The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on.
Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker.
There are rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If a broker falls down, the clearinghouse liquidates their collateral and makes their counterparty whole. More volatility means more chance the collateral will be insufficient.)
In this case, collateral requirements on GME went up. Because of its volatility. So while before Robinhood had to pony up collateral for a few shares of GME for every hundred it traded, it now had to, at close of business, pony up one hundred shares' worth of collateral for every hundred it traded. That creates a cash crunch. One that exacerbates itself with every additional trade in the security. If Robinhood fails to satisfy those collateral calls, they go out of business overnight. Into receivership. Done.
Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug.
This sounds the real reason that RH limits the trading of a number of stocks today? If so, why didn't they give this straightforward reason? Instead, they resorted to vague excuses like misinformation and "for your own good".
Because it is the equivalent of "we literally don't have enough money in the bank to allow you to trade on these". Which will be a very problematic statement for a trade broker. The equivalent of panic if too many people withdraw from a bank.
Few people are actually getting this information. So... its not horrible press for them.
And if they say this. People would sue like MAD. Because it would be "RH didn't have enough money to trade on a thing they allow trading on. Therefore we missed out on potentially 5 million in profits when I was unable to trade ..." and so the lawsuits begin.
Lol, so instead, most of the internet thinks they are colluding with institutional short sellers at hedge funds in order to save them and screw over retail investors. They already had (probably in spam detection right now as they are currently gone) hundreds of thousands of 1 star reviews on the android star and tons of people like me deleting their app.
Oh, and I heard they were supposed to IPO this quarter and I can see this event single handedly completely derailing that with how many users they are going to lose.
> instead, most of the internet thinks they are colluding with institutional short sellers at hedge funds in order to save them and screw over retail investors
Communications were undeniably terrible. That said, I imagine they have a limited number of people on staff with deep clearing knowledge, and those people were preoccupied. Aviate, Navigate, Communicate.
> I imagine they have a limited number of people on staff with deep clearing knowledge
Since you just gave us the basics in like 5 minutes, is it too much to expect that people whose job it literally is know that too? Especially the ones doing communications.
> is it too much to expect that people whose job it literally is know that too?
No, I don't think so. I don't know when they drew on these lines of credit. Maybe that was still up in the air when the first announcement was made. No financial institution wants to say "we ran out of capital" during market hours.
I'm sorry but I absolutely cannot buy this (just like $GME); I see Hanlon's razor weaponized like this constantly and I think we've long passed the point of violating Occam's.
I can accept that they ran out of cash. It's just like a company running out of servers when traffic spiked. On the other hand, moralizing their decision and citing misinformation and user-caring erodes trust.
I can't. They all saw this coming from at least two days before, and they managed to fix this problem with a trading session. Rather than freeze the entire market on GME so no one could buy or sell, institutional traders were free to buy out of their positions while retail accounts were being liquidated in a coordinated fashion across all brokerages.
It's very clear to me that insiders saw the how much hurt this short squeeze would bring the financial markets, and they all coordinated to relieve it. It's no coincidence so many hedge funds started degrossing, futures were down, and the VIX spiked to the moon exactly as $GME's price started accelerating...
...once brokerages bricked buying the VIX collapsed and markets rose.
Infinity squeeze averted and all's well in Wall Street. No big institution is likely at risk anymore and retail traders along with smaller funds will be the bagholders.
Who is “they”? Unless I’m very much mistaken, Robinhood has no institutional clients. The institutional clients as well as the more serious retail clients were unaffected.
It would be quite odd to halt trading on a stock market-wide because a small number of brokers run out of collateral.
Stop being "less smart". Robinhood's clients are/is a hedge fund manager, Citadel Securities - Robinhood’s largest customer, which tried to bail out Melvin Capital which got bankrupted in the short squeeze on GME. Unless you've lived under a rock you should know by now how Robinhood is making the money.
IB's CEO was interviewed on CNBC, and he actually said that his motivation was to "protect the market" ... specifically large players important to the market, whose solvency was threatened by the short squeeze.
"... we are concerned about the financial viability of intermediaries and the clearing house."
> There is no doubt that a default by a clearinghouse member is more likely when initial margins are low and may be
caused by a sharp unexpected move in the underlying markets. In the event of a default by one member this could trigger
a chain reaction. Firstly, initial margins will rise in an event of a default, which will restrict other trader’s ability to
participate in the market possibly acerbating the move in the underlying markets. Secondly, if the defaulting member was
a particularly large player in one asset (likely, as this would be the cause of the default), the members with opposite
positions may not receive variation margin and hence will become unhedged at the very moment they need hedging.
Thirdly, the clearinghouse may well have to recapitalise itself from the surviving members. Major clearinghouse members (including JP Morgan) appear to be seriously worried about a clearinghouse problem after the default by a member of Nasdaq Clearing AB ..."
When you put some billionaire guys, some of them happen to be have multiple roles such market makers, brokers, hedge funds that short GME and even the investors in the brokerage platform where GME is traded on one side and some poor retailers on the side side you don't need a big brain to figure out who wins.
Maybe you are not aware but Melvin lost almost 3 billions and was bailed out by Citadel and Point72 and probably they will loose even more and go bankrupt if they don't stop people buying GME.
Do you think these guys want to leave all that cash on the table and play fair? If you look at Point72 owner(Cohen) you see some really "interesting" things.
I could buy GME through ETrade but IB wouldn't allow a buy with cash. The chairman said something about market health but the reason he gave was about margin without using that word.
> It's very clear to me that insiders saw the how much hurt this short squeeze would bring the financial markets
Maybe. But if this is a trolly car problem it's clear they made the call to let the train run down the track with the retail investor when it should have been the track that eviscerated Citron and Melvin and all their backers.
Big institutions that made the bad trades should have been the bagholders.
Preventing their users from selling out of a position would be much, much more serious than preventing them from adding to a position. Incomparably so.
Have you not read about the fire they were under a while ago for making it too easy for people to lose money? Making it so people would be stuck in their positions would be insane, way more than their current actions.
If that is the case the way it supposed to happen is a directive from regulator body(SEC maybe) should go out saying stop trading of this shares. Lack of regulations and no word on why certain shares are not tradable isn't acceptable and you can't blame people from making their own theories.
There will be a lot of talk about sueing, some of it will result in litigation, and probably a few people will have some of what they thought they had taken from them restored - but none of this will result in RobinHood, or any other company, becoming the frictionless, almost-free trading platform they imagined it was.
> the frictionless, almost-free trading platform they imagined it was
Maybe we all should stop to consider whether free & frictionless are worthwhile aspirations. Ice has a lot less friction than concrete but I certainly don’t want to walk to work on it.
Maybe a little bit of friction in our news, investments, social media, communications, etc. is a good thing. Give our brains a chance to digest information and let the intelligent & cooler minds prevail rather than impulsively smashing the share or downvote button.
The problem is that Wall Street has access to, if not free, practically frictionless trading in comparison to retail investors. If you add more friction to retail investors but not Wall Street it just compounds the problem.
You do realize most hedgefunds lose money and that active trading isnt as effective as just buying and holding shares in index funds. This is Warren Buffets famous bet.
What WH has democratized is now giving retail investors the opportunity to also lose money with active trading.
Tech companies do this all the time when the cheap servers they run their businesses on can't handle the traffic.
I find it hard to believe that anybody would find it hard to empathize with the fact that your company failed to predict a wild meme craze leading to an overload of your systems.
Now that its said, it would have made more sense for Robinhood to just nuke its servers and return 500s to their users rather than deal with this whole mess.
I wonder which belief is better for the long term health of Robinhood.
Option 1: The public believes Robinhood is part of the larger finance industry cabal and will screw you over to protect their buddies.
Option 2: The public believes Robinhood is in over its head, it doesn't have the financial backing to do the job they are given, and it can go insolvent at any moment.
Considering the reputation and expectations for the finance industry, it might actually be better if the public believes option 1 even if option 2 is the real story.
I’d imagine option two is much better. I have a hard time blaming anyone for not expecting the chaos that has happened and I expect the PR narrative would go that way. Especially if robinhood had managed to stay on the side of the little guy in the public eye.
As it is, their customers got so pissed at the option one assumed story that they had to put out another post saying it’s option two anyways. Now they probably have the worst of both worlds.
Both can be true. Citadel, the hedge fund that bailed out Melvin Capital (the hedge fund that over shorted GME) is Robin Hood's largest client. So it could be there was incentive for Robin Hood to ban trading on behalf of Citadel and they also don't have money to pay back the trades they make.
If Citadel is a client of Robinhood, then they are are under no obligation to buy Robinhood's product. It's possible that Citadel stopped buying the order flow from Robinhood because they had exposure to clients who in turn had short exposure to the stocks in question. Even in the absence of such an ulterior motive, Citadel is a market maker and it would be foolish for any market maker to do huge amounts of market making on a stock that it's the headlines and is unpredictably skyrocketing. Ultimately Robinhood cannot continue to offer free orders on a stock if Robinhood's clients are not willing to buy a order flow on a specific stock from a specific client because that client's order flow is toxic and making the stock too volatile to make an orderly market in. Declining to accept toxic order flows and withdrawing liquidity from volatile stocks is a reasonable and accepted practice for market makers. Robinhood users pay zero dollars in commissions, and they get what they pay for.
Toxicity is a well-defined technical term in market microstructure literature. It basically means whether the direction someone trades in predicts the short-term direction of the market.
It's not a moral judgement. So to answer your question, hedge fund order flow is considered highly toxic. Which is why Citadel Securities pays to interact with non-toxic retail flow, instead of toxic hedge fund flow.
To understand toxic flow you have to know adverse selection. For example, you are asked to share a pizza with your brother. You are free to split it in half however you like, and your brother gets to pick which half to take. The most fair way is to split it in half otherwise he will select adversely.
Market makers job is to quote the true price of an asset by offering to buy and sell at different prices without having one side picked off more than the other. So when adverse selection occurs too often over a period of time, they will simply throw in the towel and fold, regardless of whether their opponent is bluffing or not.
In this specific case, Robinhood often have worse price than NBBO, so they get to do liquidity arbitrage in addition to the less toxic retail orderflow.
The tweet is deleted, but Google's cache says: "No one mentioning that free trades and shares at #RobinHood were made possible by sales of the trade flow to Citadel and its ilk. Robinhood's customer is and has been CItadel, not its retail traders. Which makes what is happening this week all the more..." (It actually ends in "...".)
Is that any different than any digital service with its 99.99% uptime? Robinhood will do everything it says it does except for the once in 30 years black swan meme event where 50% of their users try to invest their life savings at once
Healthy, ethical companies will sometimes combine the two. I'm sure that Tim Cook, as a boomer-aged gay man, has a very gut-level understanding of the importance of privacy: he grew up when being beaten up or even lynched for his sexual orientation was normal in his country, and where it was a criminal offense. The fact that the company he's the CEO can leverage "good privacy" to boost their profits makes for a happy combination.
They fucked up cookie management and pulled the trigger on it early this year, in the middle of a pandemic. specifically around iframes. I got stuck with the ass end of that at my company. We worked in education. There were many healthcare software people that were also pissed about that.
That was their second post of the day. Their first post [1] made no mention of liquidity or clearinghouse deposit requirements, but rather framed the decision entirely in terms of "helping" customers deal with volatility.
The first one looks like a form letter that they had on deck for "we need to stop trading right now" situations and they just plugged in the list of symbols. The second one is the more adequate explanation for when there was time to get actual humans involved.
Well they sure made selling really easy during the architected dip.
Why allow so many new users to buy those positions before they blocked buys if this was coming? I mean, the prices were elevated before it got to this. Seems like a situation of let's ride the free customer acquisition and figure it out later.
They happily took the huge influx of new users that had no knowledge of this. And many got screwed. They couldn't average down on their position. And a ton of buyers were removed. So the price got out of control. Many panicked because of it.
I'm not on RH but added more at 170 and it came with several partial fills of 1 and 2 stocks. That was RH users getting screwed as a ton of buyers were removed. Trading was not halted on the downward spiral.
They could have said - hey guess what - 750k RH users (whatever it is) that own GME cannot buy this stock, so consider this before you sell. Some kind of warning that passed the attorneys. How could they not see this coming?
Any way it went down - RH is done. I hope they "pivot" into a worse situation.
Correct me if I'm wrong, but that was at the end of the trading day, when people already made it clear their original BS blog post wasn't convincing anyone. IMO Robinhood is clearly in the wrong. It may not be as malignant as the Citadel collusion theory, but they did in fact treat their own customers like idiots. And it backfired.
Not going to defend RH, but I have some insight with regards to corporate communications.
A company in panic fire extuingisher mode has to put out some type of announcement. RH did. Twice in one day. I can believe the first one was a canned response, and the second one looks like a more thoughtful letter.
But have you ever thought how much internal wrangling, or how many draft revisions even such a short piece has to go through? The company has to be very careful in what they say in their comms - plus even more cautious with their phrasing and wording used. These types of comms will be read by arms chair lawyers and real lawyers alike. The latter will look for opportunities.
The former will read it like they were the devil's advocate themselves.
Corporate comms teams have to put in a lot of effort, and go through numerous rapid iterations, to make sure their published material is factually accurate and anodyne. In a crisis situation, even more than usual.
Yeah, you're right. I think this article lacks specifics, but they did mention capital requirements. I was referring to their previous blog entry: https://blog.robinhood.com/news/2021/1/28/keeping-customers-.... In addition, their founder @VLAD on Twitter cited misinformation as a reason.
As for conspiracy, I'd venture to guess that inconsistencies/hypocrisies and opacity turned people into cynics. I'm not saying RH is hypocritical, by the way. Instead, the hypocrisies of other platforms made people trust RH less. For instance, I saw numerous accusations that RH was helping wall street by limiting buying but not selling.
This came out after the market closed, but the limitations were put in place before the market even opened.
Plus, they never give a reason in this. They make vague references to things that could be a reason, but don't clearly state what the reason was. Leaving it unclear like this is horrible PR, and will continue to let the conspiracies spread.
That blog post was much more vague, and harder to understand than the clear explanation two comments above. I can now see that they're obliquely referencing their collateral requirements, but that wouldn't have been clear to me before reading JumpCrisscross's comment. I think g9yuayon's point stands.
There were allegations RH did a large sell-off today of client's margin positions today presumably in order meet collateral requirements. It's possible they realised it'd really not be in their client's interest to telegraph that ahead of time.
Also why would they not send a message out ahead of time if this was the case? Surely they were aware of this potential risk? Completely unacceptable to not inform users ahead of time.
I'm not sure "we had to stop people from using our app because it was going to put us out of business" engenders much confidence in either the users or the shareholders.
Crisis communications is easy to mess up and companies do not prepare for it in advance. I imagine it's a lot like the very first time an app you've built crashes really bad. Without any planning it's easy to panic and actually make things worse.
The only communication I saw from Robinhood is that they had to stop trading due to volatility. I think people jumped to the conclusion that it was them trying to act in their users interests.
The volatility was going on for days, yet they said nothing. They programmed their platform to block trading in advance, yet gave no prior announcement or warning.
A well-known investor with integrity publicly mentioned personal issues with the co-founders' integrity in the past.
I like this comment. I am going to buy and hold this comment forever. lolz
Your comment sounds similar to the explanation from the mouth of Interactive Brokers chairman and founder Thomas Peterffy [1]. His comments are based on a broader concern beyond just Robinhood.
I think a lot of people don't understand what I can only describe as the physics of the system. Like a utility, there is only so many electrons that can get pumped through the system from generators through the transmission system, through substation and distribution networks to your house. It is big and powerful, but if there is an unplanned for event that draws too much power it doesn't matter how much generation you have, the system just can't take it. Substation will pop, power will go out if not isolated.
Robinhood is small player that could never have planned for this type of event and likely doesn't want this. Most retail shops likely don't have the sophistication to handle an event like this.
> Robinhood is small player that could never have planned for this type of event
I disagree. It wasn't that long ago that securities and cash from unsettled trades were unavailable to customers. The modern abstraction of frictionless trading is just that--an abstraction.
Adding "free" to the mix removes a balancing factor. (Less cash coming in at t=0.) Becoming a clearing broker removes another, though it adds control. There are vendors selling off-the-shelf systems to calculate clearing margin requirements and risks real time. I'm looking forward to hearing if Robinhood used one of those, or if they tried to roll their own.
Either way, it's not an excusable pain point to push to one's customers. Particularly not retail customers. Particularly not unsophisticated retail customers. These are complicated systems, far more than most professionals fully grasp. A simple back-up plan, like a fallback introducing broker arrangement, would have avoided this whole mess.
> There are vendors selling off-the-shelf systems to calculate clearing margin requirements and risks real time. I'm looking forward to hearing if Robinhood used one of those, or if they tried to roll their own.
This would be really interesting to know. If you find out, please do post it.
> I think a lot of people don't understand what I can only describe as the physics of the system.
Market microstructure is a term I've adopted when studying options and the circumstances where they influence the underlying market prices more than any other factor.
HFT firms are apparently hooked up directly to the exchange. So they probably settle trades in real-time. The whole chain of retail to broker to clearinghouse is what creates the need of credit-collateral at every stage and create systemic risk if some players don't have the right risk control in place. At least that's what I have figured from a few hours of reading.
They do not. They settle trades in 2 business days like everyone else. Think about it: if you sell a share to a HFT, how could the HFT receive it immediately when you don't need to deliver it for two days?
However there is a process called CNS (Continuous Net Settlement) which means you generally only have to settle the net of your trades each day.
I've seen this around the internet and I have one honest question for clarification:
- How come a bunch of other brokers also stopped the trading in these assets? (Webull, Ameritrade, e-trade etc) did all of them end up in this state?
(I'm always worried questions like these in times like these are interpreted in bad faith, but this is an honest question, trying to understand the powers behind it)
Peterffy of Interactive Brokers said essentially the same thing. The broker is on the hook for the money as far as the clearing house is concerned. If they cannot get it from their customers, they will be left holding the bag. And in a security as volatile as GME, that could certainly happen.
In fact, we have seen things like that happen before. Forex broker FXCM blew up after their customers lost large amounts of money in the Swiss Franc in early 2015.
Surprisingly Peterffy came across as super transparent, trustworthy and honest unlike Vlad. He stated outright this was a joke and and that GME is a $17 stock trading at a crazy price because of some games (short squeeze) and he's not sure the people on the hook to pay up for the shorts are going to be able to- which is why they have to stop and get a handle on it. https://www.cnbc.com/video/2021/01/28/pro-watch-cnbcs-full-i...
.
They key point that's missing here is that ALL stock trades are on "margin" because in reality it takes 2 days to settle a trade, but that is abstracted away from you by the brokerage and clearing house, and made available to you instantly.
Caveat: I'm just starting to learn about all this, so it's probably not a perfectly accurate analogy.
Well not really, a lot of people were transferring money into Robinhood but they let you trade before the money is available. I imagine that had a huge impact on their cash crunch. Still weird they weren't straight forward with the reason or why they wouldn't enable trades for cash accounts.
Robinhood has defaulted new users to "Robinhood Instant" for years now
So the "default" RH experience is heavily based on margin but *not! in a transparent way. Deposits from banks are instant under a certain amount (10k for me but it varies) and no T+2
It should be mentioned that Ribbonhood has a history of eating losses when kids go hundreds of thousands of dollars in debt from bad bets. They simply ban the user instead of pursuing them into bankruptcy.
This is tangential to RH, but nevertheless related issue: For many years now I was wondering how exectly the ETF work and whether when I buy an ETF I can be 100% sure the issuer can follow through on their obligations?
What mechanism are there in place to insure that ETF will not deviate from the underlying stocks it should represent?
I found it difficult to understand the intricacies related to this question.
Here is one example: Suppose I was holding ETF with GME stock in it, the ETF issuer might have decided he knows better and sell the stock expecting its price to drop in the future. Meanwhile the issue will attempt to "follow" the stock by other means. Ultimately is there a way to be sure the issuer will not fail, if GME beats all anticipated expectation the issue might fail to reflect the new GME price...
What mechanism are there in place to insure that ETF will not deviate from the underlying stock?
Ok, so they can do what Merrill and other brokers did and require you to have 100% margin restrictions to ensure they get their money from you.
And let's not even begin talking about how they halted only buying and not selling. Or that they delisted the entire stock from their platform so you couldn't even search it.
The volatility of the Gamestop is just insane. People think it's because of the short squeeze, but it's not just that but the fact that the stock goes from $100 to $400 to $200 within the hour, and then as OP mentioned you end up with a lot of your liquidity stuck in Gamestop until the contracts settle.
I sure hope that GameStop or whatever companies are affected that their corporate employees aren’t in a sell blackout period. Usually you can’t sell for a few weeks before earnings are released. If you’re just a paper pusher, I would consider taking a slap on the wrist.
Yeah, I was saying if I were an employee I’d take the slap on the wrist. Likely life changing money on the table. Maybe look into doing what Mark Cuban did with his costless collar if the shares are locked up at a company controlled broker. Although volatility may make that less of a good deal.
In the current environment, it would be impossible to find a long dated symmetrically priced collar like Cuban did. Everyone knows these hype stocks will eventually tank, it's just a question of how and when.
Pretty sure right now you will be looking at more than a slap on the wrist. DOJ and SEC will be looking to take their pound of flesh from anyone who did anything outside the letter of the law on this thing. Not good to be the sacrificial lamb they hold up to show the public they prosecute Wall Street scammers.
The news did not cover the nature of the limitations, they just said limitations. I called TD early in the day and the limitations were not about buying stock but rather about selling ("shorting" options), and buying/selling spreads (a combination of options with interesting characeristics).
There are two classes of broker here -- brokers that are backed by Citadel, and Brokers that have a different market maker/clearing house and/or are not exposed to Citadel. The WeBull CEO did an interview mid-day and noted that certain market makers and institutions (i.e. citadel and/or Robinhood) were calling banks for bridge loans in the middle of the day. He also mentioned that Melvin Capital was bankrupt. I think Citron got out (that's a different story) a couple days ago or so.
I stand corrected -- thank you for clearing this up, this completely explains it.
It does not explain why Fidelity allowed purchasing the stock however though, which means I was likely wrong about the link altogether. Thanks for pointing that out.
[EDIT] - Is it reasonable to assume that maybe TD and Fidelity have a venue that the others do not have and that's the reason? When I compare RH, WeBull, Fidelity and TD I see UBS Securities, LLC as the standout difference.
Was UBS choosing to route the orders (I guess they have none of the shorts on their books? or they properly managed their risk?) while the others didn't touch it?
I was wondering about this too then I thought about people trading out of regular stocks and buying GME/AMC. When you sell a stock today you get the cash two days later, but your broker will let you buy today and normally they will settle together. It sounds like the clearing houses were demanding 100% today for any GME buys. So if you had customers selling $1 billion of regular stocks and buying GME the brokerage would have to come up with $1bil today or get closed down. I'm guessing they're scared of that happening.
I have an ETrade account and was able to enter orders (well away from the market) to buy GME at several points this afternoon when twitter was blowing up with the RH restriction news. I haven't seen any evidence that ETrade was blocking new purchases and have first-hand evidence they were accepting my buy orders.
(I hold no shares of GME stock and never have. All these orders went in exactly as normal and I was able to cancel them several minutes later.)
Moving forward, can anyone with the expertise comment on what is the right way to evaluate an exchange? why was Think or Swim and ETrade okay and insulated from the issues these other exchanges had?
These are weird times. It depends what you want. I think for most people being able to buy GME yesterday is not an important factor in choosing a broker. If you just want to buy some stocks as an investment any modern broker is probably fine. I dont like RH because it gamifies something that should be serious but for most people it works great and low cost is very nice. For me I 'd rate brokers on 1) Security, 2) Cost 3) availability of products like foreign stocks 4) gui usability 5) reliability 6) tax statements 7) margin costs 8) other products like debit cards/crypto. This list should be different for different people.
Relevant to yesterday’s Robinhood actions in $GME? That they were not being blocked from entry at ETrade, contrary to what RH and WeBull were doing and contrary to some reports lumping ETrade into “the conspiracy”.
I wasn’t in GME, but I want to know how my broker is handling unusual market conditions.
Especially in "order flow" schemes, brokers accepting trades but either not executing them or executing them at different prices is a commonplace. It's great that your experience at ETrade has not included this, but if you ever decide to actually trade a "crazy" stock the outcome might be different.
Webull isn’t a brokerage, they use apex under the hood. Ameritrade won’t let you trade on a margin with the highly volatile stocks due to risk. E*TRADE is probably the same.
I think the situation is exacerbated by the fact that RH gives up to $5,000 to new accounts without any collateral. Depending on the speed of bank transfer, RH might be on the hook to settle trades. Now, I imagine their new account trend was more or less predictable until last week but they probably got a ton of new accounts as a result of GME.
It would have been more palatable if they had reduced margin available to new accounts, or even stopped allowing new accounts for awhile. That would have been a black eye for them but much less severe than what they did instead.
RH was the number one downloaded app just a couple of days ago. They must’ve gotten at least a couple of hundred thousand new accounts. Even at $1,000 average deposit, you’re looking at hundreds of millions to cover for a day or two. That said, I highly doubt they’re in trouble. JPMorgan/Fed likely have RH covered.
But does that explain why they didn’t just prevent trading on these names unless your cash balance is settled and nothing on margin? They already have a mechanism for that.
Imagine half of your userbase, especially almost every single new user onboarded this week, explicitly only wanted to trade on specific symbols, and you don't allow them to do so for 2-3 weeks (ACH settling period) at all.
Except JumpCrisscross, they shut down trading on much lower price stocks liked $NAKD as well, which given the fact that they still were able to meet collateral (based on price per your [2] right) for the activity on all of their other stocks, why couldn't they on a dollar stock?
This is exactly correct, but you know without a doubt folks knew they were in deep last Friday the 22nd (with 0 OTMs). RH's risk department must have taken the week off, and shown back up the 28th at 4am Eastern.
The issue I have, is that I completely understand and expect this to happen, but not as laziee faire. FINRA should have been (also could have been, we don't know) up every orifice on every floor starting at $70+ a share for GME.
Also for as many many contracts to be written at insane IV, this isn't just RH who is at fault. This was literally thought to blow over and didn't -- that's not risk mitigation, that's laziness.
So the problem I have is that they didn't limit the margin requirements last week, got greedy on the potential 'gains' on the fees, and got slammed.
We will see if the 0-fee environment stays -- I hope it doesn't. It completely changes the risk profile of the individual trader were a $5 per trade fee on your one share only covers 1/2 of your fee.
But don't give 'solidity to pure wind' here[0] -- this was absolute negligence on multiple parties.
Edit: I've also always thought that the secondary market is a moral hazard. Primary Offerings are more pure in their 'economic productivity' than secondaries. Sure we can make long winded arguments that the stock price incentivizes executives to make long term decisions, secondary prices help your subsequent offerings, converts, etc... but the short of it is, at the time of a secondary transaction between Alice and Bob, $0 of effective capital is deployed to the actual investing machine... that's quite wild.
Edit x2: And the secondary moral hazard is compounded by this 'liquidity' boogyman that we must keep satisfied -- or else people will actually have to hold their positions until they get a good price.
Final edit: If you want another take, here's another view of the mechanics of it all, and again, it didn't start today... it was a boiling pot they thought wouldn't boil over:
Thanks for the great comment, I'd like to tag something on here. There's absolutely a deeper history here that goes beyond the DTCC. I've written about it earlier, but sadly it's arcane and arcane things get little love,
I have been studying Real-Time Gross Settlement systems for the past two months, including questions of liquidity in settlement systems. The question at the heart of the banking system is quite simple, if banks take capital from customers and use it to provide debt to others, then how much money should they keep on hand for their customers' withdrawals and transfers?
This question is hard to answer. As there is a conflict between what the bank does (i.e. provide debt), and how it is supposed to provide it (by taking savings etc.). Everything else, from central banks "offering cheap liquidity" is an add on. They are mechanisms that allow - for example, a bank to easily borrow this money so that they can cancel it out/repay it from transactions coming into their banks.
What makes it all borked is that you can't trust bankers with their grandmas. If there is a flaw, they will exploit it. Every major change has led to an exploit. E.g. In 1918, the American Government introduced the Leased Wire System that used the telegraphs and a network of 12 Reserves to allow banks to transct with each other across CONUS. It reduced the average time for cheques to be cashed in at banks across the country from 5.4 days in 1912 to just 2.4 days. Theoretically, this reduced the risk taken by banks when they transacted with unknown banks across the country, with the Government acting as the escrow. It catalysed innovation and led to an explosion of financial services across the young country.
The system was supposed to be foolproof by reducing the time "credit" was needed to make transactions. Essentially, until one bank sent the money and the other got it, they were operating on a system of credit. And they would "net" the books at the end of the day/week to physically transfer assets. FedWire (Leased Wire System) made everyone feel safe by sending notes of the transactions across great distances. But the netting still took time. All it took was one bank to fall behind on current obligations to other banks for all of the banks to collapse, leading to the Great Depression.
Important people got together and made rule changes to fix the problem. But then they innovated again. The Federal Reserve started making Automatic Clearing Houses (ACHs) and Remote Check Processing Centres (RCPCs) to make settlement faster, starting in the 60s and precipitating in 1972. This made settlement faster therefore safer. And it led to great financial innovation. The magic of computers and innovation meant that people could use these same systems to transact across the world!
Until in 1974, when the German lender Herstatt collapsed due foreign exchange investments based in the Dollar, which caused the bank to fail to meet its settlement obligations...
> That day, a number of banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt in exchange for US dollars (USD) that were to be delivered in New York. The bank was closed at 16:30 German time, which was 10:30 New York time. Because of time zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments
In response, important people got together and made rule changes and a new system called the Bank for International Settlements. Under the new systems, more computers were added and were linked together with the aim of reducing settlement time... You can see where this is going.
This is a simplified history. But the history of banking is the history of doing settlement while managing liquidity and counter-party risk.
Like it or not, we've hit a wall here because these systems were never designed for such circumstances. Perhaps it's time for the important people to get together again?
Shameless plug... Having worked on such systems, I recently wrote an article explaining real-time payment systems, some of which use real-time gross settlement:
Market markers and other institutional participants don’t want instant settlement, as it its a liquidity risk. It’s why you’ll see T+2 go to end of day settlement eventually (imho), but will never see real time settlement from centralized finance. Decentralized finance would improve upon this, with the trade off of having a low volume ceiling (due to network transaction limitations).
The problem with this position is that it's false. I welcome corrections, but there is a wealth of literature on this topic. For the past two to three decades there has been a small cottage industry of research in Liquidity Savings Mechanisms that are designed to prevent this scenario through clever system design.
These mechanisms have been evaluated, simulated, and tested by central banks at greater volumes than DTCC's system. The difference here is in orders of magnitude. The Feds handle $2+Tn./day. They handle $500Bn/day at most. If the Feds can introduce these systems and maintain liquidity, then what reasoning does DTCC have?
I am loathe to cast aspersions, but the aspersion I'm casting here is that they're dragging their feet, as it would effectively end an entire sub-sector of the industry. Or, at the very least, substantially re-order it. This inefficiency is someone's margin and profit.
Maybe this is an attempt to force that change to be faster? It really should be faster today, clearing sped up.
The lag for bank account transactions makes sense to wait to make sure money is there and no fraud. However, once money is in an account at an approved FDIC/SIPC insured (preferably both, Robinhood is only SIPC) brokerage it should be much faster, at least up to the FDIC/SIPC limits. There is really no reason why it shouldn't except to help market makers have the upper hand.
This could be the root of what may need to change or was desired to change with this black swan event.
Faster settlement means less time to discover and correct mistakes.
At a high level, nobody really likes trades being broken, but it's kind of a necessary "evil" that helps stabilize the entire system.
Let's say settlement happens in one minute, one morning a pension fund fat-fingers a price and loses 10 million USD to some student in her dorm room. That afternoon, the student then donates 1 million USD to an orphanage, pays off her grandparents' mortgage, buys 1 million USD worth of municipal bonds to finance a new baseball stadium, and buys several million USD in long-dated ETF call options. Some market-maker delta-hedges those options by buying the ETF. In response to the price move generated in the ETF, a large institution buys a basket of stocks and participates in the creation process with the ETF's issuer.
Now, what happens when the fat-finger is discovered and disputed? Too many things have changed for the SEC to break all of the trades and other transactions after the settlement. The student no longer has enough money to make the pension fund whole (even if everyone involved could agree that the most fair thing to do would be to limit the student to 100k profit and transfer the rest back to the pension), so I guess they're stuck with the pensioners having to live with that 10 million USD loss. "Oops, next time, make sure your pension hires a more careful trader, I hope you've learned your lesson" isn't very helpful advice to a retiree who's now out on the street.
> "Oops, next time, make sure your pension hires a more careful trader, I hope you've learned your lesson" isn't very helpful advice to a retiree who's now out on the street.
It's really not, isn't it? Almost like the dependency on human carefulness compromises the integrity of the whole system.
We've seen plenty of trading problems due to direct human error, and we've seen plenty of trading problems due to software bugs.
If we got rid of breaking trades, it would presumably force everyone to use carefully specified systems and use avionics-like development practices. Maybe we'd even see machine-checked proofs being compiled to programs and smart contracts via the Curry-Howard correspondence. Long-term, it would probably be good. In the shot term, lots of fallible counterparties going bankrupt would be very destabilizing to the system.
"make sure there is no fraud" takes a LOOOONG time.
It is the reason why a car bought from a dealer drives around without plates for a month. That's how long it takes the dealer to be totally sure the payment wasn't fraudulent.
While cash is the settlement vehicle of choice for dealer-less used car sales, certified checks (only legally issued by the federal bank) are preferred or even mandated for in-person government (surplus) auctions.
If you talk to the dealer in advance, to make sure they know about these certified checks, I'd expect them (over here, in DE) to hand you the title in direct exchange for the check, within an hour of you first setting foot on to the lot (assuming you called in advance so they have time for you and the car you want).
What you say about certified checks is, in theory, possible here. In practice the sales drones who handle these transactions have never heard of this and will treat you like you're trying to scam them out of a car somehow.
Also the title is never physically at the location where the car is sold from; the processing of titles for dealers has been outsourced to a handful of large companies who effectively act as warehouses for the physical title documents. Even if the sales drone wanted to go along and had enough clout to make it happen, it would still take an overnight-shipping delay to get the title to the buyer.
I know, it's kinda sad, tbh. Get yourself a taste of SEPA to see what you could have/use instead of ACH.
Nice to hear. And yeah, that's why I mentioned needing to call ahead to make sure that someone who can legally sign the contract is gonna be there and has sufficient understanding of how these certified checks look like/work.
Fair. Is that only for new cars, or does that include (independent) used car dealerships?
> A substantial amount of trades in the market are executed by liquidity providers that provide efficient two-sided
markets. These important trading firms trade on both sides of the market and are largely risk flat at the end of the
day. Real-time settlement would require these liquidity providers to have significant sums of capital and securities
on hand to make trade-for-trade deliveries.
The current infrastructure relies on the efficiencies of trade netting to accommodate substantial amounts of trades.
Wholesale market-making is important to the infrastructure as it provides the capital and balance sheets to back
customer trading. Significantly increasing those capital requirements by requiring pre-funding of all trades without the
benefit of recognizing the offsetting trades would substantially increase the costs of trade execution to the end user.
Real-time settlement could also introduce operational inefficiencies. In a typical low-volatility trading day, NSCC
and DTC process over one million shares per second on average, valued at over $16 million. During peak trading
hours, such as market open and close, this number spikes to over 300 million shares per second, valued at over
$25 billion. Settling these amounts throughout the day in real-time would introduce substantial financial and
operational risks to the equity markets.
Accelerated settlement that abandons the significant capital and operational efficiencies gained through
centralized multilateral netting would be a step backward for the world’s most liquid markets. Striking a balance
between the capital efficiencies of netting and the risk mitigation benefits of moving settlement closer to trade date
should be the goal of the industry.
Thanks! Replacing market makers seems difficult.
Edit: Why the downvotes? I'm quoting the article for easy access.
> Significantly increasing those capital requirements by requiring pre-funding of all trades without the benefit of recognizing the offsetting trades would substantially increase the costs of trade execution to the end user.
I don't see how this follows, if the trades are settled faster? Wouldn't you have to keep less capital on hand at any given time if you're settling trades faster? I'm clearly missing something, not sure what.
You aren't, there are netting, batching, and matching algorithms that have been developed for larger systems. The Feds, who process $2Tn.+/day, BoE, ECB etc have found these systems to hold up through trials, simulations, and implementations. DTCC, on the other hand, handles $500Bn.
I'm not an expert but how I read it is: market makers currently can sell a stock without owning it. All is well as long as they buy it back by the end of the day as settlement takes 2 more days.
If settlement was instantaneous then the market makers would have to already own a bunch of the stock in order to sell any. Owning stock requires capital. Similarly if they wanted to buy more stock they'd need cash on hand.
Would they though? If settlement was instantaneous for market makers, then obviously settlement with the brokerages would also have to be instantaneous. Then it's no longer an issue of verifying anything, the risk of proving ownership would fall squarely on the brokerages or whoever is initiating the trade with the market maker in the first place.
Most defi is on Ethereum, which is making large scaling improvements. Zkrollups right now do several thousand tx/sec without security compromises, and data sharding will expand that by 23X in about a year. This is still probably a low volume ceiling by some definitions, but it's at least in the ballpark of major systems like the VISA network and NASDAQ trades.
Further down the road, more efficient data witnesses give another 10X. Also, the power of individual nodes affects both the number of shards and the capacity of individual shards, so future scaling is the square of whatever Moore's Law has left to give us.
Can you think of a good reason why they just didn't freeze the whole market (buying and selling) instead of allowing institutional traders to buy and sell freely while only allowing retail traders to sell and in many cases forcing them to liquidate?
In my view the clearing houses had liquidity issues while many of their clients likely had solvency issues which this brick on buying alleviated.
Thank you for sharing. It is amazing to me how so many people in social media are assuming that Robinhood or others are teaming up with institutional traders to crush retail investors. It's not wrong to speculate about such possibility, but what I am seeing is people believing this theory with near-certainty, without understanding the underlying mechanics of trades, the regulations that govern it, and the kind of financial complexities firms like Robinhood can encounter.
I'm seeing some of that, but also a whole lot of "the rules are vastly in favor of the big guys - they can just stop trading when shit goes south, but us retail traders don't get to turn around and say 'nah bro, losing money, let's hit pause.'"
While that's not 100% accurate, it's in the general ballpark. And frustration with big financial players is high, and has been since 2008, for good reason.
A broker is just a service. As it turns out a low-cost/free service provides an inferior service to high-cost prime brokers.
You get what you pay for. That’s not a scandal. It’s common sense. It’d be like me complaining that it’s no fair that Google can afford better infrastructure than my startup search engine.
Day trading is not a human right. Anybody who wants trading infrastructure like Citadel is free to go out and spend the same hundreds of millions it took Citadel to build that infrastructure.
I don't think that's quite accurate either. It's not that RH's service is terrible, it's they had to cut trades to meet regulatory obligations. But, by only cutting trades in one direction. And that happened to be in the direction that favors their largest customer. And that customer also happens to be on the hook for much of the short squeeze... The optics are TERRIBLE.
They didn’t cut trades in one direction. They closed new positions in both directions. Buys were still allowed to close short positions, just the same as sells were allowed to close long positions.
That might be true if government and big finance weren’t so intertwined. A lot of these big players are propped up by endless QE, which will eventually hit normal people in the form of inflation and taxes.
> Anybody who wants trading infrastructure like Citadel is free to go out and spend the same hundreds of millions it took Citadel to build that infrastructure.
Well, no. Most people don't have that. "The rich get richer".
I believe throwawaysea's point is that the one thing has nothing to do with the other. Essentially, the bank weighing in saying "We don't believe your customers are good for this amount of money you claim they are good for." is, at heart, just financial prudence on the part of a trade's 3rd party backer. The other is criminal collusion on the part of people on the other side of a trade. But the 3rd party backer doesn't care about any of that as horrible as it may sound. They just want to be sure they can get their money from both sides, and they're not at all sure about that with these GME/BBY/AMC et al trades.
I get that, but the financial links between the players here doesn't look good, even if it's all legal.
Citadel bailed out Melvin.
Citadel is RH's biggest customer.
RH chops off the retail traders, but only in the direction that favors Citadel (and Melvin).
Was RH just ensuring they comply with regulations? Probably.
Does it look like RH is doing Citadel a solid at the expense of their users? Absolutely.
Thanks for spreading the word. The DTCC portion of this sounds like they had a "liquidity problem" in the sense that they were trying to prevent one.
The portion about not having a plan for when market makers don't want their action -- and they have to instead pay to use exchanges -- seems like a pretty stupid problem they set themselves up for.
I don't think the comparison to liquidity problem is accurate. The brokers cannot mint credit out of thin air if they don't allow margins. Hence, the cash in the broker is backed 1:1, and they won't have liquidation issues.
If Robinhood cannot fulfill these trades on margins, that is totally fine, they can halt on the margin trades if there are "liquidation issues". For all-cash trade, there shouldn't be any liquidity issues otherwise it calls into question how they manage their deposit.
The liquidity issues arise in part when trades occur on unsettled securities. Consider what happens if someone buys a stock, then turns around and sells it the same day to another counterparty. The broker has an IOU from one party for the stock, and has issued an IOU to another party. Two days layer, if the first party fails to deliver (oops, a short seller couldn't find stock to cover their short!), the broker's on the hook, at least in the short term.
Every RH trade is on credit, because it allows trading before ACH deposits settle and allows withdrawing or trading into other positions before trades settle.
>You've never heard of it unless you're a professional trader,
Or if you've seen/requested a stock certificate. It used to be fairly easy to get a paper certificate from a broker, for a fee on the order of $10. However I've read they charge as much as $500 now, in an effort to discourage ordinary people from doing it.
This explanation is unsatisfactory. If clearing stock trades were the problem, RH could have limited buy orders to fully cash-secured transactions only.
Surely this is only a problem if customer's dont have the cash. Eg I can imagine if people were funding their account with ACH or credit card payments it takes weeks to clear. It makes sense that RH would ban these from buying GME. But if you have cleared cash in your account I still dont see the cash crunch.
So what you're saying is by disintermediating share/derivative trading, one level of middlemen has been made obsolete?
Sort of like travel agents and airfares?
Why is this a problem? The fact that the share trading market is keeping these middlemen in place is part of the exploitation of the process.
Market makers perform a useful function in terms of maintaining an orderly market. Brokers don't. Especially ones that offer credit to their customers, thus hiding the risk to the counterparties of a trade.
This would be a great justification to pause this trading for all clients. The challenge is they didn't limit access for institutional while limiting access for retailers. This discrepancy is core to the feeling that Robinhood is supporting the financial establishment over their community of traders.
This makes sense. And it would make sense if they implemented this like a regular exchange-style trading halt -- no new positions in shares or options.
However, Robinhood disabled the ability to buy, but not sell.
TDA seemed to be preventing GME buys the other day even if you were closing a short call. I wondered if it was intentional or just that nobody thought about the implications of no buys.
>So while before Robinhood had to pony up collateral for a few shares of GME for every hundred it traded, it now had to, at close of business, pony up one hundred shares' worth of collateral for every hundred it traded. That creates a cash crunch.
Why is this an issue? Shouldn't robinhood already have the cash, since the trader (who bought the stock) deposited the money into robinhood prior to his purchase?
Robinhood allows up to $1,000 to be used "instantly" just by the user initiating a transfer. So Robinhood doesn't have the money yet, but the user can buy stocks -- meaning they are using Robinhood's money.
Is there anyone that understands how this all works enough to tell us what would happen if the same number of hedge funds and banks, went out of business, as the number of small businesses that also went out of business due to COVID. What would the fallout in the economy look like? Worse? Better?
Lehman and Bear Stearns went out of business in 2008.
The mountain of derivatives that they were one of the parties to netted out at zero, but in the process, a lot of people got burnt, including the ultimate mortgagees.
The share market and its derivatives net to zero. It's a mechanism for getting capital flowing between investors and producers.
So, why can't a single investor with a network of bots create enough artificial volatility to kill whatever brokerage they like (presumably through proxy buyers), while shorting the brokerage itself?
> Then you have to consider how they're getting these accounts which need credit histories and social security numbers.
Presuming an investment advisor pitching themselves as providing some kind of standalone, non-brokerage-affiliated "AI Investment-bot-as-a-Service" platform, the "bots" could be being operated in the name of their clients, acting upon said clients' brokerage accounts, with full explicit consent. (Like how Mint operated in its clients' names upon their online banking accounts, with full explicit consent.)
Ironically, I believe Robin Hood themselves offered a similar "AI Investment-bot-as-a-Service" system; though theirs was a much more mundane design, legally, in that it operated upon the clients' accounts within the Robin Hood brokerage, rather than upon the clients' accounts in external brokerages.
Presumably a single person or small group attempting such would be engaged in market manipulation as traditionally understood, and the SEC would try to charge them. (But I am neither a lawyer nor a financial expert, so the above is just uninformed speculation.)
> Aren't they always need to route orders to the exchange in order to obtain the best price on behalf of the customers?
No.
Execution is matching a buyer and a seller. Settlement is handling payment. Clearing is re-assigning the securities. This isn't perfect, but it will do.
Exchanges deal with execution. (About a third of trading occurs away from exchanges [1].) The rule in America is you can't execute, on or off exchange, worse than the national best bid and offer [2]. That number aims to catalog all on-exchange quotes.
Once a trade is matched the exchange is done. Settlement is its own can of worms. This story is about clearing. The shares you bought need to get from their seller's account to yours. Then the shares you sold need to get from your account to their buyer's.
When you bought and sold the shares, the cash and shares "appeared" in your account. That's a convenient fiction. Cash doesn't move instantly. And securities settle over days. While all of that is happening, a complex web of credit arrangements keeps everything stitched together. Those arrangements have costs and risks. One of them is the requirement to post collateral as a safeguard against a broker breaking its word [3]. When those collateral costs get high, for example, because your customers are all trading risky things with high collateral requirements, it can create a cash crunch.
What's happening here has, to my knowledge, nothing to do with exchanges or execution.
[3] "But I don't trade on margin!" No, you don't. But you're still a borrower of sorts from your broker. When you buy a share at 11AM and then sell it at Noon, you've sold a share your broker may not yet own. That's the credit risk between you and your broker. If your broker bought that share at 11AM and sold it at Noon, it sold a share it did not yet own. That's the credit risk between the broker and the clearinghouse. Clearinghouses are nice. They usually say "give us 2% of yesterday's closing price in Treasuries. If you fail to deliver on a trade, we'll sell your Treasuries--maybe all of them, across all of your collateral with us--and make your counterparty whole." But when assets get volatile, the clearinghouse may want more than 2%. So it asks for that. Per its contract. But you don't have that money. And shit, Suzie just bought and sold the same shares thirty-six times in the last minute.
> Why doesn't that collateral apply to sales, which were still allowed on rh?
It does, ceteris paribus [1]. But blocking people from exiting a position you got them into, particularly something volatile and almost self-identifying as a bubble asset, is a lot more problematic than blocking people from opening new positions.
[1] The OCC (options) nets. If you have a large collateral requirement in a position and then reduce the size of that position with offsetting contracts, your collateral requirement goes down. I don't remember if the DTCC (stock and other things) does this.
So, if I understand you correctly, there isn't a secret puppet master cabal of lizard people from Nibiru pulling the strings of high finance.
Is there a saying akin to Hanlon's razor in this case, something like "Never ascribe to conspiracy that which is adequately explained by finite resources and inflexible rules/regulations"?
I suspect this will be lost in the hysterical clamour, but yes, it is in fact true that trading platforms have to worry about systemic risk and their ability to work with certain capital obligations. The idea that this just boils down to some good old boy phoning up RH and asking them to pump GME doesn't stand up to very much scrunity at all. But such is life- the baseless conspiracy is easier to believe if you don't spend time understanding how these companies work.
I don't think your take stands up to very much scrutiny at all.
If this is about people trading on RH on margin, then just... stop allowing people to use margin to trade GME etc. "If you wanna buy GME you gotta have the cash in your account to cover it".
Problem solved and you don't need to prevent people from buying a stock they want to buy.
RH users are the product, not the customer. Why in the world would you expect RH to act in the interest of their users over the people that actually pay them, e.g. market makers like Citadel?
This isn't just about margin, absolutely, this is about all sorts of order flow agreements, credit lines and clearing agreements that break down when your entire customer base has decided they all want to go long the same incredibly volatile stock at the same time.
>"If you wanna buy GME you gotta have the cash in your account to cover it".
That's great, but that isn't the only relationship in this agreement, RH has agreements with its brokers about capital requirements. It's fairly likely that the attitude of "You need to have cash on hand for everything" basically means "You're done". That's the entire point of these risk management strategies - you are covered for what might reasonably happen so that you're making efficient use of capital.
Could be all sorts of things. The simple fact is that market makers are being protected against long tail risk while retail investors are being denied long term returns... the very thing they are being paid to do. That's what these put contracts are: long tail risk. They sold an option. Limited risk for long tail risk...
What you are saying amounts to "when long tail stuff happens," order flow agreements, credit lines and clearing agreements that break down."
This, very directly insulates them (Citadel, other contract originators, RH) from the actual risk they are supposedly being paid for. It's also ostensibly the reason why retail investors can't have access to the same vehicles as financial firms. Retail investors can't reliably back that long term risk. Here is yet another example of loss limits for insiders.
No one is saying that you are not right. You are. The contractual complex does melt down at this point. The rage is people who think this is not ok.
> retail investors are being denied long term returns
excuse me? what part of inflating GME to $400 is a deserved long term return?
this is effectively a pump and dump scheme, whether or not most of the participants think so. once the squeeze stops, no ones buying GME over $100 and everyone left holding shares better have bought two weeks ago or theyre gonna lose money.
I never said "deserved long term return." I'm saying that a hedge funds made bets, deals, ultimately with these WSB crazies. That position represents risks that they are being shielded from.
Most of these people aren't holding any stocks. They're buying derivatives, so they technically have no stocks to dump. They will likely bet like crazy on the downward part too.
But if Robinhood has some preexisting deal where they have to loan out X% of long shares to shorters, why should they have to take on the risk of defunct shorters if it is within their rights to just stop allowing trades in the symbol, without any goal of overall price manipulation?
> This isn't just about margin, absolutely, this is about all sorts of order flow agreements, credit lines and clearing agreements that break down when your entire customer base has decided they all want to go long the same incredibly volatile stock at the same time.
In other words, the situation is "too complicated," and the only solution is that the not-rich person should not do what they're doing with GME right now.
If this is true Robinhood should be explaining this to their customers. The silence for me is deafening and indicative that something more sinister is happening.
They have. There is no silence. They made a blog post saying pretty much exactly this: https://blog.robinhood.com/news/2021/1/28/an-update-on-marke... - they had capital and deposit obligations which they couldn't meet due to volatility, but having sorted this out they can resume trding.
It's likely both are true and that's the point: RH definitely will have some actual contractual and legal concerns... But how they react to that is almost certainly bring governed by whatever would help Citadel's other investments the most.
Any good lie is based on some truth. That veneer of plausibility makes everyone else carry your water for free.
The whole point is that these Wall Street companies enter into agreements that they don't want to disclose to their customers. This is just a small example.
What issues does it create if your whole client base suddenly want to buy GME?
I guess if volumes overall go up a lot, you might need to post more capital? But since your revenue should be up too, that's a good thing right? And its only for a while, I don't think anyone thinks this will go on for months do they?
And surely it's easier for your clearing house to clear 1 name than 10,000 names?
For no-frills, long, equity positions, it feels like it should be the easiest thing in the world to do. I'm happy to be corrected, I'm aware back office logistics is a dark art so maybe I and other readers can learn something?
Edit: I'm honestly not trying to be snarky here. I just don't get why it would be that big of a problem. I'd be happy to be rescued from my ignorance.
Thanks, but I'm still left wondering: why would dtc be unable to settle those trades? It seems like it would be easier for dtc to settle RobinHood trades if they were all (worst case) in one symbol than it is when clients trade 101 different names...
I don't understand what you mean? Somebody offers to sell the stock for X, somebody else (with the money stored on the stock exchange) offers the buy for the price X. Person A gets the money, person B gets the stock. That probably happens a billion times every day. Why should it make a difference which stock is being traded?
According to this interview[0], a similar firm's CEO is saying it's not that simple, and their clearing firm stopped the trades due to the costs
> Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days... our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation.
I don't know anything about stock trading, but I think I can piece an idea from some HN comments I've seen earlier.
The exchange between A and B isn't direct, or instantaneous. The actual money transfer takes days, and there are parties in between that make it possible to pretend it's immediate - much like with insta-transfers of money between the banks. Apparently, these parties are on the hook for any money that is "in flight", so they need to have a substantial buffer.
Once you get this many people trading on a stock this volatile, apparently the buffer in the middle isn't sufficient to cover the risk, so the parties in the middle stop accepting these trades.
Because the trade isn’t instant. It takes 2 days to settle the clearinghouse during which time RH has to put down cash as collateral that they won’t go bankrupt in those two days.
> If this is about people trading on RH on margin, then just... stop allowing people to use margin to trade GME etc. "If you wanna buy GME you gotta have the cash in your account to cover it".
All Robinhood accounts default to Reg T margin accounts.
The entire UX is built around this idea that the margin is transparent to end users. How many Robinhood users are aware that when they open an account, transfer money, and buy stocks all in the same day they're actually buying on margin? The cash isn't in their account until the bank transfer settles.
Likewise, when Robinhood users hit sell and then use the funds to re-buy another stock or back into the same stock, they're buying on margin. Technically the first sell doesn't clear for several days, so the subsequent purchase is made on margin.
This frenzy surely pushed the limits of Robinhood's available credit lines to support all of this margin activity.
Meanwhile, clearinghouses everywhere are increasing collateral requirements for stocks like GME. If Robinhood was struggling to secure additional credit while also facing increased fees for trading stocks like GME, they may have had no choice but to either pause the entire platform (to avoid running afoul of SEC-mandated margin requirements) or pausing meme stocks while they figured out another solution.
> Why in the world would you expect RH to act in the interest of their users
If the whole platform blows up because they go insolvent, that's even worse for the users.
>How many Robinhood users are aware that when they open an account, transfer money, and buy stocks all in the same day they're actually buying on margin?
Maybe I'm out of touch but I would guess the answer is "most". Having to wait a couple days for money to clear after being transfered to a financial institution is extremely common.
When I first deposited on RH and saw that the money was available for trading immediately my first thought wasn't "Oh the money cleared instantly", rather it was "Wow, I'm surprised they're willing to take on that risk with new accounts". Turns out, maybe RH should have given that risk a little more thought.
I would wager that the people who signed up for Robinhood this week were thinking "oh, sweet, they figured out how to let me fund an account fast, aren't apps great"
It’s not just about funding your account, it’s every single trade. When you sell a stock and then immediately buy another one, the cash from your sell doesn’t actually land for a few days.
"when Robinhood users hit sell and then use the funds to re-buy another stock or back into the same stock, they're buying on margin. Technically the first sell doesn't clear for several days, so the subsequent purchase is made on margin."
This seems like a key piece missing from lots of explanations I've read. Thanks.
Robinhood has a little note during new account setup about how your account will default to being a margin account.
They don't show any of the details on the main screens after that, though.
Normally, it doesn't matter because Robinhood eats the tiny margin cost for the customer. They make up for it by selling the order flow. This only works as long as interest rates are low and, importantly, they can get enough credit to cover it all.
In times of unprecedented volatility and unprecedented risky trading behavior, securing that debt becomes non-trivial. Robinhood's debtors have no desire to be left holding the bag if something blows up.
What do you plan to do about the options folks are holding?
When you buy a call option from a market maker, they buy shares to cover the delta. When the delta changes, they need to adjust their shares to avoid exposure. Certainly a large part of the price action here is a gamma squeeze, where WSB folks buy tons of OTM calls, which Citadel buys shares to cover, which pushes the price up, which in turn requires them to buy more.
Should they no longer be able to buy or sell options to ensure the solvency of their sellers?
I mean, it's totally reasonable to tell them they shouldn't have taken on that level of risk haha.
His point stands, way too many people are talking way beyond their experience
In this case, the missing knowledge is that Robinhood is just another middleman: they're subject to margin calls and denials of credit just like Robinhood passed to you. Robinhood's credit facility was exceeded by the growth this week, and their credit provider was uncomfortable with "their" (really, Robinhood's clients) exposure if Gamestop collapsed.
Could you explain what the problem would be then? What exposure would Robinhood and their credit provider have to a situation where a stock collapses that is being held long and not on margin by their clients? The client would definitely no longer be able to do a sell order that will get them any money, but what difference does that make to Robinhood?
I'm not an expert, but based on this link[0] from another comment section, a similar firm's CEO is saying the their clearing firm stopped the trades due to the costs
> Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions...
> there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days...
> our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation.
Think of it more as systemic risk - I would say the general logic error I'm seeing on HN is assuming all assets on deposit are firewalled, have completely uncorrelated risks, are attributable to exactly one type of funding, either margin or deposit, and information is instantly communicated - in practice these are big messy orgs with big messy books, and the lender is looking at robinhood saying "you're asking for a historically high line of credit because you're on an exponential growth curve for users, whose assets are based on 1, generously 3, meme stocks? Let's try to figure something out here, we don't want you to shut down, but we need to mitigate risk"
People are expecting more a scenario in which clients stocks are neatly divided in two piles based on an unrelated criteria, i.e. if they are attributable to margin, or whatever assets you have on deposit. Additionally, the process of having margin is itself like having a credit line - AmEx simply doesn't have the systems or procedure to lower your credit limit because Tickle Me Elmo speculation is at a all time high over the last 72 hours, and it sees you're purchasing tickle me elmos, getting assigned a credit limit is a function of your credit score, and amex isn't tracking line item level purchases
You need them to keep money flowing in your system. Like blood vessels. It's a network to keep capital flowing from those with money to loan to those who need to borrow. You don't want to put that responsibility on a single entity, that's a recipe for failure. It's better to spread risk by allowing some to succeed and others fail. There is added complexity and that's a feature, not a bug.
B/c fraud exists and people expect their money back when it happens. Yes it is 2021, not 1929. Credit and loans are a feature not a bug. If you want to put your life savings into a digital wallet go ahead. There's no protection when someone swipes it.
>I suspect this will be lost in the hysterical clamour... systemic risk... capital obligations. the baseless conspiracy...
Baseless?! ...That's it! Prepare for hysterical clamouring.
Both the hedge funds who wrote the put contracts and RH took positions nice, high, steady returns and long tail risk. The press is reporting Melvin Capital wrote put options with a face value circa $55m, for example. The long tail risk materialized. Damage is several $bn.
It seems like systemic risk means risk to heads-I-win-tails-you-lose games. This is why the hysteria. This whole thing is a symbol of a rigged system, with the typical patterns of insiders. 9 times out of 10, they win. 1 time out of 10 they pull the fire alarm.
Insiders, from the CEO of the NASDAQ to whoever makes the clearing house rules have come out swiftly and in force to suspend norms and call a literal "all bets are off." Closing buys, but not sells. Liquidating positions. How is this not a rigged game.
It is enraging to hear "be reasonable, we all have to be responsible" from these people.
The fact you're confusing option types is not helping your credibility. Writing put options is a bullish move. Melvin may have been writing CALL options (I doubt it to be honest but maybe).
Melvin had $55 million worth of put options on GameStop, which are the opposite of calls. Puts assume the share price of a stock will go down and give their owners the option to sell a stock at a certain price. Melvin assumed GameStop’s stock would fall, and bought puts allowing Melvin to sell GameStop’s stocks above the market price, netting Melvin a profit.
Melvin is that it was also shorting GameStop, meaning it was borrowing shares of GameStop, selling them on the market and using those proceeds to make other investments. Problem is, Melvin eventually has to return those GameStop shares. So now Melvin has to buy GameStop at their new, inflated price, only to give those shares back to the original owner
I read that the CEO of NASDAQ suggested a trading halt (for everyone, buy and sell) and that articles suggesting otherwise were later corrected from the poor reporting in the rush to get a scoop.
Just to be clear here, they are restricting opening new positions. If you are short on GME, you are allowed to buy in order to close out your position. However, most people are long, so they only have the option to sell.
I have no dog in this. I've stayed away from RH as I always suspected they are shady. However, blocking people also from selling is even worse imho. If the exchange does it then that's OK because trading halts for everyone. But if RH does it, people can still sell on other platforms. I would be very upset if my trader is blocking me from selling. I do understand that disabling buying caused the stock to tank, but I think it would've happened even if they disabled both. Was that their way to manipulate the stock price? idk but it makes sense.
I'm confused why you're bringing up "blocking people from selling". Has that ever happened? It certainly isn't happening here.
Edit: I'm guessing it's because the above comment said "only BUYING". I think that was a distinction from blocking both buying AND selling. If you block only one, it forces the market.
Do you honestly think the situation would have been better if they prevented both buying and selling? At least with the current approach people could sell their shares as the price dropped. It would have been much worse in my opinion if people just had to sit and watch as the value of their positions evaporated with no recourse.
The price dropped because there was no buying pressure (speculation of players shorting the stock at the top aside). Disabling the ability to buy in several brokerages removes the price discovery aspect of the system.
The price dropped because it is in an insane bubble at the moment. Whether that drop would have happened today or some other day without RH's actions is unknowable. But if a lesser drop still did happen today and people couldn't sell their positions, that would have been even worse for users.
> The price dropped because there was no buying pressure
Robinhood is not the entire market. I don't know what the exact number is, but I doubt they're even a material number of the entire stock market.
If Robinhood is the entire buying market, to the point that Robinhood pausing buying is detrimental, then how does that not make it clear that this entire situation is setting up Robinhood users to lose everything they buy?
Robinhood was not the only firm blocking buying new positions. Schwab did, TD Ameritrade did, and ETrade did, IBKR did for varying lengths of time. That is the majority of retail.
Here is a fascinating interview with the CEO of IBKR where he literally says they prevented buying for retail and closed large short positions for others:
https://streamable.com/ycdec9
For the retail investors, if a broker didn’t foresee systematic risks and cannot clear, the better thing can happen is the broker own up to mistakes and go bankrupt.
Bankruptcy is legal and investors understand such risks.
>Bankruptcy is legal and investors understand such risks.
The type of retail investor that is using RH doesn't understand the bankruptcy process and certainly wouldn't be happy to be stuck in SIPC limbo while the value of their stock plummets. When it comes to what is best for RH users, this seems like it was one of the least bad options among a collection of horrible options that are due to the way RH is managed.
Sec would crack down if you didn’t let me people close their positions and RH would be on the hook for any losses incurred. I assume you can still buy GME on RH if you wrote a call option or shorted the stock. You’ll also still able to execute your call option to get shares.
If Robinhood couldn't meet their collateral obligations then they should have just gone into default/bankruptcy. They absolutely should not be allowed to make market manipulation decisions that bail themselves out.
I'd also like a reporting of when they force closed some of their customers positions - did they do it selectively at a time when GME was lowest? From the examples I've seen it was later in the day. If they were already taking action before market open, then why didn't they also close those accounts then?
Exactly. I have a RH account with zero margin and was not able to even look at GME in the RH app (i.e. not even see a chart – didn't show up in the search results at all).
People who already owned shares were able to sell, but nothing else.
Cheers. I started in the baseless conspiracy camp and learned a lot today about how all of this works. I would recommend others do the same.
Spoiler: it’s pretty boring, and there are countless opportunities to misunderstand the relationships between all of the entities involved. What happened today made sense. It sucked, but it made sense.
They didn't mention any of this in their first announcement though, instead it was some patronizing PR fluff that they "truly believe everyone should have access to financial markets" while at the same time mentioning that they were going to restrict access. Maybe if they didn't treat everyone as little kids, they wouldn't get as big of a backlash?
I'm going to start spreading this around. It's a comment by someone else who points to an interview of the WeBull CEO and why they had issues. It's pretty clear that this is a process issue, not necessarily a RobinHood is evil issue.
Edit: I didn't know before listening to this how much was going on behind the scenes for every stock trade. It reminds me of what it takes to buy a house.
Robinhood hasn't said this is what happened to them though. If they had just said this morning, right off the bat, "our clearing house is no longer allowing new positions on these stocks" people would have been pissed, sure, but not as much, and not completely at RH.
Even now, they haven't come out and said anything directly, they just keep making vague references to having "obligations" and "requirements".
100% agree. I mentioned somewhere else that their Press Release was crap. If they'd explained like people reading were adults, (maybe they did and I didn't see it) then people would have been a lot less mad.
It's just context for the conversation I was missing, it doesn't mean they are completely blameless, and I support a class action lawsuit. I just appreciate a fuller context for myself and figured others might as well.
You all don’t recognize a revisionist account when you see one. You all don’t realize that the only firms still market making in retail options are hedge funds with GME short positions. You’re falling for the reasonable technical explanation. The “clearing house” they are talking about is Citadel. They hold (more held, probably) large GME shorts among others, and fund other hedge funds that also held those shorts.
>The idea that this just boils down to some good old boy phoning up RH and asking them to pump GME doesn't stand up to very much scrunity at all.
It's entirely possible, but do you really think that a conspiracy couldn't be possible in the financial world with all that's happened for the past 20 years?
Can you please elaborate on systematic risk in the light of not allowing to buy GME stock (not options) without margin (no money lended from broker), what many brokers did today.
It strikes me as awfully naive to simultaneously:
* accept RH's statements with no evidence and zero knowledge of their reserves and cash flow.
* ignore RH's conflict of interest. Specifically, that RH sells user trading data and that Citadel, which has a huge short position in GME, is a major customer of the data.
'Systemic risk' and 'Capital obligations' are crafted by the wealthy specifically to prevent small players from having as easy a time gaming the market as they do. No one is shouting conspiracy because they don't need to; everything everyone is mad about is happening in broad daylight.
> Robinhood is only a clearing broker that works with executing brokers to complete transactions. Citadel is an example of an executing broker.
What? No.
With respect to clearing, transferring stock from the seller to the buyer, there are clearing brokers and introducing brokers. Clearing brokers have a direct line to the clearinghouse. Robinhood is one of these. Introducing brokers use a clearing broker to clear.
With respect to execution, matching buyers and sellers, you have brokers (who represent clients) and market makers (who bet their own capital). Robinhood is a broker. It sells its order flow to market makers, of which Citadel Securities is a major one.
Watching social media frame today as being orchestrated by some shadowy cabal was truly bizarre.
Robinhood just didn’t have the capital to clear trades of super volatile stocks. I think people would have understood if they just came out and said so yesterday.
It's not about the relationship between the end user and the broker, it's about the relationship between the broker and the clearing house. Trades take two days to settle, and the brokerage needs to post collateral with the clearing house to reassure them that they have enough funds to settle the trades. When volatility goes up, clearing houses demand more collateral to allow further trading, which the brokerage might be unwilling or unable to provide. This is independent of whether the end user is using margin.
Well, in a world where users had to have fully funded their accounts before making any orders, the clearinghouse would have nothing to worry about. So it's not exactly independent from whether end users are using margin.
It looks like RH let hordes of new users onto the platform and allowed them to put in GME orders before having those users' cash in the bank. Now the clearinghouse sees the volatility, throws up its hands and goes "listen RH, no more of these crazy GME orders from you until you have the cash to pay for them". Understandable – but that should be RH's problem, not that of its users.
What's not OK is RH's sledgehammer solution of disabling buying for all users, even those whose accounts are fully funded, not to mention force-selling people's shares against their will. IMHO they deserve all of the anger and lawsuits currently directed at them. (Edit: unless, of course, they are only force-selling stocks that were bought on margin in the first place, and if their T&C let them do that, in which case ¯\_(ツ)_/¯)
The clearing house doesn't know who is trading on margin and who isn't. They don't have visibility into the brokerage's interactions with their clients. They can't "only allow trading for non-margin accounts".
No, but RH knows, and could make that distinction if they wanted to. RH is punishing margin and non-margin users alike until it has enough cash again to resume making orders.
To be clear, the RH T&C very broadly protect them in case of any arbitrary service interruption, so on paper they're probably entitled to do whatever they want. But at the end of the day, it was them who got caught with their pants down because they went too far in their UX/risk tradeoff, and now users are paying the price and are understandably pissed.
I don't know about the others, but TD Ameritrade did restrict trading (maybe just buying as well) but only if you were buying on margin. RH is getting ire because they restricted buying for everyone.
Correct. If you are in Australia, file a complaint and then escalate to AFCA. This violates the Market Integrity rules which applies to IBKR Australia.
On TD Ameritrade, I had no issues buying and selling (in cash) shares of GME today. I did have to call a broker to sell covered NOK calls though as those gave errors when trying to open the position myself in thinkorswim.
They came out and said they did it to protect users from volatile stocks. I’m sure we can hypothesize but why not just listen to what they say and judge them for it.
> As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
Everyone said the same about reddit and didn't blink when the sub came back in 45 minutes. I think it's also grossly naïve that reddit is even the main player anymore. There's so much after hours trading going on that has to be institutional. DFV made a great call and everyone noticed.
The available cash in a brokerage account can be a bit of a fiction, in that the brokerage may not literally hold it as cash, they may put it in a low-yield safe investment and keep the interest, and they may let you trade with unsettled funds from stock sales or bank transfers that haven't cleared yet.
US stocks have T+2 settlement, when you buy or sell the money and stock are really only exchanged two days later by the clearinghouse. Until that happens, if they let you trade the proceeds immediately, you're kind of trading with a very short term loan that has your "sold" stock as collateral, it's technically not totally risk-free.
You can buy with unsettled cash even in a cash account but there are a few rules to follow to avoid violations. In a margin account you may be trading with margin without realizing if you trade frequently and don't pay attention to settlement.
Even if you're not trading margin the whole system is kind of running on short-term credit and there are capital requirements. The clearinghouse has to make sure the brokerage can fulfill all its obligations for all the unsettled stuff for the next N days even if it goes under tomorrow.
(EDIT: The whole financial system tends to run like this.. you can spend the money from a deposited check long before it has cleared, etc.)
Yeah there's no technical reason not to at this point, China has it. Just inertia and having to invest in the systems and processes to do it, I guess. It started at like T+14 when you had to mail physical stock certificates around then +7, +5, +3, +2, I'm sure they'll get there eventually. US futures are already settled T+0.
From my limited experience back office software is a legacy clusterfuck and the Ops team has to pick up the phone and call counter-parties on T+1 to unfuck things more often than you'd think, but those are things that could be fixed with better systems if the investment was made.
No, robinhood by default opens margin accounts, so they loan you money to buy stocks with. Those were the orders they forced out, as far as I'm aware they never messed with cash accounts beyond not letting them buy.
Robinhood doesn’t buy and sell stocks, they just run an app. Downstream they have a relationship with Citadel, which does the actual trading. In theory it could have been Citadel that decided to stop allowing these trades, but Citadel has announced that they haven’t done that.
> Watching social media frame today as being orchestrated by some shadowy cabal was truly bizarre.
Once most of the brokerages started restricting, I assumed the SEC made the call. If it had just been RH, then some backroom deal might have been more plausible, though still unlikely given the regulations.
> Watching social media frame today as being orchestrated by some shadowy cabal was truly bizarre.
Makes me wonder how much of the rest of what social media “directs” and “nudges”. What other high profile events where all of social media happen to agree and line up on are not what they seem? Gell-Mann Amnesia is real.
They could have just completely frozen trades of these volatile stocks then? Instead, they only blocked out buying these stocks and still allowed selling. Did they not really think through the implications of this action?
Did you not think through the implications of the course you propose? If they froze buying and selling, the stock would still be sold elsewhere. The price would crash, then people would be outraged that they weren't allowed to sell.
"Robinhood sold me a stock that was part of a huge bubble, and then they wouldn't let me sell it"
It's a great example but if you understood options you would realize it's still a huge problem. I had quite a few call options on E*Trade when they froze buying. They sold me contracts and 5 minutes later made it impossible for the contracts to not decrease in value.
They could have simply let people take the risk and that's that. What happens when I buy stock and the price goes down and I lose? Does any platform really care? Nope. Why would they care now? I'd understand if it was only margin trading but why restrict a chance of (winning/losing) whenever they need to?
They always had a huge lever but it was not to be used so soon to help their friends. I now hope it becomes deserted. At least I closed my own account after this.
Because they need to post collateral for every trade that they execute but which hasn't yet settled, and they don't have enough collateral to sustain the concentrated trading volumes they've been processing.
How was the volume of GME enough to cause this problem? Today was around 60 million. Aren't they usually executing billions of trades across the market every day?
If I understand it correctly, RH is making funds available for trading right away, rather than making users wait until T+2 to be able to reinvest those funds. They can't instantly unilaterally change their policies to make users wait until T+2 to reinvest those funds. If you jump into and out of a 10k USD position 5 times today, that eats into almost 50k of RH's collateral with clearing houses for the next 2 days. A very small number of stocks probably account for a vast vast majority of this rapid flipping on their platform, so preventing expanding positions in that small number of names gets rid of the vast majority of the problem. Also, the most volatile stocks have the highest margin requirements, doubly compounding the issues with GME trading.
Or, maybe I'm misunderstanding the issue. Maybe it's fully due to the higher clearing house margin requirements for the higher volatility stocks.
> Aren't they usually executing billions of trades across the market every day?
Clearing collateral requirements vary between 2 and 100%. That means $10bn of trades in one name can require the same amount of capital as $200mm of trades in another.
Most brokers did not allow you to short because there were no shorts to borrow for that trade. This is common for stocks in high demand for shorts, especially one that is 140% borrowed. Unless you're a professional trader and have access to the best brokers, you couldn't short GME even if you wanted to (this is common, and why professionals pay big $ to have access to high demand shorts).
I couldn't buy and the stock went up = theoretical loss
I couldn't sell and the stock went down = real loss
Generally you are only liable for actual losses in court. So stopping the purchase of GME comes with little liability while stopping the sale could open them up to lots of liability.
Yes, that's the theory behind the theoretical loss. That's different from "I tried to sell at $200, you didn't let me, and now I can only sell for $100". In that case I am out an actual $100 that is directly tied to your actions.
On an individual basis yes you can make that argument. On the basis of market manipulation, it is very powerful to reduce the demand side by over 50%, while keeping the market open so that other people who want to buy at a lower price can do so. This is what happened. Don’t gaslight yourself.
I am not an expert obviously. But is this generally true in most situations?
It just seems like maybe in this specific once-in-a-lifetime situation, maybe this doesn't apply? The decision to freeze all trades seems more "neutral" than freezing just buying which perceptively seems to favor short sellers?
It's not comparable. RH stopped people turning cash into GME, worst case is they've missed out on a pump and dump but their wealth is still in tact. If they stopped people turning GME into cash, then (1) this does nothing to help the former party, (2) you're forcing these customers to possibly lose all their wealth when the GME price starts going down and you've blocked them from closing their position.
You have to allow selling or else you risk forcing your customers to hold a stock while its price is dropping. Robinhood customers would be even more pissed about that.
I'm going to start spreading this around. It's a comment by someone else who points to an interview of the WeBull CEO and why they had issues. It's pretty clear that this is a process issue, not necessarily a RobinHood is evil issue.
This is why I don't get in a of this. Is there any precedence of only allowing selling before? It couldn't even accomplish their goals of protecting investors since that forces a crash of their investments
You're essentially saying that Robinhood should have forced its users to hold an insanely volatile stock, just to be "fair" to the people who wanted to keep riding a pump and dump.
This is what upsets me the most about what's been happening in recent days. There is now a popular narrative that the market is rigged against the little guy, but as a little guy who's been investing for about a decade now I know this couldn't be further from the truth.
The only reason this situation with GME happened is because no one person has power to control what investor decide to buy and sell (with this perhaps being one of the few exceptions I've ever come across). I don't really understand where this claim that retail investors can't take the opposite side of a hedgefund's trade is coming from. Hedgefunds that are over-levered go bankrupt all the time because retail investors along with professionals take the other side of the trade. It's worth remember a lot of hedge funds lost money shorting TSLA this last year too and that trade was largely retail driven.
I also think a lot of people are being really spiteful. I understand why hedgefunds get a bad rep, especially after all that happened during the GFC, but most hedgefunds are doing honest business. I don't really understand why Melvin Capital deserves to be put out of business and for their employees to lose their jobs because of what some other hedgefunds have done in the past.
Wait “most hedge funds are doing honest business”? Who are we talking about and what honest business is that? Front running trades while market-making, privatizing the profits and distributing the losses if they fail? Networking with other billionaires on insider information? They are parasitic opportunists.
You don't have to use a PFOF flow broker – in-fact I'd advise against it. But it's kind of a win-win. You get to make "free" trades and the market makers get to make a couple of cents. PFOF is what has enabled this boom in retail trading. The biggest benefices have arguably been retail traders.
Also not all hedge funds are market makers.
> privatizing the profits and distributing the losses if they fail
What are you referring to exactly? I never know what people are referring to when they say this because hedge funds don't generally get bailed out by the government, although they do get bailed out by other companies from time to time.
Perhaps you're referring to the banks that got bailed out during the GFC? Or hedge funds taking small business loans from the government in 2020? But in that case US citizens got bailed out last year too in the form of increased unemployment benefits, stimulus checks and mortgage forbearance.
But like I said, I don't really understand why people are blaming random hedgefunds for the role some hedgefunds played in the GFC.
> Networking with other billionaires on insider information?
Right, but this is illegal. There is regulation to prevent this. You're free to do this too if you're willing to risk getting caught. I see retail investors post about their inside trades all the time on Reddit.
So the argument is that if they just froze trades (both buying and selling), then people who own many GME shares and want to sell would not be able to and there would be a subsequent backlash? Maybe? I am trying to compare the lesser of two evils here and it still seems like they made a poor choice.
Exactly, stopping buying prevents people from (potentially) making money by buying the stock low, whereas stopping selling (potentially) prevents people from losing money on the stock they already own, from the platform which they bought it.
I can't imagine the backlash if the completely froze the stocks while the market kept going.
But preventing buys on the broker with the most trades of these stocks directly leads to a price drop; this leads to loss for every current holder of the stock.
Robinhood also told users it may close out some of their positions as it takes steps to reduce account risks.
How can this be legal? If someone is holding a large amount of GME stock which they bought at (e.g.) $300 and Robinhood closes out the position below that amount, they're forcing losses on an investor who was specifically holding with the belief that the share prices would go up.
If bought on margin, it’s legal and reasonable depending on how fast risk management is responding. If those were cash purchases they liquidated, Robinhood is in a world of hurt.
That makes sense. Any position someone bought on margin is subject to being closed out or facing a margin call. Cash purchased positions should be safe.
That's just a normal thing we expect for margin accounts though. Is this extra notice being given as a reminder of the terms for margin accounts or are they taking extraordinary action? Hard to say.
They took an action to prevent buying before the market opened. Then they closed those positions ~during~ a point in time when GME was the lowest... Criminal.
Not only do I agree, I called AOCs congressional number and the house financial services committee’s office to voice complaints regarding this behavior (I am not a Robinhood user, so I have no standing in that regard).
I recommend the public complain loudly to both Congress and regulators.
I agree, I'm glad to see some bipartisan support for holding big-finance to some accountability.
I'm not so glad with AOC's response to Ted Cruz which was literally: "Your help is not wanted on this. If you want to help you can resign."
So maybe not that bipartisan. I'm not a RH user either and have no standing in this. But I'm watching with interest and hope there's some action on this.
> I'm not so glad with AOC's response to Ted Cruz which was literally: "Your help is not wanted on this. If you want to help you can resign." So maybe not that bipartisan.
This is misrepresentation (of a tweet, you could have just quoted the entire thing!):
"I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out.
Happy to work w/ almost any other GOP that aren’t trying to get me killed.
In the meantime if you want to help, you can resign."
So to summarize: yes to working with Republicans, no to working with Ted Cruz, the most hated man in the senate.
Do you know which ones? Are the positions of the sort you've mentioned susceptible to this? Because it likely refers to those trading on margin, who aren't entitled to expose their broker to risk that they can't reasonably expect to recover from the customer.
Exactly this, If you have the cash they are likely happy to let you risk it. Margin is a broker problem and they have right to manage their level of risk.
Depending on how new the account is, RH may not have gotten any funds from the account holder yet. But, while waiting for funds, RH will let the user buy some amount of stock (IIRC $1k worth). Is this enough on a large scale of new users to put them into a risky situation? I would hope not, but who knows how close to the capitalization they are running.
It doesn’t put user at risk but mean RH is drawing down on their credit line to fund the trade.
The probable issues is that clearing houses have capital requirements and the higher volume of trades of high volatility stock requires RH to put more money in to ensure it has money to settle the trades. This is what Rh hit and they need to breather for trades to settle is my educated guess. Money doesn’t move instantly behind the scenes which is why you have weird things like overnight lending where the loan is just long enough for the credits to come in.
I'm not unsympathetic to the liabilities of the brokerages and the difficult position. But this situation exists because in the US you have to be a rich person to directly interact with the stock market.
[edit] Don't pay attention to me below. I'm wrong. See responses.
Then the absurd requirements to be an accredited investor that require nearly everyone to use a broker should be lowered. It's only a very small segment of the US population that has a net worth of over 1 million dollars or an income of more than $200k/year. Most accredited investors are not human people at all but instead corporate people. If brokerages are going to act this way then people need to have the rights to bypass them.
The term "accredited investor" is only meaningful within the scope of unlisted securities. Stocks traded on exchanges are listed securities. "Accredited investors" have nothing to do with public stock exchanges.
The concept of "accredited investors", itself, is a great data point for why our implementation of capitalism isn't really capitalism. When opportunities are given explicitly to the rich, you don't have a free market.
I know that's not 100% relevant but it was therapeutic to write it.
“The broker stands between these customers and the clearing house,” said Peterffy. “So when some option holders make money, the clearing house has to give us the money to give it to our customers, while other option holders, sellers or buyers on their own side lose money we have to collect money from them and give it to the clearing house. If our customers are unable to pay for their loses we have to put up our own money.”
Explanation from the CEO of Interactive Brokers, which also limited GME trading.
This makes sense to me in terms of restricting buying on margin. But plenty of people put their own money into RH accounts and were buying stock. I don't see how that's relevant to RH paying a clearing house?
I suppose they had a huge influx of new accounts and RH gives you an advance up to like $1000 before the money is actually moved from your bank account and into your brokerage account but I'm still skeptical that this reasonably leads to "not supporting" stocks.
But when you buy a stock, like just straight up purchase it, the cash is already there, on-hand, in your account. There's no Robinhood putting up their own money because YOUR cold hard cash is there, in the RH account. That is used for the purchase. So why stop people from buying the stocks?
He was reading that off his screen. When the interviewer pressed him on why they did it he said “We did it to protect ourselves... and also of course our customers” in his best Disney villain voice.
Do retail investors really have a choice at this point? When I opened my Schwab account there were fees for each trade, but now it's free like most (all?) others. The only broker I know of that doesn't sell order flow is Interactive Brokers, and they restricted $GSE anyway (to "protect themselves").
A judge can not dismiss a civil suit due to lack of evidence until after the discovery phase since until that phase no evidence is even produced or evaluated. Prior to discovery all that a judge can evaluate are the statement of claims with damages and procedural matters such as standing, jurisdiction, proper service, etc...
There are claims of wrongdoing alleged in the lawsuit, notably that Robinhood has two classes of customers, its users who buy and sell securities using its app, and financial institutions who pay Robinhood for information about those users. The allegation in the lawsuit is that recent trading on GME by Robinhood app users resulted in a conflict on interest towards Robinhood's institutional clients, and that Robinhood halted trading in GME and other stocks to benefit its institutional customers at the expense of its app users. Given that Robinhood has a fiduciary duty to its app users and no such duty to its institutional clients, that conflict of interest was a breach of its duty and Robinhood must be liable for any losses arising as a consequence of that breach.
That is a claim of wrongdoing. In almost any non-trivial lawsuit, evidence can only be gathered after claims of wrongdoing have been made, at which point both parties are compelled to disclose vast amounts of information that could be pertinent to determine what damage has been caused.
Citadel Securities LLC (market maker) has a relationship with Robinhood, Citadel LLC (hedge fund) the one with the short doesn't. Read into this what you want.
Robinhood was set to go IPO in Q1. In the age of every tech IPO going to the moon, they're certainly going to regret not having a decent PR dept. They could have just halted everything, or just allowed trading for non-margin accounts and they could have come out looking like the good guys.
I'm not sure if they did anything wrong or by the book, but the current sentiment of them among the millenial/zoomer demographic that was going to buy there stock isn't exactly favorable.
Ironically, their stock (when it IPOs) might end up being a great candidate to short into the ground.
(Disclaimer : This is not financial advice, just musing about the current Keynisian state of the stock market)
If the core problem is volatility, then freezing trades would be the natural response.
They froze only the 'buy' option on their app. Selling would still go through and they'd still have to process those trades. There would still be movement, it would just be solely in the direction of selling.
For any still following this story -- u/deepfuckingvalue (aka RoaringKitty on YouTube) has been semi-doxxed by Bloomberg this morning -- he's a 34 year old financial advisor from Massachusetts evidently.
wallstreetbets used to be full of people like this, it's way less so now, but it would be silly to think that there aren't some hedge funds in on the buy side of this event, if not to ride the volatility. Active trading desks live and die by volatility -- if the market is not volatile, it is much harder to make money.
dang hasn't posted this yet—it's been a heck of a day, hasn't it—so I will!
The discussion on this item has spread over multiple pages, so make sure you check them all! Look for the "More" link at the bottom of the page (on all but the last page), or use a link like this:
I think one aspect getting overlooked is who lent the stock to the hedge funds? If most of GME is held by robinhood clients I am guessing it would be robinhood ? If the hedge fund goes belly up is robinhood on the hook for stoock they lent out?
That’s more than $1B at current price. Plus all the options which is probably more retail vs institutional. Options are definitely worth more than retail equity holdings.
The only good thing about Robinhood is I believe that they were among the first to have no trading fees... but now there are many other options, including Schwab (but Schwab had some major reliability issues in the last couple of days).
link is good for 3 paywall bypasses, comment if you really want to read it and you get paywalled
>Citadel Securities said it had “not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business”.
>Citadel, a hedge fund also owned by Mr Griffin, said it was “not involved in, or responsible for, any retail brokers’ decision to stop trading in any way”. Earlier this week, Citadel provided rescue financing to Melvin Capital, a hedge fund targeted by retail traders on Reddit.
I, for one, believe that Citadel Securities the market maker stands to gain more than Citadel the hedge fund ever stood to lose. And I would note that Citadel (the hedge fund) invested in Melvin; presumably to close out their shorts, not double down. Melvin claims to be out of GME, per FT reporting. FT is generally quite reputable, and it is not clear to me whether Melvin lying on this matter would be a crime?
The funniest thing here is that the leaders of the charge on Reddit are the exact equivalent of the hedge fund guys. gambling with other people’s money for a big payday.
How come this is the first time these actions had to happen?
How convenient that these actions just happen to help out their partners recover $Billions of dollars and cost millions of users $Billions in gains?
How convenient that these actions always help out the billionaire vulture short sellers, always?
Robinhood didn't just stop trading, which would make sense for these kind of trading issues. They stopped normal users from buying these stocke, while letting them liquidate and sell these stocks. Thereby pushing down price and helping out their billionaire vulture short sellers.
Large threads are paginated. If you want to see all the comments you'll need to click through the More links at the bottom, or like this:
https://news.ycombinator.com/item?id=25950685&p=2
https://news.ycombinator.com/item?id=25950685&p=3
(and so on)