[HN Gopher] Robinhood denies claims that it sold GameStop shares... ___________________________________________________________________ Robinhood denies claims that it sold GameStop shares out from under its traders Author : Alupis Score : 226 points Date : 2021-01-29 15:59 UTC (7 hours ago) (HTM) web link (www.theverge.com) (TXT) w3m dump (www.theverge.com) | TheRealDunkirk wrote: | > "And though traders may be outraged by the surprise, | Robinhood's terms of service grant it permission to close a | trader's position under a number of circumstances." | | The terms of service for EVERY service we use are entirely legal | jargon for "we can do whatever the f*k we want to do with any | data on our service, and you have no legal recourse." No matter | what the company says about "privacy" or any other rights you | think you have, buried in there somewhere is a clause that says | that no matter what happens, you can't sue. What do you expect | when you've abdicated the right to sue the company for something | you think is illegal or injurious? It's supposed to be the | bastion of last resort, to keep everyone honest. When the safety | net of the legal system is gone (e.g., forced arbitration) -- or | only used for one side, there's nothing to restrain these | humungous companies which are running the world now. We're a long | way past needing a legal reset on "terms of service." | kahrl wrote: | Terms of Service do not trump federal law and SEC regulations. | nicbou wrote: | In the EU, those would not be allowed. This is also prohibited | by German laws, particularly with regards to apartment and | employment contracts. | | > Under EU law, standard contract terms used by traders have to | be fair. This doesn't change if they're called "terms and | conditions" or are part of a detailed contract that you | actually have to sign. The contract is not allowed to create an | imbalance between your rights and obligations as a consumer and | the rights and obligations of sellers and suppliers. | | This includes... | | > Terms which restrict how and where consumers can take legal | action and obliging them to provide proof which is the | responsibility of the other party to the contract. | | https://europa.eu/youreurope/citizens/consumers/unfair-treat... | hinkley wrote: | I hope some sociology students are documenting the hell out of | this whole thing. There's so much juicy stuff going on. | | For a moment yesterday, I got sucked into this whole thing. I | bought a few shares just to see if my brokerage still would allow | it, then sold them a few % higher because it was bouncing all | over. | | Then I remembered that I'd been asking myself how close the | conversational tone in /r/wallstreetbets was to mob | mentality/mass hallucination and thinking, "I'm no expert, but | this doesn't look good." | | When the RH stuff started yesterday, I started thinking of | another failure mode: horizontal aggression. If the incumbent can | pit their opponents against each other, they can grind each other | down while the incumbent sits back and waits for the blood to | dry. | | It's hard not to see some of that going on too. | sneak wrote: | Linked fron the article is another one saying Apple and Google | are mass deleting negative reviews of the Robinhood app in their | stores: | | https://www.theverge.com/2021/1/28/22255245/google-deleting-... | | It's sort of crazy how all of these different things are eroding | trust in all of these systems simultaneously. Some can trade, but | not others, happy customer reviews are legitimate, angry customer | reviews are not. | | This is a weird time. | | I'm glad that this sort of normally-invisible manipulation is | being brought to light, however. People _shouldn 't_ be trusting | these rigged systems. | kbar13 wrote: | mass deletion of negative reviews is automatic and has been | done before if it looks like spam / brigading (which this | probably looks like). i think it's a reasonable explanation. | | https://android-developers.googleblog.com/2018/12/in-reviews... | | https://9to5google.com/2018/12/17/play-store-anti-spam-revie... | sneak wrote: | I don't think the negative reviews of Robinhood in the last | day qualify as "spam" under any definition with which I am | familiar. | | I also see nothing wrong with brigading, if you are an actual | legitimate user of an app and are unhappy with it. | | Businesses solicit positive reviews all the time. | tptacek wrote: | Every notable online review venue works to resist canvassed | reviews, which break the whole concept of online reviews. | sokoloff wrote: | Almost every free iPhone app I install has a "enjoying | our app? Rate it in the app store!" interstitial at some | point in the user journey. | | Is that "working to resist canvassed reviews"? | | (I agree they _should_ ; I don't agree they _are_ | resisting it.) | FireBeyond wrote: | Maybe more tangential, but isn't that the app itself | asking, like a gatekeeper? I think if Apple generates | that message or its triggered, then it's one-shot - if | the user says "No", it will never be seen again (to be | clear, to me and most, this is desired behavior). | | So instead you have the app asking things like this, or | "can we send you notifications?", and so if you say no, | it can ask later, and not trigger the OS interaction | until just-in-time. | tptacek wrote: | It is not my claim that any online store does an | effective job of policing canvassing, only that they all | attempt to do so. No crowdsourced online review source is | trustworthy. But they're untrustworthy because of | canvassing. | | I'll not also that soliciting a review of an app is not | quite the same thing as organizing an effort to get a | huge directional shift in reviews. | sokoloff wrote: | Agreed. Both are pretty clearly canvassing though, in my | estimation. | spunker540 wrote: | It'd be neat if rather than just display a lifetime | average they displayed a stock ticker for the ratings. | You could see the app was good but then very lowly rated | for a few days before ticking back up for example | kbar13 wrote: | yeah i'm not saying robinhood is in the right here, i | personally. i just think that this may not be an example of | apple/google conspiring to take action because of any | triggers from the past two weeks' events. | tptacek wrote: | Your theory here being that Google and Apple are in on the | scheme, which is to prop up a couple of hedge funds that were | short GME, the most notable of which secretly still are short | despite announcing having covered their position, because | Google and Apple are big companies and big companies... like | hedge funds? Or are in cahoots with Robinhood in some kind of | Silicon Valley solidarity thing? | spunker540 wrote: | He never suggested any conspiracy. He just noted how a | confluence of events are really dramatically displaying our | reliance on huge centralized services all at once. Between | Trump and Parler de-platformization a few weeks ago to RH | only allowing sells while Google and Apple clean up their | reviews for them. | sneak wrote: | Not at all; my "theory" is that a lot of large institutions | in our society that people put trust in to make decisions | based upon are really way more arbitrary and less fair than | is generally assumed. | | Most people don't think about it because they never bump up | against the invisible walls in normal use. Suddenly, they are | on display for millions. | | No grand conspiracy, just a widespread culture of "don't | worry about how it works, we'll tell you if you win." | tptacek wrote: | I'm lost. Explain to me why it is you think Apple and | Google are removing these reviews. | sneak wrote: | To ensure that developers continue to develop for their | platforms and users continue to turn to their platforms | for implicit advice about apps, the same reason they do | most things in their stores. | | Apps with large install bases are implicitly valuable to | the platform as they are popular with phone-buying | customers. It's not in the platform's interest to | alienate the developers of such apps as those apps, | together, cause people to buy that platform's devices to | run them. The incentives are aligned. | | If I distributed VPN malware via enterprise certs, I | would lose my developer account. When Facebook does it, | they lose the enterprise cert. | tptacek wrote: | If the secret goal here is to make sure that lucrative | developers all get warm reviews, why don't all lucrative | developers get warm reviews? Apple makes in fact not all | that much money in the scheme of things, even in the | just-the-app-store scheme of things, from Robinhood. | sneak wrote: | They do. | | Go look at the review scores of all of the top apps in | the app store. None are below 4 stars, unless they are | apps for services where users don't have much of a choice | in apps, such as crap companion apps for hardware or | national services that people are forced to use. | pvg wrote: | So the fact this looks as one would expect without | nefarious manipulation is proof of nefarious | manipulation? Your argument is still a little difficult | to follow. | tedunangst wrote: | This is obviously part of google's stadia play to bankrupt | GameStop. Can't you see it? | kvetching wrote: | There is plenty of screenshots floating around of people getting | their shares sold. The peak at 9:30ish which caused them to stop | selling the stock had some very interesting screenshots. Some | people had their shares automatically sell because they had them | set to sell at a high price, and somehow the market had demand at | that high price. | valuearb wrote: | How do we know these customers didn't sell their own shares? | Dirlewanger wrote: | What's more likely: multiple Robinhood customers all colluded | in a very short time to make it look like RH sold their | shares without their consent, or RH actually did this? | | Occam's razor... | valuearb wrote: | What's more likely. | | Customers regretting a bad trade use the hoary old claim a | "glitch" to try to get broker to reverse it, post about it | to try the ol social media shaming to ratchet up the | pressure, and dozens of copycats do same? | | Or Robinhood decided to start driving GME price down with | forced client sales to make the DTCC increase their | collateral requirements and force them into bankruptcy so | they can end this madness? | | What does Occam say? | Dirlewanger wrote: | Arguing in bad faith for retail investors isn't going to | help. | | And if the latter is indeed true, it's textbook market | manipulation by RH to save their own ass, and I hope RH | is punished to the fullest extent of the law. | valuearb wrote: | Most retail investors are just like WSB members, clueless | newbs who know nothing about how the market works and it | doesn't take many to try the dumbest Hail Marys possible. | | Occams razor tells you it's not market manipulation | because Robinhood wouldn't last long enough for the law | to do anything. | | Do you really not understand how margin collateral | requirements work, how close to bankruptcy this trade has | pushed Robinhood, and how dangerous that is even for | "winning" GME traders? | motohagiography wrote: | The last year has illustrated a new kind of "platform risk," | where I think we always tried to diversify exposure to them in | architecture, security, and supply chains, but it's as though it | has finally trickled down to individuals. | SpicyLemonZest wrote: | Platform risk has always been a factor in finance. That's a | large part of why retail investing is regulated so heavily: | retail investors expect an abstraction layer where your | counterparties will always be there and your trades will always | be settled, even though the underlying market often doesn't | work that way. | driverdan wrote: | How is this new? Platform risk has always existed. One of the | biggest in the past 10 years being Mt Gox. | TameAntelope wrote: | The new risk that's I'm seeing exposed here is populist outrage | can tank your business even if you've done nothing wrong, but | operate in a space that isn't intuitive or won't allow you to | act intuitively. | | Finance is complicated, and often unintuitive and yes, the | rules here tend to favor the large movers (at least larger than | retail investors). How do you operate a business for retail | investors in an environment where the rules will _force_ you to | screw over your retail customers (one could argue the "real" | customers are the consumers of the retail investor's trade | information but let's set that aside for a second) once in | awhile? | whatshisface wrote: | You explain the rules to them as clearly as possible when | they join, and put in alarm bells to sound when your margin | account is getting low. Robinhood could have had a ticker on | their homepage showing how close they were to being forced to | stop trading, for example. | [deleted] | alexpetralia wrote: | Yes, Dominion Voting Systems got hit by this as well. | enumjorge wrote: | I thought a large part of Robinhood's appeal was that it made | trading more accessible to retail investors. I think the risk | here is more running a business where the rules force you to | screw the very audience you're trying to target. | ibraheemdev wrote: | In an interview with the Robinhood CEO, the host mentioned that | Robinhood is owned by a hedgefund which has a short position in | GME. Vlad Tenev did not deny this claim, but I could not find any | proof. Is this true? | cmckn wrote: | As I understand it, Robinhood had a cash problem because of the | various collaterals required for high-risk securities during the | clearing process. When each share traded needs a high amount of | collateral (1:1, even), and you have a high number of those | trades happening, you might not have the cash to pony up. | | I think this is a downside to their business model (and probably | moreso their scale and age). There are many upsides to their | business model. | | The interview I saw with their CEO on CNN was laughable. I would | have a lot more respect for the company if the CEO could get in | the weeds a bit more. The reality is that what Robinhood and most | retail brokers provide is a convenient illusion, hiding the | complexity of trading securities. Why can't they say that? | | Edit: I almost certainly don't know what I'm talking about; but | hey, this has been a fun story to follow, eh? | nayuki wrote: | An interview with Webull CEO Anthony Denier explained much more | about the underlying mechanics of clearing houses, collateral | requirements, and the Deposit Trust Company (DTC). | https://www.youtube.com/watch?v=4RS4JIEVyXM | viscanti wrote: | Apple trades an order of magnitude more per day than any of the | stocks that were halted. Somehow the clearinghouses have no | trouble with the Apple volume. | JumpCrisscross wrote: | > _Apple trades an order of magnitude more per day than any | of the stocks that were halted. Somehow the clearinghouses | have no trouble with the Apple volume._ | | The clearinghouse had no problem with GME volumes either. | They just required collateral. Had Robinhood _not_ been able | to meet its obligations yesterday and thus gone under, that | collateral would help settle its trades with other | brokerages. | | Collateral requirements are re-calculated daily. That means | there is risk between the last collateral calculation and | where an asset is trading today. That risk is a function of | volatility. So for a stock like Apple, the DTCC may only | require 2% of the value of the trade be put up as collateral. | For a stock like GameStop, it may require 100%. | pgwhalen wrote: | It's because considerably less capital is required to clear | an Apple trade, because it is a much less volatile stock. | usmannk wrote: | Firstly, this isn't true. Just this week AMC was trading tens | of billions of dollars worth of shares per day, which is | about equal to AAPL. GME is seeing >twice as much. | | Second, the insane amount of volatility and concentration in | these tickers makes the clearinghouses charge the brokerages | way way more. You have fees (quoted in %) for expected change | and also lack of diversity. | dalbasal wrote: | Definitely a fun one. | | A recurring theme when these things happen is people being | incensed as they peek at the way things work. We scream | "obvious market manipulation" and then learn how normative this | is. | | This story has been exceptionally good to follow because the | mechanisms, as well as one half of the trades are all | relatively simple and public. This isn't a scheme with super- | complicated instruments and acronyms making their first | appearances in the news. It's a simple strategy. Simple stocks. | Simple shorts. Simple companies. | | These /wsb nutters just found stocks that was aggressively and | irresponsibly shorted. I've heard 140% of the total shares in | existence. In theory (because who knows how tf it actually | works irl), they now need to buy shares in order to sell them | at the contracted price. There are only so many shares for | sale, and the buyers have no choice. The /wsb nutters (and now | also everyone who hates hedge funds) are holding to spite them. | | Meanwhile, brokerage CEOs are hinting (and more) at market | integrity-level issues yesterday. Solvency of clearing houses | and other infrastructure stuff that we only hear about during a | scandal. | | This kind of makes sense, there are theoretical market | conditions where prices go to infinity... which is the ultimate | stretch goal for wsb right now. | iamacyborg wrote: | > In theory (because who knows how tf it actually works irl), | they now need to buy shares in order to sell them at the | contracted price. | | This assumes that the old shorts haven't already been closed. | Existing shorts could very well just be those that've been | created within the last couple days at the current overvalued | price. | | > Meanwhile, brokerage CEOs are hinting (and more) at market | integrity-level issues yesterday. Solvency of clearing houses | and other infrastructure stuff that we only hear about during | a scandal. | | Yup, the Chairman of Interactive Brokers was pretty explicit. | | > We are worried about the integrity of the marketplace and | the clearing system | | https://www.cnbc.com/2021/01/28/interactive-brokers- | restrict... | dalbasal wrote: | Riddle me this, if you know... | | How is it possible that a $20bn company threatens the | stability of clearing houses. Tesla moves by $20bn | regularly. How does one affect the clearing house as a | whole differently from the other? | SuoDuanDao wrote: | It looks to me as if there are more stocks sold short | than people are willing to sell back. The brokerages have | plenty of money, but if 140% of stocks are shorted, | delivering them all to their rightful owners is obviously | difficult. | | If that is in fact the case, the only ones who could | prevent a full-blown market meltdown is Gamestop if they | issued the missing 40%. | iamacyborg wrote: | It's been explained by other people in the comment | section already much better than I could do. | wavefunction wrote: | Robinhood wasn't fulfilling orders though as far as I | understand it? More like lead generation for Citadel, their | market-maker? That seems like an issue for Citadel to be | concerned with rather than Robinhood. | astrange wrote: | Robinhood is their own clearing broker. They send some market | orders through people like Citadel Securities because it | improves the price, but not all of them. | | (Note, RH was fined by the SEC for possibly not improving the | price as much as they could. But they were not giving you a | bad price, it was still better than the NBBO price!) | fsociety wrote: | I think the PR strategies of these companies is something along | the lines of, say the vague things which have no risk of | backlash as opposed to explaining what happened which has | higher risk of backlash. | astrange wrote: | > As I understand it, Robinhood had a cash problem because of | the various collaterals required for high-risk securities | during the clearing process. When each share traded needs a | high amount of collateral (1:1, even), and you have a high | number of those trades happening, you might not have the cash | to pony up. | | Something like that. But note that it isn't related to margin | trading - Robinhood has to post their own cash as collateral | with NSCC/DTCC, they can't use their customers' cash. So if a | customer wanted to opt out of the margin account this wouldn't | actually help. | | (I don't know what this rule is for, but it's in the rules.) | nabaraz wrote: | Here is my quick math: | | Tradeable float: 47M | | Top 3 holders: Fidelity, Blackrock, and Vanguard: 27M | | Cohen: 9M | | Half of Robinhood users own at least one share: 5M (conservative) | | That leaves us with 6M shares, and with a short interest of 71M | held short and ETFs like XRT buying them, it is likely there | aren't enough shares. | | The only way to resolve this is i) Gamestop issue more | shares/shelf-offering. ii) shorts go bankrupt and/or | clearinghouse/brokers take the bill. | gruez wrote: | >That leaves us with 6M shares, and with a short interest of | 71M held short and ETFs like XRT buying them, it is likely | there aren't enough shares. | | This is a non-issue, see sibling comment: | https://news.ycombinator.com/item?id=25961536 | kgwgk wrote: | XRT has not been buying this week: the AUM are down 80% | | https://www.bloomberg.com/news/articles/2021-01-29/the-games... | dragontamer wrote: | Or you just borrow shares from Blackrock to sell to everyone | else who wants shares. | | Aka: short selling. Yes, short-selling creates "virtual new | shares". Its only an issue if the company gets acquired. The | name of the game is to buy low sell high. Short selling inverts | it by selling high and then buying low at a later date. | arcticbull wrote: | They're still short roughly 100% of float. | | That's almost 23 billion dollars. With this much short | interest the borrow fee must be close to 100% APY [edit: 35% | APY]. There's really no good way to wait it out for the | shorties. They're getting squeezed by the borrow rates, | margin, and WSB. | dragontamer wrote: | > They're still short roughly 100% of float. | | My overall point is that looking at the float is almost | meaningless. | | Days to cover is arguably a more important figure (how easy | is it to buy / sell GME? Since GME has such high volume in | the past few days, its not really hard at all to find | shares right now). | | You're right that the borrow-rate is also important to look | at, but the short-float doesn't necessarily correlate with | the borrow rate. You absolutely can't state facts like: | | > With this much short interest the borrow fee must be | close to 100% APY. | | That's... just not how this works. | | EDIT: I looked up some public information: | https://iborrowdesk.com/report/GME | | Seems to be 35%/year right now for GME shorts. If a GME | short borrowed at $300, the stock price needs to fall to | $200 by 2022 before they lose money. Do you really think | GME can be propped up above $200 for a whole year? | | If they short sold months ago at lower borrow costs, | they've basically would be in the position to wait it out | longer than most bulls who are just messing with 3-month | call options. | | > There's really no good way to wait it out for the | shorties. | | Selling ITM calls (and maybe hedging slightly by buying an | OTM call) seems to be the obvious bear trade that would be | doing well under these circumstances. The theta on these | call options are ridiculous. That brings theta over to your | side. | alexpetralia wrote: | Not all short sellers entered their position at $5. Many | have come in at $100 and $200, etc. They will not | necessarily not face the same short squeeze, but you're | right they will probably still face the same borrow rates. | alexpetralia wrote: | Without assuming naked short selling, how could the 71M of | shares sold short find "locates" for their positions? | | I would imagine that a short seller locates the shares, borrows | them, then sells them. That is say 100 shares on loan. The | other side of that trade - the buyer - now owns the shares. | That buyer can lend those same shares out to another short | seller - say 100 shares again. Now we have 200 shares on loan. | | I don't see why someone necessarily has to lose money unless | you introduce credit risk (which in the non-theoretical case | you absolutely should). Wouldn't you just have to unwind each | of these loans? | lazyasciiart wrote: | Sure. The way to unwind the loans is for the people who | loaned them to give them back, and then the people who bought | them to sell them back. So shortSeller2 gives back his loaned | shares to Buyer. But Buyer _sells_ them back to shortSeller1 | - and he doesn 't have to sell them back for the same price | he bought them, and he doesn't have to sell them to the same | person. So he actually sells them to whoever will pay him the | most. ShortSeller1 is paying $1/day to borrow the shares, and | he sold them for $20. It's 5 days after the sale, and today | Buyer1 is asking for $40. ShortSeller1 promised to return the | shares after 7 days. What can he do to not lose money? | tedunangst wrote: | Nice to see the half of RH holds GME factoid still in | circulation. | ruph123 wrote: | What I don't get is: Now the stock is clearly overvalued. Doesn't | this make shorting it now so much more attractive? | malandrew wrote: | Technically yes, but as they say, the market can stay | irrational longer than you can stay solvent. Anyone considering | shorts should go spend some time in r/wallstreetbets and figure | out if that is a group they'd want to play chicken against. | alexpetralia wrote: | It feels like standing in front of semi-trailer hurtling | towards the edge of a cliff. | aphextron wrote: | >What I don't get is: Now the stock is clearly overvalued. | Doesn't this make shorting it now so much more attractive? | | It sure does. But good luck timing it. The whole point of a | short squeeze is that the market can stay irrational for longer | than you can stay solvent. | hntrader wrote: | Yeah, it's more attractive to short it compared to 2 weeks ago, | but consider: | | (1) Price is determined by supply and demand, not one person's | evaluation/perception of value. DOGEUSD was useless 3 months | ago and is still useless (even more useless than GME), but | shorting it then would've blown you up because of demand | exceeding supply. The volume of the incoming retail flow is | hard to predict, if enough retail people ascribe aesthetic | value to it, the price will go up. | | (2) Borrow is extremely expensive because of high demand for | the relatively small float, so you need very significant edge | to justify the high borrow costs. | enraged_camel wrote: | Their "democratize finance" slogan serves the same purpose as, | and means as much as, Google's "do no evil" slogan: it's a | cynical ploy to trick naive rubes into joining and/or using the | services of the company. | awefasdfasdf wrote: | Right. Instead of behavioural surplus generated through search, | it is generated through stock activity. | acct776 wrote: | From the makers of "Julian Assange is an Intelligence Agency", | it's "Citizens Talking is Illegal"! | cwkoss wrote: | They don't want to democratize finance. They want to make naive | retail investors feel excess confidence so they can sell more of | their dumb order flow. | | Their interface is horrible for finding any information you'd | actually want to use to make an investment decision. They are | good for easy no-fee trading, but you constantly have to avoid UI | dark patterns pointing you towards sub-optimal decisions. | bondarchuk wrote: | Their interface is just laughably, inexcusably bad. The stock | price charts don't even have labels on the y-axis! No really, | check it out! | https://blog.robinhood.com/news/2017/10/31/robinhood-now-on-... | FireBeyond wrote: | Right. You can say its hyperbole or "locker room talk" but in | situations like this, it's very clear that a large part of the | financial sector is _absolutely sincere_ when they look at | retail investors as what they literally call "dumb money", | "dumb flow". | kasey_junk wrote: | "Dumb money" is a particularly poor bit of jargon but as it's | used in finance it doesn't really mean that the finance | sector thinks a person is a rube or stupid. | | It really means you think an order doesn't imply any | directionality in the order book. Most orders don't! Most | orders happen because of things outside of the markets (I've | retired, I'm rebalancing my portfolio, my kid is going to | school, I got paid so I'm buying into my retirement fund). | | Those orders are not indicators that the market is going to | move. This is in contrast to a hedge fund unrolling their | position. That act will impact the market. | | So for instance while Melvin was taking a bath closing out | their shorts they were "smart". But my index fund sell that | made me money was "dumb". | [deleted] | Hnsuz wrote: | Lies lies.. Robin Hood bye bye | xhkkffbf wrote: | A margin call is a painful thing. Brokers have always reserved | the right to sell shares to satisfy a loan. It's nothing new or | unusual. | | If you want to gamble with the big dogs, well, this is the price | you pay. | SmokyBourbon wrote: | RTFA | | "But these investors told The Verge they didn't have options in | GameStop or AMC and hadn't purchased the stocks on margin. They | had purchased the shares outright, they said, and were planning | to hold onto them." | [deleted] | Armic wrote: | All robinhood accounts are by default margin accounts: | https://robinhood.com/us/en/support/articles/robinhood- | accou.... | rococode wrote: | Enormous difference between having a margin account and | trading on margin. A margin account simply means you're | allowed to trade on margin, not that you have actually done | so. | aphextron wrote: | >Enormous difference between having a margin account and | trading on margin. A margin account simply means you're | allowed to trade on margin, not that you have actually | done so. | | You're technically trading on margin when you open a new | account and trade before your cash has cleared. This is | most likely what happened. | cjcole wrote: | Ok, this makes sense, thanks. | | Still, this is a horrible message to show a user who is | in that situation and who did not place a sell order | themselves (message wording from the article): | | "We've received _your order_ to sell [#] shares of | [stock] at the best available price." | | This is poor communication from RH. A preventable own | goal. | thatguy0900 wrote: | Yes, but money takes a few days to clear. If you open a | robinhood account right now, deposit 1000$, then buy 500$ | of stocks you will be buying on margin because the money | hasn't cleared yet. How many people buying gme waited for | the cash to actually be in their account before buying? | In a strictly cash account you would be forced to wait, | invisible margin accounts was one of robinhoods | "innovations" | duckfang wrote: | Gotta love how that HFT'ers and similar can buy, | finalize, sell, finalize in microseconds... | | But our trades take days. | | Gee, I wonder why there's so much hate? | bigtunacan wrote: | This is directed at thatguy0900, but we have reached the | reply nested limit... | | What you and many Robinhood users probably are missing is | that your trade actually does take days. Actually go read | the Robinhood settlement period info. | | https://robinhood.com/us/en/support/articles/withdraw- | money-.... | | This is not explained clearly, but it is essentially 3 | days to settle (T+2). So if you sell a position you don't | have the cash to buy for three days. If you have traded | on Robinhood you have probably noticed that you | "immediately" have the buying power from the shares you | sold. That's not your cash, because it hasn't settled. | For three days that's margin and therefore you could get | a margin call. | | The instant deposit is limited to $1000 (margin). But | there were people saying they were forced to sell out of | much larger dollar holdings. Those were probably people | that sold out of one stock holding and then immediately | bought into GameStop, AMC, etc... So they likely believed | they were buying with cash, but they were in reality | buying on margin. | | Just to be clear, I don't think this is a good thing at | all. A brokerage should not be invisibly providing you | with margin, it should be very clear to users that this | is happening. | thatguy0900 wrote: | Your trades don't take days, depositing cash into your | account does. I imagine that applies to them as well, | they just all already have 2 billion in there. They will | also have margin accounts that gives them instant | funding, like you do. Addmitedly I doubt they get their | margin orders canceled very much when they buy risky | things. | thinkmassive wrote: | Hopefully this becomes more widely understood. It's | definitely not obvious enough for their target market to | understand, and it's not a stretch to say they try to | obscure it. | jMyles wrote: | You're saying that you read this to mean that all trades, | even done in what otherwise appear to be cash terms, can be | margin called? | | If that's the actual intent of this document, it is | substantially misleading. | Armic wrote: | Not quite - it seems like when you deposit cash, some up | to all of it is made available immediately for trading if | you're on the default account settings. My guess is that | most users believe that when they buy stocks with this | money, they think it is cash when it is in fact margin, | and these are the people who got margin called. | robjan wrote: | They specify "options in GameStop or AMC" but if you have | margin on any instruments or options which are at risk of | being assigned you will also get margin called. | UShouldBWorking wrote: | I always thought Reddit started as a response to people | replying without reading the article. It was I, I "read it". | Of course now if for children to complain about their parents | and boyfriends, but it used to be great. | | I would love a site like, I read it.com where you would be | encouraged to write a short question about the article that | needed to be anawered before being able to comment. | [deleted] | Triv888 wrote: | Next up: Google denies deleting thousands of 1-star reviews for | the RH app in the Play Store... | Jackson12 wrote: | Honestly this is a terrible look for Fintech. There's no | conspiracy here. The legacy brokers who are way more tied to | "Wall Street" have handled this a lot a better. These problems | are being caused by incompetence at Robinhood. Someone needs to | be held accountable. | xapata wrote: | Isn't that a standard practice for brokerages -- loan out the | shares that your clients are holding? I remember Ally Invest sent | me some notice that I'd be receiving a cut of the profits when | they loan out my shares. | secondcoming wrote: | IANAL but I think they can only do that if you've bought those | shares on margin. They _may_ still be able to loan out shares | you've 100% paid for unless you explicitly tell them not to. | | Denying RH the ability to loan out shares was a tactic | discussed on WSB | bigtunacan wrote: | They can loan your shares out whether they are bought with | cash or margin. Some brokerages allow you to opt of loaning | your shares to short sellers. Robinhood pays you part of the | interest made if they lend your shares out, but as far as I | know there is no way to opt-out of share lending on | Robinhood. | llampx wrote: | Its not standard in that you can choose not to lend out the | shares, and for the GME situation, you expressly DON'T want the | shares to be lent out to the shorters. | xapata wrote: | Yeah, but you might have to explicitly opt out. It's probably | in the fine print of your terms of service. | ur-whale wrote: | "Don't let the customer see how the sausage is made lest they | rush to puke in the back alley" is rule #1 for very many | businesses. | tombert wrote: | Honest question; if I had a magic wand and tomorrow banned all | short sales, what would be the negative side-effects? From a lay- | person's perspective, short selling seems pretty horrible, but | very often I find that there are variables to this that I do not | fully understand, and I know some people here are more | financially literate than I am. | graeme wrote: | Short selling unearths fraud. Check out some of the shorts | Muddy Waters had against fraudulent Chinese companies, or the | short positions against Wirecard. The latter was a complete | fraud aided by German regulators and finally taken down by | shortsellers and the Financial Times. | KerryJones wrote: | ^ This. | | A great book on a specific example is David Einhorn in | "Fooling Some of the People All of the Time". He routinely | finds fraud and shorts them, in this case, Allied Capital. | octo_t wrote: | One core place that shorting is key (which isn't touched on | much) is shorting/going long on commodity futures. Very | simplified example below: | | If I'm an airline (and my business is dependent on the price of | oil) and I think the price of oil will go up, I will hold some | amount of oil futures at the current price. If the price of oil | rises, my company is "hedged" against that rise. This is good | for the buyer of the commodity. If the price of oil goes down, | I lose on my future, but my business is fine overall. | | Correspondingly, if I'm the seller of a commodity (I own an | oilfield), I might short oil futures, in case the price goes | down. I make less money selling my oil, but I hopefully make | some back on the short | Heliosmaster wrote: | For sake of completeness, you just described a "Married Put" | notyourwork wrote: | I agree! My opinion is that options market is similar to the | derivative market we got into with bundling mortgages up. | | Its effectively putting a layer on top of something and the | confusion gives those involves in the abstraction ability to | make money on top of the real economy. | yowlingcat wrote: | Great question, and historically the answer is hyperinflation. | In fact, there was one very well known historical case | involving the Weimar Republic... | MrMan wrote: | without short selling market down moves become more crash-y - | short sellers buy (to realize profit) as the stock goes down | which tends to support the price. without buyers, an out of | favor stock might keep going down in price and have maybe no | willing buyers! and that also affects spreads, because market | makers hate volatility. | | oversimplified but real | fairity wrote: | Shorting stocks, in general, is a beneficial action for the | market because it helps prevent shares from becoming | overvalued. | | I think this situation has actually highlighted the fact that | shorting stocks needs to be easier. Currently, it's too easy to | purposefully trigger a short squeeze. | | With the goal of efficient prices in mind, short squeezes are | bad, and enabling shorting is good. | jMyles wrote: | > With the goal of efficient prices in mind, short squeezes | are bad, and enabling shorting is good. | | Yeah? Aren't they equally useful as market messages? | | If I am willing to tie up some money holding an instrument | afloat at overvalued prices longer than you are willing to | remain in your short position, haven't we ultimately, | together in our conflict, created a useful message about the | underlying asset? | | Maybe I think Company G is worth $20 but not $40, but if you | are selling it short at $5, and I'm prepared to be illiquid | for a while, don't I send the correct market signal by | squeezing you out of your short? | fairity wrote: | > Maybe I think Company G is worth $20 but not $40, but if | you are selling it short at $5, and I'm prepared to be | illiquid for a while, don't I send the correct market | signal by squeezing you out of your short? | | In this example, you'd be sending the "correct market | signal" if you sold your shares as soon as it appreciated | to $20. Anything more, and you're moving the market away | from its efficient price. | | The problem with the squeeze is that certain participants | are put into a position where they're being forced to buy. | And, that creates an incentive for other shareholders to | hold onto their shares well past their fair value. Holding | onto shares well past their fair value is antithetical to | efficient price discovery. | jMyles wrote: | > In this example, you'd be sending the "correct market | signal" if you sold your shares as soon as it appreciated | to $20. Anything more, and you're moving the market away | from its efficient price. | | Is that true? Isn't anything above that price a 'reward' | for being correct? And isn't that part of the signal | according to a perfect information paradigm? | fairity wrote: | Well, it's definitely a reward. But as I mentioned in my | last reply, it's rewarding the wrong behavior if our goal | is efficient price discovery. | jMyles wrote: | I don't see how; it creates a disincentive to take short | positions which are too low (good for price discovery) | and provides a reward for discovering and outing them | (good for price discovery). | Hamuko wrote: | > _If I am willing to tie up some money holding an | instrument afloat at overvalued prices longer than you are | willing to remain in your short position, haven 't we | ultimately, together in our conflict, created a useful | message about the underlying asset?_ | | I'd say it really only sends a message about your assets. | postalrat wrote: | I hear that argument then I heard the argument that short | selling doesn't reduce the price. | threedots wrote: | It does reduce prices because it increases the supply of | available shares, it's just that reducing prices isn't | necessarily a bad thing. We want the prices of bad things | (e.g. frauds) to go down and more generally we want prices | to reflect reality which happens more effectively when | informed investors can express negative views through | shorting. | notahacker wrote: | It's worth adding the qualifier that increasing the | supply of available shares need not reduce prices at all | if there is enough demand to buy shares at the original | price (which there should be if the price is definitely | correct and the market is efficient enough). Even without | perfectly efficient markets the shorters don't make money | if enough other market participants think they're wrong | fairity wrote: | The process of shorting involves selling shares now with | the intent of buying shares later. Price will drop in the | near term bc you're increasing supply. In theory, without | short selling, the market would still eventually arrive at | the correct price, but short selling expedites the process. | jandrese wrote: | The second order effects are problematic though. Someone | shorting a stock has an incentive to see a company fail. | Sometimes people will put out rumors or even go on fiance | shows talking about how poorly run some company is. Maybe | they make a discreet call to their buddy at the ratings | agency and have them downgraded a step. If the market's | stated purpose is to help companies find the capital they | need to succeed, then short sellers run counter to that | purpose. | | If however the purpose of the market is to be a big game for | people with huge amounts of mostly virtual currency to gamble | with then short selling is a vital instrument. | | One problem with the market is that value is not based on | what a company is worth, it is based on what investors think | it might be worth in the future, which is largely just a | guess. So the whole thing becomes divorced from reality while | investors play games with each other to try to make the | numbers go up as fast as possible. | kansface wrote: | > Someone shorting a stock has an incentive to see a | company fail. | | How is that incentive any different than the incentives of | someone taking the opposite position: | | > Sometimes people will put out rumors or even go on fiance | shows talking about how ~poorly~ well run some company is. | valuearb wrote: | The stock markets purpose isn't to help companies find | money, that Pr spin. | | It's to help investors invest their monies more cheaply and | safely. The side effect is that companies get cheaper | access to investment funds. | | Without short sellers frauds would be even more prevalent, | investor costs would be higher and companies would raise | less money. | | If you have a solvent company brought down by a short | seller, you never had a solvent company. | | And value != price. True investors like Buffett don't | really mind the casino aspect, because volatility creates | opportunities when value diverges far from price. | jcranmer wrote: | > Sometimes people will put out rumors or even go on fiance | shows talking about how poorly run some company is. Maybe | they make a discreet call to their buddy at the ratings | agency and have them downgraded a step. | | Some people buy a stock, and then put out rumors or even go | on finance shows talking about how great this company is | and how its stock is undervalued. And then sell it at the | peak, leaving others holding the bag. Yet people don't run | around saying that we should ban people from being able to | buy stock because of that. | | Both the scenarios (the one you describe and the one I | describe) are illegal market manipulation. Sure, I would | not be surprised if market manipulation of the short side | were vastly underprosecuted, but I don't think that's a | reason to complain about short selling per se. | jrowen wrote: | _Yet people don 't run around saying that we should ban | people from being able to buy stock because of that._ | | I honestly feel that way sometimes. I struggle to see how | the real value created by this whole system outweighs the | negatives. It's been abstracted too far away from | "investing in a company" and created too many perverse | incentives. Too many people just playing numbers games, | under the impression that they're somehow creating value. | HFT? How is that anything but absurd? | | I feel like we'd be better off going back to a more | simple system where actual people have actual skin in the | companies they're taking ownership of. | quickthrowman wrote: | > The second order effects are problematic though. Someone | shorting a stock has an incentive to see a company fail. | Sometimes people will put out rumors or even go on fiance | shows talking about how poorly run some company is. | | " Tesla CEO Elon Musk had a number of things to talk about | during Wednesday's quarterly earnings call, but spent a lot | of time discussing the company's Full Self-Driving system. | According to Musk, the FSD will be capable of Level 5 | autonomy by the end of 2021." | | How is Elon Musk claiming (lying) that level 5 FSD will be | available for Tesla vehicles in 2021 any different from | short sellers making similar claims about the potential | downsides of a stock? | | FWIW, Elon Mysk said they'll have a million robotaxis | operating before the end of 2020. I believe there are 0 | currently operating. [1] | | I will bet anyone 10,000 dollars that Tesla will not have | level 5 FSD by EOY. If anyone is willing to lend me money | to make the bet, I'll bet as much as they'll lend me. | | [0] https://www.cnet.com/roadshow/news/elon-musk-full-self- | drivi... | | [1] https://www.cnbc.com/2019/04/22/elon-musk-says-tesla- | robotax... | mianos wrote: | Because he works there. He has the most information | possible. He is not guessing. The SEC is quite clear | about how this has to be honest disclosure. He has been | rebuked several times for this. It is not unreasonable | for companies to miss targets and when the forward | looking information they provide at investor briefings | may be less trusted and this would normally be reflected | in the stock price change. | | Experienced investors make long term investment decisions | with this sort of thing in mind. Not everything goes to | plan but if this was fabricated it would be illegal and | is very commonly pursued by the authorities. | sakopov wrote: | Not all of short selling is bad. Sometimes it's an act of | activism. Bill Ackman has been shorting Herbalife for years | while trying to expose the pyramid scheme that it is. He was | quite successful for a number of years. Similarly, Hindenburg | Research, which was shorting Nikola Motors, revealed a lot of | fraudulent stuff surrounding Nikola's public statements and | their demo truck video. | izolate wrote: | The way I understand it is that short selling is part of a | check and balance against companies that you know are lying | about their financials. It disincentivizes untruthworthy | business practices by incentivizing calling companies out on | their untruths. | jfim wrote: | One example of such a short sell was the report by Hindenburg | research about NKLA [0], which also discloses their short | position. The net outcome of such disclosures is that | fraudulent activity is exposed, the people shorting the stock | make a profit, the people who were holding the stock still | have their shares, and hopefully new investors are more | informed about the stock that's being shorted. | | Not all short sellers take this approach though, they could | just short the stock because they think it's overvalued. It | seems that it's what happened here, but ended up on the wrong | side of the trade when WSB decided to buy GME. | | [0] https://hindenburgresearch.com/nikola/ | jariel wrote: | There's nothing horrible at all about shorting, it's just about | investing in the other direction. | | It's horrible if funds try to push a company down on that | basis, but otherwise it's normal. | | It's 'good' because you want people betting on the other side | of irrational hubris - if the market is way-overvaluing a | stock, you want them to 'lose' and for the stock to come to | something within reasons. | | Shorting helps prick mini bubbles, or stabilize them, before | they start to get way out of hand. | FireBeyond wrote: | I'm not a particular fan of short selling, but I can see a | definite validity to the value thereof. | | What happened here is massive naked short selling, with | estimates from 120 to 140 to as high as 200 per cent of | available stock shorted. | | This is entirely illegal, and has been since 2008, when it was | (one of) the contributing factor(s) to that collapse. | | However, as per usual, there are loopholes. So the big | investors are able to carry on as normal, doing this, and have | ways of covering themselves after the fact in a way that | protects them from prosecution, while still distorting the | market in the very ways that were problematic to begin with. | valuearb wrote: | It's not naked short selling. BME trades it's entire share | count in a daily basis, making it easy for the same share to | be shorted multiple times. | ballenf wrote: | Is there an equivalent to short selling for physical goods? | Does the question even make sense? | | If you though gold was overpriced (and there was no gold | futures you could short) what would you do? Buy silver? I guess | you invent a short by entering a contract to sell someone gold | 6 months from now for a given price. But short of inventing a | means to short-sell, what would you do? | jmalicki wrote: | " I guess you invent a short by entering a contract to sell | someone gold 6 months from now for a given price." - i.e. a | short futures contract (there needn't be an exchange to have | a futures contract). | | You could short it like you short a stock - find someone who | owns some gold, and have a contract to borrow the gold now, | and give it back to them in 6 months, while paying them a | small fee while it's outstanding. | | That's exactly what happens with shorting. | teyc wrote: | yes, futures contracts. | renewiltord wrote: | Yeah, with fungible items you can easily do it, but you don't | because all of them have the natural transformation into pure | paper. | | For instance, you could borrow a gold ingot and run through | the whole thing. But there's no point in that since the | validity of the whole thing rests on your creditworthiness | and how good that contract is. So you might as well never | borrow the real ingot and just write in the rest of the | clause of how you are entitled to delivery of the ingot. That | way you can trade them. | | For shorts to be viable you just need sufficient liquidity | that you know you won't fail to deliver on your side of the | thing. Which is why fungible goods are easiest. | roywiggins wrote: | As long as it's not onions, that's what futures are for. | | https://en.wikipedia.org/wiki/Onion_Futures_Act?wprov=sfla1 | tedunangst wrote: | Would you still want to buy put options? Who would sell them to | you? | valuearb wrote: | Without short sales, could Put options even exist? | mikestew wrote: | "My put contract says that you have to buy my FooBar shares | at $X, despite the last sale price being $Y and $X > $Y." I | thought that FooBar would drop down to at least $Y, that's | why I bought the options contract. | | In other words, as long as I have shares to sell, and | there's a contract saying that you will buy them from me | for a fixed price, then put options could most certainly | exist. | threedots wrote: | The point is that without short selling option MMs | couldn't hedge so no one would sell put options. | leetcrew wrote: | > From a lay-person's perspective, short selling seems pretty | horrible | | this person is probably not trading options. | mpalczewski wrote: | During market draw downs it's the short sellers that are buying | first. Without short sellers bubbles would get bigger because | no sellers taming them and their bursting would be much harsher | as you would only have sellers. Shorting also allows one to | invest in a company while shorting others in the sector in | order to invest in a company while hedging broader economic | risk. Also buying put options allows you to insure your own | risk. These are sold by market makers that are able to hedge | their own position by short selling, without short selling no | more insurance. | rtkwe wrote: | > bursting would be much harsher as you would only have | sellers | | I'm not sold on how much of a cushion that is. Shorters want | it to fall as much as possible, in an ideal world all the way | to zero so they don't effectively owe anything. There's no | reason for them to buy until they think it's hit bottom and | they also have incentives to drive the price lower with bad | press and any other manipulations they can think of. | hartator wrote: | I don't get blocking buy on certain stocks for "liquidity | requirements". When buying on Robinhood, I need to first wire | them my money. Can't they use that cash to fund my own buys? | bob1029 wrote: | The entire thing is best viewed as a super-short-term credit | basis between all participants. At no point is the financial | system in a state of absolute settlement. It is continual flux. | Best you can get is scoped, relative settlement with | assumptions. DTCC is the most fundamental source of truth, but | this is after the fact and not very useful when one needs to | make an immediate decision. | alfalfasprout wrote: | Yeah, but settlement happens EOD not on each transaction (as | the orders fill). As long as we're talking about trades _not_ | on margin then Robinhood should already have the requisite | assets for clearing readily available. | | Margin is a totally different story. | bilbo0s wrote: | _Can 't they use that cash to fund my own buys_ | | Is this how people really think the markets work? If it is, | it's no wonder that a lot of retail investors will be taken to | the cleaners. What you just suggested is so illegal that no | professional trader would have had the nerve to even mention | it. | | I think it might be helpful if RH had some kind of trading | tutorial that maybe went through the mechanics and rules so | that people joining would have a better understanding. What | I've been reading the last few days betrays a massive lack of | understanding about how a lot of this works. | ta1234567890 wrote: | > What you just suggested is so illegal that no professional | trader would have had the nerve to even mention it. | | Why is it illegal? | | At least from the outside, it doesn't make sense. If I | transfer money to RH to buy stocks, I expect that money to be | used to buy the stock, when I buy the stock, whatever that | process might entail. So if my purchase requires collateral | because settlement happens later, then I would expect for my | money to be used as collateral for my purchase and then be | fully paid out once settlement occurs. Why wouldn't it be | that way? (if I'm not borrowing money from anyone). | marcinzm wrote: | Doesn't Robinhood allow you to buy stocks before the transfer | finishes? So you can buy right away rather than waiting 3+ | days. They call it Robinhood Instant. | Tsiklon wrote: | From what little I've read on the matter if they're offering | you the ability to trade instantly when you send them money, | they are allowing you to trade on margin. | | That is to say that the money you've sent them won't actually | settle in their account until several days later (depending on | their clearing house). Therefore they're actually taking on a | loan to allow you to use their services "instantly" - this is | entirely transparent to the user. | Alupis wrote: | Let me get this straight: | | 1) RH automatically makes every account a Margin account. | | 2) RH doesn't make this clear to their customers (buried in the | TOS where they know newbie investors won't look, which makes up | probably 99% of their customers). | | 3) RH allows people to initiate money transfers into RH, but also | allows purchasing of stock immediately (on Margin) without | informing the customer. | | 4) Investors believe they've outright purchased stock, because RH | app shows the stock in their account, and money now gone (even | though it's still pending the transfer). | | 5) RH then "margin calls" all of the people who had money | transfers pending at the time of GME purchase. | | Ya... that seems pretty predatory in my opinion. Downright shady | business... How can this not be construed as market manipulation, | even if RH _had_ to do this to save themselves yesterday. RH got | themselves into this position in the first place... | MattGaiser wrote: | There are all sorts of rules that brokers generally abstract | away: | | https://finance.zacks.com/tax-rules-use-proceeds-stock-sales... | | https://www.fidelity.com/learning-center/trading-investing/t... | | My understanding is that you couldn't do day trading without a | margin account. | mrits wrote: | I have a margin account but E*Trade let me day trade for | years without one. There were rules like you couldn't buy and | sell the same stock in the same day but you also got hundreds | of violations before they suspended this ability. So if you | are more of a day-swing trader and not doing high volume it | worked well enough for me. | dillondoyle wrote: | Does schwab? I've gotten notices for selling stock before it | settles | downrightmike wrote: | I have a RH, and yeah when you sign up they tell you what | margin is and you can choose to not use it as it is riskier. As | this is just a 'see what happens' use case for me, I didn't | elect margin. And well this is what happens. The predatory part | is just giving it out at all to low funds retail traders. | BoorishBears wrote: | 99% of the people who use RH could not use it if RH didn't | give you "implicit margin". The "democratization" is centered | around it | | And I mean if you want, ask RH and they'll downgrade to to a | cash account... just be ready for T+2 and no options trading | | https://robinhood.com/us/en/support/articles/options- | investi... | | > NOTE: If you start options trading in your Cash account, | we'll automatically upgrade you to an Instant account. | | If Robinhood only had covered options you'd be right back to: | not supporting the way people are using it to enable all | this. | | - | | In fact, imagine if they didn't do this, all the new people | who tried to enter GME would have had to wait 2 days to | enter, and much fewer people would have had access to options | | Ironically I actually think it might have stopped this dead | in its tracks by damping the influx of cash | kllrnohj wrote: | > And I mean if you want, ask RH and they'll downgrade to | to a cash account... just be ready for T+2 and no options | trading | | You can do options trading on a cash account. You can only | do covered options, but honestly that's probably a good | restriction for most. | hmaxwell wrote: | I think the way it works now is great, being able to go | short on naked options with a proper margin maintenance | is way smarter than restricting everyone to go long on | options or only allow people to sell calls on covered | options (which kind of defeats the purpose of a bearish | position when you are required to hold the deliverables). | kllrnohj wrote: | For a mass-market low-education target demographic? The | defaults matter here. | | Retail investors shouldn't be restricted from having such | capabilities, but that doesn't mean it should be the | _default_ | manigandham wrote: | A bearish position is to be long on puts. You don't need | to write options, especially naked options which are | usually the highest tier of access on every broker and | require extra agreements. | BoorishBears wrote: | Edit: Actually can you show me where RH even says you can | trade covered options without Instant? I've only found | evidence to the contrary | | https://robinhood.com/us/en/support/articles/options- | investi... | | > NOTE: If you start options trading in your Cash | account, we'll automatically upgrade you to an Instant | account. | | Maybe if you've downgraded they won't upgrade you, but | it's neither here nor there, covered options aren't what | have allowed this to happen | | If Robinhood only had covered options you'd be right back | where I said it'd be: not supporting the way people are | using it to enable all this. | dataflow wrote: | Their advertisement for Gold literally says "access to margin" | on one of its selling points. How is anyone without Gold | supposed to read that without mistakenly concluding they don't | have margin? | j2bax wrote: | It's just a minor UI discrepancy. Take it easy man! | [deleted] | avlewis wrote: | I really think Robinhood might go out of business before | Gamestop. | kbar13 wrote: | the instant availability of funds likely was a growth decision | for better on boarding UX. imagine getting a referral from a | friend who said hey get in on this stock, installing the app, | and having to wait 2-5 business days for ACH to clear. guessing | during normal operation this is an acceptable risk for | robinhood and users, obviously this isn't gonna fly when things | go wild like the last couple of weeks | cm2187 wrote: | Pretty much every broker does that when you buy stocks too. I | think most securities settle T+2, which means that you are | not the owner (and cash hasn't gone out of the door) until 2 | business days after the transaction. But the broker will show | your account debited immediately and will add the stock to | your portfolio in the UI too. It's well intended but | misleading. | MattGaiser wrote: | https://www.fidelity.com/learning-center/trading- | investing/t... | scsilver wrote: | Imo The whole gamma squeeze was based on options writers not | taking into account how quickly and army of new investors can | leverage this instantly available capital. | gruez wrote: | >5) RH then "margin calls" all of the people who had money | transfers pending at the time of GME purchase. | | Is there any evidence of this? The article seems to only say | that _some_ people got margin called, but didn 't say whether | those people were using "real" margin or was using the "instant | deposit" margin. | CrazyCatDog wrote: | Exactly! Maybe 15 years ago I had the same confusion with | fidelity---why are my trades on margin when there is ample | cash to support them? It's all about the speed of settlement | --margin unlocks the opportunity to transact in real-time. At | the time, I remember having an option to opt-out of margin | based transactions, but don't remember seeing that anytime | recently. | | For people playing the gme lotto (no wrong making---actually | wish I had time to join the party), settling any way other | than margin is effectively Russian roulette! | kylecordes wrote: | Right, there's probably no way to margin call people who have | already initiated the transfer of the money. RH has to float | it a few days for the ACH to complete. | dylan604 wrote: | Why in the world does ACH take so damn long to complete? Do | the electrons move slower in the ACH network? I make a | request to purchase, the funds availability in my account | are verified, the withdrawl is requested, then, waiting, | waiting, waiting. Why? This is the area I would love to see | "distrupted". Force the banks to honor the requests in | order they are received (not in the order they choose that | is most lucrative to the bank). If a transfer request comes | in for a value greater than my account has, decline the | transfer. | astrange wrote: | It's largely artificial and controlled by the Fed; it | can't really be disrupted since you can't replace the Fed | (PayPal and Zelle haven't replaced ACH), but they have | shaved off a day in recent years and plan to add actual | realtime settlement in the next few years. In the | meantime, the computers still work business hours and | take off weekends for some reason. | | > Force the banks to honor the requests in order they are | received (not in the order they choose that is most | lucrative to the bank). | | Didn't this already happen? | toast0 wrote: | ACH settlement is getting faster. There's been a big push | in the last few years, which will finish March 19, 2021 | with three same day ACH settlement windows, and from what | I can tell most (all?) ACH transactions under $100,000 | eligible for same day settlement, with the remainder | settling the at 8:30 AM Eastern the next business day (or | future day if future dated). | | What services banks and brokerages offer on top of that, | can be more limited of course, but that's the state of | the system. | dheera wrote: | RH is free and doesn't charge commissions. | | This should be a BIG RED FLAG that you are the product and not | the customer. In general, if you aren't paying, they have no | interest in keeping you happy. | Dylan16807 wrote: | They skim a little bit off each trade, but in a way that | doesn't cost the consumer more than the sticker price. It's | basically a commission and every broker does it, so no red | flag. | ghaff wrote: | For regular purchases, _most_ large brokerages don 't charge | commissions these days on most purchases. Not a particular | fan of RH but the fact that they don't charge commissions | isn't any more of a flag than in the case of Fidelity. | deelowe wrote: | Almost no one charges commission these days. | FabHK wrote: | A bit like the forex shops at airports that sell you the | pound for $1.47, and buy it for $1.27, but charge "no | commission"... | ghaff wrote: | Obviously brokerages still make money in lots of ways | such as low interest on cash accounts, fees on their own | mutual funds, etc. But the point is that there's noting | _unique_ about RH not charging commissions. | astrange wrote: | RH isn't free, you can upgrade to a paid account. | vineyardmike wrote: | It's pretty obvious (at least to me when I signed up) that the | "instant money transfer" means margin. Even if you don't get | the concept of "margin" specific to investing, you should get | that you're borrowing against the transfer when you use it. | | Edit: I just deposited more money into robinhood, and the | screen says "your funds will be transfered in next several | days... in meantime, we'll give you access to $X while you wait | for the funds to clear" | | Also, the UI separates your cleared money, from the instant | deposit money as 2 line items. | | It says that its not your money in the UI. | marcinzm wrote: | In the age of the internet (well 30+ years into it even) | thinking that digital funds can be transferred instantly | seems a pretty sane assumption. | ur-whale wrote: | It isn't. | | Settlement is complicated business. | | Complicated enough that it took the invention of Bitcoin to | take it out of the bankers hands and move it to the digital | realm. | | And even then, it was not instantaneous (10mn) until layer | two solutions appeared. | | Thinking that "money can be transferred instantaneously | because digital" is not a reasonable assumption. | kllrnohj wrote: | > Complicated enough that it took the invention of | Bitcoin to take it out of the bankers hands and move it | to the digital realm. | | That's not at all what bitcoin does or helps with. | | Settlement is not complicated. ACH is complicated, but | ACH isn't just settlement. Bank to bank wire transfers | are just settlement, and are regularly same-day (even | same-hour) with immediate fund availability. | | Hell, FedWire has been doing real-time near-instant | moving of money between accounts _since 1920_ | https://en.wikipedia.org/wiki/Fedwire | harikb wrote: | "15 minutes" to settle cash for next trade is enough | "instant" for most traders I think. The part that | irritates people is the "2 business days" problem in the | regular account. | | I have heard it is complicated, but can someone elaborate | the "computing cost" of a regular (non-coin) digital | transfer? | | Btw, transfers within 15 minutes are being done all over | the world without the fancy blockchain and coin. I do | understand the need for some transfers to be delayed , | say liquidating all of one's investment to take a few | days just for security reasons. | ur-whale wrote: | >can someone elaborate | | Well there's - for starters - : | | https://www.investopedia.com/terms/c/counterpartyrisk.asp | fastball wrote: | In the UK bank transfers are instant. | ur-whale wrote: | They very likely aren't. They just appear to be to the | retail crowd. | marcinzm wrote: | It seems to be in fact instant: | https://en.wikipedia.org/wiki/Faster_Payments_Service | ur-whale wrote: | There is precious little explanation in the article you | cite on how this is _actually_ implemented on the back- | end. | | Banking plumbing is notoriously harder than most folks | realize, and I wouldn't be surprised if there wasn't very | hard (and very small) limits to how big of an amount / | how many TPS you can actually execute with this system. | | I might be wrong, but I'd be surprised if you could move | 10M pounds instantaneously with this. | Alupis wrote: | Just like with Tesla's AutoPilot, naming does matter. | | If you tell people your car has AutoPilot, what would a | reasonable person assume? It can drive itself! And they | did, and people have died. | | When RH tells Average Joe that the funds are "Instantly" | available... that does indeed mean _instant_ to most | people. | Alupis wrote: | Pretend you're not a techie and not aware of how ACH works. | | "Instant" means instant to most folks. Not, "we're going to | lend you the money for several days and can then force sell | your stocks whenever we want". | | RH app even pretends the money is actually in your account. | There's a lot of deception that went into designing the app. | kinkrtyavimoodh wrote: | I AM a techie and even I would take RH on their word when | they say 'instant'. When I send money to India from a US | bank account via an intermediary (so that neither the US | bank nor the Indian bank are first-party to the | transaction) it is removed from my US account (in USD) and | reaches my Indian account (in INR) within seconds, and I | can see the balance in my Indian account and spend it right | away, so I have no reason to believe it can't happen | domestically when it doesn't even involve a currency | change. | | It's like this in most parts of the world. It's only the | perversity of the American banking system where money | transfers in this day and age routinely take 2-3 days and | no one thinks there's anything bizarre about that. | mensetmanusman wrote: | It's a balance, because instant transfer has some bad | side effects. | | E.g. if a scammer steals all of your money, it would be | good to have a day to try to cancel that... | philderbeast wrote: | reversing transactions is a thing even without putting an | artificial delay in the transaction process. | MattGaiser wrote: | Any broker that lets you immediately use the cash from a | sale to buy something new is also doing the same deception. | | If an account allows those, it is a margin account. | brigade wrote: | Uh no, as defined by Reg T, brokers are free to let cash | accounts immediately buy with unsettled funds. It's only | a violation if you _sell_ a security before the funds | used to purchase it settle. | | Margin accounts have a different legal definition and | regulations. | | Robin Hood is actually pretty unique in that its cash | accounts are _always_ restricted to settled funds; | instead they decided to optimize for margin accounts that | don 't allow for increased leverage. Which is not | something other brokers optimize for that I've seen. | Alupis wrote: | The typical RH customer... the one that invests spare | change, purchases fractions of a share, and thinks they | can get rich off a $100 investment, is not going to know | these nuances. | | There's good reasons the traditional brokerages have so | many rules... | | The facts seem to be RH saw a opportunity to prey on | uninformed individuals by making investing seem "cool" | and "stupid easy". | | RH deliberately did not do a good job of A) Putting | limits on newbies (like no margin!) so they do not get | themselves into trouble and B) Explaining the more | complicated concepts behind what RH was allowing | literally any mirror-fogging human being to do. | Dylan16807 wrote: | > RH deliberately did not do a good job of A) Putting | limits on newbies (like no margin!) so they do not get | themselves into trouble | | But someone who has initiated a money transfer and then | used that pending money to buy stock, technically on | margin, is _not_ getting themselves into margin-related | trouble. There is no good reason for there to be limits | here. | Tenoke wrote: | Plenty of people trading for 10k at Schwab don't know | either. Plenty of people don't know the details of their | bank account, too. I do blame RH but not for this.. | | People are always going to be uninformed about some | things, yes we should minimize that but we shouldn't make | services available only to the rich because of it. | Alupis wrote: | I'm not aware of any other institution that allows to to | take on debt by accident. | kortilla wrote: | Banks (overdraft) | Alupis wrote: | All banks offer overdraft protection when you open your | account, and they clearly explain what it would mean for | your account to go negative. | | Definitely not a good comparison. | Tenoke wrote: | You've never heard of a reversed PayPal or bank | transaction that leaves users with a negative balance? | db579 wrote: | OK so as a none techie why is it _not_ genuinely instant? | Why can 't my cash be exchanged for the stock in real time | (where real time is defined as within a minute or two say). | astrange wrote: | It's cheaper to do it slower - banks don't have to | constantly talk to each other all day. Russia actually | gave up on same day settlement and called it a | modernization. | | https://www.fintechfutures.com/2013/03/moscow-exchange- | adopt... | | Also, you may still be able to pay for stocks with checks | at some places, so the cash isn't always available. | nullc wrote: | RH can't win here: Previously they came under fire when a | user committed suicide after the RH app showed a | substantial negative balance due to an offsetting position | that hadn't settled yet. | | If they reflected it accurately they'd be showing a | negative balance until the funds arrived and some users | would think they lost all their funds. | | The real mistake is that they're extending margin to | uninformed and unsophisticated users. ... but pointing that | out just brings accusations that it's gatekeeping or | limiting access to people who aren't rich. | ziml77 wrote: | People hate the gatekeeping but then complain when they | get bitten by something they didn't understand. There's | only so much you can boil this stuff down and if they | don't want gatekeeping then they need to accept personal | responsibility when it turns out that they didn't know as | much as they thought they did. | joshspankit wrote: | They could certainly have won by being clear on each | screen. | | They specifically positioned as the "everyman trading | platform", and so even from the drawing board they knew | that the majority of app users would be people with | little or no experience. | | All they had to do to win was to say "Hey, I know this | balance looks bad, but it's actually not the final number | and here's why", and similarly: to be explicit about | _why_ they automatically make margin accounts, and then | to again mention that when people purchase stocks. | nullc wrote: | I think you might underestimate how deeply and | inexplicably confused people can get. | | I fielded a question from a friend who was furious that | his broker wouldn't let him exercise a call yesterday ... | a call that he was _short_. But he understood his | position enough to understand exercising the call would | be very profitable for him. Part of the reason that he | thought he could excercise it was because there were | notices about call exercise (presumably that it was still | available for people who were already long the calls). | | It's extremely hard to anticipate all the ways someone | might become confused and adding additional material to | resolve a potential confusion risks introducing other new | and novel confusion. There is a constant trade-off. | | I think the goal of an actual "everyman trading platform" | is essentially achieved by the sorts of interfaces | offered on 401k accounts-- geared around not-more-than- | daily trades of highly liquid securities (and if not | outright curated, at least focusing on diverse relative | safe funds). What RH is doing might be marketed as an | everyman trading platform but for many (most?) users it's | just a casino. | MattGaiser wrote: | Any broker that lets you do anything like day trading is | essentially extending margin. | | A true cash account has quite a few restrictions: | | https://www.fidelity.com/learning-center/trading- | investing/t... | nullc wrote: | Sure. And? It used to be the case (only a couple years | ago--) that you had to have an account worth at least | $10k and at least represent that you had some experience | to get approved for margin at most brokerages. | | Although it's been a long time, I spent the first decade | with a trading account without margin just fine. | ziml77 wrote: | As far as I know Robinhood only lets you trade on margin | if you have a pending transfer of money in. They also | have a very low limit on that of $1000. | MattGaiser wrote: | It is also margin trading if you buy and sell before | settlement. Buying a stock, selling it a day later, and | using the funds to buy something else requires a margin | account. | | https://www.fidelity.com/learning-center/trading- | investing/t... | kllrnohj wrote: | > It is also margin trading if you buy and sell before | settlement | | Not always, see situation #3 | https://www.sec.gov/oiea/investor-alerts-and- | bulletins/ib_ca... | | You need margin to engage in day-trading, but you can | sell a settled stock & immediately use the funds to buy | something else just fine as long as you then hold onto | that purchase for 2 days. | vineyardmike wrote: | it doesn't take techie knowledge, but I'll admit it takes | financial knowledge. | | Which IMO you should have before you do anything "complex" | like invest real money. | pnathan wrote: | It was not obvious to me. | | What my perception was, was that you were being loaned money | against the transfer you were sending in. It was _not_ clear | at all to me that it was a generic margin account. Because, | among other things, I consider margin trading to be a higher | risk activity than I care to engage in; if I had known that I | was signing up for a margin account, I would have not signed | up at all. | | That said, I've definitely been edu-ma-cated on this, and | I"ll be reading brokerage ToS more carefully from now on. | Tenoke wrote: | >What my perception was, was that you were being loaned | money against the transfer you were sending in | | That _is_ margin trading though. It sounds like you thought | only some trading on a loan counts as margin per definition | but you knew you weren 't trading with your actual money | but a loan which is the important part. | kllrnohj wrote: | https://www.investopedia.com/terms/m/margin.asp | | margin trading overwhelmingly refers to paying a | percentage as a collateral, _not_ a stop-gap loan to | cover ACH transfer delays. Yes you have to have a margin | account to trade with immediately deposited funds (thanks | ACH), but that 's not the typical usage of the phrase and | as such isn't what you'll find being described when you | look up the term. | | Particularly since you _can_ trade with unsettled funds | using a cash account in some circumstances, see situation | #3 here: https://www.sec.gov/oiea/investor-alerts-and- | bulletins/ib_ca... | kortilla wrote: | You're confusing margin trading with leveraging. Margin | trading is just using loaned money to execute the trade. | | The "dangerous" part of margin trading is taking a loan for | more than you have equivalent cash collateral of. | ibraheemdev wrote: | I'm confused. Why is everyone getting mad at Robinhood? Wasn't it | the market makers who stopped them from trading GME? And doesn't | Robinhood have the right to sell margin stocks bought on margin? | CarelessExpert wrote: | a) It's not clear these were margin calls. If they were, | absolutely, they were in the right. If these were cash | accounts, this would be... bad. | | b) The MM's almost certainly didn't force RH to shut down buys. | Current speculation is it was likely a combination of pressure | from clearing houses and their own internal risk management. | | Odds are they didn't have enough capital on hand to deal with | settlement given the level of volatility, and if they let more | people buy, it would've pushed them over allowable levels. | | This is supported by the fact that they've drawn down about | 500mm from debt facilities and announced a 1B funding raise | this morning | (https://www.nytimes.com/2021/01/29/technology/robinhood- | fund...), while throttling purchases of GME to no more than 5 | shares per account and no more than 10 options contracts | (https://robinhood.com/us/en/support/articles/changes-due- | to-...). | | And note, I say this is speculation because RH has been | completely opaque about what happened here. All they say is "we | have regulatory requirements", and we're left filling the | blanks. | | Edit: In fairness to RH, I should note that in their blog post | on the topic (https://blog.robinhood.com/news/2021/1/28/an- | update-on-marke...) from late yesterday they mention: | | "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." | | This does obliquely point to the issues I mention above, and is | enough to unpack what happened here _if_ you have an | understanding of the structural mechanics of stock trading. | Though it 'd be nice if they were a lot more direct in their | language, here. If I was a layman investor this'd look like | meaningless obfuscation. | | But it's certainly (somewhat) better than some of the early | interviews and reporting... | ineedasername wrote: | This might indicate that, at least for this sort of fintech, | "lean" can't be an option: there will need to be some form of | deep-pocket backing in order to stop the company from going | belly-up due to a short-term credit crunch. Fortunately RH | had sufficient funding for that, but it's conveivable that | the next time if there's an even bigger collateral call by | the clearing houses (or some other issue) they won't be able | to cover it-- sort of like Bear Sterns in 2008, which | collapsed more because of lack of confidence than actual | liabilities, which it could otherwise have weathered, but | panic set it, they lacked credit necessary to stay afloat, | and were basically liquidated at crazy fire sale prices. (I'm | Not saying they didn't have a lot of responsibility in their | downfall: they played fast & loose, and when that collapsed | it caused a general panic on them as a whole) | CarelessExpert wrote: | > This might indicate that, at least for this sort of | fintech, "lean" can't be an option: there will need to be | some form of deep-pocket backing in order to stop the | company from going belly-up due to a short-term credit | crunch. | | Honestly, I think this is tough. Building a regulatory | regime for a six sigma event is extremely difficult. | | That being said, there probably needs to be a better | mechanism--maybe a market wide 24 hour circuit breaker plus | some sort of emergency credit backstop--to ensure liquidity | for these types of events without disadvantaging any | particular market participants. | | I dunno, I'm making shit up here and don't know what the | hell I'm talking about. | | Seems complicated though... | | Now, I will say, if you ask me, it's about time to start | putting in even more short-side controls. | | Allowing these massive funds to build gigantic positions | with infinite loss potential clearly represents systemic | risk, particularly given we've seen over and over and over | again that, as much as these institutions are supposed to | be "professionals", their risk management is utterly | inadequate. | | Start with totally banning naked shorts. Increase margin | requirements on short positions. Maybe flat out ban | shorting over a certain percentage of float. How about | limit the amount of short-side risk a firm can hold as a | percentage of its total portfolio. | | RH is in many ways a victim of a much much larger | structural market dysfunction. | | > Fortunately RH had sufficient funding for that, | | So _that_ I don 't agree with. | | RH had to completely stop buy-side activity on their | platform yesterday and then _massively_ curtailed it today. | Not only did they not have sufficient funding to support | BAU, they still don 't! | | Meanwhile, the controls they put in place to allow them to | limp along single-handedly produced a massive drop in the | price. Then, to add insult to injury, they increased margin | requirements and margin called accounts, forcing | liquidation at substantially reduced prices, thereby | locking in losses for their clients. | | My guess is they're buying time, right now, by limiting | buy-side volume and dipping into credit lines, until the 1B | cash infusion lands on their books, all while preparing for | the class action lawsuits and congressional investigations. | | Oh, and that IPO? Expect that to be postponed... | PragmaticPulp wrote: | > If they were, absolutely, they were in the right. If these | were cash accounts, this would be... bad. | | As outlandish as this sounds, Robinhood signs everyone up for | margin accounts by default. | | Users must explicitly opt-out of margin to get a cash | account. Robinhood calls it "downgrading" their account. | ineedasername wrote: | Which is kind of crazy: It looks like their default margin | is 100% of your cash balance. | | It would be much more transparent to be opt-in & say "Hey, | you deposited $1k. If you want, we're willing to _loan_ you | an additional $1k. " I think more people might refrain from | margin trading if it was presented that way. But it would | reduce trading volume, and therefore a major revenue source | in the form of trading data they sell to market makers, so | of course they don't do that. | | As it stand though, to my outsider's eyes it makes their | theoretical liabilities twice their collateral. Normally | that's probably fine, gains & losses on large volumes of | divers stockes will even out. But in unique circumstances | (um, right now) the collapse of a single stock (or worse, a | highly correlated asset class) puts them on the hook for an | amount equal to their customers' losses. Considering their | retail clientele, it's probably fair to assume that many of | their customers can't (or won't) cover those loses by | depositing more cash... hence the suicide a while back. | CarelessExpert wrote: | Ugh, I know. Honestly, I will be more than happy if RH | doesn't survive this. Gamifying investing and all but | encouraging gambling behaviour, defaulting to allowing | trading on margin, and now their behaviour over the past | couple of days... there are _far_ better options out there | these days. | TeMPOraL wrote: | > _Why is everyone getting mad at Robinhood?_ | | They were the first to suddenly block buying (but not selling!) | GME when everyone in retail wanted to buy, and they refuse to | explain why. | | > _Wasn 't it the market makers who stopped them from trading | GME?_ | | Who knows? _They refuse to explain anything_. | | > _And doesn 't Robinhood have the right to sell margin stocks | bought on margin?_ | | Yes. That part of the anger is misplaced. But it's not a | significant part of the drama anyway. | tptacek wrote: | They haven't refused to explain why. Very Online People just | don't accept their explanation. | TeMPOraL wrote: | Well, they've published a blog post. And got CEO on the | news. But what they offered was not an explanation. | | The explanation they offered in their blog post: | | _" 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."_ | | That's not an explanation, that's just hot air. | | _What_ financial requirements? _What_ capital obligations | and clearinghouse deposits? _Which_ requirements fluctuate | based on volatility? _How_ do these requirements protect | the investors and the markets? And ultimately, how | _exactly_ any of this leads to them blocking buy orders on | $GME? | tptacek wrote: | We have so many sources, from multiple brokerages, about | increased capital requirements to clear GME and AMC | trades that it has revived discussions about whether | there are bad unintended consequences of the Dodd-Frank | regulations that centralized clearing, which have the | impact of transmuting private company risk management | policies (that protect systemically important firms like | DTCC) into global financial policy. But you've managed to | dismiss all this as "hot air", thus, I would suggest, | confirming my suggestion that Very Online People simply | don't accept the fairly clear explanation of what | happened. | | It seems reasonable to fault Robinhood for shitty comms | (though, as 'JumpCrisscross pointed out yesterday, the | general rule is "aviate, navigate, then communicate"), | but the endemic message board pathology is to use shitty | comms to justify conspiracy theories, which are more fun | to talk about than reality and take over these threads | like algae. | TeMPOraL wrote: | Everybody here correctly divined what you mention, and | then could confirm it after other trading apps went on to | actually shed some light towards what's going on. | | My point is exactly the shitty comms of Robin Hood - they | were the first to make this move, they gave no reasonable | explanation. It doesn't matter what we know now. What | matters is that RH's users didn't know _then_. | tptacek wrote: | In light of this comment I can't really understand what | you meant by the last paragraph of your last comment. | Were you actually asking? Or did you know, and know that | RH's answers to those questions were in fact not | nefarious, and just want to keep the drama alive a bit | longer? | TeMPOraL wrote: | I get the high-level picture, I'm somewhat unclear about | the details, and I'm not sure iff this even applies to | Robin Hood, because they didn't confirm any of this. | That's all irrelevant, though. | | The top-level question here was, why people are angry at | Robin Hood. My explanation is simple: they cut a lot of | people off buying at the moment they wanted to buy, and | provided no explanation. Any theory as to why they did | that comes from taking explanations of other traders and | the mechanics, not from anything RH said. | | If you think what they published was sufficient | explanation (and remember, the target audience is mostly | regular folks with even less clue about stock market than | I have), then why did RH's CEO get drilled by the news on | the same questions I'm listing? Apparently the | newscasters and their audiences also don't believe he | answered anything. | tptacek wrote: | First, it's Robinhood, not Robin Hood. | | Second: I'm not interested in the binary of whether or | not people are mad at Robinhood. People should be mad at | Robinhood for a variety of reasons, most notably that it | is an online casino masquerading as an investment app. | | I am very interested in the conspiracy theory that says | Robinhood halted GME orders as part of an effort to | protect hedge funds. That conspiracy was repeated by a | number of legislators yesterday, seemingly encouraging | ordinary people to follow on this terribly risky GME | bubble. The conspiracy appears to be false. | | If we don't disagree, we don't disagree. | TeMPOraL wrote: | Alright, so we were talking past each other. Sorry for | not picking up on it sooner. | | I don't subscribe to the conspiracy theory - the | "mundane", mechanical explanation seems perfectly | adequate. My only opinion on Robinhood is that the | current backlash they face could've been avoided if they | were communicating honestly and in details. The angry mob | ultimately isn't after them. | jedmeyers wrote: | > And doesn't Robinhood have the right to sell margin stocks | bought on margin? | | Only if they issue a margin call. But what if they were the | ones responsible for the conditions that lead to the margin | call in the first place (blocking buys on a specific stock)? | cardiffspaceman wrote: | Naturally, many longs were in on margin. RH asserted their | right under their TOS to margin call without notice. This | might be legal, but it looks like mining the retail investors | for gold. I think it should NEVER happen. A firm like RH | should instead gather its fortitude and fund itself to ride | such events out, and ALWAYS give accounts five days to | respond to a margin call. To do otherwise is to "undermine | market confidence" in the words of the SEC. | franklampard wrote: | The CEO denied anyone else influenced them to do what they did | yesterday. | secondcoming wrote: | I'm not buying it. Lots of other brokers also did the same. I | think RH were the first. I find it hard to believe this move | wasn't coordinated in some fashion. | CarelessExpert wrote: | > Lots of other brokers also did the same. | | And a lot didn't. | | Some (e.g. TD A) imposed increased margin requirements, but | that's perfectly normal for high volatility stocks or | options in margin accounts, and to be honest I'm amazed it | didn't happen sooner. | | This comes down to those brokers that are their own | clearing house versus those brokers that rely on a company | like Apex. | | It looks like Robinhood, Webull, IBKR, and others, all ran | into the same capital requirements issues as their | customers loaded up on a high value, high volatility stock. | Their clearing houses basically told them they had to pony | up more cash, or they had to stop allowing customers to | increase their positions. | | So this was "coordinated" insofar as they all used a | clearing house (I believe RH and Webull both use Apex, but | don't quote me on that) that made what amounts to a margin | call on the brokerage. | | To be clear, _this should not have happened_. It 's | entirely a function of the companies being under- | capitalized as a result of inadequate risk management | practices in this very strange market environment. | secondcoming wrote: | > they had to stop allowing customers to increase their | positions | | I can't get my head around the logic. They allowed people | to sell; you can't sell unless there's a buyer. But RH+ | blocked people from buying. | | Does a clearing house care whether a transaction is a buy | or sell? | CarelessExpert wrote: | > They allowed people to sell; you can't sell unless | there's a buyer. | | There are many other exchanges. The buy side of those | sells might be on TD Ameritrade or Schwab or other | brokerages where purchases were still allowed, not to | mention institutional buyers looking to hedge calls or | cover short positions. | | What this prevented was RH customers specifically loading | up on more stock. | | I think your confusion might be thinking "they" all | blocked buys, but that couldn't be further from the | truth. A couple of brokerages blocked buys, but the | majority did not. | depingus wrote: | Robinhood is its own clearing system. | | https://blog.robinhood.com/news/2018/10/9/introducing- | cleari... | | https://www.cnbc.com/2021/01/28/robinhood-interactive- | broker... | CarelessExpert wrote: | Ah, yup, I stand corrected, they moved off of Apex. I | told you not to quote me on that! ;) | | Nevertheless, they still have capital requirements they | have to adhere to in order to ensure settlement can | occur, and it appears they were on the verge of being | unable to meet those requirements. | bri3d wrote: | If you read the article at all, it clearly mentions that the | traders in question don't believe they bought the shares on | margin. Whether or not this is user error, who knows. And | Citadel have gone on the record repeatedly stating they did not | influence Robinhood's trading halt. The information available | makes it seem as though Robinhood were told they needed to | deposit more into their DTCC (clearinghouse) accounts to allow | trades to continue - essentially, that Robinhood got called on | their own margins at the clearinghouse level. | | https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea56... | | https://www.bloomberg.com/news/articles/2021-01-29/for-robin... | | https://www.nytimes.com/2021/01/29/business/dealbook/robinho... | midjji wrote: | There have been rumors of robinhood simply being buggy for | some time before this. Things like orders being processed | after being cancelled, orders being processed out of order | causing conflicts, orders being executed massively delayed | after the client threw an error message. Basically, if their | database infrastructure is buggy and unstable, then combined | with heavy load, something like this could happen. And | notably robinhood does not provide use client side action | logs, only server side actions logs on demand. | | I think it could have happened, but I very much doubt they | ever did it intentionally, and it is practically guaranteed | people would claim this happened to them, regardless of if it | did actually happen to them. | crazynick4 wrote: | If they process an order 'late' the price change could | swing in their favor and they would end up netting the | difference. FXCM got caught for this in FX years ago, | skimming fractions of pennies off the trades for millions | in profit. I'd be interested to know if those late trades | always went in one direction. | JohnTHaller wrote: | Robinhood blocked its users from buying or opening new | positions in GME. But allowed selling. From the outside, it | appears to be a coordinated effort to drive the price down to | protect the overgeneralized billionaire hedge owners. The CEO | of Robinhood did interviews to 'explain' why they did it, but | it was really just a word salad of an explanation. | | CORRECTION: "60% of its users owned GME at the time." appears | to have been incorrectly reported and since corrected. | reducesuffering wrote: | 60% of RH users owning GME is false (or if they do, it's | indirectly through ETF's that they can still sell). This was | misreporting and corrected by the original reporter. | | https://twitter.com/motherboard/status/1354956664974278656 | JohnTHaller wrote: | Thanks, corrected. | NoOneNew wrote: | They didnt allow people to buy GME. Only sell. Forced one sided | positioning. It's rather frowned upon. That's where a big | portion of hate comes from. | bpodgursky wrote: | Ok, but if they had banned selling and there was a large | price drop anyway (forcing investors to eat a loss, unable to | sell), they would have been catastrophically screwed legally. | kinkrtyavimoodh wrote: | Robinhood doing anything unilaterally about this sounds and | feels extremely sketchy and screams illegal to me (if it | isn't it should be). It's one thing if the SEC stops all | GME trade coz that would be fair across the board. But | Robinhood effectively being able to block trades for retail | while institutional investors do whatever screams market | manipulation. | bpodgursky wrote: | Yeah, I'm not at all defending blocking buys, just saying | that blocking both buys AND sells was completely out of | the question. | PragmaticPulp wrote: | Reading between the lines, they ran out of capital to post | the required collateral for the trades. | | They've been dancing around the subject because they don't | want to trigger a bank run, but this is likely why they had | to suddenly raise $1 billion and draw down their credit lines | yesterday. | | It appears they reached a point where they simply couldn't | afford to support the buy orders on the volatile stocks any | more. They likely had 2 options: | | 1) Shut down the entire platform until they could raise | enough additional capital to post the required collateral. | It's difficult to retain users and raise another round if you | literally have to turn your service off on the hottest | trading day every. | | 2) Shut down buy orders on the few stocks that were driving | the capital requirements over the limit, at least allowing | users to continue to sell. | | Frankly, I think the narrative that Robinhood users are | driving this situation has been greatly exaggerated. A few | weeks or months from now, I think we'll learn that the | majority of volume came from institutional investors rather | than retail users. Redditors may have sparked the situation, | but hedge funds are certainly capitalizing on it. | sidibe wrote: | Did they block people from buying or did they block people | from opening new positions? | andonisus wrote: | Yes. | ibraheemdev wrote: | Yes to both? | randylahey wrote: | When someone does this it means both the things you asked | are being answered in the affirmative. | nrmitchi wrote: | Even if that is the case (which I don't disagree with you on) | Robinhood has done, and continues to do, such a shitty job | education it's users on what they're actually buying that they | don't know this. | | So is this action Robinhood's fault? Not really. Is the fact | that the user doesn't understand this at all Robinhood's fault? | 100% absolutely. | bvirb wrote: | I think one way to look at it is that RH based their company | off of amassing a huge number of retail customers and selling | their deal flow. They then pissed off a huge number of those | retail customers with a surprise and un-announced change to | their trading rules (no more buying GME) in the middle of those | retail customer's massively successful effort to make a bunch | of money using their product. Their customers then pretty | quickly lost a bunch of money. | | Regardless of where the fault lies that seems like a recipe for | pissing of a lot of your customers, and from there it seems | reasonable that the customers would be pissed at the company | who sold them the product (as opposed to one of their | vendors/customers). | | In that light, and particularly w/ a finance app, it might seem | even weirder if their angry customers _weren't_ mad at | Robinhood and were willing to accept "it wasn't our fault" for | any reason. | CyberDildonics wrote: | There is a thundering herd of people with no experience buying | a stock at 100x what it was a few months ago and vowing to lose | their savings by never selling. It shouldn't be a surprise when | they ultimately get outraged at the biggest target. | MrMan wrote: | RH might well be incompetent - I dont understand why we are | discussing them when their offering is inferior to basically | all other brokerages. people should switch away from bad | products / services | jariel wrote: | Why does the media even remotely consider repeating the companies | 'marketing mission' BS when reporting on them? | | CNN spent years with these fluffy articles basically promoting | Robin Hood and their 'Occupy Wall St.' rubbish. | | "Democratize Finance" is PR, not reality, it shouldn't be | contemplated as part of the story. | gruez wrote: | If you read the other threads it's clear what's happening is that | robinhood's product isn't designed to cope with high | volatility[1]. Is this a flaw in their product? Yes. But then | again, they are a _discount_ brokerage for a reason. It 's not | any different than any other consumer product that shits the bed | during 99.9 percentile events. | | [1] Specifically, they're required by the DTCC to put up a | deposit on every trade their users make. During periods of low | volatility this is fine because they can come up with the money, | but when volatility goes up so do the deposit requirements, which | can cause them to become insolvent. This is further compounded by | the fact that their product invisibly hands out margin, eg. | "instant" deposits of $1000, or giving you the money before it | settles (2 days later). | nightski wrote: | Obviously the situation needs to be investigated. But I think | there is a real possibility they did nothing wrong here. | | Despite this, the main problem I see with Robinhood is that | with it's gamified UI, ease of access, etc... these 99.9 | percentile events are mainly what it is designed for. It's | encouraging people to pick up the "hot stock" on social media | on a whim. | | While there may not be legal repercussions for this, it's | fundamentally incapable of it's core purpose. If you are new to | RH you might not realize that the platform has outages all the | time and it costs its users a lot of money. It is straight up | dangerous to trade on this platform for the purpose which the | UI glorifies. | | Index funds have done a lot more to democratize finance than RH | in my personal view. While commission free sounds fantastic, it | comes with some very large hidden costs. | mike00632 wrote: | There are worse problems with Robinhood, all of which I'm | surprised people aren't bringing up more: | | 1) They've had outages where 100% of stocks were unavailable | for trading. | | 2) Their business model is to offer their users inferior | prices and then collect on the arbitrage (Yes, this is | illegal. Yes, they are in trouble with the SEC over it). | | 3) Robinhood isn't transparent with their users about the | risks of trading options and trading on margin. Some of the | barriers they've removed for their users to make risky bets | were there for regulatory reasons, it's not just a matter of | their app being over-gamified. | alexpetralia wrote: | (2) is false. | | You can't offer "inferior prices" to customers. It's called | the Order Protection Rule of RegNMS. You must price improve | the customer, by law. If a bid-offer is 23.01/23.02, | Robinhood (but actually Citadel/Two Sigma) _must_ transact | with a buy order at 23.0199 or less (the subpenny rule only | applies to quotes, not actual trades). The reason Robinhood | sells this order flow is because Citadel/Two Sigma would | rather collect a spread of almost 1 cent (23.0199-23.01) | from _you_ rather than a hedge fund, who may conceivably | move the market against the market maker. They are "paying | for order flow" (PFOF) - much less than 1 cent - to collect | the 1 cent spread from you. | | Robinhood is in trouble with the SEC for a failure to | disclose this relationship to customers, _not_ for having | the economic arrangement to begin with. | filoleg wrote: | (1) is pretty weak too. | | Yes, they had outages where 100% of stocks were | unavailable for trading, which is factually true. What | makes that assertion weaker is the fact that other | brokerages had the same kind of outages too, and not with | less frequency of occurrence either. Which is why (1) is | not really a meaningful point against RH specifically. | pessimizer wrote: | That other fruits are rotten does not weaken the | assertion that this particular fruit is rotten. I don't | think anyone is claiming that every fault that Robinhood | has is unique. | Dylan16807 wrote: | But it _does_ weaken the argument of "why isn't everyone | bringing this up more?" | | If they have a normal amount of outages, then the outages | aren't brought up because that's boring. | filoleg wrote: | >That other fruits are rotten does not weaken the | assertion that this particular fruit is rotten | | Services occasionally experiencing unexpected outages | doesn't make them a rotten fruit. By that metric, | literally every single complex online service in | existence is rotten. Given how rare those outages are, | and how they are all not happening at the same time | across different brokerages, I wager to say it is normal | with nothing nefarious going on. Unless you expect a | complex online service to have zero downtime ever, which | is just unrealistic. | MrMan wrote: | thank you | newacct583 wrote: | That I think is the real scandal here. Robinhood was built to | market to (and in some sense coevolve with) the | wallstreetbets culture of crowd-sourced market manipulation. | And that was a great growth hack. | | Until it grew enough that the crowd source market | manipulation was... actually manipulating significant | markets. GME has been ballooned to the tune of something like | $13B over the past few days, based almost entirely on a | flawed understanding of short trading. | | And absent any discussion about Robinhood in particular, I | think we need to be asking whether or not this crowd of | people who didn't quite understand shorts were fed those lies | at the direction of users who did. Someone has (or will have) | made a ton of money here at the expense of the late-arriving | GME traders. It seems like we should find out who. | Miner49er wrote: | What is the flaw in the understanding of shorting? | newacct583 wrote: | Most people seem to have been led to understand that the | short leverage of 140% meant that when the short call | happens, the hedge fund will "have to buy more stock than | exists" to settle, and thus that something like an | infinite price spike will happen. The same people tend to | refer to this as a "naked short", which it is not[1]. | Most of these people seem to have latched onto a theory | that the short calls are all coming due today and that | they NEED to buy as much GME as possible ahead of the | metaphorical rapture. | | But the hedge funds in question closed out their short | positions days ago. The stock right now is being propped | up by simple (and misinformed) speculation. And | effectively all of the purchase price that people are | paying right now is going to end up being transferred to | the people with earlier positions who are getting out at | the peak of the bubble. | | [1] A naked short is a short sale where no underlying | stock was borrowed first. This is a crime, but only | possible for certain very privileged traders with control | over the various tracking records. Leverage over 100% | just means (for example) that you borrowed a share, sold | it, then later went to the same buyer and borrowed it | again. You end up owing them "two shares", but not | necessarily the _same_ share twice. In practice what | happened is that as the stock started rising, Melvin | closed its position buy repeatedly buying and returning | shares to the tune of 140% of the capitalization. (Edit | to add: it seems likely that it did so in combination | with a bunch of loans and favors from other hedge funds | with the ability to buy and hold GME across the | inevitable collapse. The WSB folks complaining about | hedge fund corruption and insider dealing aren 't wrong.) | [deleted] | mike00632 wrote: | ^^^^ so much this. | | I keep seeing over and over again that hedgefunds MUST | buy stock if the price goes up, and that 100% shares | short is some sort of trigger that means everyone must | buy. | | There is another common misconception that stock cannot | be created, that there is some finite supply. People | should take note that AMC has (shrewdly) issued a lot of | new shares in response to their stock price climb. | arcticbull wrote: | There's a few issues for the short sellers though, one is | that their brokers are charging them interest on their | borrowed shares as a function of their share price. The | higher the share price, the more interest they have to | pay. Not just that, the harder the shares are to borrow, | the more interest they have to pay. This creates a | ticking clock. During the initial BYND squeeze, some | people were being charged 100% APY. | | Then of course as it goes up and they bump up against | their personal (or their brokers' personal) risk | tolerance, they're forced by _them_ to buy. | samstave wrote: | How does one borrow a share of stock? | arcticbull wrote: | Go to a broker, search for the security you're interested | in but don't have a position in. Hit sell. You will | receive cash, and you will see a negative number of | shares in your account. | MattGaiser wrote: | > But the hedge funds in question closed out their short | positions days ago. | | I have asked people about this. They accuse me of buying | into corporate media propaganda. Melvin must still be in | and be near exploding in their minds. | nrmitchi wrote: | At this point "Melvin Capital's position" seems like more | of a conspiracy theory than anything based in fact. | nrmitchi wrote: | > And effectively all of the purchase price that people | are paying right now is going to end up being transferred | to the people with earlier positions who are getting out | at the peak of the bubble. | | There is _at least_ one other group that is likely | benefiting massively through all of this: Those who have | been selling options. There are a lot of levels here, but | when this is all done I suspect that the aggregate spent | by retail traders on premiums for options that expired | worthless will eclipse the final market cap of GME. | | When there is this much volume, you have to remember that | _someone_ is in the middle of it taking a tiny fraction | in order to facilitate it. These people are likely doing | a very good job limiting their risk, and just printing | money right now. | | I suspect that overall we'll end up with "Hedge Funds" | (as an aggregate) in likely the same positions, | intermediaries and market makers _wayyyy_ up, and Retail | (as an aggregate) way down. Which, I guess is the system | that people are virtual-rioting over. | [deleted] | majormajor wrote: | "The short interest staying at a similar range means | nobody has closed out their old positions so we can keep | squeezing" seems to be a big one. | | If you assume that new short positions are being opened - | and at the recent prices, that's not an entirely | unattractive thing to do - then the short interest | staying steady suggests some positions being closed and | others being opened, and tells you little about single | actors. | | And anyone opening short positions at today's prices is | basically "resetting the clock" on how long you'd need to | squeeze to get them to back down... so if I were to sell | it short now, I'd be betting that some folks making some | of their first investments ever to ride the hype train | are going to be more likely to blink first than I am. | ticviking wrote: | The WSB guys are talking about this in theie coded meme | terms about diamond hands and it's not over til it's over | language. | | They're basically loudly signalling that they will not | sell until the short float is down. | TheOtherHobbes wrote: | Speculation: | | We know how easy and cheap it is to buy anonymous Twitter | and Facebook accounts and use them to create a convenient | illusion of crowd sentiment. | | We also know that Bitcoin appears to have been pumped and | dumped through a number of cycles. | | https://www.financemagnates.com/cryptocurrency/interview/cr | y... | | If - hypothetically, ignoring the nominal legalities - it | were possible to do the same on Reddit without leaving too | obvious a trail, what's to stop one or a small number of | players from running a virtual operation that creates this | kind of sentiment for trading? | | And then betting for or against it - or perhaps both, in | sequence - for some very easy money? | samstave wrote: | Do we know if any of the C-Suite of GME sold a ton of | shares during this debacle? | astrange wrote: | If they did, it would be a coincidence, since corporate | officers usually can't sell shares whenever they want. | | GME might have sold new shares though; they were already | set up to do this at any time. | | https://thefly.com/landingPageNews.php?id=3209193&headlin | e=G... | bunnyfoofoo wrote: | Some did a couple weeks ago: | https://finviz.com/quote.ashx?t=GME | | Scroll to the bottom, there's an SEC filing section. | | Nothing to write home about though. | vincentmarle wrote: | > But I think there is a real possibility they did nothing | wrong here. | | They did blatantly lie about their liquidity problems. They | didn't mention it in their fluff blog post. Their CEO smirked | on national TV and insisted it was not about liquidity. Turns | out it was. That's the problem. | valuearb wrote: | If he admitted how close they were to insolvency Robinhood | would be out of business and no one would be getting their | trades closed. | | Financial firms never warn about liquidity issues to | prevent a run on their bank. | WrtCdEvrydy wrote: | No sector of the finance industry is ever honest about | liquidity... too much fear of a panic. | swalsh wrote: | The messaging was certainly problematic. But the actions | seem to be done in good faith. | cma wrote: | > Despite this, the main problem I see with Robinhood is that | with it's gamified UI, ease of access, etc... these 99.9 | percentile events are mainly what it is designed for. It's | encouraging people to pick up the "hot stock" on social media | on a whim. | | Landline phones and CNBC in the dot com boom and after could | do much the same. They had a show where a guy just yelled out | symbols all angry with cheesy soundboard effects. Only | difference was higher commissions and no buying into | fractional shares and stuff. | ghaff wrote: | Commission free is pretty much the norm these days. There are | exceptions, but the norm. | | I don't disagree that, for most people, just investing in | index funds is probably the best approach. | YinglingLight wrote: | Citadel fulfills most of Robinhoood's orders. | | Citadel owns Melvin Capital, which is collapsing as we speak. | | Our new Treasury Secretary Janet Yellen has been paid $810k by | Citadel for her orator skills. | | Our new Press Secretary stated that Yellen will not recuse | herself from any potential involvement with GME. | Miner49er wrote: | > [1] Specifically, they're required by the DTCC to put up a | deposit on every trade their users make. During periods of low | volatility this is fine because they can come up with the | money, but when volatility goes up so do the deposit | requirements, which can cause them to become insolvent. This is | further compounded by the fact that their product invisibly | hands out margin, eg. "instant" deposits of $1000, or giving | you the money before it settles (2 days later). | | Assuming they aren't allowing any margin to be used on GME | (including instant deposits) how could they possibly not come | up with the money? Does that mean they are doing other stuff | with users money and only fractionally paying for shares? The | clearinghouse (normally) just assumes they are good for it if | they ever need to come get it? | | EDIT: Apparently it is a fractional deposit that the clearing | house requires. Apparently though, it can't be client money. So | my next question is, why is that? | tonfa wrote: | > So my next question is, why is that? | | Don't most brokers allow you to continue trading before | settlement? (so someone has to put collateral for that) | | I guess most traders would complain if they had to wait two | days after every trade :) | | Edit, maybe best is to look at the explanation from Money | Stuff: | | > But at some level of volatility things break down. If a | stock is really worth $400 on Monday and $20 on Wednesday, | there is a risk that a lot of the people who bought it on | Monday won't show up with cash on Wednesday. Something very | bad happened to them between Monday and Wednesday; some of | them might not have made it. You need to make sure the | collateral is sufficient to cover that risk. | hinkley wrote: | > Don't most brokers allow you to continue trading before | settlement? | | Hasn't that changed a bit though? I'm trying to recall what | the policy change alert I got a few years ago. Something | about you can buy shares with proceeds of unsettled sales, | but if you sell the new shares before the previous sale is | settled, your account can get flipped into some state where | you have reduced trading abilities for a period of time. 30 | days? | | It was implied that "the SEC made us do it". I think it was | meant to put the kibosh on day trading. You can still day | trade, but your returns are cut dramatically by requiring a | larger cash position. | [deleted] | Miner49er wrote: | > Don't most brokers allow you to continue trading before | settlement? (so someone has to put collateral for that) | | Sure, but I wonder why RH didn't just change their rules to | being that you won't be able to trade instantly with any | sold GME, and then used client funds as collateral? This | seems much better than stopping buying altogether. I | suppose maybe the code wasn't in place for something like | this, idk. | bilbo0s wrote: | _and then used client funds as collateral_ | | Huh? | | You realize that's illegal right? | gruez wrote: | >and then used client funds as collateral? | | check the edit in the parent's comment. It's expressly | prohibited. | tonfa wrote: | > and then used client funds as collateral? | | But that's not necessarily settled right? E.g. client | sells AMC, then buys GME. At this point RH doesn't have | the cash to for it (the settlement should clear, but it | still needs to come up with the collateral). | | (I'm not an expert so take it with a grain of salt, but | that makes at least some sense :)) | jmalicki wrote: | The fraction became 100% on GME, which is typical for highly | volatile stocks. That's why they had to disable trading in it | - they could cover the small fraction, but not 100%. | himinlomax wrote: | This explanation is plausible, but then the question becomes | RH's lack of openness, and its CEO's laughable non-answers in | interviews on the issues. | | Their hands may be tied here, but they look bad any way you | look at it, and for good reasons. | valuearb wrote: | The only honest answer the CEO can give is "we are a thinly | capitalized startup with a unique business model, that meant | when the DTCC jacked margin requirements on BME further | trades would have pushed us into insolvency" | | That's not the kind of message any CEO wants to put out in | public, | rdiddly wrote: | It can be spun. "We did it to ensure the stability and | integrity of our platform." | crazynick4 wrote: | I think volatility is an issue for any broker. | | Does RH wait to confirm an order until they find a counterparty | or does their system just accept it and then find someone to | clear it with after the fact? If it's the latter, and they find | themselves in a situation of extreme volatility/zero liquidity, | they could end up holding the bag. | [deleted] | psychlops wrote: | I wouldn't call it a flaw. Their product can handle the high | volatility, their finances can't. At least, that's what we | believe is true since they got a $1B loan yesterday. But Tenev, | the CEO, was on TV yesterday saying that it wasn't a solvency | issue...so.... | | Interactive Brokers Chairman, Petterfy, highlights that in his | interview. He also said it caused clearing issues and that his | firm could afford it. They just, you know, decided to halt | trading cause he _thinks the squeeze was illegal_. | valuearb wrote: | The only thing Robinhood is lying about is their solvency. | bilbo0s wrote: | I agree. | | I would bet they don't have available funds. They framed it | as, "We're stopping this to help you." But the reality was | more like, "We're stopping this because we can't legally | facilitate any more of these trades since we don't have the | money to spare." | pishpash wrote: | It is both, they need to help themselves and help | customers who would be harmed if Robinhood had gone under | suddenly. An orderly unwinding is better for everyone. | psychlops wrote: | I believe this as well. He did not do himself any favors | and let himself be cornered on two interviews. | | I respect that he cannot come out and say they have | solvency issues, as his accounts would empty fast turning a | potential solvency issue into a real one. But he didn't | seem to even have a clear idea of, nor a numerical way to | explain why they were having settlement issues. | | My guess is that they will be spending more money in their | clearing department this year. | shawndrost wrote: | Do you believe that about all the brokerages that halted | trading on GME et al? Or did Robinhood call a halt due to | insolvency, and coincidentally, other brokerages called a | halt for unrelated reasons? | pmiller2 wrote: | Suppose you're right. How do you explain the $1B loan | Robinhood took out? | rdiddly wrote: | Taking out a loan, in itself, doesn't indicate | insolvency. If it did, nobody would lend, ever. Now | defaulting on a loan - that does indicate insolvency. | valuearb wrote: | I suspect if they didn't have liquidity issues, they were | just quicker that Robinhood to prevent them. I'm sure | they didn't want to tie up a huge part of their | collateral in BME. | justforyou wrote: | If the SEC had done their job RH would have been shut down | ages ago due to their platform's facilitation of rampant | identity theft. | hinkley wrote: | Tenev said they didn't have a _liquidity_ problem. I think | he lied about that, but I think they 're solvent. The | reserve system required by the securities people mean they | have to have a cash position proportional to the total flux | of trades. There were some laws passed a few years back | that reduce how quickly you can turn unsettled trades into | new trades. Without that they'd probably need a much larger | cash position. | | I suspect he was thinking of bank runs. If people think | they aren't solvent, then it becomes true. If he says they | have a liquidity problem (which I agree the loan they took | out is a confession of that fact), then they could have a | solvency problem if everyone without a margin account | cashes out. | cma wrote: | Could be something like if Citadel goes insolvent and only | makes their payments for flow to Robinhood on a delayed | schedule, then Robinhood may not get paid for the last | quarter or year of income and incur huge losses. | astrange wrote: | Citadel (who loaned Melvin a lot of money) and Citadel | Securities (who pay RH for order flow) are not the same | company. | pageandrew wrote: | Sorry, as a noob, why does Robinhood need lots of cash to | facilitate trades, and what connection does that have to | volatility? | hi5eyes wrote: | [irrelevant link] | pageandrew wrote: | Couldn't Robinhood just disable margin trading without | disrupting cash trading? | tedunangst wrote: | This would require RH to explain to their users the | nuances of moving violations (buying a new stock after | selling an old stock before settlement) and that gets | messy. Nobody wants to be bothered by rules when they're | about to make it rain day trading. | throwaheyy wrote: | That link was pretty irrelevant to your original | question. | | The answer is that even cash-settled trades take 2 days | to settle, which most traders would consider an | unacceptable wait to take delivery of their shares in | this day and age. Seeing the shares appear in your | account immediately after buying is merely an abstraction | provided by brokers, and the brokers need to have their | own cash on deposit to secure this. | nrmitchi wrote: | The person you are responding to posted that link... | incorrectly? There is no context, but it's just not | directly applicable. | | Yes, if Robinhood is letting people trade on margin, then | Robinhood needs to have the cash to support that margin. | That is one thing. And they have largely, as far as I | know, disabled that already. | | The other part is that they are required to have reserves | and collateral for trades that are "cash" until they | settle, as all brokerages are. I am not an expert here, | but my understanding is that this requirement increases | as volatility goes up, as as correlation of trades goes | up (ie, if all of the volume is in a couple stocks, it's | highly correlated, and thus the reserve requirement is | higher). This must be, by regulation, _Robinhood 's | money_ (ie, not customer funds), and Robinhood just | didn't have the money to keep opening new positions. | | As for the underlying _why_ of the requirement, I don 't | know. I assume it has something to do with preventing | brokerages from accepting increasingly risk trades during | high volatility events (which, ya, is what's happening | right now). But either way, it's the current rule, and as | a brokerage, they have to follow it. | psychlops wrote: | Brokers are required to keep a certain amount of capital on | hand to ensure that customers can be made whole in case | some sort of risk arises. | | The amount of money they are required to keep on hand | varies according to the risk of the investment (among other | things). The increased volatility translates into higher | risk and therefore requires the broker to keep more money | on hand. | | I haven't seen the exact amount in this case other than | hearing total amount of $14 billion and that it would be a | percentage of that. | desertrider12 wrote: | For shorts and trading on margin that all makes sense, | but I still don't get why that would prevent retail | investors from buying regular shares with their own cash. | Where does the broker assume risk in that transaction? | | Edit: nrmitchi below explained how the broker is legally | required to have some extra collateral on hand in between | accepting and clearing the order. | jyrkesh wrote: | I think this thread did a great job of explaining how | volatility can affect collateral requirements: | https://twitter.com/KralcTrebor/status/1354952686165225478 | treis wrote: | It takes a couple days for stock trades to settle. While | that process is happening Robinhood has to keep collateral | at the clearing house to ensure that when settlement | happens the money is there to pay the other party. | | Volatility makes that requirement go up because of the time | risk. If you agree to buy something for $300, fail to | settle, and it drops to $20 in the meantime that | counterparty is out more money. | [deleted] | ogre_codes wrote: | > Their product can handle the high volatility, their | finances can't. | | Multiple times both here and previously, RH has demonstrated | that their product cannot handle unexpected high volumes of | traffic. | | Also, their finances _are part of_ their product. They are a | financial services company. Money and finance is what they | do. | psychlops wrote: | I admit, I am not aware of their products capacity, but | they never mentioned it as an issue, nor has their product | crashed this week (that I am aware of). It was a conscious | decision to stop trading. | | They cannot control the volatility of the products they | sell and the subsequent increase in the cost of doing | business. They can't control their whole supply chain and | do not sell GME and other products out of inventory so have | to buy it from someone else. | ogre_codes wrote: | The problem here is fundamentally Robinhood is in an | industry where screwing up has huge consequences for | their customers. | | If Apple has a supply chain issue and my phone is 10 days | late, I might be irritated but the most it will cost me | is a few days frustration. | | If Robinhood fails to execute a trade for me, it can _and | has_ potentially cost a user tens of thousands of | dollars. | | What happens when the share price starts to give way and | Robinhood fails to execute trades as the share-price is | dropping rapidly? | | If I owned shares in GME (or AMC etc) on Robinhood, I'd | be getting out now because they've done nothing to | suggest they are capable of serving users when things get | sketchy. | | I don't own GME, and will never put money in RH at this | point. | [deleted] | 99_00 wrote: | The Gamestop incident is a very counter to the Robinhood brand so | very damaging to the company.. Communication was not handled | well. A good lesson for everyone. | | People shouldn't be trying to figure out what's going on by | digging deep in forums and social media. CEO should have been | front and centre the day it happened. Hindsight is 20/20. A | lesson for all. | | Doesn't help that opportunistic politicians jump on it to raise | their profile. | tgb wrote: | I'll make a little prediction: the negative press Robinhood is | receiving will be out-weighed by the fact that so many people | are getting interested in stocks due to this. I think they'll | be better off despite this debacle in a month. (Though this | doesn't include the possibility that they broke a regulation | and lose a court case or that congress is spurned into action | and regulates them out of business somehow.) | bob1029 wrote: | This is my take as well. Robinhood getting raked over the | coals is a bi-annual tradition which has been practiced for | several years now. | | It's not like they really had a choice or were fundamentally | at fault for anything in this case. Contrast with prior | incidents which were wholly related to bad engineering | practices. | | Getting a margin call from the DTCC isn't an optional | inconvenience. Perhaps Robinhood could have had more buffer | available to deal with this scenario, and that may wind up | being the regulatory outcome of all of this. | nimos wrote: | Saying you can only sell an asset but not buy is clearly going | affect the price - regardless of the reason they did it. | | If a broker can't do their job they should be forced to shut down | completely until they can. | | Its pretty clear they don't have the liquidity/assets to handle | their customers transactions. Letting brokers manipulate asset | prices so they can avoid shutting down is a dangerous precedence | to set. Really hope IB/RH and everyone else involved gets blown | up by this. | jariel wrote: | It's actually rational. | | They're flooded and can't handle the scenario - but they | definitely can't stop people from selling because that would be | locking them into positions. | | I don't like RH as a company, but if they are facing | difficulties, this is a reasonable thing to do. | | People are giving RH heat for this most recent policy but | frankly that's not remotely the reason they should be upset. I | for one, basically believe RH on it. The reason 'RH' is 'shady' | is for their normal business practices. | | Frankly, the notion of 'free option trading for unsophisticated | investors' sounds like the biggest hustle ever. Surely there | are a lot of folk using it who really know what's what, but | mostly not. | valuearb wrote: | They didn't manipulate squat, they were fighting to save their | life. If they were manipulating GME price they would have tried | to pump it higher because each time it crashed their DTCC | margin requirements went up. | | Driving GME price down before all these trades clear likely | kills Robinhood. | nimos wrote: | You really think stopping all buying and only allowing | selling doesn't manipulate the price? | | I fully agree they were fighting to save their life. They | can't handle their customer trades they should shut down | until they can. | | Really they should have a system to only allow buying with | settled funds. I'd be fine with that. | valuearb wrote: | Robinhood would have no customers if it implemented that | system. | | And Robinhoods actions affect on GMEs price was likely | small. The investing world is far larger than Robinhood, | and Citadels own statistics show retail investors have been | net sellers of GME since Monday. | | And again, every time that GMEs price crashed, Robinhood's | collateral requirements increased. Why would they try to | kill themselves? | | Saying they manipulated GME trading is like saying one | pirhana quitting the school is manipulating the feeding | frenzy. | bordercases wrote: | What's so important with Robinhood making it out alive? | valuearb wrote: | If it doesn't every Robinhood trader will have their | account locked, and will only ever get paid a fraction of | its value years from now. | | While that is more than fair for WSB traders who caused | this mess, there are likely many hundreds of thousands of | innocent customers who may have not bought one share in | GME getting the same punishment. | yowlingcat wrote: | > They didn't manipulate squat, they were fighting to save | their life. | | These two things don't seem mutually exclusive. Actually, it | seems like they'd be positively correlated. If you're | fighting to save your life, aren't you more likely to resort | to manipulation? And certainly when the cost of fines is | several orders of magnitude less than the cost of closing | your position at that point, it seems downright economical. | lovehashbrowns wrote: | It's entirely possible that RH doesn't care if the hedge | fund loses all its money from the short and RH's buddy | Citadel has to do a bail out to the tune of billions. In | that scenario, RH still has to pause buy trades to save | their own ass because they're running out of cash they need | for the collateral that's required. | | Do note that RH is not the only one that paused buy trades. | | What I find more suspicious on RH's part is the timing of | this all. RH should have known well before this week that | GME was going to be a highly volatile stock. They should | have already reached out to investors and banks for credit. | They should have already had over a billion lined up to | take on the volatility. I can understand other brokers like | TD not being prepared because they might not be used to | this Reddit-driven WSB volatility. RH, on the other hand, | should have been ready. They've been aware of WSB and their | antics since its inception. Yet they waited until Thursday | to pause trades. That's where I start to go into conspiracy | mode. | valuearb wrote: | Yes, infinite credit lines are easily arranged within a | one week notice for a thinly capitalized broker. | | Dont you realize how big a $1B credit line is for a | broker with so few assets such as Robinhood? | lovehashbrowns wrote: | Sorry just to fully understand, "credit lines" is the | issue here, yes? | valuearb wrote: | No, the issue is that Robinhood is a startup brokerage | with likely very few actual assets. Go try to get a $2M | short term loan using a $1M home as collateral. You will | get laughed out of every bank in the country. | | Now try to get investors to invest $2M for half of your | home, again the mirth and laughter will be rampant. | Eventually you will find someone to lend or invest $700K | but it will take months to close and meanwhile Robinhood | is dead. | lovehashbrowns wrote: | Oh, I gotcha now. I am going off of this story: | https://www.wsj.com/articles/robinhood-raises-1-billion- | to-m... | | Reading closer, they supposedly got ~$500 million from | its banks as loans and $1 billion from existing | investors. My issue is in not knowing when this was all | initiated and how long it takes for the money to go from | its current place(s) to Robinhood. | | Regardless, I am still learning all of this so thank you | for replying and adding clarity. | [deleted] | valuearb wrote: | If Robinhood wanted to manipulate the GME market, they | would have banned selling, not buying. Driving GMEs price | lower increases Robinhoods collateral requirements and | pushes them closer to bankruptcy. | urda wrote: | Illegally stopping all buying and only allowing sale of an | asset or stock is market manipulation. | valuearb wrote: | There was nothing illegal in what Robinhood did, and every | broker has the right to determine which instruments they | are willing to sell or buy, at any time. | | Would you prefer Robinhood to implode so you have to wait | years to get a small fraction of your account paid? | astrange wrote: | Brokers can't stop you from selling shares; they're your | shares. Only the regulator can prevent sales. | | This made what RH did look unfair, but stopping buys was | all they could do. | paulgb wrote: | I understand where you're coming from, but if they halted | selling and it came out that people were stuck in positions | they couldn't sell out of, people who wanted to sell and | couldn't would be even madder than people who wanted to buy are | now (and might also have more legal standing.) | | Put another way, just because they have to halt buying, they | don't owe it to their customers who are holding to _not_ allow | other customers who want to sell to do so. | nimos wrote: | Yes definitely, it would have been a total shitstorm. | | I think that shitstorm is preferable to allowing brokers to | manipulate asset prices to protect themselves. | filoleg wrote: | >I think that shitstorm is preferable to allowing brokers | to manipulate asset prices to protect themselves. | | I don't think that "biting off the nose to spite the face" | is the approach I would prefer when it comes to my money. | And, I think, a lot of people would agree with me this. | | Also, the whole "protect themselves" line sounds like pure | outrage without thinking about the actual consequences. If | your brokerage doesn't "protect itself" and implodes, what | do you think is gonna happen to the value of your assets | sitting in that brokerage (as well as the assets of | everyone else in that brokerage)? | fairity wrote: | RH and all brokerages should be held accountable for the losses | their clients sustained due to these trade restrictions. | | But, I don't RH deserves to be singled out & vilified when many | other brokerages ran into the exact same problem as RH and solved | it with the same trade restrictions. | | Overall, I've been happy with the effect RH has had on retail | investing. Primarily, other brokerages that used to charge me | $5-8 commission per trade have now been forced to substantially | lower their fees. | kleer001 wrote: | > all brokerages should be held accountable for the losses | their clients sustained due to these trade restrictions. | | That's not how a market works in two distinct ways. | | 1 - buyer beware | | 2 - businesses cannot be not responsible for restrictions | placed on them, see 1 | Areading314 wrote: | If its free, you're not a customer. You're the product. | crazynick4 wrote: | Rh was probably losing money on widening spreads. If a client | buys and holds and volatility increases and spreads widen, when | the client closes out the trade, Rh will eat the difference in | the spreads. If a client opens a short position and spreads | widen, RH will make a net gain when the client closes out. I | think this is why they halted people from buying and probably why | they closed out the trades for clients, I would guess it was | during periods of lower volatility. | | I don't know how legal it is for them to do that but when | volatility is high like this that's when a broker like RH can | really go under. | amluto wrote: | I am pretty sure Rh doesn't take positions the way you're | describing. | crazynick4 wrote: | I am pretty sure they're a broker who hedges their positions | with a counterparty. Otherwise, they would be taking on the | risk themselves? | | But I think my math was backwards on the closing transaction. | If the spreads widen they would technically end up net | positive. | tedunangst wrote: | They're a broker, not a market maker. They don't have | positions. ___________________________________________________________________ (page generated 2021-01-29 23:00 UTC)