO, who I thought was very poor about communicating this, but I don't think that particular sentence was a lie.
> I would define it as "current liabilities in excess of current assets"
I don't think this is a good definition.
If I have a $150 electric bill due immediately, no cash, and $200,000 of real estate I have a liquidity issue.
This despite the fact that my current assets far exceed my current liabilities.
I don't think this is a good definition.
If I have a $150 electric bill due immediately, no cash, and $200,000 of real estate I have a liquidity issue.
This despite the fact that my current assets far exceed my current liabilities.
If someone tells you to buy the Empire State Building and you refuse, do you have a liquidity issue?
They are refusing to do things to prevent liquidity issues. Their customers can send requests that cause them to temporarily take on more debt. There are particular orders that need a lot of money to execute. Block those orders and they don't need to borrow the money.
They are refusing to do things to prevent liquidity issues. Their customers can send requests that cause them to temporarily take on more debt. There are particular orders that need a lot of money to execute. Block those orders and they don't need to borrow the money.
> I would define it as "current liabilities in excess of current assets"
That's solvency, not liquidity. If your liabilities exceed your assets you have gone bust.
Liquidity is having the cash to cover your outflows. You may have enough assets but if these assets aren't liquid, you have a liquidity issue.
That's solvency, not liquidity. If your liabilities exceed your assets you have gone bust.
Liquidity is having the cash to cover your outflows. You may have enough assets but if these assets aren't liquid, you have a liquidity issue.
They literally did not have enough money in the bank to continue business as usual. If that's not a liquidity issue I don't know what is.
It wasn't "business as usual," though. It was a huge spike in orders that became very expensive to execute.
You could say they didn't provision enough resources to handle extreme load.
You could say they didn't provision enough resources to handle extreme load.
They were in it, as they wouldn't have been able to deliver the value of the options at that point (that's why they needed the cash injection).
The whole stock market industry is based on fractional reserves.
The whole stock market industry is based on fractional reserves.
[deleted]
What do you mean by
> deliver the value of the options
Do you mean they wouldn't be able to give people cash if they sold their options?
> deliver the value of the options
Do you mean they wouldn't be able to give people cash if they sold their options?
Similar explanation was posted Jan 28 on twitter by Silent Cal[1]. This article and the twitter thread do paint a very plausible explanation. And is easy to accept.
OTOH, a potentially far more nefarious, yet plausible, underlying motive was posted on /r/wsb today [2] that links GME to counterfeiting shorts.
Given Steve Cohen's numerous scandals through the years as detailed on wikipedia [3], needing to cover up for counterfeiting shorts also seems like a plausible explanation.
I hope the finance committee investigations AOC called for take place and consider both points.
* - Not invested in GME, and prohibited from doing so by my employer. No intention of committing suicide and happy w/life.
[1] - https://twitter.com/KralcTrebor/status/1354952686165225478
[2] - https://www.reddit.com/r/wallstreetbets/comments/l97ykd/the_...
[3] - https://en.wikipedia.org/wiki/Steve_Cohen_(businessman))
OTOH, a potentially far more nefarious, yet plausible, underlying motive was posted on /r/wsb today [2] that links GME to counterfeiting shorts.
Given Steve Cohen's numerous scandals through the years as detailed on wikipedia [3], needing to cover up for counterfeiting shorts also seems like a plausible explanation.
I hope the finance committee investigations AOC called for take place and consider both points.
* - Not invested in GME, and prohibited from doing so by my employer. No intention of committing suicide and happy w/life.
[1] - https://twitter.com/KralcTrebor/status/1354952686165225478
[2] - https://www.reddit.com/r/wallstreetbets/comments/l97ykd/the_...
[3] - https://en.wikipedia.org/wiki/Steve_Cohen_(businessman))
Note that Silent Cal posted an update that the DTCC discretionarily upped collateral required for specific stocks to 100%, and did so without announcing it to the public. https://twitter.com/KralcTrebor/status/1355172567242469377
I read that reddit thread earlier when it was at the top of r/all and it is unhinged.
How this went from vanilla pump and dump to this conspiratorial lunacy is beyond me and I hope it stops when GME comes back down to earth.
How this went from vanilla pump and dump to this conspiratorial lunacy is beyond me and I hope it stops when GME comes back down to earth.
Is it possible Gamestop is selling back shares that it bought back a couple years ago, and we just don't know because they are only required to report that quarterly? Their outstanding shares used to be above 100 Million, its now around 70.
https://www.fool.com/investing/2019/12/10/gamestop-just-boug...
https://www.fool.com/investing/2019/12/10/gamestop-just-boug...
Isn't counterfeiting shorts like counterfeiting money?
A lot harder to prove.
Thanks for sharing. I found it much more logical to believe it is illegal manipulation given history.
I don't buy the suggestion that DTCC deposit requirements left Robinhood and other brokers unable to facilitate all transactions. It is a backwards rationalization, trying to put technical reasons to a fear-driven decision.
First of all, they limited opening trades for all accounts, not just accounts buying on margin or with unsettled funds. If you have a cash account and you buy a stock, your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade.
Secondly, many brokerages only blocked options transactions. These don't clear through DTCC at all. They clear through OCC and net purchases of options actually capitalize the clearinghouse and can in some cases actually be advantageous to the broker by getting their accounts long premium (if the broker is net short premium, the OCC charges them more).
It's more likely that the brokerages didn't have enough staff to reconcile the trades, or that Robinhood's fake margin accounts (Robinhood Instant) left them in a position where they had to choose between telling people that they have to wait for funds to settle, or limiting trades.
Any brokerage that limits trading in an asset for which the exchanges and clearinghouses are functional is harming its customers by preventing their market access. Weird hand-wavey apologetics about the DTCC or OCC don't explain why the retail brokerages had to limit trading in cash accounts.
First of all, they limited opening trades for all accounts, not just accounts buying on margin or with unsettled funds. If you have a cash account and you buy a stock, your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade.
Secondly, many brokerages only blocked options transactions. These don't clear through DTCC at all. They clear through OCC and net purchases of options actually capitalize the clearinghouse and can in some cases actually be advantageous to the broker by getting their accounts long premium (if the broker is net short premium, the OCC charges them more).
It's more likely that the brokerages didn't have enough staff to reconcile the trades, or that Robinhood's fake margin accounts (Robinhood Instant) left them in a position where they had to choose between telling people that they have to wait for funds to settle, or limiting trades.
Any brokerage that limits trading in an asset for which the exchanges and clearinghouses are functional is harming its customers by preventing their market access. Weird hand-wavey apologetics about the DTCC or OCC don't explain why the retail brokerages had to limit trading in cash accounts.
> your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade
I think you’re thinking about it wrong. All brokers contribute to this posted collateral and those funds, collectively, serve as a fund of mutual insurance in the event of a failure or near-failure of a participant. These are not "partial payment of customer trades, with the rest to come later".
In order to prevent customers from being affected by that near-failure, the clearinghouse first goes to that struggling broker and then to this mutual insurance fund. That is the reason why this must be funded with broker funds rather than customer funds, so the fact that you 100% paid for your shares doesn’t mean that the broker has “all of the funds” required because they can’t use your money to post this. (Otherwise “to protect customers” is not accomplished.)
I think you’re thinking about it wrong. All brokers contribute to this posted collateral and those funds, collectively, serve as a fund of mutual insurance in the event of a failure or near-failure of a participant. These are not "partial payment of customer trades, with the rest to come later".
In order to prevent customers from being affected by that near-failure, the clearinghouse first goes to that struggling broker and then to this mutual insurance fund. That is the reason why this must be funded with broker funds rather than customer funds, so the fact that you 100% paid for your shares doesn’t mean that the broker has “all of the funds” required because they can’t use your money to post this. (Otherwise “to protect customers” is not accomplished.)
Brokers are not allowed to touch client money to submit the deposit. That the purchases are settled cash on the user's account makes no difference, because none of that money Robinhood could use to clear the deposit.
But it’s not client money the second the trade executes?
It's client money until the trade settles at T+2, at which point it's the counterparty's money. It's never Robinhood's money (unless they're the counterparty, but I don't believe they do propriatary trading)
At what point does the client's money belong to Robinhood? You're not buying stocks from Robinhood.
Robinhood is on the hook to do their part in settling the trade and delivering the shares to their client and cash to the seller.
Obviously once funds are used to execute a trade, they are no longer client funds. It seems obvious that the cash at that moment would be held separately as the shares settle. That's discretely identifiable hard cash that is fully funding that specific share purchase.
I completely grok the various ways that cash that "looks like" it's in the account might not be; deposits that haven't actually cleared, prior trades that haven't actually settled.. and in those cases the brokerage is actually extending credit to their client, and that credit can run dry.
But if I have hard cash and a trade executes, that cash is gone from the account. The counterparty risk at that point is the shares not being delivered, which seems to me like it would be collateral that the seller needs to be posting to DTCC (likely DTC already holds the shares). The buyer needs to show they have the hard cash, and they can easily do that.
I guess I can't get around the fact that if the purchase is fully funded with hard cash that's in the account, that is cleared cash that can be sent off to DTCC/NSCC during the end-of-day settlement via FedWire.
Obviously once funds are used to execute a trade, they are no longer client funds. It seems obvious that the cash at that moment would be held separately as the shares settle. That's discretely identifiable hard cash that is fully funding that specific share purchase.
I completely grok the various ways that cash that "looks like" it's in the account might not be; deposits that haven't actually cleared, prior trades that haven't actually settled.. and in those cases the brokerage is actually extending credit to their client, and that credit can run dry.
But if I have hard cash and a trade executes, that cash is gone from the account. The counterparty risk at that point is the shares not being delivered, which seems to me like it would be collateral that the seller needs to be posting to DTCC (likely DTC already holds the shares). The buyer needs to show they have the hard cash, and they can easily do that.
I guess I can't get around the fact that if the purchase is fully funded with hard cash that's in the account, that is cleared cash that can be sent off to DTCC/NSCC during the end-of-day settlement via FedWire.
I think the margin stuff is pretty much a red herring. The customer's cash doesn't belong to Robinhood. Robinhood is required to provide its own cash as collateral, because it's ensuring the market against itself. Those collateral rules aren't just for margin purchases.
Would love to be corrected here if I'm wrong, but I'm not sure margin has really much to do with what's going on, and it seems to be most of what we're talking about.
Would love to be corrected here if I'm wrong, but I'm not sure margin has really much to do with what's going on, and it seems to be most of what we're talking about.
Robinhood has finite working capital and credit limits.
The more of their capital consumed by margin loans, the less available for collateral.
The more of their capital consumed by margin loans, the less available for collateral.
Robinhood Instant means that a customer doesn't necessarily need to have settled funds to trade.
https://robinhood.com/us/en/support/articles/deposit-money-i...
They call this a "margin" account but FINRA has rules about how margin accounts work. Minimum maintenance is 25% for long shares, and minimum equity is $2000.
https://www.finra.org/rules-guidance/rulebooks/finra-rules/4...
I could envision how Robinhood's margin practices and Robinhood Instant contributed greatly to the need to draw on credit lines and raise additional funds from investors.
https://robinhood.com/us/en/support/articles/deposit-money-i...
They call this a "margin" account but FINRA has rules about how margin accounts work. Minimum maintenance is 25% for long shares, and minimum equity is $2000.
https://www.finra.org/rules-guidance/rulebooks/finra-rules/4...
I could envision how Robinhood's margin practices and Robinhood Instant contributed greatly to the need to draw on credit lines and raise additional funds from investors.
I think we're talking past each other. I'm saying that, according to the rules, even if Robinhood had absolutely no margin buying whatsoever, they'd still have substantially the same collateral problem. They can't use customer funds for DTCC collateral.
I believe this is the correct understanding, with the minor explicit callout that every dollar RH had to use to cover pre-cleared ACH deposits was a dollar they couldn't use to put towards backing their DTCC collateral.
So in one way, the influx of new users and new inbound money could not have come at a worse time, even though I also believe it likely was rather inconsequential in comparison to the DTCC requirements.
So in one way, the influx of new users and new inbound money could not have come at a worse time, even though I also believe it likely was rather inconsequential in comparison to the DTCC requirements.
> even if Robinhood had absolutely no margin buying whatsoever, they'd still have substantially the same collateral problem
They'd have a less concentrated position in GME, a smaller CNS long, and lower peak net settlement debits. All of those factors affect capital commitments. They also wouldn't have to commit their own capital for Robinhood Instant accounts with customer check/ACH deposits that haven't cleared. Currently, Robinhood Instant means that Robinhood uses up to $1k of its own funds per account to clear trades...not DTCC collateral, but rather just to pay for the trade.
In the absence of margin, Robinhood doesn't have a collateral problem in the sense of effecting transactions that may not clear. Rather, it has a liquidity problem. Big difference.
The risk to Robinhood from GME buying in margin accounts is that they would have a very large net long as a firm, and then one day the stock gaps down so quickly -- perhaps overnight -- that there is no time/opportunity to close out margined positions before they lose more than their accounts' total equity. That could leave Robinhood holding the bag on 75% of the loss assuming minimum maintenance margin.
That's why I don't believe margin to be a red herring. It directly and indirectly affects the amount of the required deposit and the clearing obligations of the firm, and also imposes a very large risk upon Robinhood in the event of a scenario where GME closes in the after-hours session at $300 on a Friday and then reopens at $0.40 on Monday morning because the company filed for bankruptcy (just an example). That scenario in turn reduces the likelihood that Robinhood can borrow from banks and investors to infuse itself with the cash required to keep its business running.
Someone else posted an article saying that additional collateral across all firms due to the r/WSB squeeze is a bit less than $8B according to a DTCC spokesman. Not sure how much of that is attributable to Robinhood. That sounds like a lot of money but it's really not, in the world of financial institutions -- especially in today's cash-happy low-rates environment. To put it in perspective, Melvin Cap got $2.75B overnight, from two people.
My own personal gripe about this whole thing is that the way Robinhood carried out its business was chiefly damaging to its own customers. I also believe they shouldn't be allowed to offer "Robinhood Instant" because it doesn't appear to line up with federal requirements for margin accounts.
They'd have a less concentrated position in GME, a smaller CNS long, and lower peak net settlement debits. All of those factors affect capital commitments. They also wouldn't have to commit their own capital for Robinhood Instant accounts with customer check/ACH deposits that haven't cleared. Currently, Robinhood Instant means that Robinhood uses up to $1k of its own funds per account to clear trades...not DTCC collateral, but rather just to pay for the trade.
In the absence of margin, Robinhood doesn't have a collateral problem in the sense of effecting transactions that may not clear. Rather, it has a liquidity problem. Big difference.
The risk to Robinhood from GME buying in margin accounts is that they would have a very large net long as a firm, and then one day the stock gaps down so quickly -- perhaps overnight -- that there is no time/opportunity to close out margined positions before they lose more than their accounts' total equity. That could leave Robinhood holding the bag on 75% of the loss assuming minimum maintenance margin.
That's why I don't believe margin to be a red herring. It directly and indirectly affects the amount of the required deposit and the clearing obligations of the firm, and also imposes a very large risk upon Robinhood in the event of a scenario where GME closes in the after-hours session at $300 on a Friday and then reopens at $0.40 on Monday morning because the company filed for bankruptcy (just an example). That scenario in turn reduces the likelihood that Robinhood can borrow from banks and investors to infuse itself with the cash required to keep its business running.
Someone else posted an article saying that additional collateral across all firms due to the r/WSB squeeze is a bit less than $8B according to a DTCC spokesman. Not sure how much of that is attributable to Robinhood. That sounds like a lot of money but it's really not, in the world of financial institutions -- especially in today's cash-happy low-rates environment. To put it in perspective, Melvin Cap got $2.75B overnight, from two people.
My own personal gripe about this whole thing is that the way Robinhood carried out its business was chiefly damaging to its own customers. I also believe they shouldn't be allowed to offer "Robinhood Instant" because it doesn't appear to line up with federal requirements for margin accounts.
I think--like most outsiders trying to have a technical discussion--you can peel back the onion only so many layers.
A true insider would alternatively laugh or cringe at our crude analogies and simplifications of what's really happening inside the factory.
A true insider would alternatively laugh or cringe at our crude analogies and simplifications of what's really happening inside the factory.
Yeah, I'm trying to use more question marks and hedging "as I understand its" here. I've pentested huge clearing systems before. But I'm not going to lie and say I understood what the hell they were doing (also, the people at those firms made fun of clearing as the most boring conceivable stuff to look at).
But (1) lots of experts keep saying that Robinhood can't use customer cash as collateral to DTCC, and (2) DTCC's published rules seem to say that Robinhood owes collateral margin or not.
So like, I'm willing to bet that the margin stuff is a red herring, but I'm not willing to WSB-bet it.
But (1) lots of experts keep saying that Robinhood can't use customer cash as collateral to DTCC, and (2) DTCC's published rules seem to say that Robinhood owes collateral margin or not.
So like, I'm willing to bet that the margin stuff is a red herring, but I'm not willing to WSB-bet it.
The margin accounts seem to be a small part of it but they do tie up RH's cash further thus limiting what they have available for collateral.
This is right; in fact the article says "this is not about margin accounts".
You say it's bizarre, but apparently the regulations are written so that customer funds can't be used until the trade settles.
Going by what you think is reasonable isn't going to answer the legal question.
Going by what you think is reasonable isn't going to answer the legal question.
Would you mind quoting that part of "the regulations," or at least linking to them and giving a general nudge toward the relevant section?
The whole premise of client asset segregation is that failure of the broker should not put the assets of a client in jeopardy. This isn't a technical detail of "the regulations", it's the entire foundational premise.
The trade is not "done" until it settles. As discussed throughout, that's T+2. Prior to settlement, the trade can fail (e.g. your counterparty turns out not to have the money/stock to fund their side of the trade).
If you really want to read the detail, it's called Rule 15c3-3.
The trade is not "done" until it settles. As discussed throughout, that's T+2. Prior to settlement, the trade can fail (e.g. your counterparty turns out not to have the money/stock to fund their side of the trade).
If you really want to read the detail, it's called Rule 15c3-3.
15c3-3 does not say that a broker can not use client funds to purchase securities for the client that the client is trying to buy.
It says the broker can’t use client funds to purchase securities for proprietary trading.
Everyone has totally misread the rule and then is stating a total falsehood as if it’s unequivocal truth. It’s maddening.
> The Commission adopted Rule 15c3-3 in 1972, in part, to ensure that a broker-dealer in possession of customers' funds either deployed those funds “in safe areas of the broker-dealer's business related to servicing its customers” or, if not deployed in such areas, deposited the funds in a reserve bank account to prevent commingling of customer and firm funds.[7] Rule 15c3-3 requires a broker-dealer to calculate what amount, if any, it must deposit on behalf of customers in the reserve bank account, entitled “Special Reserve Bank Account for the Exclusive Benefit of Customers” (“Reserve Bank Account”), under the formula set forth in Rule 15c3-3a (“Reserve Formula”).[8] Generally, the Reserve Formula requires a broker-dealer to calculate any amounts it owes its customers and the amount of funds generated through the use of customer securities, called credits, and compare this amount to any amounts its customers owe it, called debits.[9] If credits exceed customer debits, the broker-dealer must deposit that net amount in the Reserve Bank Account.[10]
https://www.federalregister.gov/documents/2004/09/07/04-2018...
> Possession and Control Monitoring is related to SEC rule 15c3-3 - The Customer Protection Rule. The Customer Protection Rule prohibits a brokerage firm from commingling fully paid for customer securities with non-fully paid for customer securities and/or firm securities.
> When a client of the firm purchases securities through the firm and pays for those securities in full, the firm must "lock-up" or "segregate" those securities for the protection of the client. The segregation of fully paid for customer securities protects those client owned securities from the firm's creditors in the event that the firm can no longer continue as a going concern - that is, the firm goes belly up.
> SEC rule 15c3-3 also prevents the brokerage firm from using full paid for segregated shares to satisfy any delivery commitments that might result from the firm's trading activities. If, for whatever reason, the firm does use segregated customer shares to satisfy a firm delivery a 'SEG Violation' or Possession and Control violation occurs.
http://brokerage101.com/opscntl.html
> The reserve formula calculation is performed weekly to identify customer related payables and receivables. If the calculation results in a net payable to customer, the broker-dealer is required to reserve this amount in a special reserve bank account. This special reserve bank account is for the exclusive benefit of customers and funds can only be withdrawn with the support of an updated reserve formula calculation. In theory, on the date the reserve formula is calculated, combining the securities held in possession or control plus the funds included in the reserve formula should equal the amount the broker- dealer owes to the customer.
https://www2.deloitte.com/content/dam/Deloitte/global/Docume...
> Rule 15c3-3 prohibits use of customer property to support non-customer activities.
https://www.sec.gov/rules/final/34-50295.htm
It says the broker can’t use client funds to purchase securities for proprietary trading.
Everyone has totally misread the rule and then is stating a total falsehood as if it’s unequivocal truth. It’s maddening.
> The Commission adopted Rule 15c3-3 in 1972, in part, to ensure that a broker-dealer in possession of customers' funds either deployed those funds “in safe areas of the broker-dealer's business related to servicing its customers” or, if not deployed in such areas, deposited the funds in a reserve bank account to prevent commingling of customer and firm funds.[7] Rule 15c3-3 requires a broker-dealer to calculate what amount, if any, it must deposit on behalf of customers in the reserve bank account, entitled “Special Reserve Bank Account for the Exclusive Benefit of Customers” (“Reserve Bank Account”), under the formula set forth in Rule 15c3-3a (“Reserve Formula”).[8] Generally, the Reserve Formula requires a broker-dealer to calculate any amounts it owes its customers and the amount of funds generated through the use of customer securities, called credits, and compare this amount to any amounts its customers owe it, called debits.[9] If credits exceed customer debits, the broker-dealer must deposit that net amount in the Reserve Bank Account.[10]
https://www.federalregister.gov/documents/2004/09/07/04-2018...
> Possession and Control Monitoring is related to SEC rule 15c3-3 - The Customer Protection Rule. The Customer Protection Rule prohibits a brokerage firm from commingling fully paid for customer securities with non-fully paid for customer securities and/or firm securities.
> When a client of the firm purchases securities through the firm and pays for those securities in full, the firm must "lock-up" or "segregate" those securities for the protection of the client. The segregation of fully paid for customer securities protects those client owned securities from the firm's creditors in the event that the firm can no longer continue as a going concern - that is, the firm goes belly up.
> SEC rule 15c3-3 also prevents the brokerage firm from using full paid for segregated shares to satisfy any delivery commitments that might result from the firm's trading activities. If, for whatever reason, the firm does use segregated customer shares to satisfy a firm delivery a 'SEG Violation' or Possession and Control violation occurs.
http://brokerage101.com/opscntl.html
> The reserve formula calculation is performed weekly to identify customer related payables and receivables. If the calculation results in a net payable to customer, the broker-dealer is required to reserve this amount in a special reserve bank account. This special reserve bank account is for the exclusive benefit of customers and funds can only be withdrawn with the support of an updated reserve formula calculation. In theory, on the date the reserve formula is calculated, combining the securities held in possession or control plus the funds included in the reserve formula should equal the amount the broker- dealer owes to the customer.
https://www2.deloitte.com/content/dam/Deloitte/global/Docume...
> Rule 15c3-3 prohibits use of customer property to support non-customer activities.
https://www.sec.gov/rules/final/34-50295.htm
This is a long series of citations that seems on its face to confirm that broker-dealers can't use customer funds to post DTCC collateral.
Where do you get that from?
Everything in the rule is about not using customer funds for proprietary purposes. Not co-mingling customer and brokerage funds. Meaning the brokerage can’t make their own trades with customer money.
There isn’t a single word against using customer funds to purchase customer shares.
It’s a rule against using customer funds for non-customer activities.
If anything the problem that Robinhood ran up against was net capital requirements under 15c3-1.
Everything in the rule is about not using customer funds for proprietary purposes. Not co-mingling customer and brokerage funds. Meaning the brokerage can’t make their own trades with customer money.
There isn’t a single word against using customer funds to purchase customer shares.
It’s a rule against using customer funds for non-customer activities.
If anything the problem that Robinhood ran up against was net capital requirements under 15c3-1.
It seems that clearinghouse collateral is considered "firm overhead"?
So I'd say the truth came out in an interview late Sunday evening between Elon Musk and Robinhood CEO Vlad Tenev. [1]
> Tenev explained that while he was sleeping, at 3:30 a.m. PT on Thursday, Robinhood's operations team received a file from the National Securities Clearing Corporation (NSCC) that as a clearing broker, Robinhood Securities needed to put up around $3 billion "an order of magnitude more than what it typically is."
> So, it was unprecedented activity. I don't have the full context about what was going on, what's going on in the NSCC to make these calculations," Tenev added — prompting Musk to joke if someone was “holding you hostage right now.”
> Tenev said that after putting their heads together and calling the higher-ups at the NSCC, they got that figure down to $1.4 billion, from the initial $3 billion. "We were making some progress, right, but still a higher number," he added.
> Next, Tenev said they had to explain how to "manage risk in these symbols" by restricting activity in the volatile stocks. After that, the NSCC said the charges on the deposit were $700 million, which Robinhood "paid promptly."
You don't even have to read between the lines here. Robinhood isn't the problem here. Massive long retail demand is crushing shorts, which is potentially opening the clearing houses to multi-billion dollar losses. The way to stem the losses is to stem buying pressure and get the stock to come down.
So call up Robinhood and demand $3 billion in collateral (an order of magnitude higher than the day before) unless they stop the buying pressure on the shares. When Robinhood agreed to limit buying, the NSCC was willing to drop the collateral requirement to $700 million.
This isn't about a share-for-share clearing / transaction cost for each buy order entered. Those buy orders are cash funded and zero risk for Robinhood and zero risk to NSCC / DTCC. This is about extorting Robinhood to stave off the bankruptcy and subsequent contagion of a 140% short interest on a stock that's gone up 70x in just a few months.
Look, I agree that Robinhood can't use customer funds to pay extortion demands from the clearing houses. My point is that Robinhood clearing fully cash-paid buy orders does not incur additional clearing costs to Robinhood. It's not a per-order transaction fee. It's a slush fund which is used to pad against defaults.
> "Now, why is that so high? Like this seems like, it sounds like an unprecedented increase in demand for capital. What formula did they use to calculate that?" Musk asked.
> To contextualize the number, the app's CEO noted that RobinHood had raised about $2 billion in total venture funding. He added that the formula was “not fully transparent” and “not publicly shared.”
[1] - https://www.msn.com/en-us/money/savingandinvesting/spill-the...
> Tenev explained that while he was sleeping, at 3:30 a.m. PT on Thursday, Robinhood's operations team received a file from the National Securities Clearing Corporation (NSCC) that as a clearing broker, Robinhood Securities needed to put up around $3 billion "an order of magnitude more than what it typically is."
> So, it was unprecedented activity. I don't have the full context about what was going on, what's going on in the NSCC to make these calculations," Tenev added — prompting Musk to joke if someone was “holding you hostage right now.”
> Tenev said that after putting their heads together and calling the higher-ups at the NSCC, they got that figure down to $1.4 billion, from the initial $3 billion. "We were making some progress, right, but still a higher number," he added.
> Next, Tenev said they had to explain how to "manage risk in these symbols" by restricting activity in the volatile stocks. After that, the NSCC said the charges on the deposit were $700 million, which Robinhood "paid promptly."
You don't even have to read between the lines here. Robinhood isn't the problem here. Massive long retail demand is crushing shorts, which is potentially opening the clearing houses to multi-billion dollar losses. The way to stem the losses is to stem buying pressure and get the stock to come down.
So call up Robinhood and demand $3 billion in collateral (an order of magnitude higher than the day before) unless they stop the buying pressure on the shares. When Robinhood agreed to limit buying, the NSCC was willing to drop the collateral requirement to $700 million.
This isn't about a share-for-share clearing / transaction cost for each buy order entered. Those buy orders are cash funded and zero risk for Robinhood and zero risk to NSCC / DTCC. This is about extorting Robinhood to stave off the bankruptcy and subsequent contagion of a 140% short interest on a stock that's gone up 70x in just a few months.
Look, I agree that Robinhood can't use customer funds to pay extortion demands from the clearing houses. My point is that Robinhood clearing fully cash-paid buy orders does not incur additional clearing costs to Robinhood. It's not a per-order transaction fee. It's a slush fund which is used to pad against defaults.
> "Now, why is that so high? Like this seems like, it sounds like an unprecedented increase in demand for capital. What formula did they use to calculate that?" Musk asked.
> To contextualize the number, the app's CEO noted that RobinHood had raised about $2 billion in total venture funding. He added that the formula was “not fully transparent” and “not publicly shared.”
[1] - https://www.msn.com/en-us/money/savingandinvesting/spill-the...
I'm sorry, but you just conceded the whole discussion (turns out: it was definitely clearing collateral calls!) but then moved the goalposts to a conspiracy in which the clearinghouses were protecting the shorts.
A lot of people are claiming “customer funds have to be segregated” and that “funds can’t be used to actually buy the security and are not released from the customer account until the trade settles”.
I think these are massive oversimplifications to the point of being useless or outright false.
I suppose if you wanted to learn a little bit about how the regulations are actually written, you could start here:
https://www.finra.org/sites/default/files/SEA.Rule_.15c3-3.p...
These are just some of the requirements that brokers have to “reduce securities to possession or control” for both fully-paid or excess margin securities.
Here’s my (mostly uneducated) opinion on what is really happening. It has roughly nothing to do with Robinhood not being able to execute Buy orders because they couldn’t post the funds required. Because fully-paid securities (non-margin) are paid for with customer funds, not floated by the broker while they settle.
The problem was that too many shares have been lended out to short sellers out from under long positions that are now trying to sell.
The hedge funds that borrowed and sold those shares simply don’t have the cash or credit to buy the shares back at the current market price that the rightful owner has rightfully now sold. Failing that the broker needs to find someone else willing the lend a share the the hedge fund. And who would want to lend a share of GME to an insolvent short seller?!
So there is a deficiency, but the deficiency is because of hedge funds which are now $30B underwater while unrelated parties are trying to sell shares that have already been sold.
Yes, this is a long way of saying there’s a short squeeze. But you know the saying “owe the bank $1 million you can’t pay, that’s bad news for you. Owe the bank $100 million you can’t pay, that’s bad news for the bank!”
It’s a game of musical shares. The brokers that let the hedge funds load up on 140% short interest now need to either force-liquidate the hedge fund shorts to get back the share that’s being traded and needs to be delivered to Robinhood, or they need to find someone else to borrow the share from.
When the broker fails to deliver the share at the time the original holder sells it, the broker is now on the hook for any price movement that occurs until they can deliver. Which of course the hedge fund can’t afford, so it’s lose-lose.
In the end Robinhood disabled the buy button because all the shares being sold have been loaned out and shorted, there’s not enough shares available to borrow, and the hedge funds are way past bankruptcy at this point and hoping for some massive price reversal or else they take a lot of people down with them.
The counterparty risks at this point are extreme. It’s not Robinhood that’s the problem, it’s the people selling Robinhood shares that they can’t actually show a clear title on. I think what Robinhood is worried about mostly at this point is contagion when the hedge funds holding 140% short interest can’t afford the $30B bill.
I think these are massive oversimplifications to the point of being useless or outright false.
I suppose if you wanted to learn a little bit about how the regulations are actually written, you could start here:
https://www.finra.org/sites/default/files/SEA.Rule_.15c3-3.p...
These are just some of the requirements that brokers have to “reduce securities to possession or control” for both fully-paid or excess margin securities.
Here’s my (mostly uneducated) opinion on what is really happening. It has roughly nothing to do with Robinhood not being able to execute Buy orders because they couldn’t post the funds required. Because fully-paid securities (non-margin) are paid for with customer funds, not floated by the broker while they settle.
The problem was that too many shares have been lended out to short sellers out from under long positions that are now trying to sell.
The hedge funds that borrowed and sold those shares simply don’t have the cash or credit to buy the shares back at the current market price that the rightful owner has rightfully now sold. Failing that the broker needs to find someone else willing the lend a share the the hedge fund. And who would want to lend a share of GME to an insolvent short seller?!
So there is a deficiency, but the deficiency is because of hedge funds which are now $30B underwater while unrelated parties are trying to sell shares that have already been sold.
Yes, this is a long way of saying there’s a short squeeze. But you know the saying “owe the bank $1 million you can’t pay, that’s bad news for you. Owe the bank $100 million you can’t pay, that’s bad news for the bank!”
It’s a game of musical shares. The brokers that let the hedge funds load up on 140% short interest now need to either force-liquidate the hedge fund shorts to get back the share that’s being traded and needs to be delivered to Robinhood, or they need to find someone else to borrow the share from.
When the broker fails to deliver the share at the time the original holder sells it, the broker is now on the hook for any price movement that occurs until they can deliver. Which of course the hedge fund can’t afford, so it’s lose-lose.
In the end Robinhood disabled the buy button because all the shares being sold have been loaned out and shorted, there’s not enough shares available to borrow, and the hedge funds are way past bankruptcy at this point and hoping for some massive price reversal or else they take a lot of people down with them.
The counterparty risks at this point are extreme. It’s not Robinhood that’s the problem, it’s the people selling Robinhood shares that they can’t actually show a clear title on. I think what Robinhood is worried about mostly at this point is contagion when the hedge funds holding 140% short interest can’t afford the $30B bill.
I'm really skeptical that robinhood shut down buys because they were the ones worried about counterparty risk. That's kinda out of character. And then extended that concern to 50 other stocks.
There’s zero risk to Robinhood to settle a full-cash Buy of a security, except for counter-party risk not being able to deliver the shares free and clear.
Lack of truly real available GME shares are literally the whole issue at hand here, since literally more than all of them have actually been loaned to the Hedges to short.
The funds are deposited and under the full control of Robinhood.
This theory that Robinhood has to match their customer fully cleared funds with their own dollars, which can’t be backed by the customer funds, in order to actually take delivery of the shares and only then can the customer account funds be debited.... It’s been repeated constantly without evidence, and I’d really like to see the evidence.
Lack of truly real available GME shares are literally the whole issue at hand here, since literally more than all of them have actually been loaned to the Hedges to short.
The funds are deposited and under the full control of Robinhood.
This theory that Robinhood has to match their customer fully cleared funds with their own dollars, which can’t be backed by the customer funds, in order to actually take delivery of the shares and only then can the customer account funds be debited.... It’s been repeated constantly without evidence, and I’d really like to see the evidence.
You're saying this, but the rules (which are convoluted) appear to require fund segregation, and, moreover, when MF Global was accused of doing what you're talking about, it was a major NYT and WSJ story.
http://m.futuresmag.com/2011/12/28/mf-global-may-have-sent-c...
http://m.futuresmag.com/2011/12/28/mf-global-may-have-sent-c...
What MF Global did was totally different;
> The story states that a London clearinghouse forced MF Global to pay roughly $300 million to back some of its bond holdings during its last week.
There's a mountain of difference between sending customer money to purchase customer's own securities, versus raiding customer accounts to pay a margin call against your own bond holdings.
You cannot raid customer funds to pay for proprietary (broker's own) activity. Of course using customer own funds to pay for customer's own orders is not restricted. There's nothing to collateralize for a fully cash funded share purchase. Collateral can only possibly be an issue if the customer is trading on margin.
> The story states that a London clearinghouse forced MF Global to pay roughly $300 million to back some of its bond holdings during its last week.
There's a mountain of difference between sending customer money to purchase customer's own securities, versus raiding customer accounts to pay a margin call against your own bond holdings.
You cannot raid customer funds to pay for proprietary (broker's own) activity. Of course using customer own funds to pay for customer's own orders is not restricted. There's nothing to collateralize for a fully cash funded share purchase. Collateral can only possibly be an issue if the customer is trading on margin.
Can you go into more detail about your read of 15c3-3 allowing Robinhood to post customer funds to satisfy its clearing obligations with DTCC?
It's client money until it settles.
Assuming this is true, what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours.
Suppose a 3% interest rate (which seems high for guaranteed cleared funds), $1 billion for 24 hours is $82,000.
Suppose a 3% interest rate (which seems high for guaranteed cleared funds), $1 billion for 24 hours is $82,000.
The Broker isn't allowed to borrow against client money either - it's client money, partitioned off from the broker's fungible funds, and not the Broker's to offer as collateral.
But debt is the natural answer, and Robinhood did get as much in loans as they can[0].
[0]https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
But debt is the natural answer, and Robinhood did get as much in loans as they can[0].
[0]https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
>what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours.
and that's exactly what they did. On thursday night they secured a $1B loan.
and that's exactly what they did. On thursday night they secured a $1B loan.
That's not exactly what they did. What they did was to get $1B in funding against other assets that are actually theirs.
Just because your house is worth $1M doesn't mean that I (being "not you") can go get a mortgage pledging your house as collateral.
Just because your house is worth $1M doesn't mean that I (being "not you") can go get a mortgage pledging your house as collateral.
> First of all, they limited opening trades for all accounts, not just accounts buying on margin or with unsettled funds.
RobinHood’s UX was built around the concept of hiding margin details from clients. All Robinhood accounts are margin accounts by default. Inbound funds transfers give people margin buying abilities before the trades arrive.
Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock? This is an unprecedented event and it happened very, very fast.
Robinhood likely only had a few options to roll out immediately. Let’s not pretend they could have reworked their trading platform, tested and deployed the changes, and implemented the action in a matter of hours.
RobinHood’s UX was built around the concept of hiding margin details from clients. All Robinhood accounts are margin accounts by default. Inbound funds transfers give people margin buying abilities before the trades arrive.
Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock? This is an unprecedented event and it happened very, very fast.
Robinhood likely only had a few options to roll out immediately. Let’s not pretend they could have reworked their trading platform, tested and deployed the changes, and implemented the action in a matter of hours.
If this was the case, why not just provide an honest explanation rather than “we’re restricting this for your own good”
No company likes to say "our clearinghouse doesn't trust us to settle our accounts". It makes them look unstable... as they probably are. I bet you, RH has been handing out margin the same way mortgage sellers handed out loans in 2007.
If they're not willing to be honest with their customers, I'm not willing to sympathize with them when their lies result in conspiracy theories. They made their bed.
Yeah, I don't sympathize with them either, but I think the conspiracy theories are probably false.
What they did was still blatant market manipulation, even if the conspiracy theories are all wrong and it was unintentional. That alone warrants a serious investigation and probably the introduction of some new market regulations.
Sure, but people should probably know the truth about it being incompetence or a conspiracy to save GME shorts before they decide to plow even more money into the trade.
Yes RH is terrible.
LOL but RH is known to be pretty unstable...
"Redditors in the irony-poisoned Wall Street Bets (r/wallstreetbets) community discovered an exploit in the investing app Robinhood they’ve named “infinite leverage” that enables them to lose huge sums of money at record speeds."
https://www.vice.com/en/article/gyz9kj/a-robinhood-exploit-l...
"Redditors in the irony-poisoned Wall Street Bets (r/wallstreetbets) community discovered an exploit in the investing app Robinhood they’ve named “infinite leverage” that enables them to lose huge sums of money at record speeds."
https://www.vice.com/en/article/gyz9kj/a-robinhood-exploit-l...
Because the honest explanation was that they were near insolvent for a period.
> Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock?
Yes, this is impossible to believe. Different stocks already have different margin requirements. Turning off margin trading for specific stocks is a fundamental system requirement.
Yes, this is impossible to believe. Different stocks already have different margin requirements. Turning off margin trading for specific stocks is a fundamental system requirement.
I think all these margin discussions are a red herring. The clearinghouse requirements are based on the total number of shares sold, not the total sold on margin. As I understand it, clearing is mutual insurance against a disaster at the brokerage, not against customers randomly defaulting.
> If you have a cash account and you buy a stock, your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade.
If they have two days to pay, DTCC is taking on some counterparty risk. Isn't that reason enough for DTCC to increase the deposit requirements when they see risk increasing? (Not a rhetorical question, you seem to know what you're talking about so I am curious what the answer is.)
If they have two days to pay, DTCC is taking on some counterparty risk. Isn't that reason enough for DTCC to increase the deposit requirements when they see risk increasing? (Not a rhetorical question, you seem to know what you're talking about so I am curious what the answer is.)
That is true, and maybe most likely what’s happened.
Just realized that DTCC changing the deposit requirements seems completely non-transparent and arbitrary (I agree it was a plausible reason in this case), abs could be used to help their friends in hedge funds that had shorted, out of someone paid them to do this.
The fundamental problem is that the stock market has substantial different rules, for example see after hours trading, which can be used to take margins away from unprofessional investors.
Just realized that DTCC changing the deposit requirements seems completely non-transparent and arbitrary (I agree it was a plausible reason in this case), abs could be used to help their friends in hedge funds that had shorted, out of someone paid them to do this.
The fundamental problem is that the stock market has substantial different rules, for example see after hours trading, which can be used to take margins away from unprofessional investors.
> Just realized that DTCC changing the deposit requirements seems completely non-transparent and arbitrary
There’s a difference between something being so esoteric that most people don’t know about it, and being non-transparent. As the article points out, the deposit requirements follow a known formula, it’s just one that most of us had never heard of before all this.
There’s a difference between something being so esoteric that most people don’t know about it, and being non-transparent. As the article points out, the deposit requirements follow a known formula, it’s just one that most of us had never heard of before all this.
Thanks, I didn't catch that part.
The purpose of a clearinghouse is to manage that counterparty risk prior to settlement, and ensure that settlement occurs smoothly. Some clearinghouses like OCC carry counterparty risk throughout the life of a trade.
The counterparty in question is the clearing member, ie Robinhood. If the trade is fully cash-secured then there is no risk that Robinhood will go under because it has 100% of the cash required to make good on the trade (assuming they still make enough from PFOF to cover their operating costs for a couple of days.) And for existing margin accounts, they just have to continue the practice of aggressively closing positions that fall below maintenance margin.
The counterparty in question is the clearing member, ie Robinhood. If the trade is fully cash-secured then there is no risk that Robinhood will go under because it has 100% of the cash required to make good on the trade (assuming they still make enough from PFOF to cover their operating costs for a couple of days.) And for existing margin accounts, they just have to continue the practice of aggressively closing positions that fall below maintenance margin.
The NSCC formulas for this (I assume these are the relevant ones and if not that they're representative) are published. You can just go read them. I don't see where they say "if trades are made with customer cash and not on margin you don't have to account for them in the equity group collateral requirement". That also wouldn't make much sense; the clearinghouse protects participating firms from each other, not just from their customers.
Actually, the Clearing Fund Formula accounts for Margin Requirement Differential, so margin is indeed a component of the amount posted.
More importantly, cash requirement effectively reduces the amount of leverage that customers are able to use, and that means (A) no additional firm capital needs to be lent for purchases of GME or whatever other stock, and (B) margin-account customers trade less on a given amount of their own capital.
Are you suggesting that Robinhood would be required by Procedure XV to post more than $1 for every $1 of GME stock that a customer buys in a cash account?
More importantly, cash requirement effectively reduces the amount of leverage that customers are able to use, and that means (A) no additional firm capital needs to be lent for purchases of GME or whatever other stock, and (B) margin-account customers trade less on a given amount of their own capital.
Are you suggesting that Robinhood would be required by Procedure XV to post more than $1 for every $1 of GME stock that a customer buys in a cash account?
I'm not sure I follow why the future actions of Robinhood customers matter. They've executed the number of trades they've executed, DTCC raises the collateral requirement for meme stocks, and now they're on the hook, whether stocks were purchased on margin (implicitly or otherwise) or not. You've got the rules in front of you. They seem to plainly say that Robinhood has to put up collateral regardless of whether margin is involved.
Again, I think the margin stuff is mostly a red herring?
Again, I think the margin stuff is mostly a red herring?
I think the suggestion is that RH is required to post $1 even for cash buys, not just 0.02 or whatever it was before.
Comments that start with saying "I don't buy" the real-world non-simple explanation, even in the face of mountains of real world evidence, are not in the spirit of any site that pretends to be some kind of better place.
Conspiracy fantasies should be moderated down by the administrators. "Wide eyed curiosity" comes second to pragmatism, realism, lack of narcissism and entitlement.
Conspiracy fantasies should be moderated down by the administrators. "Wide eyed curiosity" comes second to pragmatism, realism, lack of narcissism and entitlement.
It’s scary how much conspiratorial thinking is gaining traction in the GameStop story.
Despite the narratives about people buying GameStop for altruistic purposes or for sticking it to Wall Street, it’s obvious that most people bought because they were told the trade couldn’t fail and this was an easy way to double their money (or more).
When it doesn’t work out, I’m worried that people will reach for more conspiracy theories instead of realizing that the latest GME buyers were always guaranteed losses.
Despite the narratives about people buying GameStop for altruistic purposes or for sticking it to Wall Street, it’s obvious that most people bought because they were told the trade couldn’t fail and this was an easy way to double their money (or more).
When it doesn’t work out, I’m worried that people will reach for more conspiracy theories instead of realizing that the latest GME buyers were always guaranteed losses.
When I get explanations like “you can’t buy or sell for your own good” on a funded account without leverage, at a time where the odds of money were sky high, it does seem fishy. People on WSB have been YOLOing entire accounts to zero for months, where was the concern when people were losing money? Why the concern when they are actually making money?
Also, if there is a good regulatory explanation, why not just give that, instead of thin statements like “we’re blocking these trades for your own good.” I’m open to reasonable explanations with evidence.
Also, if there is a good regulatory explanation, why not just give that, instead of thin statements like “we’re blocking these trades for your own good.” I’m open to reasonable explanations with evidence.
The messaging was not forthcoming, I’ll grant you that.
But they are actually correct if you take a step back. Protecting the DTCC protects all brokers and thus in turn protects their users.
The regulations and the practices followed in the industry are to protect against against real scenarios which can lead to brokers collapsing and investor funds being decimated.
Maybe it would have looked better had robinhood come out and said “we don’t have enough liquidity”, though that’s still not a reassuring message for their users.
But they are actually correct if you take a step back. Protecting the DTCC protects all brokers and thus in turn protects their users.
The regulations and the practices followed in the industry are to protect against against real scenarios which can lead to brokers collapsing and investor funds being decimated.
Maybe it would have looked better had robinhood come out and said “we don’t have enough liquidity”, though that’s still not a reassuring message for their users.
[deleted]
I remember the MMM ponzi scheme that was in a bunch of countries including Nigeria. When these things go south people always need an outlet to blame for denying them their free money they thought was coming and better if its a third party and not themselves or whoever duped them into investing. People were furious at editorials or government officials trying to dissuade others which may or may not have brought it to an end. Here its going to be the brokers fault for not being able to let people open more positions, otherwise it certainly would have kept going up and certainly at some point there would have been a price they were willing to sell at.
It's puzzling that people find it surprising that the situation caused speculation and "conspiracy theories."
It's frustrating that the phrase "conspiracy theory" is used as a way to dismiss skepticism. I hear more and more hand-wringing that conspiracy theories needs to somehow be addressed.
And it's annoying that given how complex the situation is, and how little transparency in the market there is, we think that one narrative by authorities should be taken at face value.
If you truly dislike conspiratorial thinking, then it seems the best possible reaction is to reply calmly explaining to the conspiratorialists what happened and buttressing counter-claims of the skepticism where it exists.
It's frustrating that the phrase "conspiracy theory" is used as a way to dismiss skepticism. I hear more and more hand-wringing that conspiracy theories needs to somehow be addressed.
And it's annoying that given how complex the situation is, and how little transparency in the market there is, we think that one narrative by authorities should be taken at face value.
If you truly dislike conspiratorial thinking, then it seems the best possible reaction is to reply calmly explaining to the conspiratorialists what happened and buttressing counter-claims of the skepticism where it exists.
Common, I may not know enough about the stock market to be opinionated about this case in particular, but when literally billions are at stake, conspiracies about mild collusion between brokers and market manipulation are really not that far-fetched.
I like how you criticise the above comment for saying "I don't buy" based on high-minded notion of better spirit of discussion, and then in your second paragraph imply it's a "conspiracy fantasy".
Bonus points for your completely failure to address the arguments of the comment.
Bonus points for your completely failure to address the arguments of the comment.
It's not my job to teach everyone about trading operations. I am alarmed at the prevalence of anger founded on willful ignorance, on this site. I don't have an obligation to refute every dumb angry post tit for tat. I am not even trying to be "right" I rather want to encourage people not to fall prey to the temptation of thinking that you can simply scrunch up your face and decide to "not buy" a narrative simply because you cannot be bothered to be well informed.
To be honest it just sounds like you're one of those people who goes on social media, makes a claim, then when someone asks for evidence you just say "look it up". Unless you have something to contribute other than smug comments that amount to "look at these dumb plebs who know nothing about the market", then please stop posting FUD.
A Soros-owned space laser is a conspiracy theory. Citadel forcing Robinhood to disable buys due to their massive short position is not.
I feel that many people are lumping hypotheses into the conspiratorial bucket because of Qanon and current events. Are all skeptics conspiracy theorists?
I feel that many people are lumping hypotheses into the conspiratorial bucket because of Qanon and current events. Are all skeptics conspiracy theorists?
The space laser is certainly more outlandish, but both are fundamentally the same. They both posit (contra all the available evidence!) that sinister forces are behind something in the world that you feel has gone wrong.
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There's no difference between conspiracy and hypothesis.
You mean "conspiracy theory" and "hypothesis". And yes, there fundamentally is a difference between theory and hypothesis:
https://www.merriam-webster.com/words-at-play/difference-bet...
https://www.merriam-webster.com/words-at-play/difference-bet...
> Outside of scientific reasoning, "theory" and "hypothesis" are often used interchangeably, and "theory' can unfortunately be interpreted to mean "less sound" or "lightly speculated."
I read that "cash accounts" don't really exist from the clearing perspective, because the broker can't counts cash accounts as part of its collateral.
Cash accounts (which is just a margin account with 100% collateral in cash) protect the broken against client default, but don't protect the clearinghouse from broker default. It's an opaque API wrapper, in programmer language.
Cash accounts (which is just a margin account with 100% collateral in cash) protect the broken against client default, but don't protect the clearinghouse from broker default. It's an opaque API wrapper, in programmer language.
For cash accounts, the broker already has settled cash when the trade is made, and can immediately post that cash to the clearinghouse.
The broker cannot use customer funds to post a broker obligation.
The broker would be using customer funds to clear a customer trade.
Of course they'd do that when it comes time to actually fund the trade. That's not what Robinhood's limitation was and not the subject of this article. The funds in question required to be posted to DTCC are a broker responsibility to serve as mutual insurance wherein the risk of a broker failing are shared among the brokers in some proportion to the volume and risk that they represent. These must be posted using broker funds (obviously, you can't protect customers from things outside their control by pledging customer money to be used in the event of a default).
How, pray tell, do you think a broker actually funds an unsettled obligation on a cash-secured customer trade?
At this point, I wonder if you’re willfully not understanding the difference between customer funds for settlement and DTCC broker deposits to ensure an additional layer of customer protection/confidence, possibly because you think it shouldn’t be necessary.
In some ways it’s worse than the Chesterton’s Fence parable. You don’t see the point of the fence, so you pretend that it already doesn’t exist.
It seems perfectly fair to ask why this required broker deposit exists. It seems way less productive to ask whether it exists or to pretend it doesn’t.
In some ways it’s worse than the Chesterton’s Fence parable. You don’t see the point of the fence, so you pretend that it already doesn’t exist.
It seems perfectly fair to ask why this required broker deposit exists. It seems way less productive to ask whether it exists or to pretend it doesn’t.
Perhaps the part that you're missing is that in addition to margin accounts, Robinhood also has accounts that are able to trade up to 1k before they are funded (that is to say, before the deposits clear). So Robinhood has to lay out its own money to clear those trades, as well as traditional margin trades where the customer has settled equity but the brokerage also carries risk.
BTW, I don't know what that parable is but your invocation of it seems like a rather complex way of telling me that you think I'm being disingenuous.
BTW, I don't know what that parable is but your invocation of it seems like a rather complex way of telling me that you think I'm being disingenuous.
Not as collateral, it has to be the broker own funds. (It's a protection against brokers failing)
DTCC raised collateral requirements for GME from 2% to 100%.
Is that documented somewhere? I absolutely believe it, I'm just curious.
Robinhood CEO said on an interview with Musk that collateral went overnight from 300m to 3b (which they were later able to negotiate down to 700m by stopping buy orders)
Source?
While DTCC did not publicly confirm the amount, it did confirm that capital requirements were raised January 28. Given that numerous participants have publicly stated it was to 100%, that seems likely.
https://www.bloombergquint.com/quicktakes/what-s-the-dtcc-an...
https://www.bloombergquint.com/quicktakes/what-s-the-dtcc-an...
But but but that's not market manipulation, that's just one company doing a normal thing in the normal course of business…
I'm sure it had nothing to do with GME.
I'm sure it had nothing to do with GME.
It had lots to do with GME in that GME was the source of the risk (because of its through the roof volatility) that the DTCC was protecting against. But if your implication is that the DTCC has a dog in that fight you are way off base - they exist several layers below hedge funds in the trading stack and have nothing to do with each other, in fact I'd be willing to bet Gabe Plotkin couldn't even tell you what DTCC stands for.
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Surely RH risk management would see that both the 99% VaR and the gap risk have jumped, and draw the credit lines before their DTCC margin dried up? What's the worst that can happen if you top up the account a little more than you need? Whatever you save on interest can't be worth the reputation damage?
There must be more to this story, as other brokers got in the same pickle. Perhaps it is some modern form of balance management that the new guys prefer, akin to just-in-time.
There must be more to this story, as other brokers got in the same pickle. Perhaps it is some modern form of balance management that the new guys prefer, akin to just-in-time.
No one ever accused Robinhood of being competent.
Although I think you're underestimating the difficulty of pulling billions of dollars out of nowhere. Robinhood was forced to sell equity to meet the deposit requirements - that's a harsh ask.
Although I think you're underestimating the difficulty of pulling billions of dollars out of nowhere. Robinhood was forced to sell equity to meet the deposit requirements - that's a harsh ask.
That is another oddity. If there was no insolvency problem, presumeably all that was needed was a loan?
And they did get a loan[0]. I think you overestimate the ability of Robinhood to get an infinite amount of money in debt from banks within a few days notice. Then they even sold more equity[1].
[0]https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
[1]https://www.wsj.com/articles/robinhood-raises-1-billion-to-m...
[0]https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
[1]https://www.wsj.com/articles/robinhood-raises-1-billion-to-m...
They're a financial institution in the age of zero interest, in no danger of defaulting. I mean come on?
You sure it wasn't just money they were about to raise anyway? Just jam some friends in pre IPO?
You sure it wasn't just money they were about to raise anyway? Just jam some friends in pre IPO?
Not only are they probably not operationally prepared to just pull down credit on no notice, but there's an additional risk - the member's VAR calc is calculated using a EWMA (exponentially weighted moving average) volatlity estimate. What this means is that RH can exhaust its entire credit line, and despite allowing no additional buys, their deposite required still increases because volatility went up. Breaching DTCC's requirements with no way to fix the issue.
3% to 100% collatoral isn't covered by topping of the accounts though. RH was doing hundreds of millions (?) in $GME per day, so that increased that number from something like $3MM to $100MM.
RH say they scrambled to organise necessary credit lines in response to new DTCC requirements. Well why weren't they in place by Monday, Tuesday or Wednesday in the expectation that DTCC would increase these requirements? Volumes were already exploding with many days of advanced warning and IVs already approaching the hundreds of percent. There's a plausible alternative that RH is not being entirely truthful, and purposely didn't organise the required lines in order to satisfy their biggest customer, so they had a legal way to restrict trading. I don't have evidence that this is true, but nor would I expect to have this evidence at this early point in time.
I believe RH's explanation is probably the truthful one (Hanlon's Razor), but some scepticism is warranted.
I believe RH's explanation is probably the truthful one (Hanlon's Razor), but some scepticism is warranted.
The article you just read points out all the other brokerages that had to do the same thing Robinhood did.
WeBull CEO said that their situation was very different, as Robinhood is self clearing and they are not. They were told to stop trading. So the situation is not as simple.
While it's true that Robinhood has its own clearing firm, Robinhood securities is a NTCC member and is perusant to the same deposit requirements as everyone else.
Just as Apex clearing had to raise capital deposits, so did Robinhood securities. That they own the firm just means they wouldn't pay the clearing fee in return for funding the clearing firm.
Just as Apex clearing had to raise capital deposits, so did Robinhood securities. That they own the firm just means they wouldn't pay the clearing fee in return for funding the clearing firm.
And they are no longer restricting
I guess it's possible there is some sort of conspiracy going on, but I always like to remember "never attribute to malice that which can be adequately explained by stupidity."
I don't apply Hanlon's Razor when there are billions of insider dollars at stake.
Why not both?
> but some scepticism is definitely warranted
What’s the alternate explanation in which RH is being nefarious? Why would they want to stop buys?
What’s the alternate explanation in which RH is being nefarious? Why would they want to stop buys?
The conspiracy theory is that they restricted trading in order to crash the GME price, thereby benefiting Citadel. There seems to be a "legal" way they could've done this, which is failing to be sufficiently capitalized for when the DTCC reqs change.
Hanlon's Razor and all, I fully agree, so I think this isn't the most likely explanation, but I don't think the prior for it is that low either.
Hanlon's Razor and all, I fully agree, so I think this isn't the most likely explanation, but I don't think the prior for it is that low either.
I wouldn’t dismiss that theory as conspiracy theory, given Steven cohen’s history of convictions.
To be fair, that's not pertaining to Citadel (which RH sells flow to) but to Point72, a different backer of Melvin Capital
A bunch of rich people from whom Robinhood takes payment for order flow stood to lose money if shorts continued to squeeze quickly, and selling pressure from spooked longs provides an offer to shorts who need to cover.
So you accuse the author of bad faith or at best laziness or gullibility. You are now obligated to provide superior explanation of the trading regulations, not just call names.
I tuned down the rhetoric a bit as that's not how I wished it to come off. I think the article is very good actually, I just wanted to introduce some scepticism regarding the PR explanation we're getting at the moment (and there might be something I'm overlooking that debunks what I've said, very possible).
I know literally nothing about the legal landscape here. Are they allowed to be dishonest or even misleading in PR statements on topics like this? (I’m thinking of how much trouble Musk got in for “420”).
> (I’m thinking of how much trouble Musk got in for “420”).
Yes, trouble, the kind he could just walk of. Some people also call that the cost of doing business.
Yes, trouble, the kind he could just walk of. Some people also call that the cost of doing business.
Yes, they are, as you can most easily see because Musk getting "punished" didn't stop him from continuing to break securities law on Twitter.
The punishments are smaller than the benefits.
I'm not saying Robinhood was breaking the law or lying here though.
At any rate, hostile questions on cable TV are not official sworn statements under Sarvanes-Oxley or court hearings. It's unfair and inappropriate to hold someone to a standard of perfection in live hostile questioning on TV.
The punishments are smaller than the benefits.
I'm not saying Robinhood was breaking the law or lying here though.
At any rate, hostile questions on cable TV are not official sworn statements under Sarvanes-Oxley or court hearings. It's unfair and inappropriate to hold someone to a standard of perfection in live hostile questioning on TV.
What if I told you people break the law and are dishonest?
I would reply that I am a Bayesian rationalist not a Boolean rationalist.
I'm not aware of any specific restrictions on PR statements so I guess they're allowed to be as (dis)honest as any company is allowed to be.
Tesla is publicly traded, which is why the SEC took action. Robinhood was looking to go public, but hasn't done so yet.
This is my leading theory. It's called "plausible deniability". When billions of dollars are at stake I don't believe in coincidence, especially not when they moved in the direction of megapowerful people that includes a guy convicted for insider trading.
Aren’t there mega powerful people on both sides?
As far as I can see you have Citadel on the short side hemorrhaging cash. On the long side you have mutual funds like Blackrock, but they can’t close their position, and they’re making money lending their shares. I don’t see a Citadel-sized institutional interest and influence on the long side. Only retail investors would go all in on a stock trading at 20x earnings or whatever it is.
We have congressional corruption on the record for 6 figure payments. Billions at stake at Citadel can get a percentage changed on a risk management formula used for liquidity requirements at DTC, especially when they can easily justify it. Like I said, plausible deniability. If you disagree maybe you haven’t personally witnessed the levels of institutional corruption I have.
We have congressional corruption on the record for 6 figure payments. Billions at stake at Citadel can get a percentage changed on a risk management formula used for liquidity requirements at DTC, especially when they can easily justify it. Like I said, plausible deniability. If you disagree maybe you haven’t personally witnessed the levels of institutional corruption I have.
Having read this, this also sounds like a plausible explanation:
https://old.reddit.com/r/wallstreetbets/comments/lanf94/gme_...
How I am interpreting this is that reddit's bet was too right -- these hedge funds were so exposed, and the momentum was building so fast against them, that it was about to create a liquidity problem that could threaten the stability of the entire market.
How I am interpreting this is that reddit's bet was too right -- these hedge funds were so exposed, and the momentum was building so fast against them, that it was about to create a liquidity problem that could threaten the stability of the entire market.
Interesting explanation. I wonder if hedge funds that short enormous amounts of stock include this scenario in their risk calculations. I expect that yes, they are well aware that if the price of a stocks runs away too much, these mechanisms will force brokerages to disallow buying, so that they can buy back the stock at lower prices.
However, there is one thing I still don’t understand from the article. Why were hedge funds allowed to still buy the stock? If this liquidity problem really happened as described, shouldn’t the trading be halted completely? I suspect the answer is that they don’t use a brokerage to buy and sell stocks. They probably have some kind of direct access to stock exchanges so they are not bound by the limitations set by brokers.
However, there is one thing I still don’t understand from the article. Why were hedge funds allowed to still buy the stock? If this liquidity problem really happened as described, shouldn’t the trading be halted completely? I suspect the answer is that they don’t use a brokerage to buy and sell stocks. They probably have some kind of direct access to stock exchanges so they are not bound by the limitations set by brokers.
> Why were hedge funds allowed to still buy the stock?
They use a prime broker, which is a fancy way to say Goldmans, JPM, Citi, etc's institutional brokers, which also have the same relationship with the DTCC. And their prime brokers did not leave too little cash at the clearinghouse.
That's if you buy the story here. I'm still mulling it over. I used to run hedge funds, and indeed PBed with these big names.
They use a prime broker, which is a fancy way to say Goldmans, JPM, Citi, etc's institutional brokers, which also have the same relationship with the DTCC. And their prime brokers did not leave too little cash at the clearinghouse.
That's if you buy the story here. I'm still mulling it over. I used to run hedge funds, and indeed PBed with these big names.
Whether or not you were able to buy gamestop was more about how wealthy the broker you used was. If you were a retail investor on Fidelity, you could even buy options still.
Hedge Funds naturally have, well, wealthy brokers tailored for institutional investors.
Hedge Funds naturally have, well, wealthy brokers tailored for institutional investors.
Hedge funds tend not to use shady brokers who don't have strong balance sheets and competent risk managers and technologists. The list of better brokers is long.
This doesn't seem to add to the story. This doesn't explain why they had to keep selling. It only explains why continuing to sell didn't put them in financial peril.
Robinhood took actions which they knew would manipulate the market in a particular way - one which was beneficial to them and their business partners. That's why people are upset.
Robinhood took actions which they knew would manipulate the market in a particular way - one which was beneficial to them and their business partners. That's why people are upset.
If they had blocked selling and it later came out that they didn't need to, people who had wanted to sell would be understandably pissed as well. It's a damned-if-you-do, damned-if-you-don't situation.
I think they chose the least-bad of the two paths, because even if they blocked their own customers from selling, customers holding GME at other firms would be able to sell. Would you want to be with a brokerage who blocked you from selling when they could have allowed it?
I think they chose the least-bad of the two paths, because even if they blocked their own customers from selling, customers holding GME at other firms would be able to sell. Would you want to be with a brokerage who blocked you from selling when they could have allowed it?
The order should have come from the SEC to block trading across the board. No buying and no selling until the current orders are settled and there's liquidity available for more trading.
I absolutely would prefer that and I don't even own GME. Anything else is blatant market manipulation, whether or not it's intended.
IMO, it should be illegal to facilitate only selling or only buying. Brokers should be forced to offer both or neither.
IMO, it should be illegal to facilitate only selling or only buying. Brokers should be forced to offer both or neither.
>IMO, it should be illegal to facilitate only selling or only buying. Brokers should be forced to offer both or neither.
Just because you shut down trading at one brokerage doesn't mean the price is frozen. It could still drop like a rock, and you'd still end up with a bunch of pissed off customers saying that they couldn't exit in time.
Just because you shut down trading at one brokerage doesn't mean the price is frozen. It could still drop like a rock, and you'd still end up with a bunch of pissed off customers saying that they couldn't exit in time.
Yeah, but at least you as a broker wouldn't have a hand in the price change. If they piss off their customers who wanted to sell, that's just how it is. That will give them an incentive to keep both options open instead of restricting traders to only buying or only selling when it suits them.
>Yeah, but at least you as a broker wouldn't have a hand in the price change. If they piss off their customers who wanted to sell, that's just how it is
No, the price change occurred when new money couldn't flow into GME, due to deposit requirements. Stopping sells when there isn't any technical reason to do so is also an intervention, and arguably a bigger one.
> That will give them an incentive to keep both options open instead of restricting traders to only buying or only selling when it suits them.
And doing the reverse suits the HODLers, who would love nothing more than to prevent others from breaking rank and tanking the stock price, but sucks for everyone else who wants to get off the wild ride. On Thursday MUST asset management sold off its stake in GME. If people weren't allowed to get out, and it tanked further, I could easily imagine accusations that robinhood was doing it to the benefit of wall st firms, to eliminate competition for sells.
No, the price change occurred when new money couldn't flow into GME, due to deposit requirements. Stopping sells when there isn't any technical reason to do so is also an intervention, and arguably a bigger one.
> That will give them an incentive to keep both options open instead of restricting traders to only buying or only selling when it suits them.
And doing the reverse suits the HODLers, who would love nothing more than to prevent others from breaking rank and tanking the stock price, but sucks for everyone else who wants to get off the wild ride. On Thursday MUST asset management sold off its stake in GME. If people weren't allowed to get out, and it tanked further, I could easily imagine accusations that robinhood was doing it to the benefit of wall st firms, to eliminate competition for sells.
I believe you're missing the big picture here.
If a broker only allows purchases of a stock, they push the trajectory of that stock value up. If they only allow sales, they push the trajectory down. Brokers should not have the power to affect the trajectory of a stock. It is a conflict of interest for their business.
Yes, it would absolutely suck for stock holders if sales were restricted while the price was decreasing. In addition to not being able to exclusively restrict buying or selling, brokers should also probably be made partially liable for losses incurred as a result of restrictions on sales. It should also be a huge hit to their brand when they are forced to lock down a stock because of liquidity issues.
But at the end of the day, it is a conflict of interest for brokers to artificially affect stock values. What they did is not currently illegal (so far as I can tell), and it may not have even been their intent to manipulate the market, but there's no way around it. That is exactly what happened.
If a broker only allows purchases of a stock, they push the trajectory of that stock value up. If they only allow sales, they push the trajectory down. Brokers should not have the power to affect the trajectory of a stock. It is a conflict of interest for their business.
Yes, it would absolutely suck for stock holders if sales were restricted while the price was decreasing. In addition to not being able to exclusively restrict buying or selling, brokers should also probably be made partially liable for losses incurred as a result of restrictions on sales. It should also be a huge hit to their brand when they are forced to lock down a stock because of liquidity issues.
But at the end of the day, it is a conflict of interest for brokers to artificially affect stock values. What they did is not currently illegal (so far as I can tell), and it may not have even been their intent to manipulate the market, but there's no way around it. That is exactly what happened.
>But at the end of the day, it is a conflict of interest for brokers to artificially affect stock values.
The problem is that restricting sells unnecessarily can also be construed as artificially affecting stock values, even though it might produce less net change overall. An extreme example would be if the sell/buy functionality were handled by different servers, and only the "buy" servers caught fire. Do you shut down the "sell" server as well to preserve market balance, even though they're working fine and there's no risk to them? In that case the legal system definitely prefers doing nothing (or less) than more. See law stackexchange's take on the trolley problem, which I believe is similar. https://law.stackexchange.com/questions/1639/what-is-the-leg...
The problem is that restricting sells unnecessarily can also be construed as artificially affecting stock values, even though it might produce less net change overall. An extreme example would be if the sell/buy functionality were handled by different servers, and only the "buy" servers caught fire. Do you shut down the "sell" server as well to preserve market balance, even though they're working fine and there's no risk to them? In that case the legal system definitely prefers doing nothing (or less) than more. See law stackexchange's take on the trolley problem, which I believe is similar. https://law.stackexchange.com/questions/1639/what-is-the-leg...
You could still buy if you were short (close your position). And allegedly there's many more shorts than long positions.
Absolutely. Just imagine the inverse scenario here where they had a conflict of interest in a long position and turned off selling. Turning off both is fine if they’re not able to legally handle new buys. But just turning off buys is also pretty freaking sus.
If a broker blocks selling, and the price drops, there is real damage to the holder of the shares. If they block buying, there is only a potential hypothetical loss.
You're only looking at longs.
If a broker blocks buying and the price goes down, there are real benefits to the holders of the shorts.
Hence the concerns of market manipulation.
If a broker blocks buying and the price goes down, there are real benefits to the holders of the shorts.
Hence the concerns of market manipulation.
> If a broker blocks buying and the price goes down, there are real benefits to the holders of the shorts
Which is not an actual harm to a Robinhood user. Avoiding liability means avoiding actual harm.
Which is not an actual harm to a Robinhood user. Avoiding liability means avoiding actual harm.
Why is it okay for a broker to facilitate market manipulation as long as it doesn't harm their customers? If they're benefiting someone (in this case, the short sellers), then they must also be harming someone (in this case, the short lenders).
That’s exactly my problem with it. Why leave sell as an option then? Sure; if you can’t buy more because you legally can’t, that’s fine. But leaving the sell option on felt planned. I would assume in a situation like this it would be most responsible to simply disable trading on it entirely until it was back to manageable. At least then they would have plausible deniability.
> While others only halted options
> - Interactive
False, IB halted buys of GME stock even with 100% available cash funds
> - Interactive
False, IB halted buys of GME stock even with 100% available cash funds
> So, Robinhood legally could not submit trades on $GME until they could muster the deposits for GME that they needed
This seems ad odds with what the Robinhood CEO said in interviews which was that Robinhood did not have any legal obstacles but acted preemptively to avoid future issues. I think the distinction is important, as both lawsuits and potential investigations into market manipulation and fraud will hinge on this point. Especially since it seems certain hedge funds "in the know" seemed to reload shorts before the action that was taken, so while Robinhood might have queued up for this action expecting the they might run into legal requirements, they however decided to instead pull the trigger themselve, potentially because acting in good faith they would not run into a legal requirement, which would have left people holding a huge bag on top of their existing losses, potentially bankrupting a couple of major players and likely killing robinhood as well.
This seems ad odds with what the Robinhood CEO said in interviews which was that Robinhood did not have any legal obstacles but acted preemptively to avoid future issues. I think the distinction is important, as both lawsuits and potential investigations into market manipulation and fraud will hinge on this point. Especially since it seems certain hedge funds "in the know" seemed to reload shorts before the action that was taken, so while Robinhood might have queued up for this action expecting the they might run into legal requirements, they however decided to instead pull the trigger themselve, potentially because acting in good faith they would not run into a legal requirement, which would have left people holding a huge bag on top of their existing losses, potentially bankrupting a couple of major players and likely killing robinhood as well.
Would love it if someone would write a detailed article addressing the conspiracy Melvin Capital (and others) not exiting their short position. Melvin Capital says they did, yet the sentiment on virtually all of reddit (not just /r/WSB) is they didn't. I haven't found really anything to support reddit's conclusion.
There wouldn't be much to write about. Hedge Funds are not required to disclose their short positions in the US, so no one really knew how many shorts they had and of what kind, and no one knows if they did indeed close them.
Reddit was speculating based on the lack of a reduction in short interest. However, it's hard to determine because a) you don't know how many shorts Melvin had b) you don't know how many new short positions were created that day
Reddit was speculating based on the lack of a reduction in short interest. However, it's hard to determine because a) you don't know how many shorts Melvin had b) you don't know how many new short positions were created that day
also (c) short interest is not a real-time computation.
Melvin Capital claimed they exited all short positions, yet there weren’t any significant change in short %. By all accounts, they had huge percentage of shorts, so them covering shorts should have dropped short % down below 100%.
It sounded too much like a PR move to convince WSB that short squeeze was over. Would Melvin Capital lie about short positions to save $billions of dollars?
Melvin Capital initially claimed their short losses were 30%, now they are claiming short losses over 50%. How are they still losing money on shorts?
It sounded too much like a PR move to convince WSB that short squeeze was over. Would Melvin Capital lie about short positions to save $billions of dollars?
Melvin Capital initially claimed their short losses were 30%, now they are claiming short losses over 50%. How are they still losing money on shorts?
Also trying to understand this. According to S3[0] many short positions are still open, but it is unclear if these are the original shorts, or new if new shorts were opened at the higher price point. In other news, Melvin Capital is down 53%[1]
[0]https://twitter.com/ihors3/status/1355246955874701314
[1]https://www.wsj.com/articles/melvin-capital-lost-53-in-janua...
[0]https://twitter.com/ihors3/status/1355246955874701314
[1]https://www.wsj.com/articles/melvin-capital-lost-53-in-janua...
thanks for the links. I guess I can't understand that S3 chart at all, because it looks to me like the "SI Shares" have dropped precipitously in the last couple days.
Yeah, it's a little confusing, SI is on the left. It's dropped from 70m to 58m in the past month, but 58m is still above the float @ 49.6m [0]
[0]https://www.reddit.com/r/wallstreetbets/comments/ip6jnv/the_...
[0]https://www.reddit.com/r/wallstreetbets/comments/ip6jnv/the_...
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I'm just a finance enthusiast, so take what I say with a grain of salt. Now that GME is clearly overvalued, that makes the shorting even more expensive. The borrow fees that Melvin capital owes for their shorts are less than the current ones (iirc ~25% vs ~50%). If you're a hedge fund that wants to make money to short GME, it would make sense to buy the shorts off Melvin rather than the public market. Melvin itself does not have the liquidity to maintain these shorts, but Point 72 and Citadel likely do.
http://counterfeitingstock.com/CS2.0/CounterfeitingStock.htm...
While I'm wary of Robinhood and their reasoning I can believe it as they're a new company, but I can also believe that the DTCC is involved in all this.
While I'm wary of Robinhood and their reasoning I can believe it as they're a new company, but I can also believe that the DTCC is involved in all this.
A lot of noise in the press about how awful this was for people buying in late.
I don’t recall quite as much concern during the last Bitcoin bubble. At least GME is actually worth something($5, $10, whatever)
If people want to play the lotto or burn a billion dollars to send a message, I’m not sure why billionaires would go on cnbc angrily shouting it’s a “way of attacking wealthy people” if they weren’t really angry about something.
I don’t recall quite as much concern during the last Bitcoin bubble. At least GME is actually worth something($5, $10, whatever)
If people want to play the lotto or burn a billion dollars to send a message, I’m not sure why billionaires would go on cnbc angrily shouting it’s a “way of attacking wealthy people” if they weren’t really angry about something.
>If people want to play the lotto or burn a billion dollars to send a message I’m not sure why billionaires would go on cnbc angrily shouting it’s a “way of attacking wealthy people” if they weren’t really angry about something.
My head hurts trying to read this
My head hurts trying to read this
Billionaires aren’t crying when people play the lotto. Or put it all on red. Or spend it on weed.
Why is Leon Cooperman so worried about it ending badly for the general public. That means the rich will make a killing. He wasn’t bothered when things ended badly for the general public at any other time — like 2008.
Even if he was really worried about the general public, why does he think this is attacking the rich?
Why is Leon Cooperman so worried about it ending badly for the general public. That means the rich will make a killing. He wasn’t bothered when things ended badly for the general public at any other time — like 2008.
Even if he was really worried about the general public, why does he think this is attacking the rich?
They failed in communication and lost trust. If their platform could not scale to the needs of their users, they should come out and say it, and should have done so before the fallout.
[deleted]
The article is completely wrong. Robinhood did not disable buys only, they disabled any trades that took a net new position. Existing options holders who needed to buy or sell were allowed to, and regular retail traders could also buy or sell on the other side of those transactions, because they went to closing existing open positions.
The reason you couldn’t buy but you could sell is just the simple mechanics of a short squeeze. All the net open positions were short sellers needing to buy (e.g. needing retail investors to sell) and there was just near zero volume of call options holders looking to sell (e.g. needing retail investors to buy) to close an existing position.
I feel pretty upset to see the article going into all these details of capitalization - that 100% was not the issue and at no point did Robinhood “disable buys but not sells.” They disabled creating net new positions which just happened to have a side-effect of disabling buys as a matter of the particular trading volume of various option types. If you were a call option holder, you could sell (and therefore the other party could buy).
The reason you couldn’t buy but you could sell is just the simple mechanics of a short squeeze. All the net open positions were short sellers needing to buy (e.g. needing retail investors to sell) and there was just near zero volume of call options holders looking to sell (e.g. needing retail investors to buy) to close an existing position.
I feel pretty upset to see the article going into all these details of capitalization - that 100% was not the issue and at no point did Robinhood “disable buys but not sells.” They disabled creating net new positions which just happened to have a side-effect of disabling buys as a matter of the particular trading volume of various option types. If you were a call option holder, you could sell (and therefore the other party could buy).
Regardless of which side of this you’re on. I think it’s pretty weird they didn’t clearly explain why they disabled buy orders. The reason given in the user interface was “volatility”, not much else.
Sure, it's a great explanation, but it's also straight from the shorting playbook:
http://counterfeitingstock.com/CS2.0/CounterfeitingStock.htm...
"Pulling margin from long customers — The clearinghouses and broker dealers who finance margin accounts will suddenly pull all long margin availability, citing very transparent reasons for the abrupt change in lending policy. This causes a flood of margin selling, which further drives the stock price down and gets the shorts the cheap long shares that they need to cover. (Click here for more on Pulling Margin)."
http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html
http://counterfeitingstock.com/CS2.0/CounterfeitingStock.htm...
"Pulling margin from long customers — The clearinghouses and broker dealers who finance margin accounts will suddenly pull all long margin availability, citing very transparent reasons for the abrupt change in lending policy. This causes a flood of margin selling, which further drives the stock price down and gets the shorts the cheap long shares that they need to cover. (Click here for more on Pulling Margin)."
http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html
I don't understand this part:
> Basically, when you submit a trade on a broker, the exchange of money for stock doesn't actually happen until 2 days later, and the firm that handles that exchange is called a clearing firm. Before then, Robinhood just sends records: John bought 2 GME for $600, Mary sold 1 GME for $290. If that's all that happened that day, then Robinhood would need to provide $310 dollars to the clearing firm, and receive 1 stock.
> That's a credit risk - what if Robinhood doesn't have the money on settlement? The clearing firm would be on the hook.
Why would the clearing firm be on the hook? Can't they just refuse to hand the stocks over if Robinhood doesn't have the money to pay for it?
> Basically, when you submit a trade on a broker, the exchange of money for stock doesn't actually happen until 2 days later, and the firm that handles that exchange is called a clearing firm. Before then, Robinhood just sends records: John bought 2 GME for $600, Mary sold 1 GME for $290. If that's all that happened that day, then Robinhood would need to provide $310 dollars to the clearing firm, and receive 1 stock.
> That's a credit risk - what if Robinhood doesn't have the money on settlement? The clearing firm would be on the hook.
Why would the clearing firm be on the hook? Can't they just refuse to hand the stocks over if Robinhood doesn't have the money to pay for it?
[deleted]
This is well-reasoned and decently thorough.
However, when Robinhood et al halted only buys but not sells, they opened themselves up to the "corrupt elite" interpretation that Wall Street manipulated the market. There's almost no question that the effects of the unidirectional freeze were to drive down the price, thereby helping the shorts. Sure, Robinhood would have been not as well off as they were when they did allow sells, but they'd at least not be directly contributing to manipulation.
Further, the article indicates DTCC increased deposit requirements. What is their procedure for making this decision? Are they rule/process-based or discretionary?
I ask because DRCC seems like a singular bottleneck in this system, a single point of failure. It's a bit odd to see the argument that it's not a "conspiracy" (though I'd prefer "corrupt collusion") because one organization all parties depend on made a discretionary decision that caused most participants to take an action benefitting the people most likely to be well-connected to said organization.
It remains to be seen whether facts bear out any of these hypotheses. Facts do bear out that Robinhood lied about their cash flow situation. But I do find it peculiar that we're getting this explanation three days after the fact. "Government rules require vastly increased deposits due to the unprecedented conditions yada yada yada" would have been a better message than the BS they did end up sending out, and it's a perfect excuse to pass the buck.
However, when Robinhood et al halted only buys but not sells, they opened themselves up to the "corrupt elite" interpretation that Wall Street manipulated the market. There's almost no question that the effects of the unidirectional freeze were to drive down the price, thereby helping the shorts. Sure, Robinhood would have been not as well off as they were when they did allow sells, but they'd at least not be directly contributing to manipulation.
Further, the article indicates DTCC increased deposit requirements. What is their procedure for making this decision? Are they rule/process-based or discretionary?
I ask because DRCC seems like a singular bottleneck in this system, a single point of failure. It's a bit odd to see the argument that it's not a "conspiracy" (though I'd prefer "corrupt collusion") because one organization all parties depend on made a discretionary decision that caused most participants to take an action benefitting the people most likely to be well-connected to said organization.
It remains to be seen whether facts bear out any of these hypotheses. Facts do bear out that Robinhood lied about their cash flow situation. But I do find it peculiar that we're getting this explanation three days after the fact. "Government rules require vastly increased deposits due to the unprecedented conditions yada yada yada" would have been a better message than the BS they did end up sending out, and it's a perfect excuse to pass the buck.
Also, if cash were the issue, why limit only “meme stocks” why not limit stock buying across the board to prevent manipulation?
+1
Exactly.
My post has a score of zero, yet zero comments explaining why I'm wrong. I expect better from self-described "hackers."
Exactly.
My post has a score of zero, yet zero comments explaining why I'm wrong. I expect better from self-described "hackers."
Any thoughts/comments on the “convenient” timing?
I’m not writing a lot here, first post! Hi! :)
One thing I didn’t see mentioned here yet, and what makes look suspicious in my eyes, is the timing.
It seemed to me, and I saw this charted in some places afterwards (sorry, don’t have proper sources right now), that the disabling of the options on MULTIPLE brokerages happens almost exactly at the same time a heavy ladder attack was started which dropped the price significantly from - maybe 300-ish? to 120-ish in minutes.
It looked like stop losses should get triggered and the whole market brought to the bottom without the smaller investors a) being able to buy the dip and b) being able to rally the price by buying back thusly.
All the reasons given for the disabling and more might apply, but still this could have been used through the timing as part of a multiple pronged attack, seemingly also coordinated with bots flooding wsb with disheartening messages and a DDOS attack on Reddit’s DNS infrastructure, to try and keep individual investors alone with their decisions to either hold or keep their profits and ruin, thus trying to trigger a panic sale.
What, maybe to get out of some kind of squeeze? :)
It was great to see that most people seem to have held on even whilst disconnected from the hivemind for a bit.
I’m not writing a lot here, first post! Hi! :)
One thing I didn’t see mentioned here yet, and what makes look suspicious in my eyes, is the timing.
It seemed to me, and I saw this charted in some places afterwards (sorry, don’t have proper sources right now), that the disabling of the options on MULTIPLE brokerages happens almost exactly at the same time a heavy ladder attack was started which dropped the price significantly from - maybe 300-ish? to 120-ish in minutes.
It looked like stop losses should get triggered and the whole market brought to the bottom without the smaller investors a) being able to buy the dip and b) being able to rally the price by buying back thusly.
All the reasons given for the disabling and more might apply, but still this could have been used through the timing as part of a multiple pronged attack, seemingly also coordinated with bots flooding wsb with disheartening messages and a DDOS attack on Reddit’s DNS infrastructure, to try and keep individual investors alone with their decisions to either hold or keep their profits and ruin, thus trying to trigger a panic sale.
What, maybe to get out of some kind of squeeze? :)
It was great to see that most people seem to have held on even whilst disconnected from the hivemind for a bit.
> Any thoughts/comments on the “convenient” timing?
WSB lit a fire, RH had to call the fire department
WSB lit a fire, RH had to call the fire department
This is misinformation. The DTCC used their discretionary powers to jack up the collateral requirements on certain specific stocks to 100%, well above what was required by the VaR formula.
For a description of this see e.g. https://twitter.com/KralcTrebor/status/1355172567242469377
For a description of this see e.g. https://twitter.com/KralcTrebor/status/1355172567242469377
As you can see, buys make this worse, sells make it better. Robinhood could not execute buys, because it would increase the deposits they'd need, which they legally must obligate by. Sells, on the other hand, do not have this problem. They would not push the 95% boundary more to the right.
I have been trying to analyze this Robinhood story in an unbiased and objective way. My motivation is that I am interested in contemporary history and believe that what we witnessed in these past few days is a historical event.
I have a question to those here who are knowledgeable about finance and law (I am certainly not).
If my stock trading app stops allowing buying a stock, while still allowing selling a stock, even if this is done purely for technical reasons (see quote at beginning of this comment), am I incurring in market manipulation? To me the answer is evidently yes, but I would like to hear other opinions.
I have been trying to analyze this Robinhood story in an unbiased and objective way. My motivation is that I am interested in contemporary history and believe that what we witnessed in these past few days is a historical event.
I have a question to those here who are knowledgeable about finance and law (I am certainly not).
If my stock trading app stops allowing buying a stock, while still allowing selling a stock, even if this is done purely for technical reasons (see quote at beginning of this comment), am I incurring in market manipulation? To me the answer is evidently yes, but I would like to hear other opinions.
This is really about protecting their clients, the hedge funds. Here you have it from the CEO of Interactive Brokers. The retail investors are the product, no the clients.
https://m.youtube.com/watch?v=7RH4XKP55fM
https://m.youtube.com/watch?v=7RH4XKP55fM
Just use a broker like fidelity who is not similarly conflicted.
Yeah, but if there are 4-5 big players and 3 of them ban the purchase of these stocks(not the sale) they can have a big impact on their price..just like U.S sanctions affect Venezuela's econnomy. And then you find out they have a vetted interest to drive the price down...so long with the free market
No mention of fractional share mechanics. Anyone have info on how those work?
I see claims floating around of $2k/share trades, but only on fractional share sells. I wonder if people are confusing a real squeeze with Robinhood burning money to piece together whole shares.
I see claims floating around of $2k/share trades, but only on fractional share sells. I wonder if people are confusing a real squeeze with Robinhood burning money to piece together whole shares.
Fractional shares are an accounting convention within the accounts of individual brokers such as Robinhood, giving multiple customers a partial claim on a unit of stock the broker holds. They're never tradeable on the actual exchange.
What I want to know is why the block buys of GME and AMC when they could’ve blocked purchase of any other high volume stock that wasn’t the vehicle used as part of a class war. Why not block Tesla, Microsoft and Apple purchases?
Admittedly I know nothing about the stock market but when your decision somehow align with your business decisions and business partners interests, it’s hard not for people to expect there’s a more nefarious reason behind it.
Let's say some subreddit convinces a whole town that it would be a good idea to turn on all their water taps, and leave them on, at the same time. And, as the reservoir drains dry and the sewage lines start overflowing, the water company cuts supply. And then it turns out that the water company has some vague amorphous relationship with a bottled water company. Do you assume that the water company shut off supply because everyone did something weird and the system was about to stop working, or that they did it to benefit the bottled water company?
Like, at some point, "this entity was forced into a position where they had to do the thing, but the thing might have benefited someone they're connected to, therefore they must have done it intentionally for reasons of collusion" looks like a pretty flimsy explanation.
Like, at some point, "this entity was forced into a position where they had to do the thing, but the thing might have benefited someone they're connected to, therefore they must have done it intentionally for reasons of collusion" looks like a pretty flimsy explanation.
While I understand the sentiment of your analogy, I think a big part that’s missing in your analogy is that the water bottle company loses a ton of money (if not bankrupt) if everyone keeps their water taps on and they gain a ton of money if they turn it off which changes the story completely. If I am the water company, and it’s in the water bottle interests, what stops the water company from simple saying “oh we have sewage issues” while the water bottle company rakes in the dough.
What I don’t get is why Robinhood didn’t outright explain this at first. It seems like it’s a good excuse and they announced it right after the media suggested this was the possibility.
What I don’t get is why Robinhood didn’t outright explain this at first. It seems like it’s a good excuse and they announced it right after the media suggested this was the possibility.
They probably should have. But “we are virtually insolvent”, if that was the case, is not the sort of thing that companies, especially private companies, are normally excited about doing. Bad look.
It seems to me that the system has way too many incentives for collusion across the various levels.
Even the DTC is just a private corporation apparently?
The incentives make the system, and so should this system be rethought from the ground up to align the incentives so that never again would this kind of stuff happen againÖ
See: https://old.reddit.com/r/wallstreetbets/comments/l9auf5/impo...
The incentives make the system, and so should this system be rethought from the ground up to align the incentives so that never again would this kind of stuff happen againÖ
See: https://old.reddit.com/r/wallstreetbets/comments/l9auf5/impo...
From the conversation in CH:
Elon Musk: OK, you had to restrict buying. Why didn’t you also restrict selling?
Vlad Tenev: The fact of the matter is, people get really pissed off if they’re holding stock and they want to sell it and they can’t. So I think that’s that’s categorically worse.
Read full transcript: https://www.mrhack.io/blog/elon-musk-vlad-tenev-robinhood-ce...
Read full transcript: https://www.mrhack.io/blog/elon-musk-vlad-tenev-robinhood-ce...
If Robinhood wants to play in this game they need to have deep enough pockets to cover unanticipated events. "We can't both pay our bills and provide you with service at the same time" isn't a great sales pitch.
So the record we have right now is that Robinhood can't keep their servers running on high volatility days (see early 2020) and they can't cover their collateral obligations on high volatility stocks, basically the exact times that people will want to be using their service.
So the record we have right now is that Robinhood can't keep their servers running on high volatility days (see early 2020) and they can't cover their collateral obligations on high volatility stocks, basically the exact times that people will want to be using their service.
Simultaenous with pausing buys of GME they were allowing accounts and positions to be opened and margin trades to occur, so it cannot be that they simply needed to limit their capital requirement full stop. The capital requirement is a prerequisite for being in the business and this is not an unforeseen circumstance, it's why they have lines of credit (which in fact they did draw on, just not enough to support the business they purport to be in) on top of their working capital.
I mean I get this it's a totally rational explanation of how all the machinery works.
But why did Robinhood start liquidating peoples' shares at a loss (to the holders)? That is literally stealing from the poor to cover their own ass. The bank doesn't sell my house if the housing market gets volatile. What give any broker the authority to execute transactions on my behalf when they're under pressure because of a poorly constructed business strategy?
But why did Robinhood start liquidating peoples' shares at a loss (to the holders)? That is literally stealing from the poor to cover their own ass. The bank doesn't sell my house if the housing market gets volatile. What give any broker the authority to execute transactions on my behalf when they're under pressure because of a poorly constructed business strategy?
That would be the margin agreement that you agreed to when you opened your account.
https://cdn.robinhood.com/assets/robinhood/legal/RHS%20Margi...
https://cdn.robinhood.com/assets/robinhood/legal/RHS%20Margi...
I don’t have a margin account (or any account anymore on RH) and they did this on cash accounts too.
This doesn’t explain why the list of restrictions on buying expanded to 50 stocks, including low volatility stocks like Starbucks which is now limited to just 1 share.
Lol that's because it's speculation and backwards rationalization. I'm sure they will eventually update the apologetics to somehow address the low-volatility instruments as well.
Interactive Brokers blocked share purchases too (the article claims they only blocked options), and not just on GME, even for Cash accounts (i.e. no margin involved).
> Sells, on the other hand, do not have this problem. They would not push the 95% boundary more to the right.
This is misleading in the article. The margin requirements have to do with VaR or value at risk, which has to do with the historical price returns of specific stocks.
If a particular broker doesn't allow buying, in theory it shouldn't be directly related to the VaR.
Case in point. RH severely restricted buying and GME stayed at lofty levels...
This is misleading in the article. The margin requirements have to do with VaR or value at risk, which has to do with the historical price returns of specific stocks.
If a particular broker doesn't allow buying, in theory it shouldn't be directly related to the VaR.
Case in point. RH severely restricted buying and GME stayed at lofty levels...
Was the buy limit only for GME or all stocks on RobinHood?
If it's the former, how does the article's explanation fits?
If it's the former, how does the article's explanation fits?
It was for a couple dozen different high volatility stocks.
The article does not really answer the question in the title. Yes, it shows why they still had the ability to execute Sells. But the question most people have is: If you are forced to halt Buys, isn't it fairest to also halt Sells?
Now, I can see the counterargument: if you halt Sells, you are effectively preventing people from withdrawing their money from Robinhood. But, by allowing Sells (which are being bought by another party somewhere) you likely to influence the price, and you're putting your customers in a strange position relative to clients of other institutions who can still buy, and indeed, buy from Robinhood customers. I still haven't seen this question properly addressed. What are the precedents? When forced to restrict trading because of regulatory obligations in the past, has the normal response been to halt all trading or only one side?
Now, I can see the counterargument: if you halt Sells, you are effectively preventing people from withdrawing their money from Robinhood. But, by allowing Sells (which are being bought by another party somewhere) you likely to influence the price, and you're putting your customers in a strange position relative to clients of other institutions who can still buy, and indeed, buy from Robinhood customers. I still haven't seen this question properly addressed. What are the precedents? When forced to restrict trading because of regulatory obligations in the past, has the normal response been to halt all trading or only one side?
Be careful what you wish for! Levine noted Friday that a huge amount of the trading done in GME was institutional. Large firms can probably handle whatever collateral requirements there will ever be for a specific symbol. Here you have a bunch of random people pushing a $15 stock up to $400. Volatility makes it impossible for Robinhood to keep transacting in that stock. They shut down buys and sells. But trading on GME continues elsewhere; in fact, most GME trading has been occurring elsewhere. Now: the market crashes (as it inevitably must). You got in at $250, cheered as it beat $320, and now the stock is heading back to double digits...
> stock is heading back to double digits
You think
You think
I sure do.
Down to 185 in after hours trading (6:16 EST). From a 225 close at end of US trading hours.
Every conversation I get into about this stuff with normal people, I conclude by asking: "have you seen a GameStop?"
The whole thesis here is just so transparently stupid. I know that's true of cryptocurrency stuff that has stayed in the money for a long time. But I mean, really. GameStop is going to zero.
It's not just that every downloads their games now; it's that the whole turnaround pitch ("we'll be the Apple Stores of gaming") ignores the bargain-basement commercial real estate GameStop occupies.
The whole thesis here is just so transparently stupid. I know that's true of cryptocurrency stuff that has stayed in the money for a long time. But I mean, really. GameStop is going to zero.
It's not just that every downloads their games now; it's that the whole turnaround pitch ("we'll be the Apple Stores of gaming") ignores the bargain-basement commercial real estate GameStop occupies.
This is actual intersting debate. When the exchange itself halts, they (necessarily, mathematically) halt buts and sells. But there's no correct answer possible for just one brokerage.
So now we go meta and ask "should it be legal to be a brokerage without a much larger cash cushion than current rules? Or should clients be warned about the possibility of freezes like this? Or should buyers take responsibility and not put their money in discount low-quality brokerages if they want to day-trade run hedge-fund style manipulation plays?
All in all, if you hate sleazy hedge funds, you should have any sympathy for day traders and squeezers either, as as they intentionally are playing the same no-holds-barred game, not doing investing as the market system intends.
If you want to hold Melvin accountable by law for alleged misdeeds, it's silly to say the law should require brokers to aid in market manipulation activities against their own solvency interests, instead of the law should require (and enforce) that Melvin do whatever they are doing wrong.
So now we go meta and ask "should it be legal to be a brokerage without a much larger cash cushion than current rules? Or should clients be warned about the possibility of freezes like this? Or should buyers take responsibility and not put their money in discount low-quality brokerages if they want to day-trade run hedge-fund style manipulation plays?
All in all, if you hate sleazy hedge funds, you should have any sympathy for day traders and squeezers either, as as they intentionally are playing the same no-holds-barred game, not doing investing as the market system intends.
If you want to hold Melvin accountable by law for alleged misdeeds, it's silly to say the law should require brokers to aid in market manipulation activities against their own solvency interests, instead of the law should require (and enforce) that Melvin do whatever they are doing wrong.
From understanding the issue is that RH didn't have enough collateral to execute buys. If they restricted sell on RH in the name of symmetry, but other broker with no collateral issue would still allow buy and sell the stock would remain volatile. In this case, not being able to buy is a nuisance, but won't make you loose money directly. Not being able to cash out in the event of a steep decline on the other is directly and highly prejudicial.
I understand that restricting buys affect the price for those who already bought in, but at least they can still cash out..
I understand that restricting buys affect the price for those who already bought in, but at least they can still cash out..
i'm not an expert in any of this, but I've heard/read multiple people comment that there is no situation where you're legally allowed to halt sells short of the SEC or market (NYSE/Nasdaq, etc) saying so
Yes, we know capital requirements go up, but they cut off buying even for those with sufficient money in their accounts. Money that was transferred from a user bank account and now (I assume) exists in a RH-controlled account. So if RH needed the funds they didn’t they use the money users already sent them?
The Webull CEO made an offhand comment “we couldn’t use funds from our users’ accounts due to regulatory restrictions.” I haven’t found what restrictions those are (so if you know, thank you for sharing!)
I’m guessing the money in user accounts isn’t actually held as liquid cash. I bet they lend it out like a bank which means a 1000% increase in liquidity requirements meant a leveraged bank-run situation.
The Webull CEO made an offhand comment “we couldn’t use funds from our users’ accounts due to regulatory restrictions.” I haven’t found what restrictions those are (so if you know, thank you for sharing!)
I’m guessing the money in user accounts isn’t actually held as liquid cash. I bet they lend it out like a bank which means a 1000% increase in liquidity requirements meant a leveraged bank-run situation.
Brokers can't use client money to make the deposit.
I know almost nothing about buying/selling stock and brokers. (With two exceptions [1], all my investments have been the "buy shares of a mutual fund and hold it forever except for occasional exchanges with other funds I'm going to hold forever, or when I need to make a big purchase like a new car" kind of investments). Thus, I'm quite confused here.
What is this "deposit" in this case?
Could someone walk through what happens in this case: I have $X at my cash account at a broker, and I direct that broker to buy something that will cost $Y (including any broker fees, commissions, required tax withholding, etc.), where Y <= X.
I presume that ultimately I end up wit the thing I wanted to buy, and my cash account ends up with $(X-Y)?
So what happens as a step along the road to making that happen that requires the broker to use money that is not money from my cash account?
[1] In 1998 or 1999, the newsreader I used on Red Hat started corrupting my .newsrc after an update. I tracked it down to a change in one of the ctype macros in the C standard library. The newsreader assumed that all the flags fit in a char, which had been true before the update, but now wasn't. I submitted a patch that changed one declaration in the newsreader from "char" to "unsigned short". When Red Hat was going to IPO, I was surprised to get an email telling me that since I was a contributor to Red Hat, I could buy Red Hat stock at the IPO price. I bought a few thousand dollars worth that morning at $14/share, sold them that afternoon at something like $70/share, transferred the money out, and never touched my ETrade account again.
Who says submitting patches to open source doesn't pay? :-)
The other time was when T-Mobile gave every customer one share of stock. Eventually they got tired of having to deal with having a bazillion people who owned one share each of their stock, and told us we had to transfer our shares to the broker of our choice or sell. I sold.
What is this "deposit" in this case?
Could someone walk through what happens in this case: I have $X at my cash account at a broker, and I direct that broker to buy something that will cost $Y (including any broker fees, commissions, required tax withholding, etc.), where Y <= X.
I presume that ultimately I end up wit the thing I wanted to buy, and my cash account ends up with $(X-Y)?
So what happens as a step along the road to making that happen that requires the broker to use money that is not money from my cash account?
[1] In 1998 or 1999, the newsreader I used on Red Hat started corrupting my .newsrc after an update. I tracked it down to a change in one of the ctype macros in the C standard library. The newsreader assumed that all the flags fit in a char, which had been true before the update, but now wasn't. I submitted a patch that changed one declaration in the newsreader from "char" to "unsigned short". When Red Hat was going to IPO, I was surprised to get an email telling me that since I was a contributor to Red Hat, I could buy Red Hat stock at the IPO price. I bought a few thousand dollars worth that morning at $14/share, sold them that afternoon at something like $70/share, transferred the money out, and never touched my ETrade account again.
Who says submitting patches to open source doesn't pay? :-)
The other time was when T-Mobile gave every customer one share of stock. Eventually they got tired of having to deal with having a bazillion people who owned one share each of their stock, and told us we had to transfer our shares to the broker of our choice or sell. I sold.
The reason the deposits are necessary is that there is no inherent trust between the firms on settlement day. The deposits are the Brokers saying, "Hey, trust me, I've got everything I need to complete the settlement, here's my collateral".
As such, if a Broker doesn't have the funds to complete the transaction, you can pull it from their deposits.
Your money doesn't really play a part in this, and indeed the illusion of "give $X for Y stock" is just an illusion.
As such, if a Broker doesn't have the funds to complete the transaction, you can pull it from their deposits.
Your money doesn't really play a part in this, and indeed the illusion of "give $X for Y stock" is just an illusion.
So if I tell a broker to buy $X worth of some stock for me, is what actually happens that the broker buys $X worth of that stock using their money, and then when that has completed a couple days later the broker takes $X from my cash account and transfers the stock to me?
No, when you tell a broker to buy $X of stock, they send a record of that purchase to a clearing firm. The clearing firm, in order to make sure none of the Brokers becomes insolvent before settlement, requires every Broker offer up collateral - it's collateral, it's not spent if everything goes well.
It's the SEC requiring brokers offer up insurance in case they explode.
Then, 2 days later, your actual money goes to the clearing firm and is exchanged for stock.
It's the SEC requiring brokers offer up insurance in case they explode.
Then, 2 days later, your actual money goes to the clearing firm and is exchanged for stock.
And this is why it’s confusing to the unsophisticated investor. Why didn’t they send my money in the first place? They can call it 100% collateral if they really want, but it’s basically payment up front. Once they get the stock I asked for, they take the money.
I suspect there are a lot more complicated trading mechanisms that take advantage of that 2 day gap that make my plan unfeasible though.
I suspect there are a lot more complicated trading mechanisms that take advantage of that 2 day gap that make my plan unfeasible though.
Would also like to know the answer to this. From the amount of people explaining the nuance of the deposit rules it seems many people expect trading to work the way you've described. The fact that it (counterintuitively?) doesn't seems like it might be a flaw in the system.
To me it seems strange that that isn't allowed.
How do high frequency traders operate in these conditions? Do they use margin? Is it not as capital intensive because they tend to buy AND sell so much?
They don't use Robinhood. Like the article say there is companies that are 50 years old with barrels of money.
To be fair, Interactive Brokers also halted these transactions, and they're well-known for catering to hobbyist and professional traders. Granted, they're more mainstream than dedicated day-trading brokerages, but some of those depended on clearing houses that also decided to halt sales.
[deleted]
Failure of REGULATOR;
"If it moves tax it. If it keeps moving regulate it. And if it stops moving subsidize it" --Ronald Reagan (b. 1911)
"If it moves tax it. If it keeps moving regulate it. And if it stops moving subsidize it" --Ronald Reagan (b. 1911)
At that point the stock should have been "frozen", if you disable buy but not sell it means the stock can only go down.
Which should be, and probably is, super duper criminal.
Did they block buying, or did they block opening new positions (i.e. could shorts still buy to close)? The latter is completely consistent and all this outrage would be unwarranted.
They blocked buying. https://www.theverge.com/2021/1/28/22254102/robinhood-gamest...
That article doesn't help clarify at all because it's just focused on long positions, if anything though I would say it's just about opening vs closing positions, the subtitle says "Users can still close their positions but can’t trade more"
What is not clear to you? You logged into the app and were not able to purchase shares of GME, plain and simple, you could only sell.
The latter.
Don't forget to re-rate Robinhoods app. Mine got deleted.
Sorry if this is off topic, reading this story reminded me to check my review.
Sorry if this is off topic, reading this story reminded me to check my review.
These brokers halted buys of GME
Robinhood Webull M1 Finance Public E-Trade
Does any of the above still restrict trading of those stocks, other than Robinhood?
Robinhood Webull M1 Finance Public E-Trade
Does any of the above still restrict trading of those stocks, other than Robinhood?
Makes sense. Too bad their CEO didn't make the same arguments when he was giving all those interviews :p
If so, shouldn't they not stopped to buy ALL stockes, if that would be the case?
The stock system is not really equipped to handle large small volumes I guess?
Rather than disabling the buy button they should have had a popup appear that explains the situation as simply as possible so that people wouldn't resort to conspiracy theories as an explanation.
Instead they made the UX look evil as hell. Like locking a user in a room with nothing but a loaded gun.
Instead they made the UX look evil as hell. Like locking a user in a room with nothing but a loaded gun.
Author has no explanation for the formula and the esoteric quote provided.
Setting aside blame and the speculation about whether this was or wasn't intentional manipulation, there's another thing that gives me pause:
All of the offered explanations describe scenarios which are not possible in a decentralized financial toolchain.
All of the offered explanations describe scenarios which are not possible in a decentralized financial toolchain.
Okay, but why stop buys instead of freezing buys and sells?
Well, i'm glad we finally got a clear explanation of this unexpected but thoroughly non-conspiratorial series of events from checks notes the guy who runs the Super Smash Brothers stats database.
Is it possible that collateral requirements were raised by clearing houses specifically to knock Robinhood retail investors out of the game?
Honestly, I found this article to be of extremely low quality. It really doesn't matter why this thing happened.
Adding a plausible or even reasonable explanation for why it happened only distracts from the fact that it did happen, and retail traders were disadvantaged as a result.
Distractions are not helpful, and can arguably be considered shill activity in some respects by muddying the waters, it also prevents resolution of the real problems. Please don't add to bullshit, there's enough of it on the street after last week.
Any time there are more sellers than buyers the market price will go down, these are simple mechanics, easily modeled to a fair degree of accuracy, everyone in the market knows this, and this loss that played out was tragic because many people were harmed in the process by the brokerage exchanges/clearinghouses actions.
That fact, is what is important and why the people responsible for these decisions should be held to account.
There need be no conspiracy which many people seem to assume based on their posts, the simple fact is people were disadvantaged because the rules were changed on them inequitably and without notice.
If there was collusion, the SEC should investigate and put people in prison for this, not fine them, as to if that will happen we'll need to wait and see.
The fact remains, retail traders were disadvantaged and as any brokerage firm, if they could no longer trade due to trading requirements all trading should have halted on the platform and a blanket notice sent to everyone as to why; this is obvious, has happened in the past, and obviously this didn't happen this time and hedge funds were allowed to close or possibly re-short their inherently risky positions while retail investors could only look on in shock at being unable to do anything with the rug pulled out from under them simply waiting until the restrictions were lifted or sell at a loss.
This, in my opinion was criminal and a major breach of the public trust, as well as fiduciary responsibility. Even if they have it in the user agreement as a legal caveat with vague language, no one consents to someone saying after the fact, we're going to change the rules when the chips are down and allow your money to be stolen, and actually do it, and you hold us harmless or we won't offer the service; and that is exactly what happened.
A take it or leave it ultimatum to get you in the door which allows shady corporate behavior without court oversight, simply based on the fundamental theory that if you agree to a contract you can't go back and sue them for loss but the contracts can be updated at any time after and by simply clicking/using the service you consent is laughable. Lots of issues around this and arbitration abound, I won't get any further into contract law, I'm not an attorney, its not interesting to me.
What's critical is, a very important line was crossed, and by doing what Robinhood and the other firms did, they have effectively doomed their businesses.
It doesn't matter if google has reset their reviews, or facebook bans groups, it hit the news nationally. Most everyone has heard about what happened and while some may not understand the implications immediately a simple fact remains.
A brokerage business cannot operate without trust, and because some of them allowed a conflict of interest, coupled with their own very possible questionable motives and their actions this is the expected and predictable result.
I personally didn't participate in the new-tulip mania because it doesn't meet my risk profile, but I still pulled all my funds from E*trade the moment I heard trades were limited in one direction.
I cannot trust any brokerage that would allow only buys and not sells for the simple reason that this is a clearly rigged market and you can't make money long-term in a rigged market. A casino is a rigged market.
The only possibility in a rigged market is what the house allows you to make, and companies will always do what's in their own best interest, and when the business becomes taking my money as long as they can provide a plausible reason for it that passes legal muster I have no doubt they can and will do that.
I find the claims of accounts of individuals being liquidated at a loss during trade restrictions because they were margin accounts by default and the margin requirements suddenly changed, troubling to say the least.
Investing is not a casino, and by taking the actions these brokers/clearinghouses did to limit trades in only one direction, they have shown that these firms think it is, by their actions.
I refuse to do business with any business that I cannot trust will follow a very basic duty of care and all of these companies have failed in this respect in my eyes.
They also had a fiduciary responsibility to their shareholders which they broke when they decided to allow trades in only one direction because there will be fallout.
I find it most surprising that there haven't been any shareholder lawsuits filed over this because there are plenty of investors in these financial service companies that will take a loss as a result of these decisions.
Mostly because investors that have been watching this attentively who were not involved in the related securities are now moving their money from firms they can no longer trust due to the now-changed risk profile.
There should be almost no reasonable customer to Brokerage/Exchange counter-party risk with 100% backed funds, and this profile seems to have suddenly changed.
Simple fact, this didn't need to happen, but for a complex number of reasons which are mostly immaterial, it was allowed to happen.
If your the type that wants to go into the why's or hows, focus on the root cause, and you need look no further than its because no one was regulating market shorts, and the shorts thought they could harvest investor money from various securities with impunity through sophisticated structured mechanisms to manipulate the price down with plausibly legal structures.
It doesn't matter that it happened because of lax reporting requirements, no regulation, cheap margin/leverage, or a high barrier to countermeasure. It happened.
Everything that happened and continues to happen after is immaterial except to show us what has changed and what investors will now need to do to adjust for that now changed risk profile.
Edit: on a side note, anyone happen to know why the YC edit/update function isn't working? It claims to update the post but isn't actually working; I had to delete the post and repost to have it actually update for some minor spelling and grammatical corrections and to better clarify specific wording to be less vague.
Adding a plausible or even reasonable explanation for why it happened only distracts from the fact that it did happen, and retail traders were disadvantaged as a result.
Distractions are not helpful, and can arguably be considered shill activity in some respects by muddying the waters, it also prevents resolution of the real problems. Please don't add to bullshit, there's enough of it on the street after last week.
Any time there are more sellers than buyers the market price will go down, these are simple mechanics, easily modeled to a fair degree of accuracy, everyone in the market knows this, and this loss that played out was tragic because many people were harmed in the process by the brokerage exchanges/clearinghouses actions.
That fact, is what is important and why the people responsible for these decisions should be held to account.
There need be no conspiracy which many people seem to assume based on their posts, the simple fact is people were disadvantaged because the rules were changed on them inequitably and without notice.
If there was collusion, the SEC should investigate and put people in prison for this, not fine them, as to if that will happen we'll need to wait and see.
The fact remains, retail traders were disadvantaged and as any brokerage firm, if they could no longer trade due to trading requirements all trading should have halted on the platform and a blanket notice sent to everyone as to why; this is obvious, has happened in the past, and obviously this didn't happen this time and hedge funds were allowed to close or possibly re-short their inherently risky positions while retail investors could only look on in shock at being unable to do anything with the rug pulled out from under them simply waiting until the restrictions were lifted or sell at a loss.
This, in my opinion was criminal and a major breach of the public trust, as well as fiduciary responsibility. Even if they have it in the user agreement as a legal caveat with vague language, no one consents to someone saying after the fact, we're going to change the rules when the chips are down and allow your money to be stolen, and actually do it, and you hold us harmless or we won't offer the service; and that is exactly what happened.
A take it or leave it ultimatum to get you in the door which allows shady corporate behavior without court oversight, simply based on the fundamental theory that if you agree to a contract you can't go back and sue them for loss but the contracts can be updated at any time after and by simply clicking/using the service you consent is laughable. Lots of issues around this and arbitration abound, I won't get any further into contract law, I'm not an attorney, its not interesting to me.
What's critical is, a very important line was crossed, and by doing what Robinhood and the other firms did, they have effectively doomed their businesses.
It doesn't matter if google has reset their reviews, or facebook bans groups, it hit the news nationally. Most everyone has heard about what happened and while some may not understand the implications immediately a simple fact remains.
A brokerage business cannot operate without trust, and because some of them allowed a conflict of interest, coupled with their own very possible questionable motives and their actions this is the expected and predictable result.
I personally didn't participate in the new-tulip mania because it doesn't meet my risk profile, but I still pulled all my funds from E*trade the moment I heard trades were limited in one direction.
I cannot trust any brokerage that would allow only buys and not sells for the simple reason that this is a clearly rigged market and you can't make money long-term in a rigged market. A casino is a rigged market.
The only possibility in a rigged market is what the house allows you to make, and companies will always do what's in their own best interest, and when the business becomes taking my money as long as they can provide a plausible reason for it that passes legal muster I have no doubt they can and will do that.
I find the claims of accounts of individuals being liquidated at a loss during trade restrictions because they were margin accounts by default and the margin requirements suddenly changed, troubling to say the least.
Investing is not a casino, and by taking the actions these brokers/clearinghouses did to limit trades in only one direction, they have shown that these firms think it is, by their actions.
I refuse to do business with any business that I cannot trust will follow a very basic duty of care and all of these companies have failed in this respect in my eyes.
They also had a fiduciary responsibility to their shareholders which they broke when they decided to allow trades in only one direction because there will be fallout.
I find it most surprising that there haven't been any shareholder lawsuits filed over this because there are plenty of investors in these financial service companies that will take a loss as a result of these decisions.
Mostly because investors that have been watching this attentively who were not involved in the related securities are now moving their money from firms they can no longer trust due to the now-changed risk profile.
There should be almost no reasonable customer to Brokerage/Exchange counter-party risk with 100% backed funds, and this profile seems to have suddenly changed.
Simple fact, this didn't need to happen, but for a complex number of reasons which are mostly immaterial, it was allowed to happen.
If your the type that wants to go into the why's or hows, focus on the root cause, and you need look no further than its because no one was regulating market shorts, and the shorts thought they could harvest investor money from various securities with impunity through sophisticated structured mechanisms to manipulate the price down with plausibly legal structures.
It doesn't matter that it happened because of lax reporting requirements, no regulation, cheap margin/leverage, or a high barrier to countermeasure. It happened.
Everything that happened and continues to happen after is immaterial except to show us what has changed and what investors will now need to do to adjust for that now changed risk profile.
Edit: on a side note, anyone happen to know why the YC edit/update function isn't working? It claims to update the post but isn't actually working; I had to delete the post and repost to have it actually update for some minor spelling and grammatical corrections and to better clarify specific wording to be less vague.
Why was buying with personal cash disabled?
Because they wanted the price to go down
[deleted]
Robinhood is done as trading company. After this fiasco, who in their right mind can trust Robinhood for financial future.
The cofounder stated in every interview that it was not a liquidity issue. The actual company stated reasons are still very cagey and ambiguous.
There are all these third parties coming out with shill articles, trying to excuse Robinhood. This is classic propaganda PR campaign.
Robinhood can’t explicitly state what they did for specific reason, because everyone can analyze whether it’s true or not. What is being attempted is to run third party propaganda PR campaign to excuse Robinhood.
Has Robinhood explicitly stated the exact reasons for shutting down buying but allowing selling stocks? If not then why not? Unless Robinhood comes out with detailed legal and business justifications, all these shill excuses are just vapor.
The cofounder stated in every interview that it was not a liquidity issue. The actual company stated reasons are still very cagey and ambiguous.
There are all these third parties coming out with shill articles, trying to excuse Robinhood. This is classic propaganda PR campaign.
Robinhood can’t explicitly state what they did for specific reason, because everyone can analyze whether it’s true or not. What is being attempted is to run third party propaganda PR campaign to excuse Robinhood.
Has Robinhood explicitly stated the exact reasons for shutting down buying but allowing selling stocks? If not then why not? Unless Robinhood comes out with detailed legal and business justifications, all these shill excuses are just vapor.
Robin Hood in my opinion is constrained by their previous marketing. There message to prospective users is at odds with reality. At some point this had to catch up with them. Stop worrying about this one crappy broker.
I want to switch off from Robinhood which alternative are you recommending ?
Whatever you pick, remember to transfer instead of selling. But it might take days to happen. Maybe even weeks with current RH situation.
Actually, if you sell you don't have to wait so long. And you don't have to pay $75 in fees to RH.
Why would you prefer to transfer? Just hit the bid and move the cash IMO.
EDIT: wasn't thinking about the tax implications for those who intend to carry positions greater than a year.
Why would you prefer to transfer? Just hit the bid and move the cash IMO.
EDIT: wasn't thinking about the tax implications for those who intend to carry positions greater than a year.
After this bull market, you'd have to have only $1,000 in the account to make the taxes less than the $75 fee...
Robinhood had many, many issues before. Very often at very critical times when the market moved.
And their business model is a disgrace. As many say, PFOF should be illegal.
And their business model is a disgrace. As many say, PFOF should be illegal.
>And their business model is a disgrace. As many say, PFOF should be illegal.
You get equal or better prices than on the open exchanges (NBBO), and they kick back money to the brokers making commissions-free trading possible. What's not to love?
You get equal or better prices than on the open exchanges (NBBO), and they kick back money to the brokers making commissions-free trading possible. What's not to love?
Robinhood has a conflict of interest.
Citadel owns Robinhood.
Citadel owns hedge funds that shorted GME.
Robinhood blocked purchasing GME.
Something is fishy in all of this.
Something is fishy in all of this.
They do business with a company that is involved in the large short position, that is why.
> It is not about margin accounts
> Brokers cannot use client money to satisfy their clearing fund obligation.
Let's assume there's no margin, and everyone fronts cash for their trades. There's no reason that Robinhood or other broker would not use client money for clearing... that's the point of a broker.
> Brokers cannot use client money to satisfy their clearing fund obligation.
Let's assume there's no margin, and everyone fronts cash for their trades. There's no reason that Robinhood or other broker would not use client money for clearing... that's the point of a broker.
Never understood bailouts of hedge funds, whether by government dole, or by corporate collusion as Robinhood is now doing.
On a fine day, these buffoons are all Ayn Randish free marketeers. They should be willing to live by their principles even in downturns.
On a fine day, these buffoons are all Ayn Randish free marketeers. They should be willing to live by their principles even in downturns.
I haven't read the books. Do any of the free market characters ever end up failing?
Yes, at least for a time. In general it's quite rare for a book to end with the protagonist failing, but in The Fountainhead, IIRC, the protagonist spends an extended period of time doing manual labor rather than architecture because he cannot practice it freely.
No, compassionate society is weak and prevents John Galt from achieving his true potential. Wasted 2 of my crucial formative years reading those books when I should have been studying for university entrance exams.
There are some interesting ideas. But my personal guide is Thoreau, who says "that government is best that governs the least". I've never heard anyone call Thoreau a libertarian, but I'd rather be a Thoreau libertarian than Rand-ian.
There are some interesting ideas. But my personal guide is Thoreau, who says "that government is best that governs the least". I've never heard anyone call Thoreau a libertarian, but I'd rather be a Thoreau libertarian than Rand-ian.
Never ceases to amaze me Ayn Rand resorted to receive social security benefits when she was old and broke, fact which makes her philosophy all the weaker. People need a safety net because unpredictible things happen that are beyond control.
I sympathise with her as a person. She went through a lot of trials and difficulties during her life. But to deny that other people matter in our lives is a strange stance. I decided that I don't want to go there. My work is to benefit humanity, little though it might be.
I see no evidence of collusion so far, but if there is any, it would be for Randian self interest, so I don't see your point.
I was just saying that a short squeeze is a known risk for short positions. As a small-scale investor, I also knew that Covid and stay-at-home means that a lot more small time investors will be involved in 2020-21, skewing market valuations in crazy ways. GME was only one manic instance. Why was such an issue raised over this particular incident? Why call for regulation, and squeezing Robinhood to freeze buys?
I am not advocating the buying spree, since a lot of small-time investors will get hurt if and when the price comes down. The SEC should issue advisories. But Hedge Funds shedding tears is hardly justifiable.
I am not advocating the buying spree, since a lot of small-time investors will get hurt if and when the price comes down. The SEC should issue advisories. But Hedge Funds shedding tears is hardly justifiable.
>On a fine day, these buffoons are all Ayn Randish free marketeers. They should be willing to live by their principles even in downturns.
Is wall st some sort of hive mind? How do you know whether they supported the deposit requirements in the first place? What if there weren't deposit requirements, and that led to different calamity a few years down the line, would everyone just be getting upset about the lack of regulation?
Is wall st some sort of hive mind? How do you know whether they supported the deposit requirements in the first place? What if there weren't deposit requirements, and that led to different calamity a few years down the line, would everyone just be getting upset about the lack of regulation?
what's not being discussed here is that Robinhood became their own clearing broker in 2018. I'm sure at the time of the launch it was celebrated with great fanfare as it would "help the consumer" and add to their bottom line. It's not an evil conspiracy but it's the typical silicon valley grow at all costs mentality. They apparently did not account for the risks of being their own clearing broker and having to put up the deposit to the DTC before settlement. However, they should have realized in this past year that their users have a hive mind and have the same collective behavior (which is also why citadel pays them so much), so when a stock gets popular, everyone will be on the buy side. Other brokers such as webull, were able to reenable trading the following day without limits because they use Apex Clearing which likely has the ability to collateralize the trades and has a more diverse set of trades (buys/sells) that net each other out.
Things they could have done to prevent this, that actually would have been good for the user, but limited growth is: disabled margin trading, reduced account size, use a third party clearing broker.
Things they could have done to prevent this, that actually would have been good for the user, but limited growth is: disabled margin trading, reduced account size, use a third party clearing broker.
It wasn't only Robinhood.
> Bad Brokers - Restricted purchasing of certain tickers E-Toro - Proof
E-Trade - Proof
Ally - Proof
Public.com - Proof
Merrill Edge - Proof
IG Broker - Proof
Trade Republic - Proof
Webull - Admitted they were forced to by clearing firm - Clearing firm is Apex - They'll be moved to neutral once they publicly confirm Apex was sole reason the trades were restricted.
Neutral Brokers - Restricted trading, publicly naming their intermediary Freetrade - Proof, blames Barclays - CMO Interview - CMO Tweets M1 Finance - Proof - Blames Apex Clearing Trading212 - Proof - re-enabled, caused by intermediary - Intermediary is IB
Tastyworks - Proof, blame Apex Clearing Stash - Proof, blamex Apex Clearing TD Ameritrade/Canada - Proof - Proof2 - (Margin requirements increased, Covered call and short put orders may only be placed with a broker and support times are > 2h, other trades restricted) - Neutral because they didn't restrict the purchase of stocks with cash.
Source: https://www.reddit.com/r/stocks/comments/l8rhr3/weekend_gme_...
> Bad Brokers - Restricted purchasing of certain tickers E-Toro - Proof
E-Trade - Proof
Ally - Proof
Public.com - Proof
Merrill Edge - Proof
IG Broker - Proof
Trade Republic - Proof
Webull - Admitted they were forced to by clearing firm - Clearing firm is Apex - They'll be moved to neutral once they publicly confirm Apex was sole reason the trades were restricted.
Neutral Brokers - Restricted trading, publicly naming their intermediary Freetrade - Proof, blames Barclays - CMO Interview - CMO Tweets M1 Finance - Proof - Blames Apex Clearing Trading212 - Proof - re-enabled, caused by intermediary - Intermediary is IB
Tastyworks - Proof, blame Apex Clearing Stash - Proof, blamex Apex Clearing TD Ameritrade/Canada - Proof - Proof2 - (Margin requirements increased, Covered call and short put orders may only be placed with a broker and support times are > 2h, other trades restricted) - Neutral because they didn't restrict the purchase of stocks with cash.
Source: https://www.reddit.com/r/stocks/comments/l8rhr3/weekend_gme_...
You would have thought that article had mentioned that, wouldn't you?
It mentions it in passing, at the end, with a spin on the facts. The article glosses over the connections that the brokerage clearing houses have with hedge funds that likely have potentially painful short exposure. It also glosses over the consequences of making shares in certain companies sell order only. It's not a very good or balanced article.
Keep in mind that Robinhood also gives everyone a margin account by default. They also let people invest on margin before their inbound bank transfers arrive (Robinhood Instant). The influx of new traders sending money to Robinhood or selling other stocks to buy GME quickly drained their credit lines, reducing the capital they had available for collateral.
Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any new purchases using those proceeds are done on margin.
This was a capital crunch at Robinhood due to an unexpected herd of new traders all looking to do the same thing in unison. It violated the assumptions of their business model, and the only way to keep the platform from grinding to insolvency (or violating regulations) was to slow down the unexpected event by slowing meme stock purchases.
Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?
The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.