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...
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.
The point is you are technically margin-trading when you do that. From the broker's perspective you are trading on margin until your prior trades settle.
As a onboarding hack I can see this as a great idea to help people get their first $100-$1000 on the market fast.
But the chance of an eventual margin call is almost certain in the long run (as has happened here).
It’s time to talk ethics in tech, this was a design decision to not unwind this once the user was embedded or otherwise clarify this upfront.
Margin call risk totally must be disclosed and is legally required (in Australia where I am) to be disclosed by any investment professional you paid to setup this sort of arrangement. I’d be fairly confident the same applies to US investment advisers.
It’s totally the sort of ‘feature’ that the user could have been advised of around say the 30 day mark. “We’ve set you up a margin account that’s valid for your first $1000, please now confirm if you’d like to continue to carry a margin call risk otherwise were converting you to a standard account.”
It’s also super common for margin facilities to allow investors carrying the risk, 24-48 hours to contribute to retain the position, auto-selling out is a last resort.
It’s not just on-boarding. People expect to make a transfer from their bank account and have insta-credit to their RH tradable cash balance. This is a core feature of their app.
It's time the US got instant wire transfers. Most of the rest of the world has it. Being able to wire money to a friend and 5 seconds later their phone goes 'ding' and they can spend that money is really a requirement of basic functional banking.
The system you mention is the same. Clearing is done at the end of the day.
All that is exchanged during the day are IOUs (debt) and if one player in the chain goes bankrupt during the day the central bank might cover its debt up to some limit.
We haven't had any major crisis since those instant pay apps were put into place. So those aren't really battle tested systems and I guess we'll only effectively discover how resilient they are during the next crisis...
For those trying to follow along. Margin lending occurs when part of the funds put on the market are funded by a debt mechanism.
Classically I might invest say $10,000 and the debt facilitate would say provide a $10,000 loan and I’d have $20,000 invested in the market in my name, with a 50% loan to value ratio.
If the investment dropped far enough.. say to $12,000, the margin call facility works like this.
It considers the remaining money is always the lenders, so now the lender is exposed for $10,000/$12,000 eg 83% of the exposure is theirs.
They then ask you to top back up your contribution so they are less exposed (within 24-48hrs), or they auto-sell stock to ensure they are not exposed further.
In the case of Robinhood, the margin lending arrangement is always fully backed once the cash is processed. Which I’m guessing is always reliably a few days after it’s deposited.
So it’s crazy to trigger margin calls as all the debt is quickly fully backed.
It would be expected that Robinhood would have negotiated an instrument that never left them with margin calls on cash contributions like this. This is totally on them.
This is not specific to margin accounts and is not what is meant by margin. Cash account with any broker (that I know of) would also give you the same feature -- that is you have access to the cash for trading before the transfer is complete.
If they are letting you trade with instant credit, then under the hood there ARE margin loans going on. To be compliant with SEC regulations the broker must be pulling on short term margin loans from a bank to cover the securities being bought without hard cash in hand.
No they are exposed to you as a credit risk. They trust you that you intend to transfer the money in good faith. As long as the transfer is complete at no point they make a loan to you because trade settles at T+2, i.e. cash is not required on the date of trade. It is the loaning aspect that is regulated. Free riding is forbidden by Reg-T of the FRB. Your broker's settlement risk is not considered a margin loan either. It is a credit risk that they satisfy by depositing funds with the DTCC for a tiny fraction of the notional value.
The difference between the credit risk and the margin loan is that in the vast majority (say > 99%) of times the credit risk does not become a loan. You don't need to punish all the people acting in good faith for the action of a few. The regulation on free riding comes from a money supply perspective. You are not allowed to create money without taking out a loan.
In Canada I use WealthSimple and they don’t even have margin accounts. In the past I’ve been pissed about the 3 day hold period of funds coming in but I totally get it now.
I'm waiting for when their cash account allows direct deposit and then they support instant transfer from Wealthsimple cash account into Wealthsimple trade.
Don't believe so. I got hellbanned for selling, buying something new, and selling that all in one day. Hey, I'm easily confused. You can sell and immediately buy with the proceeds but cannot sell the newly purchased shares until the original trades settle.
Fortunately they make it easy to create new accounts and transfer from one to another. Now my banned account is empty and I'm more careful.
Yikes i'm sorry. They definitely give a few chances I also don't really understand. I now always try to have extra cash inside the actual investment account. Maybe you can try to change the sell order (first in first out -> sell the oldest share first)
There's various brokerages that don't give registered users margin accounts by default and it's something that users specifically have to ask for (similar to asking for options trading).
Which ones? I thought being able to buy securities immediately after initiating a transfer before that transfer settles was industry standard? I know (at least) Fidelity and Vanguard let you do so with just a normal run-of-the-mill brokerage account.
My husband once accidentally messed up his transfer to Vanguard and it didn't go thru and he already purchased mutual funds with that money he meant to transfer. It told him he had a trading violation and the lady on the phone said having just a single trading violation didn't matter.
Hmmm... my Vanguard account doesn't work that way. If I initiate a buy using external funds (from my bank), the actual purchase doesn't happen until the funds clear in ~2 days. It will just show "pending".
The general info you cite is great, but I'm disappointed in the Zacks stuff.
The US moved to what's called T+2 settlement (trade + 2 days) in 2017, over 2 years ago. Zacks still talks about T+3. In contrast, your Fidelity link gets it right.
Someone might say "so what!", but Zacks purports to be a financial advice website. They should know better. It makes me question the accuracy of the rest of their website.
For example, imagine that on Monday you have nothing in your brokerage account except shares of a specific stock, which you sell that morning for $10,000. The trade will settle on Thursday.
It's further down the (infinite-scrolling) page, under the title "Why Wait Three Days to Sell Stock?". Looks like much of the material there is older, but this section at least has been updated to mention the change to T+2.
No you really can't because of what is known as free riding.
Consider a scenario where you have a cash account with say 100 dollars and you buy 1 share of stock X for 100 dollars. That's it, you can no longer trade for two days. Because trades take two days to complete, if you have a cash account you need to wait that full two days before you technically own the shares and can sell it. Until that two day elapses, your account has 0 dollars in it.
Now if you have 100 dollars in your account and you buy stock A for 30 dollars, then your account will have 70 dollars left that you can use to trade with, but this is an incredibly inefficient and impractical way of trading.
Perhaps I don't understand it, but I think parent poster gave bad example of what s/he tried to say.
My understanding is that if you had $100 and you purchased stock for $100 and it went up in few hours to $120 and you decided to sell it, so you can purchase something else. You can't you have to wait 2 days.
Of course if you have enough money you will have buffer to account for that, but it makes it harder to do day trading when everything is delayed by 2 days.
The "you can't part" here is what's not clear. My understanding of non-margin trading is that you would be able to sell for $120. What you would not be able to do is then purchase something else with that $120 until T+2 when it settles and the money is in your account again. You technically don't have that $120 until the settlement.
Wikipedia, and almost any remotely reputable source, defines day trading as when a trader "buys and sells a financial instrument within the same trading day, such that all positions are closed before the market closes..."
If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.
> If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.
Deposit $1000, wait 3 days, buy and sell $100 of the same stock in the same day. You still have $900 to trade with.
It may be “less efficient”, but it also reduces your risk, and risk management is fundamentally what successful trading is about.
Some people don’t want to depend on the bank for margin or leverage, and are happy to trade with cash only. Increased efficiency brings increased risk and decreased ability to deal with short term shocks.
There are certain options you can't trade without a margin account because they are fundamentally on margin no matter what.
Whether or not you can "day trade" on a cash account would probably just be equivocating about what "day trading" is.
It definitely does limit your ability to very quickly enter/exit positions.
You can, its called a cash account. IMO this is better than a margin account, especially for <20k$. Below this threshold margin accounts are usually treated nearly identical to cash accounts.. except you can _buy_ when you shouldn't be able to... and then have to hold that security for 1-3days for the funds to clear.
In a cash account when you sell, the funds must settle for 2-3days... meaning you can't use those funds for purchases.
It keeps people who are cash short out of the market, rather than in... that's the main difference for small accounts.
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.
I’ve had an account since Feb. 2015 and don’t remember seeing an in-app notice either. It’s certainly possible I saw it but don’t remember now.
I checked back through my email archives and found the announcement email “Introducing Robinhood Instant” from Feb. 23, 2016.
From the small print terms at the bottom of the email:
“Robinhood Instant is implemented as a limited margin account designed to allow customers to purchase with unsettled funds. Robinhood Instant is free, which means customers will not be charged interest. Further, Robinhood Instant accounts will not be able to purchase securities with more than the account cash amount (leverage) or engage in short selling.”
> 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.
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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
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, I think you're lying.
> NOTE: If you start options trading in your Cash account, we’ll automatically upgrade you to an Instant account.
HAHA oh my god this is terrifyingly predatory. It says "automatically", but I hope that there is a notice at least. Even if someone went to the effort to make sure that they understood their account type, it would just... change out from under them.
This is sort of like accidently using a premium feature in some SaaS platform, and being automatically upgraded into a free trial without knowing.
You start with Robinhood Instant if your account was made any time in the last 5? or so years?
And things people know RH for won't work without it (like instant deposits and not waiting for settlement)
So options trading was actually added after most accounts had already if not all accounts were Instant
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Really the only reason people ever go to Robinhood Cash these days is trying to get around PDT restrictions... but they inevitably realize the entire experience they've been introduced to ran on margin
I read it more as "If you have manually downgraded to a cash account, and then go into the "Trade Options" page and buy something, we'll automatically change your account type so that it works"
But you're right that it could just be legacy wording.
I'm not talking about Robinhood specifically but general rules & regulations (see eg https://www.fool.com/the-ascent/buying-stocks/margin-account... ). RH specifically may have their own constraints beyond what's necessary, though. In which case get yourself a better brokerage.
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).
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.
Cash equities settlement is t+2, as are most transactions in financial markets. This is just how the underlying plumbing of the markets work, nothing to do with robinhood. You have the illusion of instant trading, but under the hood there's a huge amount of boring settlement machinery.
Incidently, this is no different to the experience of a big bank or hedge fund trader. Settlement risk is real, and institutions have entire risk management departments devoted to it (banks even need to capitalise for it, to cover precisely these types of scenarios)
And yet people will still say they can't fathom a single possible use case for crypto. Tokenized, non-custodial securities on blockchain can't come fast enough.
With respect i disagree. T+2 is not because of technological limitations of traditional databases or trust issues. Instantaneous settlement is possible (for example in the UK we have instantaneous inter-bank transfers), but it is not desired. Having delayed settlement means you can net offsetting transactions, it means you can handle outages in the infrastructure, it means you can unwind and correct errors.
Thank you for this. It's frustrating to hear people making comments who don't have the fundamental understanding of why/how the markets work and are just upset about not being able to join in on the melee and assume it's nefarious behavior. My POV is that it was obviously a risk RH took to not make it more clear what the behavior of people's accounts would be when market volatility is high. But I worked for a Commodity Risk Management Company on their custom derivatives platform and 90% of what we did was around properly valuing customer positions so we could make sure margin requirements were met. This was a huge deal to everyone involved because the counterparty risk was so high for our company.
Help me understand, if the blockchain has 100% uptime, how would there be outages in the infrastructure? To take down a large blockchain, you'd have to take out the entire network, or basically the whole internet.
What errors would occur if all the rules for transfer of assets were encoded on-chain? Crypto is already moving hundreds of billions of dollars worth of tokens 24/7 every single day. There's no central bank entities or clearing houses. The collateral for loans is completely tracked on-chain and fully auditable on the ledger. Tell me why that's not superior.
Re outages, it is not about the blockchain itself necessarily, but all the services and systems that interface with it.
Errors occur because humans are humans and fat finger trade details.
That aside, as I mentioned in original comment, instantaneous settlement has other problems, e.g netting is important in managing liquidity.
And to your point about crypto managing billions of dollars of tokens - it's an absolutely trivial amount compared to what's moved in the markets every day. Blockchains are incredibly inefficient and transaction rates orders of magnitude lower than what'd be needed.
You may not be familiar with the layer 2 innovations in crypto enabled by zero knowledge proofs, but blockchains such as Ethereum are about to get several orders of magnitude more efficient. It will absolutely be able to accommodate these transactions in the not too distant future. I get the tech needs to mature and get to a battle tested point first, but blockchain based stock trading is inevitable.
There’s just a single database that ultimately registers trades and ownership. [1] It’s not a technical limitation that creates the “constraints”. That’s what the parent is trying to explain.
That leaves me with more questions than answers with regards to DTCC's role in the future of finance. To me, it looks like an archaic, centralized institution that was set up to solve a problem they had in the 1960s with paper securities transfers. Smart contracts didn't exist then, so they weren't even an option. This central clearinghouse concept is going the way of the paper ticker. It has no place in the long term future of finance.
Yes, and they could "technically" build a scalable instantaneous system with a usable API. What prevents any movement in that direction is the messy interconnected web around it. A blockchain isn't going to help with it even if it's a technologically superior solution (it may not be).
Unlike what a concerning number of crypto enthusiasts appear to believe, "sorry for your loss" is often not an acceptable response in the mainstream world of finance.
But just like most players in the space have magically discovered the need for KYC if they want any real mainstream adoption, I expect that they'll also spend the next few years discovering why chargebacks and fraud protection are a thing.
We know, the Fed will step in at any time to back stop the losses. Don't kid yourself into thinking that such a system is without systemic risks. There's a reason why the big wigs spend their time in Davos dreaming and scheming about The Great and Orderly Reset.
As for KYC, crypto is well aware of it. Any centralized exchange you deal with in US has it in place already.
As for fraud protection and chargebacks, that is really just an insurance problem. And that's got solutions in the works.
Not speaking for them, but the thought would be the custody of the asset is never transferred to a 3rd party like it is with the typical broker/client/clearing corporation arrangement that stocks use. If the asset is traded it goes straight from counterparty to counterparty. There's no need for an escrow arrangement because the execution is out of the hands of the counterparties.
A smart contract or wallet on the blockchain would hold a tokenized version of the security. In this way, folks could leave their tokens on a centralized brokerage if they chose to, or take custody of their shares by transferring the shares to a crypto wallet that they own the keys to.
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.
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.
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.
> they need to accept personal responsibility when it turns out that they didn't know as much as they thought they did.
aka, RH is between a rock and a hard place - either the clueless user suicides due to poor understanding, and causing bad PR, or they do what they're doing now.
I think RH makes things sufficiently clear. The problem is RH is just a shitty platform that is susceptible to these kinds of problems due to high volatility which forces them into a regulatory corner every once in a blue moon.
I was a user when they had that suicide situation and RH did do a better job of explaining your actual balance when you entered a somewhat complex trade that caused you to have a negative balance. Still a user, who didn't know what he was doing, entered a complex trade, saw something he didn't understand and ended his life. In response Robinhood could have:
1. Made the UI "easier" to understand (i.e. lie) for 99% of situations
2. Raise the entry requirements to ensure people knew what they were doing (Gatekeep)
They chose (and continue to choose) 1, and I don't envy them - how would ever explain all the ways a margin account can put you in trouble on a 4 inch screen? Most users only care about "instant deposits" and will never get into trouble 99% of time. It took 2 "black swan" events (IIRC, the first suicide issue was during the first COVID market crash) for these issues to come to light.
Except their UX is streamlining away things and essentially manipulating users to get higher conversion rates and engagement. As seems to be the norm among successfull apps today. Just that stakes on the user side are more immediate than with news and social media.
They brought this onto themselves by optimizing for growth over healthy and sustainable markets.
Can you explain what specifically is manipulate about robinhood's ux? Maybe is me, but I don't find the ux of robinhood significantly different than the other brokerages I use (Fidelity and Merrill Edge).
This comes from someone who's of the opinion that manipulative dark UX patterns have been normalized - I have not used the competition you speak of, I wouldn't be surprised if they are similar.
The marketing push for options by calling it "instant trading" is pretty BS too.
Is it so black & white? Is it not possible to design an interface that shows the true state but is also indicative of how things should eventually settle?
Sure they can win here. 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? That's misleading if not outright deceptive. They can easily "win" by... removing that clause, and (optionally, or not) replacing it with something like "access to margin beyond your portfolio value" or something. It's not that they're already doing things as well as they can and the problem is just too complicated to simplify further. They actively mislead people.
And note that "borrowing money" does not imply "have margin" for people either. They might realize they're borrowing money, but not realize that has further implications they might not expect, like the broker being able to sell your stock without your approval. If they actually use the word "margin", people could at least look up what it means and likely realize it's a nontrivial topic. But just saying we'll make $X available to you makes it so much harder for them to understand there are non-obvious implications.
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.
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 and probably the only universal fix is the ready availability of competent human support, which doesn't exactly fit inside the normal "app" business model.
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 relatively safe funds). What RH is doing might be marketed as an everyman trading platform but for many (most?) users it's just a casino.
> I think you might underestimate how deeply and inexplicably confused people can get.
> ...
> 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.
I actually support this argument. I also concede that it’s easy to point out the information in hindsight. But I will still argue that a vital part of building a company of RH’s size and branding is about taking the time to think deeply about the customer experience. To be the experts. To distill that expertise carefully when designing each service and each app screen.
Just based on how RH potentially “sold shares out from under people”, and how the accounts are automatically margin accounts as apparently stated on some part of the user agreement; RH was specifically aware of how this would violate user expectation and they chose not to address it. It’s very difficult, I feel, for someone to argue on the basis of “well yes, of course they were margin accounts, it’s obvious to anyone who knows about how stock accounts work because <blank>” because RH was specifically designing their platform around people who don’t know how stock accounts work.
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.
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.
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.
Am I missing something here? The winning play is just not having the instant feature or at very least making it an “and also take out a loan” button. Then you have a $0 balance until your transfer settles and then it’s positive. No weirdness.
You can’t blame people for their ignorance when you present them a fiction. If your cute little abstraction leaks then don’t do it.
Actually RH already won: they just got $1B extra from the investors. Also I’m sure what retail investors experience now (dealing with lower lever details of the abstraction they were used to) was known by more experienced traders, but I still think that it’s better to lose money this way than trusting in a pension fund for 50 years that hides everything.
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.
> 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
That's actually a lot more complicated. The Banks take loan with one another to make this happen as well from what I read.
It might be so, but I don't work in that field, so my perception will be guided by what I see. Which is my point, unless you are intimately familiar with how ACH etc works it's natural to assume that these transfers are near instantaneous.
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.
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.
Also, not having enough money in the bank, getting charged by the bank to hold on to what little you have, eventually getting charged into negative dollars.
> 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.
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.
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).
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.
When I left Australia in 2006, inter bank transfers settled every four hours. Often by ISDN lines between banks. "Constantly talking" is a BS excuse. As far as I know (someone still there can correct me) inter bank transfers there are now down to 5 minutes.
The US banking system is arcane and archaic. It's cheaper not to modernize to be sure. Forgive me for being frustrated at banks cheaping out on this when they average quarter of a trillion dollars in profit every year over the last few years.
Yep, in Europe inter-bank transfers are also instant and if the underlying reason for all these regulations, confusions and trading impact is that US institutions have just been too cheap to upgrade the legacy infrastructure running the biggest store and exchange of value in the world then frankly surprise and anger seems justified.
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.
The whole innovation of RobinHood stood for is to abstract that away from you so you can instantly start trading and continue when you sell stocks. In the end we get to the same point why a lot of things when it comes to trading are made difficult or impossible after big fiasco and collapses - you can't trust the retail not saying I didn't know better when they lose it all.
>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.
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.
Ah - I have generally understood it as working on a percentage of the trade; being part and parcel of a leveraged strategy.
It's one thing to loan me $100 when we have shaken hands and contractually already agreed that $100 is on its way. It's another thing to assume control of that $100 when the $100 already agreed to is on its way.
The contract with you says that if it settles, you get that money. The contract on the stock market says that it is supposed to settle. But a non-negligible percentage of the time, participants in the stock market do not make good on their contracts. Maybe they are a day late. Or the trade is reversed and the money or stock for your side comes back to you. You will get whatever happens while executing the trade, but it might not be what you expected to get.
In a cash account, the broker takes your money/stock and you live with the inconvenience. In a margin account, the broker is effectively lending you money to cover unsettled trades and is taking on that inconvenience instead. Given the high volume of trades going through a brokerage relative to the wealth of the brokerage, that inconvenience can become a real operational risk.
How real? Well, Robinhood just had to get an emergency loan for a billion dollars to cover trades that are open and have not settled. Why? Your ability to execute the trades that you made depends on various counterparties all doing what they said that they would, when they said that they would do it. But if they don't, and you prove unable, Robinhood is still legally obligated to make sure that they are able to settle all of their contracts on the stock market which they took on on your behalf.
:) I have, approximately, 99.7% of my invested money in vanguard funds. The other 0.3% goes into the fund for doing trading.
To be honest, it's probable that I should adjust my risk tolerance to 5% ultra-low risk assets and 5% ultra-high risk; the current state of asset allocation is overly correlated with US large cap corporations.
Notably absent here is the fact that planes can land themselves. In fact the plane can do everything on its own besides taxi on the runway and takeoff...most of the time. Yes, pilots are there to take over if needed, but that doesn't change the reality of autopilot which is not just "keep it in a straight line"
Hang out in the Aviation StackExchange long enough and you'll see exactly that question come up. "Why do we even still have pilots?", or "What does a pilot actually do?".
Yes, in general, people are ignorant of what pilots do and what AutoPilot can and cannot do.
This is made even more confusing by recent progress in autopilot with some large jets getting auto-landing features.
And yes... a pilot can program the FMS with waypoints, altitudes, etc, get into the air, push a button... and the plane will indeed fly itself. Modern jets even have automatic throttle/power control too.
A better name for Tesla's system is what it actually is... Driver Asist. But that's not sexy... and we're far off into the weeds.
"Instant" means instant. There is no way to paint it differently.
It's disingenuous to call an ACH transfer "instant" instead of "It'll take several days during which time we'll lend you money", like RH did here.
"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.
All of that risk is associated with holding the goods and currency for this delayed period! It all makes sense, but, if ACH was 10 minutes instead of two days, the entire issue would barely matter.
> 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.
That’s not the same as what parent comment was suggesting. You can’t send money to literally anyone using only an email address. You and the recipient still have to have regular bank accounts within the settlement system. The email address only serves as a more friendly identifier than the account number.
I should've been clearer: as long as the recipient has linked their email and/or mobile to their account (via PayID) settlement is instant and their email/mobile number can be used to address transfers
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.
In a lot of countries bank transfer is near real time. Chip and pin is the standard for more than a decade. Checks are no longer al primary way to pay anymore.
Yeah, but with lightning you really need enough value along the network path(s) to execute a transaction, possibly causing a similar thing as this to happen. I still think it would be an improvement though, as enthusiastic buyers could expand the network and get their buys through.
> Yeah, but with lightning you really need enough value along the network path(s) to execute a transaction, possibly causing a similar thing as this to happen.
It's atomic, it either completes 100% or it fails, there's no partial state where the money gets stuck in one of the middle-nodes.
I'm a software engineer, so I think I'm more familiar with how apps work than most people, and this wasn't obvious to me! Good thing I only use Robinhood for money I don't care about losing.
I completely agree with you right up until the end. Robinhood's entire product is built on a manipulative and predatory premise that making people feel comfortable "trading stocks", whether they fully understand what is happening under the hood, is a net positive.
It was bound to blow up eventually, but I disagree with your assumption that this is obviously "market manipulation".
If they had to take this action to save themselves, the alternative was worse. Robinhood would have [edit: potentially] gone under while holding all of their customer's stock, and I guess SPIC would have figured it out eventually? No one would have had the option to sell, and Robinhood going under would likely have had a much larger impact on the price of specific securities. I have *absolutely* no idea what would have happened if Robinhood wasn't able to settle trades that it had already made. I assume it would have been an absolute catastrophy. By that logic, Robinhood "manipulated the market" in a way that prevented GME stock from tanking.
I would be very concerned here if Robinhood ends up going under for "market manipulation", with no reference to the extremely poor and predatory product decisions that set this up in the first place. We'll just have the next company pop up, promise to do "nothing illegal", and then set up the same house of cards.
If they had to take this action to save themselves, they have already betrayed the trust of their customers.
> Robinhood's entire product is built on a manipulative and predatory premise that making people feel comfortable "trading stocks", whether they fully understand what is happening under the hood, is a net positive.
I think that people generally understand that when they buy stocks, those stocks may go up or down. There is no guarantee of making money. You take your chances.
What they don't understand is that the brokerage can sell what they bought at the day's low price, because the account they funded with cold hard cash was termed a margin account. What they don't understand is that their brokerage might arbitrarily decide to prevent them from trading particular issues on a given day. What they don't understand is that, due to their broker's lack of financial prudence, that their broker may need to manipulate the market to their individual disadvantage "for the greater good".
I mean, I think you're kind of proving my point. Robinhood's entire product is so predatory that they shouldn't have had their users trust in the first place. But that's not really the question here?
The things you mention are things that people should probably understand. The fact that customers en-masse did not understand these things is *definitely Robinhood's fault*.
> the account they funded with cold hard cash was termed a margin account
Until it was actually funded and settled though, it is on margin (after which it's still a margin account, it's just covered, and you can not use margin). This is again something that customers should be educated on. Robinhood could have made the user wait 2-3 days (while waiting for the funds to settle) before they could buy any stock. Robinhood prioritized user engagement. Robinhood could make users wait 2-3 days between selling a stock and buying a new one. Again, Robinhood chose to prioritize user engagement instead.
> due to the broker's lack of financial prudence
Robinhood was not even close to the only broker who was impacted by this, so can we stop pretending that they were?
> may need to manipulate the market to their individual disadvantage
Again, I disagree that Robinhood following the actual policy of the accounts the users were using, in order to be compliant with financial regulations, is "manipulating the market".
I think that the IB CEO really fucked up there by not, and I apologize if this sounds offensive, dumbing his explanation down more and being a bit more clear. As someone who spends a lot of time as an expert in a topic, it is very difficult to have a good calibration about how intracate topics in your domain will be understood by outsiders.
> the financial viability of intermediaries and the clearing house
These are not the "big players" that WSB seems to think they are screweing. IB doesn't give a shit about a couple of hedge funds (who most likely are not in the game any more anyways). They likely don't care much about any market makers who have found themselves in a bind (I doubt many of these exist though).
Intermediaries and clearing houses are the people who's job it is to ensure smooth operations in the market and make sure that trades eventually settle. Ie, if I sell you something (lets say, 1 GME) for $400, that doesn't happen instantaneously, even though we like to pretend it does. If GME goes to $20, it's possible that the person who bought the thing from me just... never shows up with that $400 (maybe their broker went insolvent, who knows, it doesn't really matter). But it's still owed to me, and now someone in the middle is on the hook. And really, this is a correlated risk. If it happens with 1 share of GME, it's much more likely to happen for millions of GME. So now your clearing house is out hundreds of millions -> billions of dollars[0], and are left holding a couple M in GME stock that they can't sell.
There is a difference between trying to protect a specific player or group of players in the game, and making an attempt to protect the infrastructure that makes the game possible.
[0] And if the clearing house can't handle this, then it falls to your broker, who also probably can't handle it[1]. So then if you don't get the money for what you sold, any sort of faith in the financial system evaporates. Which triggers a bank run. Which triggers a financial crisis way beyond anything seen in 2008 because all of the infrastructure was totally destroyed and now we have to start from scratch.
[1] This is especially true in the case of Robinhood, who I am certain (without evidence) has an extremely disproprotional and correlated exposure to specific high risk tickers (GME, AMC, BB, NAKD, etc)
> Ya... that seems pretty predatory in my opinion.
I think Hanlon's Razor applies here:
"never attribute to malice that which is adequately explained by stupidity"
The more I see with this fiasco, the more I feel like RH management just made a platform with a bunch of shortcuts and didn't realize what the unintended consequences of a trading platform with zero friction margin accounts would be.
Not absolving them of responsibility, and I've definitely see some places where their choices favor themselves over their users. But the situation is largely out of their control at this point and they are just trying to do damage control.
> "never attribute to malice that which is adequately explained by stupidity"
I am getting tired of seeing companies and other major entities weaponizing Hanlon's razor. I refuse to believe that such a massive entity with so much resources at it's disposal has a think-tank consisting of two interns and a comatose member of middle-management. I've seen this sequence of events multiple times:
1. Entity X does thing that directly harms/angers people.
2. Entity X 'apologizes' and says some variation of "oopsies, didn't mean to, just a miscommunication gone awry, we'll definitely look into improving our internal processes in the future :)".
3. Entity X faces no real repercussions.
At what point does this become a violation of Occam's Razor? That all of these decisions that somehow always leave the entity unharmed/better off at the expense of others were not made with intentionality and/or any remote understanding of their consequences? When do they wear away the benefit of the doubt?
> That all of these decisions that somehow always leave the entity unharmed/better off at the expense of others were not made with intentionality and/or any remote understanding of their consequences?
Robinhood just had to borrow a billion dollars. Having to get a billion dollar emergency bail out is not the sign of a sinister plot, it's the sign of a colossal fuck up.
> I refuse to believe that such a massive entity with so much resources at it's disposal has a think-tank consisting of two interns and a comatose member of middle-management.
There are a fair number of signs that Robinhood is a mess. This isn't the first time the company has run afoul of their own success and wound up screwing over investors.
> Entity X faces no real repercussions.
I didn't say they shouldn't be responsible for the consequences of their mistake. My point was that it's more likely this is a screw up than some sinister plan on their part.
We're on the same page as far as this last bit goes for sure. Regardless of whether it was a screw up or malice, they should be the ones paying the price (though sadly I suspect we both know they won't).
> Robinhood just had to borrow a billion dollars. Having to get a billion dollar emergency bail out is not the sign of a sinister plot, it's the sign of a colossal fuck up.
What about a sinister plot that fucked up? Being bailed out is consistent both with being dumb and short-sighted, or being deliberately negligent and short-sighted. Failure is possible in both cases if not more likely in the latter (this failure wouldn't be possible if Robinhood didn't decide to facilitate liquidity out of its advertised risk class, but would be tempting to ignore if you precluded the possibility of retail colluding on its own. The benefit for Robinhood would be greater order volume over time which means i.e. higher quarterly revenues).
In addition, if you are willing to claim bailouts are evidence that deliberate negligence/"sinister plans" aren't present, you would have to claim the 2008 subprime mortgage crisis didn't feature deliberate negligence, which isn't true.
My original reply was to a post where someone accused RH of being predatory. To me, that strongly suggests there was intent here by RH to get users into this situation.
I don't think RH intended this situation. That is all.
I'm not suggesting there was no negligence. In fact I think there was. Negligence is essentially criminally screwing up.
This situation is orthogonal to what's predatory. Its predatory that they generally encourage customers to front more than they realise they're fronting. Many customers think they're betting £1000, they don't realise they're actually betting their house.
> Its predatory that they generally encourage customers to front more than they realise they're fronting.
This isn't entirely true. Margin accounts don't have an unlimited bottom. If you put $1000 in a margin account, you can buy more than $1000 worth of securities. As soon as the value of those securities drops below $1000, those shares are liquidated. Typically, you are never on the hook for more than your initial $1000.
From Investopedia:
> " The Federal Reserve has a 50% initial margin requirement, meaning you must front at least half the cash for a stock purchase.
> This requirement gives you the ability to purchase up to $20,000 worth of stock, effectively doubling your purchasing power."
It is very risky to invest in volatile stocks with a margin account because you can hit a margin call fast. Suppose you put $2000 into RH and get $2000 worth of GME. If GME drops 50% in a day (highly possible), you get a margin call and poof your $2000 is worth zero.
> Many customers think they're betting £1000, they don't realise they're actually betting their house.
This isn't true on either part. To see why, take a peek at RH's FAQ on margin: "Access to margin is not automatic to everyone, and requires you to upgrade to Gold."
In other words. To make leveraged purchases, you have to deliberately upgrade your account to gold and have $2000 in your account. The whole reason people upgrade to gold is to get access to margin.
It is possible to put yourself out there quite a bit further than you want and lose everything you invest, but it's pretty hard to lose more than you invest. (I'm not even sure it's possible).
Calling it a “bailout” is mischaracterising it. The solvency of Robinhood wasn’t in question.
The funds they put up at the clearinghouse are to manage settlement of customer trades. They had to stop allowing customers to open new positions because they needed to deposit more settlement margin at the clearinghouse. The margin required depends on the volatility of the stock symbol, and in this case clearinghouse increased the margin requirement for GME to 100%, on top of the higher demand for shares by customers.
As for paying the price, I’m pretty sure no broker is ever liable for theoretical profits missed out on.
It was an unplanned loan so they could continue operating effectively. If you want to pick nits and say it's not a bail-out... whatever. It's not business as usual.
>Another Robinhood user posted a video claiming to have gotten 25 times leverage by turning $2,000 of stock into $50,000 worth of buying power. Multiple other users posted videos and screenshots of the hack, with directions on how to repeat the cheat code. Bloomberg News first reported the glitch.
This one is incredible because he put all of that money into Apple puts two days before they released their earnings report. He lost everything.
Hanlon's razor is not a good heuristic, I don't know why everyone is so into it. If there's a monetary incentive to be deliberate, it's way more likely to be deliberate. Deception is everywhere, especially in sales.
I think the evidence here points towards quite a bit of stupidity on the part of Robinhood. They didn't anticipate the way their platform could be weaponized.
There is plenty of malfeasance as well, as things have gone off in ways they didn't anticipate, RH and the other exchanges are making sure their big money clients are protected as best as possible from the WSB craziness at the expense of retail investors.
But the last bit wasn't planned which is what I was getting at.
They knew well in advance what the risks and issues were. Previous year they had the exact same issue just on a smaller scale. They just chose to do nothing about it.
Did not say RH should get a free pass here. Or some kind of herd immunity because it's a company. I said it was most likely a fuck-up. There can and should be repercussions when you screw up and it hurts other people.
Are you genuinely surprised that a grey haired lawyer might get caught flat footed by the shenanigans of an out-of-control Reddit channel?
Don't get me wrong, there are definitely people in the 65+ club who understand tech. But frequently older people don't, even older people who were near tech. And in particular many of them don't get communities like Reddit.
I don't think a lot of people could have predicted that tens of thousands of retail investors would flash mob an out of favor stock to bust a hedge fund's short position. The chances that a 65 year old lawyer would see that coming? Seems pretty unlikely.
Conspiracy theory: This entire GME squeeze was orchestrated by one/many of Robinhood’s competitors who spotted this weakness and knew exactly how to leverage the masses to exploit it and drive RH out of business.
I think the much simpler "conspiracy" is that a few people in WSB have been using the platform to pump and dump stocks and this one just got a little out of control.
RH has fucked up a bunch here, but there are some folks who are going to make a killing on this (maybe already have). It's quite possible there are a few front-runners on WSB who are talking GME up like mad even as they quietly sell off shares for a big profit. The front runners have big profits on this deal.
Yeah, no. This is similar to Republican claims of election fraud: it's entirely plausible (and downright indefensible to not believe) that voting machines are subject to manipulation, but at the same time there's just an astounding lack of evidence any such manipulation exists.
there clearly has been manipulation of some sort. However not anywhere near enough to turn the election. A couple dead people who voted here and there needs to be investigated, but 10 votes in a state don't change any results.
What are your sources?
I haven’t read that 10 fraudulent votes number anywhere.
I did watch the video with the woman unpacking the suitcase full of ballots.
That wasn’t her best day for sure.
So you think it's a coincidence that most of these brokers around the world were having pretty biased "incompetence" right when the hedgefonds attacked? How convenient.
This is definitely one of those things that may all be somewhere within the bounds of the rules, and the SEC will allow it, as long as you don't fuck it up. A "don't ask don't tell" kind of situation when firms tread into the grey area between the black and white of strict rules. My boss always used to say "We don't have many rules, just don't be the reason why we have to create a rule".
4.5) Because of their insane overuse of margin to ease onboarding, their depository obligations begin bleeding beyond their ability to triage, putting the accounts of both their investors and clients at risk.
5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase (in order to reduce the overall risk profile of the robinhood brokerage and to scrape back as much money as possible to cover their depository obligations which they, goto 1, screwed up themselves by offering way too much margin to clients who didn't know they were getting margin (or what it even is))
Over the past two days, Robinhood royally fucked it up, beyond anyone's wildest fears. If they were Chase or BofA or someone, I'd say they're systemic and will get by to survive another day. They're not.
Robinhood is finished. If they somehow manage to meet their depository and net capital obligations over the next few trading days, and if they somehow manage to survive the large downturn in users the platform will experience after their actions this week, and if they survive the inevitable congressional hearing, they'll still have the SEC investigation to look forward to.
Those who made it #1 are the ones who want to create an account to participate to bankrupt a hedge fund. I say their next move can be revenge on Robinhood for, at the very least, entertaining the misunderstanding with their customers (="They sold my stock without an order from me" when they were effectively on margin and halfway legit).
The downturn hasn't happened yet. There's significant stickiness to getting money out of robinhood; they let you trade instantly using margin, but they don't let you withdraw it until its all settled, and settlements take 2 days after exiting your last trade. Even many of the WSB fanatics who hate RH are stuck with them, because even transferring securities in-kind to a new brokerage is often accompanied by a week or more of a freeze on liquidation.
>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.
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!
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.
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.
This is the most spot on post ever. The amount of stuff in the world that relies on old, tried and true "a file appears in a directory somewhere overnight and is processed the next morning on 'the other side'" method is probably staggering. But most people nowadays don't know or understand this at all, as they've never been exposed to this. And why would they ever be. And all the fixed column width stuff as well and delimiter based import/exports.
Heck I've had to fix one of these things where it suddenly started failing the overnight transfers and when I went to check why it was because a fricking musician had named their song to include the delimiter used in one of those...
Yes, it's a complex problem. Yes, mythical man month, etc. But US banks over the last several years have averaged a quarter trillion dollars per year in profit.
They just have very little incentive to change things. In the meantime, they're earning interest on funds.
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).
I always just assume it so they earn interest on the money they have withdrawn immediately from the payer's account, yet refuse to deposit into the receiver's account for 3-5 biz days. I don't think I'm being cynical about it. It's the only logical explanation. Computers only working banker's hours is not a logical excuse (while fun to joke about). A phone support person tried to tell me that a human still approves the transactions. Whatever that means, but it's not logical either.
Interest rates have been effectively 0% since the 90s.
> A phone support person tried to tell me that a human still approves the transactions.
This is true in some cases. They do at least have to audit some of them manually and possibly close your account, file SARs, etc, if they don't like you enough.
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.
I have seen a snail move through my garden at a faster pace. If it were 1992, and all we had were 9600kbps, then I could understand the burst all transactions after hours and then do the settle up over night. Suggesting that they are going to have 3 windows each day for settlement windows is a 1999 solution. That also sounds counter intuitive in that at each of those windows their systems will get slammed with orders to process. If they just let each one settle as they come in, then they would spread the load.
I'm really dumbfounded at how either I'm an idiot and just cannot understand the issue, or at how the rest of the world has been snowed over into believing it is terribly complex and takes decades to make incremental changes.
Not the rest of the world. Canada has fixed it. Interac settlement is 30 minutes max, with a $5000 limit, and interbank transfers are end-of-same-day. This is even assuming you have to change banks: there are only five banks, and they're regionally divided. Settlement in the same bank (and their investment arms!) is 30 minutes, even if the money is going to a different person. I paid for my house with this, and the payment was received before we walked out of the room!
It's only America's payment system that's woefully behind.
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
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.
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.
The role of option writers is very much an under-reported part of this whole fiasco.
Normally you want option writers to be able to provide liquidity by going naked short when selling calls. Obviously that fails when involving small companies with high short interest and hordes of "4chan found a Bloomberg Terminal" investors.
I looked a little at GME during the week and I saw that the option market makers had significantly reduced their participation. I bet that they're also big losers. But that's what they do for a living, it's their own fault if they blew up selling calls naked. They knew the risks. Delta hedging doesn't work when a stock can move 100% in a single day.
> 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.
Wait, what? That is the first that I'm hearing of this. That's crazy. Even without doing all of this, Robinhood having the ability to unpredictably/arbitrarily decide when to disable/enable actions on stocks is extremely bad for the market. They disguise this as protecting their users, but you cannot expect to have freedom as an investor if you don't know when or if you will be able to make a trade because a stock "isn't allowed right now".
Part of the problem is that Robinhood treats their user-base like children. Nobody wants to be protected from risky decisions or from themselves and you can't just do that to people. It is an insult and an unfair withholding of the right of risk and the means to make money from the little guy. That's the dumbest thing I have ever heard. Risk should be a right. Nobody should be able to force you to not take a risk.
I understand that talking to someone off a bridge is a wonderful thing, but at the end of the day, that person is never withheld the right to jump.
They didn't decide actions on market, they pulled back their loan to the users which forced the positions to close, as with any other broker (others are transparent about it though). Not that I approve but that's a difference.
No... they also put caps on how much stock you can buy for a particular symbol. They are basically controlling the volume and direction of trade for some of these symbols on their platform...
This is tangential to RH, but nevertheless I think it's a related issue: For many years now I was wondering how exectly the ETF work and whether when I buy an ETF I can be 100% sure the issuer can follow through on their obligations?
What mechanism are there in place to insure that ETF will not deviate from the underlying stocks it should represent?
I found it difficult to understand the intricacies related to this question.
Here is one example: Suppose I was holding ETF with GME stock in it, the ETF issuer might have decided he knows better and sell the stock expecting its price to drop in the future. Meanwhile the issue will attempt to "follow" the stock by other means. Ultimately is there a way to be sure the issuer will not fail, if GME beats all anticipated expectation the issue might fail to reflect the new GME price...
What mechanism are there in place to insure that ETF will not deviate from the underlying stock?
I honestly don't think so. Before getting into stock trading, I read about it for a couple of months.
About how you can lose money on trading bonds, what is clearing and volatility, how taxes are paid and so, and so. The fact is, you certainly could lose money trading stock, and broker certainly can sell your shares without your permission (in my country).
Especially if you are poor. But that is common knowledge. And people losing money on stock exchange, on forex, wherever is nothing interesting or new. Is this predatory behavior? Maybe. Almost no retail investor makes money doing risky trades on stock exchange. That is what those people did.
Inversely, they took a position exploiting pretty much exactly what you describe from a hedge fund, and the only reason it didn't work was that it got shut down by powers from above.
WSB has been trying to push their own version of truth to the media and people seem to be swallowing it whole; that robinhood is basically pure evil and just out to squash the dreams of the WSB geniuses who are trying to stick it to the man. They're really a bunch of whiners. Everything I've read has pointed at that RH has been stretched to their limits financially given their current business model.
I don't think anywhere in their terms did it say users are not allowed to trade outside the US. But that didn't stop RH from freezing $800 in my account for a year after making 103% in a day on $VXX and other ETNs during a trip to Mexico in 2017. I eventually got my money back. But it took me a year.
Under normal scenarios this works extremely well. Being able to trade immediately was a boon. Of course I knew that it was margin but the cover scenarios never even arose for the many years I used Robinhood.
It was one of the many reasons I used them. (I don’t anymore for other reasons)
The rules sound quite reasonable to me; Robin Hood is trying to protect itself from the extreme volatility in the wsb/reddit stocks and the higher level of collateral thus required.
That's absolutely not true. You have to specifically opt-in to trading on margin, read disclosures, and have a minimum $2k balance.
Instant deposit is not trading on margin, it's trading on deposits that you make that are instantly available in Robinhood but take a day or two to clear ACH. That's all made clear up front on the screens about Instant Deposit, not buried in T&C.
"When you sign up for a new account, you’ll automatically start with a Robinhood Instant account, *which is a margin account*."
> it's trading on deposits that you make that are instantly available
If it's made instantly available, it is being loaned to you from Robinhood, but that is... still margin. It may be interest free margin, but it's still margin. It is money that has not settled into your account yet. If it's not on margin, you can't use it until it's settled.
Hell if you sell a stock and then immediately buy a new one, that is also margin, because, again, the funds have not settled into your account yet.
If you want a Cash account (a non-margin account), you can downgrade, and "You won’t have access to instant deposits or instant settlements".
The fact that you have to do this manually however is, in my opinion, predatory, and setting up a house of cards that will eventually fall over, because users won't understand what is actually happening.
But the fact that it's predatory doesn't make it not true.
If you want to call that margin, it's margin with 100% collateral. It's not margin in any meaningful sense. It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check. Would the trade clear before the check? Sure. Is that margin? I really struggle to see how.
Except the collateral hasn't settled yet, so you can't guarantee what could happen.
> It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check.
There are tons of things that could happen here. The check could bounce. Your bank could go under. The check could be fake. You could have stolen the check from someone else, and when they see it clear, they'll call their bank and the funds will be withdrawn.
> Would the trade clear before the check? Sure. Is that margin?
Yes, it is. The broker may choose to loan you the money short term with the assumption that the check will clear, but they don't have to. They could just refuse to make the trade until the funds clear.
If they did choose to buy the stock for you, they would be accepting that risk. If your money doesn't clear, they will be stuck with the stock.
If this was a share of VTI, with low volatility, they'd likely be fine with it. Even if the check didn't clear, they could just re-sell the stock. It's super unlikely to drastically check in value in the 2 days before the check clears.
If this was a share of GME today, they are buying it for you for $350. There is a change that your check doesn't clear. There is a chance that tomorrow GME is worth $50. If both of those things happen, your broker would have paid $350 for a stock that they didn't want, and can only sell for $50, and be stuck holding a $300 loss.
Ie, they have loaned you money (even if it's short term and with no interest), but if the account doesn't actually get funded, or a previous trade doesn't actually settle[0], they are left holding the bag, the same as if it was "traditional" margin.
[0] This is unlikely, but it could happen for a variety of reasons. I believe this would correlate with much larger issues with the state of the financial system, and in that case would just start compounding issues (because if your trade doesn't settle, then chances are a whole bunch of trades don't settle, and your broker will be left holding the bag for all of them)
In typical times, yes, it is "amazing" for the user, in that they get to trade more often without worrying about the underlying complexity.
People right now are complaining because they are (reportedly) being margin-called, largely yelling on the internet that they are being margin called but weren't using margin therefore Robinhood is conspiring with George Soros or some shit, even though they technically were trading with Robinhoods money.
Should Robinhood be allowed to treat something as a trade on margin when the fact that it is on margin is papered over and the user clearly doesn't understand what they're doing? Probably not.
But this isn't Robinhood "manipulating the market to support Hedge Funds (or whoever the new enemy is today[0]); this is Robinhood having a gold-plated pile of dog-shit that they've been selling as solid gold for the last couple of years, and now the cracks are showing.
[0] I heard this morning that the new enemy who is trying to manipulate the market is the DTCC. Which is just... comical in my opinion, but hey, the internet is gunna internet I guess
Ok sure, but I still don't really see what's so bad about being margin called. Like even given that unlikely occurrence where RH might margin call you, what you get out of RH doing this still seems all around great for the user.
Margin calls typically end poorly for the user because they are highly correlated with the asset being in a negative position.
If you buy a $10 stock on margin, and it raises to $15, you owe Robinhood $10, and that is secured by a $15 stock. This is extremely unlikely to get margin called. Even if it does, you're up.
If you buy a $10 stock on margin, and it drops to $5 (even if just temporarily), you owe Robinhood $10 secured by a $5 stock, which puts them in a riskier position, and may margin-call to cut their losses. You get the $5 from the sale, but still owe Robinhood the initial $10.
I'm sure you can see how this can compound to amplify drops if a large number of people have bought the same thing, all on margin, and it starts dropping for whatever reason.
Edit: Follow-on
This is particularly "bad" if your goal was to "own the stock" (at pretty much any price) just so that someone else can't buy it.
You are correct. FINRA Rule 4210 defines the requirements for margin.
Robinhood's FAQ on the subject was ostensibly written by someone who doesn't understand that "margin" is a word with specific meaning in the context of a highly regulated brokerage business. It's an account where you take risk with only partial equity, with the institution putting up the balance.
From FINRA:
"The term 'margin' means the amount of equity to be maintained on a security position held or carried in an account."
Elsewhere on Robinhood's site, I was happy to find some acknowledgment of the regulatory requirements:
"To purchase a security on margin, we require that you have at least $2,000 or 100 percent of the security’s purchase price (whichever value is less) deposited into your account. This is called the "margin minimum." If you are designated a pattern day trader, you must have $25,000 in portfolio value (minus any cryptocurrency positions) before you continue day trading.
Note: If you are borrowing on margin and fall under $2k portfolio value, you are at risk of a margin call and potential liquidation"
People here are downvoting you because they don't know the rules and they believe Robinhood's website when it says that Robinhood Instant is margin.
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.
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.
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.
Depends on which broker. But generally it's somewhere around a penny so for most trades even if you're paying more per stock it's a better deal than even a very cheap direct commission.
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.
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).
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.
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.
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.
"The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission."
What you are referring to is the fact that Robinhood can't offer a worse price than the NBBO, but the NBBO is not the best available price, there are also dark pools and brokers can match orders against their own clients.
Robinhood, like all brokers, has a fiduciary duty to its customers and as such is required to do what it can to always offer the best price to its clients instead of simply offering the NBBO, whose price serves as a worst case scenario when all other options have been exhausted. Robinhood not only failed to do that, they failed to do it while claiming in marketing materials that their execution is better than their competitors (it's not).
> The SEC has stated that “routing order flow for automated execution, or internally executing order flow on an auto- mated basis, at the best bid or offer quotation, would not necessarily satisfy a broker-dealer’s duty of best execution for small orders in listed and OTC securities.” The reasoning behind this view is that prices better than the NBBO may be readily accessible to the member."
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.
Yeah... And other stock trading platforms also stopped users from trading GSE. So by your own bad logic the original complaint against Ribbonhood should be no big deal, right?
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.
They don't have a normal amount of outages. They have more outages. It's a significant amount of outages. It's already been the subject of complaints previously.
>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.
It's partially true tho, they provide inferior price than other brokers using Citadel (because their contract apparently gives them a bigger kickback than most other brokers).
In practice price improvement is split between the trader and the broker right, some brokers might do 50/50 while others will be 80/20.
Yes this is true. It wouldn't qualify under the "best execution" standard, which is based on publicly displayed (lit) quotes.
But you are right that technically you could've been price improved slightly better had your broker signed a more favorable agreement with a market maker (and then passed it onto you). This would really venture into business economics though and is not related to regulation/legality.
> 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.
> 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.
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.
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?
It's a good point. Many of the more popular subs are transparently astroturfed, and more than a few mods are bought and paid for. Reddit is already neck deep in information warfare. I'd be surprised if what you describe isn't already happening, although who knows at what scale.
"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.
Technically not. Shorts have a borrow fee, and if you trust the wsb guys on this number, the current borrow fee on gme is 80 percent per annum. So if I'm not getting anything wrong here, short sellers do have a bit of a clock.
Does 80 percent per annum mean that carrying the short for ~9 months will cost roughly the same as closing it out today, assuming the price remains constant for the next 9 months?
It means your broker will charge you that carry cost on a pro rata basis, assuming borrow also remains constant. (It's generally not a fixed rate.)
So if you carry a 9mo short with 80% borrow rate on a stock that realizes 0 vol, you played yourself.
If you don't want to deal with borrow, you can buy a put and sell a call on the same strike (usually slightly higher than ATM) which comes with an implied borrow rate that is locked in.
Overlap between which world views? Are you saying between the short sellers’ world views and WSB’s? I have a feeling that a lot of the people on WSB actually work on Wall Street and are just on their phones at work. There seem to be some experienced professional traders there(among many who aren’t), but I don’t see much similarity between them and the shorters in particular.
It’s really creepy how you just compare WSB to a group that half the country considers “supporters of terrorism” or literal terrorists. This is the “magical thinking” to me.
The original GME investment groupthink (Reddit always works this way, it’s lovingly called “the hivemind”) was based on complex, but logically-sound technical reasoning. A lot of due diligence was done. QAnon, as far as I know at least, was based on a post on 4chan with no verifiable evidence whatsoever. WSB’s GME buying was motivated by logic and evidence at its core, and many aspects of this logic have happened exactly as predicted (for example, the multiple gamma squeezes). Unlike QAnon, the more you learn about this, the more it makes sense (though, very obviously, the price is going to crash eventually, and these people know it). Respectfully, I think it’s disingenuous and below-board to try to baselessly compare something you don’t understand well to an alt-right hate group. Show me the solid due diligence and technical analysis that underlies QAnon, and maybe I’ll give your comparison a closer look.
I'm just saying that it's all the same magical thinking. I'm not saying it's the same people, though given the demographics I suspect the overlap is bigger than we think.
Your suspicion, and you’re baseless assumptions about the “demographic” of several million Reddit users, sounds a lot like “magical thinking” without any evidence to offer.
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.)
> 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.
I don't know what you mean. You want a list? I don't have one, but I'm sure you can find one.
If you mean a tradeable index so you can invest in market makers... I doubt it. Their entire business is making money for themselves, and likely don't need or want public shareholders that they have to report to.
They are paying for ads saying they closed their position. Why would they do that if they actually closed? The occams razor pushing naivety of this forum is really starting to grate. How many times do they have to fool you before you get the message?
Seen this twice now. This is another conspiracy theory. The screenshot going around is NOT a paid ad from Melvin, it's a promotion of a headline from a CNBC show. CNBC doesn't take money to issue ads on behalf of its guests, they were merely teasing the content of the segment.
Individuals buying now are more likely to get screwed. On a self-interested side, they could be wanting as few retail investors to lose as possible to minimize the calls for new regulations
> 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.
They put ads on Twitter saying the had closed their positions. Why would someone put ads on Twitter saying that? They're either lying or playing 4D chess.
That link is to a screenshot of a routine promoter for a CNBC show. I mean, I guess it's possible that this was done because CNBC took a kickback from Melvin to put paid content out on its twitter feed, but that would be a huge, huge scandal if so, much larger than the story of Melvin failing would be. CNBC may be business journalism but they're still selling journalism under the NBC brand.
They don't do that, basically. This is a conspiracy theory.
But it's old news. It's not even relevant content as of three days ago, where they first announced that they had closed their position. Is there even a new press release that restates the action they took and announced three days ago that would make it news?
>But the hedge funds in question closed out their short positions days ago.
No they haven't, because they are literally running ads on CNBC telling people that right now. Why would they spend money doing that if they no longer have skin in the game?
Please be patient, I seem to be experiencing some genuine cognitive dissonance. Rare to catch oneself at it so I hope you'll help.
In your example, if I understand it, I go to Alice, take her share and give her an IOU. I give the share to Bob, and take his money. Then I go to bob, take his share and give him an IOU. I give the share to Christy, and take her money.
I have two people's money, and two people have my IOU's. If ten shares exist and these are the only shares that changed hands, it would be 20% shorted - or am I misunderstanding already?
Assuming I'm not, I would think I need to buy any two of these ten shares to give one each to Alice and Bob, and it could be the same one if Bob or Alice sell it back to me after I return it for my IOU. Okay, so far so good for a 20% short position.
If the shares were 140% shorted, that would imply that I've sold each of the ten shares once, and four of them twice. This sounds like the same situation in theory except that now rather than having the option of buying a share from someone whom I've just returned it to for an IOU I now have to do that - four times at least in total. The difference practically though seems to be that people know I don't have much bargaining power. If ten of the twenty-four people who own either a share or one of my IOU's conspire to not sell me a share back at any price, I'm in a world of hurt - and the more shares I've sold, the higher the odds that enough of the people owning these shares would want to do exactly that.
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.
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.
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.
Is that what happened? Did hedgefunds run out of credit? The problem with this reasoning is that it takes rules which apply to small investors trading through an intermediate platform and applies them to Melvin. It's just false that anything would be a legal or rules-based trigger for Melvin to buy. They don't HAVE to buy like people have been claiming. Melvin isn't trading on Robinhood.
Melvin may not be trading on RH, but they are trading on a prime broker who has a personal risk tolerance expressed as a function of mark to market losses. Once you exceed your collateral the broker is on the hook for your losses and “shorting GME” is not part of a prime brokers business model.
It seems to me like the regulatory framework around brokerages like Robinhood that gamify trading need to be fixed, but it smells like something that’ll take an act of congress.
Which makes retail harder to invest and one of the reasons why people are mad is that they are not allowed to participate in the stock market. It doesn't seem like there's a winning formula here. The term professional investor is already under fire but it's literally by the decision makers to protect you. Not many people like that.
This is the weird part. If RH is in the wrong, the crime they committed was giving users what the users thought they wanted (all gas, no brakes, no seatbelts).
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.
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.
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.
I saw the Interactive Brokers interview [0] and his explanation actually made a lot of sense to me (I don't know about Robinhood other than it has had many previous problems).
He said that they were worried about counterparty risk. They are only taking one side of a trade (on behalf of their customers) and depend on the other side to make good on their promise. In this environment they are not certain that the other side can deliver on (for example) certain GameStop options trades, and they don't want to be stuck holding the bag.
When the interviewer asked about customers being angry about the rules changing "in the middle of the game", he said he viewed the game as market manipulation, which is illegal.
But isn't he correct? Jeff Bezos or Bill Gates could almost certainly achieve what the Reddit mob is doing and engineer a short squeeze. But how would that not be market manipulation? Probably almost no Redditors believe the long term value of GameStop is $350, market manipulation is the whole point, the new part is that it's crowdsourced.
IMO both of his explanations are extremely reasonable. But if you look at the comments on the video (and on Reddit), the take away is overwhelmingly, "he is so honest about the fraud", "He should be in a jail cell", that he is covering up insolvency, etc (just look at the linked video, it's not just one or two comments).
This one interview probably isn't a huge deal in the big scheme of things, but I think it's very illustrative of a larger trend. It seems like the level of distrust in our society is so high (particularly towards our institutions) that, increasingly, straightforward explanations for things are rejected in favor of conspiracies.
And once we are at this point, it is hard to see how it doesn't only accelerate. After all, believing one thing happened just makes the anger increase and believing the next one even more plausible. People will inevitably lose their shirt buying GameStop at $350 a share (when it's only been worth <$15 for years) then blame the whole system being "rigged" against them. The number of people who want to burn it all down is only increasing and it makes it hard to be optimistic about the future.
He said that they were worried about counterparty risk.
Peterffy is a brilliant guy. You've got to respect anyone who is a self-made billionaire.
But I thought he did a bad job expressing himself in this interview. IMO he should have clearly separated stocks and options at the very beginning, and he should have stressed the difference between them.
The counterparty risk is higher in options. A lot of the Robinhood crowd is/was playing by owning call options.
If professional option market makers step away (which, in my limited study of the market they did), then the only way to make money on an in-the-money option is to exercise. But the risk is huge on a stock that is so volatile. And most of the Robinhood crowd that owned those call options most likely didn't have the cash needed to exercise.
Peterffy is right that being a counterparty to Robinhood was risky. As proven by Robinhood needing to raise $1 billion in capital on an emergency basis.
Of course everything gets even more complicated as soon as the DTCC starts increasing margin requirements. They probably demanded 100% (instead of more typical 2%) on GME stock. Oh shit! Now the stock itself is very hard to trade. So much capital required.
Peterffy should have explained stuff like that. But that's probably hard to do when the CNBC anchors are asking loaded basic questions.
> But isn't he correct? Jeff Bezos or Bill Gates could almost certainly achieve what the Reddit mob is doing and engineer a short squeeze. But how would that not be market manipulation?
So I actually spent a bunch of time thinking about this the other day, and came to the conclusion that yes, either of them could easily do the same thing to a small-cap stock all by themselves. There are a couple differences though. First, as soon as they control 5%, they would have to report. This would likely start making it more difficult for them to acquire additional shares), and they would have reporting requirements. This doesn't apply to a group of small individuals.
Second, even if they could, what is the point? They bid up the stock, completely corner the market, and then what? *They would have no exit plan.* If they just start selling, the price will start dropping again. At the end, they'd end up in a similar position to where they started (minus transaction fees). If they planned to keep the entire company, and were buying it to control it, it would be cheaper to just acquire the company the traditional way ("hostile takeover" type acquisions not-withstanding)
For what it's worth, I think this logic applies to hedge funds as well; they need to have an exit strategy, or there is no benefit. They can't make money for some of their investors, and lose money for others.
This is different than the current WSB group. Their exit strategy is "try to undercut the rest of the group". Some of the group will benefit, while most will lose. This leaves an actual benefit for the leader.
> The number of people who want to burn it all down is only increasing and it makes it hard to be optimistic about the future.
It may seem rather tin-foil hat of me to say, but seeing reports of large amounts of foreign money piling in to the GME situation definitely made me consider how this would be yet another time that a relatively small amount of money could do a lot to destabilize the country.
Very well thought out, thank you for taking the time to reply. Indeed his explanation makes sense in a certain context. However, if he shut it down because it was illegal, then he needs no other explanation. Consider that his primary explanation, the first thing he says is that he's worried about the clearing system. Not the legality...this raises an eyebrow.
Not saying he's wrong, just that framed in the context of deep-pocketed, connected market players losing money then he'd better be pretty damned specific.
Like you, I won't bother to dignify the comments on the video. There is a mob with pitchforks out there. The ending will not be pretty and the repercussions will be felt for a long time.
The idea that what is happening is illegal market manipulation is kind of ridiculous to me since it's not really any different than anyone (including shorts) going on CNBC and talking about why you should buy X stock
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.
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.
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."
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.
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?
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.
You think eTrade, owned by Morgan Stanley, had liquidity problems?? That's so outrageous it beggars belief.
There was absolutely some kind of coordinated manipulation happening. It is telling that the SEC's statement seems to have scared at least some of the brokers away from trying to prohibit buying (but allowing selling).
The market has circuit breakers for a reason and brokers can and do stop all trades on a symbol in certain extraordinary circumstances. But only allowing selling is basically forcing the price down and obvious manipulation.
I doubt E-Trade has access to much of Morgan Stanley’s liquidity, that would be absurd. Even they have limitations their parent enforces, and it would be really inefficient to operate with a massive surplus of collateral.
But again I said they may just not have liked tying up so much collateral for a single trade. Different companies with different needs.
And restricting purchases while allowing selling is the fastest way to reduce your collateral requirements. Every share sold is money the DTCC owes you, every purchase is money you owe them.
Lastly, it wasn’t a very useful conspiracy if restricting purchases on this rabble of minor brokers was the method. You could still buy GME across over 90% of the brokers by client base.
Even my broker, InteractiveBrokers, only restricted options. I could buy all day long. Or go long all day by.
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.
You are correct. But an emergency loan indicates increased risk of insolvency. Robinhood isn’t going to borrow money they don’t need, and raise their interest costs. Likely the loans were preexisting credit lines, so they were obligated to find Robinhood upon request.
The question is whether it will be enough and if not, whether new loans or investment will be available. Sitting on the outside it’s impossible to know whether this is an eminently comfortable buffer or a last finger in the dike.
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.
Citadel (who loaned Melvin a lot of money) and Citadel Securities (who pay RH for order flow) are not the same company - they used to be, but have split up.
Corporate veil could be pierced if there was attempt to have one of the companies change Robinhood's behavior on behalf of the other, but that is pure speculation and many of the other explanations make sense too.
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.
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.
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.
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.
Strictly speaking, most traders of US listed stocks wait two days to settle trades. Robinhood will give you an advance on your funds but that doesn't make T+2 settlement "unacceptable...in this day and age" lol.
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.
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.
> [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?
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.
> 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.
> 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.
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 :))
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%.
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,
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.
> "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."
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.
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?
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.
> 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
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?
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%.
I don't actually know, but I think shorts are covered by borrowing stock, which is a rule that exists to fix this problem... though the fact that it's possible to short more stock than exist suggests borrowing stock doesn't mean what it sounds like.
More generally though, the talk was about clearing problems all stock trades, not just these. I can understand how a meltdown related directly to the stocks in question could happen. I don't understand why this threatens the solvency of the whole clearing house. Even if all 140% are due at once (they're not) @ $0, someone owes someone else $25bn - $30bn.
It doesn't affect the clearing houses, it affects the brokers.
The clearing houses told the brokers (WeBull, Robinhood) that they need $x of capital to secure the trades, and they simply didn't have that cash.
This is only occurring because of the overall volatility and volume of trades going through particular brokers. Some brokers have been unaffected, presumably because they have more cash on hand.
I don't really understand why they would need to put up a margin in order to execute/clear a fully paid buy order on the exchange. Users promised $x in exchange for stock. RH have their $x. RH needs to make good on the exchange or clearing house. Seems to me that risk runs the other way... Other brokers/clearing house participants might be unable to pay RH users because leverage + a unexpectedly high stock price.
I understand why RH would shut down leverage. After that point, I don't understand why/how stock purchases represent a risk to anyone but the buyer. How is the non-leveraged side creating a risk of nonpayment? I really don't know how any of this works though, so let's leave this all aside. Lets grant that RH/users are at risk of being unable to cover trades.
So what? GME buys on RH create a scenario that risks RH running out of money. So what? Why/how does this risk the clearing houses? It's a $20bn stock. A 2% move in any of the big companies is a $20bn.
because the volume is so high that it was a multiple of the total shares in existence yesterday.
im simplyfing but RH could have had to put up to 300m - 1B collateral just to cover the gamestop trades. (they can't use their customers money for this)
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.
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
> 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.)
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.
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!)
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.
> 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%.
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.
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.
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.
>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)?
I doubt there are many people on RH that wouldn't get covered fully by SIPC even in the worst case.
The idea that a broker going under wipes out all its members assets is just not true. MAYBE some stuff in flight would have issues. All the capital requirements and regulations are designed specifically so the brokerage fails first before customer assets are at risk. And again, still SIPC insured.
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.
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.
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.
They are SIPC insured and every single regulation and capital requirement is designed so the broker fails first before any customer assets are at risk. Maybe some stuff in flight might have issues.
It might create a liquidity crunch for some people but the idea that people would only get a fraction of their account is pretty much FUD.
But the idea they could go months or years without getting access to the stocks in their account isn’t. And it’s small consolation to get all your GME shares back only when it’s trading back at $20.
Hedge funds didn’t bury Robinhood under 100,000 bad reviews. Both the shorts and longs have a vested interest in keeping Robinhood afloat, but the WSB doesn’t seem to realize that.
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?
The issue was between Robinhood and DTCC, and couldn't be resolved by having customers' settled cash because of the rules that forbid using the customers cash as collateral. Though it might have worked if it just slowed down buys enough.
I'm not tuned in enough to know the exact relationship between RH and DTCC.
I am tuned in enough to know there is a big difference between rolling up and asking for credit saying "Hey I've got X dollars in settled cash to buy Y. Please lend me some money." and saying "Hey I've lent out X dollars to buy Y. Please lend me some money."
I said I don't know the exact relationship between RH and DTCC because it isn't public. Why would they be asking the DTCC for credit? That is absurd on the face of what collateral is there for.
They can borrow money and use that for collateral which is exactly what they did. And there is a massive world of difference rolling up to a bank/investors saying "Hey I have settled funds, I need to borrow money to post as collateral" vs "Hey I lent people a bunch of money, I need to borrow a money to post collateral".
They were told by their clearing house they aren't allowed to continue allowing $GME trades due to capital requirements, and they have to let customers unwind their positions at any time.
If they had stopped all trading of the security because their clearing house wouldnt agree to the deal, thats one thing. When they limited only one type of trading which had an asymmetric affect on the different groups trading this security, then it looks like market manipulation, sounds like market manipulation, walks like market manipulation
Links? 100% of what I've seen is clearing required more collateral. I haven't seen one reliable source saying a clearing house outright forbid trading GME.
> 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.
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.
Why assume they'd only want to distort prices up rather than down?
On the contrary, it seems to me that "banning selling, not buying" could be a useful tool for helping out some hypothetical buddies who would rather that a large tranche of 115s & 320s don't end up very inconveniently in the money.
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.
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.
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.
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.
Exactly. IMO if there was a liquidity issue / settlement issue they should've gone to the SEC / NYSE and HALTED trading. Not manipulate the market dynamics via volume. It's incredibly shady, and I've already withdrawn what assets I could from their platform.
If the only way for you to comply with regulations is to violate other regulations (market manipulation), you must shut down your company.
It's really quite simple.
Robinhood is like some guy driving without a license who gets pulled over by a cop and says "but I'm ineligible for a driver's license, so obtaining one would be illegal fraud, so I didn't do that". Guess what buddy, you don't get to drive.
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.
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.)
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.
I emptied my account, just like I did after the Wells scandals (plural). Years from now, maybe a new exec team, and I'll consider returning (though it's been many years for Wells, and I have no reason to reconsider...)
The dilemma though is that a clear statement of “we are running out of cash” would start a run of customers transferring their money and cashing out, cash RH didn’t have.
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.
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.
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.
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.
35% year doesn't sound so bad until you realize that a lot of shorts are heavily leveraged--they borrowed money to have the "capital" to make a bigger trade than they could really afford. This would multiply their earnings if it works out, but it also multiplies their losses and the interest they pay. I assure you if a hedge fund could just wait out the crowd they would do that rather than take a billion dollar loss, but if they are leveraged it requires their lender's cooperation.
Ameritrade wouldn't let me write covered calls (for calls expiring today) unless I called up their trading desk. Which had a 700 person line in front of me.
> 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?
Are you factoring in the cost of the call option that prevents their entire portfolio from getting nuked if GME keeps going up for some reason?
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.
> why would blackrock lend you their shares so that you could tank their value?
Because Blackrock commonly does whole-market index funds. They have to hold onto those shares as long as people are buying their mutual funds.
Might as well collect some interest while waiting. They wouldn't lend all their shares away: they just lend away all the shares that they expect that their mutual fund won't sell this year.
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?
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?
> 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.
No.
You just need one entity, say Blackrock, that is a) long, b) has lent their shares out to short sellers, and c) is willing to reduce their long position (to realise profits, say), then 1 share circulating is enough for the shorts to close their position.
Basically, the shorts can buy a few shares, return them to the whoever they borrowed it from, then buy it again from them, and return it, buy it, etc.
Here's how it works:
1. Initial position
Blackrock long 27 (27 shares), random people long 20 (20 shares)
Note: net share supply = 47
2. Shorter A come in, borrow 26 shares from Blackrock
Blackrock long 27 (1 share, 26 lent to short A), random people long 20 (20 shares), shorter A flat (26 shares, 26 borrowed)
3. Shorter A go short by actually selling to random people
Blackrock long 27 (1 share, 26 lent to short A), random people long 46 (46 shares), shorter A short 26 (0 shares, 26 borrowed)
4. Shorter B come in, borrow 45 shares from random people
Blackrock long 27 (1 share, 26 lent to short A), random people long 46 (1 shares, 45 lent to short B), shorter A short 26 (0 shares, 26 borrowed), shorter B flat (45 shares, 45 borrowed)
5. Shorter B actually go short by selling 45 shares to redditors
Blackrock long 27 (1 share, 26 lent to short A), random people long 46 (1 shares, 45 lent to short B), shorter A short 26 (0 shares, 26 borrowed), shorter B short 45 (0 shares, 45 borrowed), Redditors long 45 (45 shares)
And, redditors with their 45 shares won't sell, and won't lend.
You say: > 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.
I suggest:
There is one random guy that still has a share (all the others have lent them out). So:
6. Shorter B buy a share from that random person with a share (they're happy to sell it at this high price):
Blackrock long 27 (1 share, 26 lent to short A), random people long 45 (0 shares, 45 lent to short B), shorter A short 26 (0 shares, 26 borrowed), shorter B short 44 (1 share, 45 borrowed), Redditors long 45 (45 shares)
7. Shorter B return the 1 share to the random person they've borrowed it from:
Blackrock long 27 (1 share, 26 lent to short A), random people long 45 (1 shares, 44 lent to short B), shorter A short 26 (0 shares, 26 borrowed), shorter B short 44 (0 share, 44 borrowed), Redditors long 45 (45 shares)
8. Shorter B buys the 1 share from the random person they've just returned it to:
Blackrock long 27 (1 share, 26 lent to short A), random people long 44 (0 shares, 44 lent to short B), shorter A short 26 (0 shares, 26 borrowed), shorter B short 43 (1 share, 44 borrowed), Redditors long 45 (45 shares)
9. Now, return steps 7+8 43 times:
Blackrock long 27 (1 share, 26 lent to short A), random people long 1 (0 shares, 1 lent to short B), shorter A short 26 (0 shares, 26 borrowed), shorter B short 0 (1 share, 1 borrowed), Redditors long 45 (45 shares)
10. And have short B return the final share to random person. Then shorter B is flat, and out.
Blackrock long 27 (1 share, 26 lent to short A), random people long 1 (1 shares, 0 lent to short B), shorter A short 26 (0 shares, 26 borrowed), Redditors long 45 (45 shares)
11. Now, have shorter A to the same game with 1 share from Blackrock 26 times - Blackrock is probably also happy to sell at these prices:
Blackrock long 1 (1 share, 0 lent to short A), random people long 1 (1 shares, 0 lent to short B), shorter A flat (0 shares, 0 borrowed), Redditors long 45 (45 shares)
12. Endgame.
Shorters are out, despite the fact that redditors were holding 45 out of 47 shares, and never let go of them!
Blackrock and random people have reduced their long exposure to 1 each. Redditors are stuck with 45 shares.
Note: how much the shorters lost depends: they sold in step 3 and 5, and bought back in steps 6,8,9,11. The price difference determines their loss. They probably lost quite a bit. Blackrock and random people probably won quite a bit. Redditors that are left with the 45 shares... depends for what price they can sell it.
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.
> 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."
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.
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.
> 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.
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
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.
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.
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.
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.
> 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.
Yet people don't run around saying that we should ban people from being able to buy stock because of that.
I honestly wonder if we should 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 playing numbers games and gambling, under the impression that they're creating value somehow. 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.
HFT (electronic market making in general, HFT being a particularly potent expression of it) drastically lowered transaction costs for retail investors, and most theories of how HFT is harmful or absurd are based on a lack of understanding of market structure. Is how it's something other than absurd.
Oh, I wouldn’t even call my idle layman thoughts a theory, more of a hunch really.
Have retail investors generally benefitted from doing an amount of trading that would incur significant transaction costs?
Do you think my general sentiment is off base, and the market (as is) is unequivocally a good thing for society as a whole? Even with regular worldwide crises caused by wild speculation, greed, and incompetence?
I would be very interested to read a thorough defense of how the increasingly complex market machinations and instruments are good for “the people” and some indication that their value isn’t entirely captured by the small cohort that dreamed them up. I admit that I understand this very poorly.
A thing retail investors have always done (placing orders to buy and sell stocks) used to cost a lot. Now it's practically free. You can flee to a more abstract argument about whether investing itself is bad, but I'm not interested in debating that, only in observing that HFT had a large hand in eliminating those costs.
I note further that you only attempted to rebut one of the two points I made in my comment.
That’s been my argument/question all along, though. I started off with the sentiment that maybe we should stop people from buying stocks, period. HFT was not the main thrust, I can easily claim that you’ve sidestepped my points as well.
Anyway I’m not trying to debate, I thought it was clear from my last post that I’m not an expert and I’m really just asking questions (sincerely, not rhetorically) and seeking to gain more understanding of the market and its macro-level, “big picture” effects on society.
I'm not interested in and take no position on your broader argument. I'm exclusively interested in: "HFT? How is that anything but absurd?". I think that's easy to refute. If we agree, we agree, that's great.
So HFT is not absurd because it lowered transaction costs for retail investors. What mechanism did it achieve this by?
I call it absurd because computer algorithms trading stocks at the microsecond level seems completely divorced from the theoretical basis of “investing.” I don’t understand how it makes sense on a theoretical level. Reducing transaction costs doesn’t seem to explain that.
For example: HFT-backed trading systems enable companies like Citadel to quote better spreads to retail traders than to hedge and mutual funds, which is why PFOF arrangements are structured in terms of how much better their prices will be than the actual exchange (which they are required to at least match, by regulation).
It's probably the case that no one person needs to make a microsecond-scale trade. But, obviously, there are many people trading, not just one, and making things very fast is one way you make things scale. In reality, though, extremely high performance is probably more important as a vector for competition, which is ultimately what brought spreads down.
Thank you. I definitely have some reading to do in trying to wrap my head around all of this. At first glance, it does seem like some people in the industry (Charlie Munger, Michael Spence) share my perspective (though Munger could just be strategizing).
You know who is almost certainly not strategizing? Vanguard, which is probably the most trustworthy firm in all of finance. You can look up what they've said about HFT, too. :)
I keep coming back to these fundamental questions. HFT (and market making in general) increases liquidity. Why is liquidity a good thing? Why should it be so easy to quickly buy and sell ownership of companies? To me that seems like a bad thing. I feel like I’m just missing some fundamental understanding.
As a powerful investor, you can buy a large position in a company, lobby for changes that increase the short term value of the stock, sell it, and move on, likely destroying it in the process, leaving all of the people who were actually invested in its success holding the bag. Is that to be seen as a net good? It seems like HFT and other instruments are just taking that concept to ever more extreme levels.
I was more specific than "liquidity". I said "reduced spreads and lowered trading costs". It is better for you to pay less to execute a trade than to pay more for it.
I don't know what an HFT MM has to do with people manipulating the stock markets directionally.
Sorry - I was referring more to some other stuff I was reading than anything you said.
It has to do with it because it enables it. It's part of abstracting investing away from providing capital to companies because you believe they will succeed. Somewhere there is an argument for why these abstractions are beneficial to more than just the people profiting off of them. Why do you keep studiously avoiding engaging on this?
I'm interested in discussing things that are knowable, and where I have some chance of learning things. You said that HFT was absurd. It was easy to point out that there are real, practical benefits to HFT (those benefits become even clearer if you do some reading on how crooked the human-scale market making system was prior to HFT; Google, for instance, [odd eighths]).
That's the extent of my interest in this discussion. If you do some research and find out something that refutes my argument about HFT, I'd be interested in learning about it. Otherwise, I think if we're on the same page about this detail of the thread, it's fine to leave it there.
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.
> 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.
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.
> 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?
> 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.
> 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?
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).
Assuming the index is priced correctly, the fact that SPY is up 20% means the net present value of future cash flows for the largest companies on the exchange have increased through covid. In and of itself, there’s nothing unethical about that. Unless you’re claiming they’re maliciously profiting off the backs of the unemployed? Would be interested in any evidence of that.
>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.
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.
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
> 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)
That's true in a weird abstract "perfectly efficient" world where nobody has to buy or sell stocks except for liquidity, and we all just know the correct price.
The normal model of the market posits that different people have different biases and scraps of information, and we use buying and selling to find the "correct" price. Under that model, selling will always reduce the price compared to what it would have been.
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.
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.
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.
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.
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.
In an ideal situation, short sellers are supposed to "keep markets honest".
There are specialized hedge funds that trawl through data to seek out companies that might be engaging in fraudulent activity. They then investigate those leads. If they find evidence of fraud (ie inflated earnings), they short the stock and the make public the evidence.
Obviously the SEC should also be doing this. However, it can be argued that having additional well funded market participants that are financially incentivized to seek out and report fraud is beneficial.
On a side note, some of these hedge funds do not immediately announce which company was the subject of their investigation when they report evidence of fraud. This causes a mad scramble of activity amongst companies that were engaging in fraudulent behavior, resulting in more fraud being exposed.
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?
" 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^H^H^H^H forward contract (oops, futures are on exchanges and forwards not, I forgot that being exchange driven is part of what makes it a future vs. forward)
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.
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.
I am by no means an expert, and have a disdain for short sellers, but I will say this: having watched the "Dirty Money" on Valeance where it appeared that shorts were the first to sniff out the fuckery, I believe we'd need some very strong regulation in place to cover cases like that, which really we should have anyways.
If you're a true "free market" believer, you will probably hold the belief that short-sellers are a part of the "built-in regulation" of the invisible hand. At least that's how I understand the argument.
Really, the biggest problem is that shorts have a vested interest in tearing a company down, be it through tricks like FUD, short ladders or just outright market manipulation. If they're just trying to make sure a stock is not overvalued, fine. If they start trying to kneecap thriving businesses through shady tactics, who does that serve other than the short seller?
"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.
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.
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.
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.
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.
the screenshots (which could be faked obviously, but there have been no allegations of that) contain verbiage to the effect of "we took the liberty of closing out your position"
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?
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?
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.
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?
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?
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.
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.
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.
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.
They initiate a cash transfer via ACH, which takes a few days (absurd). In the meantime they honor the amount you decided to withdraw. It's a bookie floating a new gambler.
I opened an account two days ago to buy one share of GME for fun, then they blocked my ability to, but I still can't take my money out -- despite my bank notifying me that it's been withdrawn. This is because they probably process all the ACH records in a nightly job on weekdays. It'll be Monday before the money can begin its 3 day trip back to my bank.
So much of this process is unnecessary but what are you going to do? They (the entrenched financial system) have you by the throat.
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.
> 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).
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.
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.
This is nothing new. I had a Shearson account back in the early 1980s and bought an oil company stock that was undervalued. One of those leveraged buyouts occurred when I was on a short vacation, and I did not find about the expiration of a buyout offer (no broker bothered to call me). Later I found out that Shearson had sold a lot of shares from their customer accounts to get the benefit of the buyout offer, and replaced them with lower priced shares after the offer expired. Later, Sandy W., the head of Shearson was hailed as a financial genius. This was nearly 40 years ago.
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?
Somewhat offtopic I guess, but a huge part of this seems to be two-day settlement.
Why on earth does the US still have two day settlement?
Surely we're at a point where we ought to be able to send money nearly instantly for ~free. In the UK we have the faster payments network, but hell crypto whatever take your pick. Surely 2 days is not the right amount of time?
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
"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...
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)
> 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.
Good point, and is actually the thing I have the most problem with here with other institutions but you're right that RH did the same thing: only weathered the storm by a few mechanisms, one of which upended democratic access to the market.
RH probably had a bad choice to make: The clearing houses were demanding more collateral, RH had to figure it out. RH was still wrong, but the fundamental problems were those mechanisms that allowed lack of collateral to discriminatorily disadvantaged on class of investors in favor of others. I doubt that was the deliberate intent when these mechanisms arose, but it sure is the result, and needs to be fixed.
I'm not convinced on the theory of efficient markets & allocation of capital. WSB making decisions knowingly contrary to the underlying finances of a company sort of undermines that theory. Those theories pretty much rely on people making, mostly, fundamentally, financial decisions, even if they're wrong or poorly informed. WSB was making more a philosophical decision (along with some pile on FOMO, sure) and that method of decision making is definitely not covered by the theory of efficient markets.
Though I suppose the GME incident, with the peripheral stocks like AMC, could be viewed as the first round of an iterated prisoner's dilemma. It was a "defection" that worked this time. But, if the institutions impacted and those watching are left to respond on their own instead of through artificial protection, they might very well come up with strategies that would thwart the philosophical decision making of WSB in this situation.
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.
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.
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.
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.
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.
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?
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.
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.
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?
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.
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.
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.
> 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)?
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.
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.
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.
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.
> 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.
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.
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
So if I'm reading the comments here correctly then the basic reason people got into this situation is because there's no way to actually transfer money into their account quickly and RH had to design around this?
That's some pretty impressively^Wembarrassingly primitive transfer mechanisms right there. :D
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.
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?
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.
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.
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.
It's pretty easy for RH to just dismiss this without doing any research but it's also pretty easy to figure out. Have RH sit down with people who say they were affected, and go through the transaction log. Honestly I wouldn't be surprised if there were a bug that caused unintentional selling like this, because it sounds like RH was acting on the boundaries of their abilities. This was an edge case that their systems weren't designed to handle, and they didn't have a good way to work around it besides shutting off trading.
Fidelity has zero commission stock trades. Commission on option contracts seem low (~0.65 per contract). I seemed to be getting slightly better prices with Fidelity than Robinhood. Even before this latest fiasco, I wasn't seeing the point of continuing to use Robinhood. Is there any?
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.
RH had a major outage last year probably due to a leap year bug. The founders are your typical SV "move fast, break things, write bad software" types. There hasn't been a good reason to use them since 2019, when the competition eliminated commissions.
The news seems to be saying that Robinhood, a popular app, is able and willing to sell users' shares without their permission. This is a surprising and unpleasant quality of Robinhood, an app. Sounds like tech to me?
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.
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
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.
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.
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.
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".
“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”.
This is all fundamentally a Thomas Hobbes scenario of the masses deciding the "state of nature" no longer suits them and they want to work together
Basically Hobbes said "You might be strong, but someone will always be stronger. It makes sense to band together & agree on a few rules (form a government) so that we're stronger than any individual and we (mostly) won't get punched in the face. Otherwise, life is 'nasty, brutish, and short'"
As long as you're not an anarchist or anarcho-capitalist, this should be pretty fundamental & you agree with it, though sure different people draw the line in different places on how many rules should be made and what they should be about, which is fine, people can disagree on that stuff, that's mostly a different topic.
In the GameStop situation, we have a whole bunch of people saying:
Hey, the state of nature in the investment world is that we're all separate and weak and we get pwned by the big players. Let's band together so we're not as weak.
This is, essentially, what the large institutions are already doing. They're already a collection of people acting together.
Which is what makes this situation so infuriating: I don't particularly like all of the ways that capital markets function, but they should be roughly democratic (small "d")_in terms of access, no separate rules for different groups. A group of people that call themselves "Citibank" or whatever should not retain a privileged position above a looser group that calls themselves "WallStreetBets".
Yes, I understand the concepts behind T+2 and clearing houses calling for more collateral etc: but that's the problem right there. If those mechanisms are resulting in a privileged position for some institutions then it's those mechanisms that are flawed & antithetical to a democratically accessible market
I think people that are trying to justify this by explaining about calls for collateral and so on are completely missing the point: Those mechanisms are creating financial victims of the retail investors who lost their shirts when the price tanked because rule makers decided you were only allowed to sell GME, not buy it.
It's like saying (in possibly too extreme of an example, but I want to illustrate the point) that a murderer killing a cop is justified because if they didn't shoot the cop then they would be executed in the electric chair. That's not how it's supposed to work. Large institutions don't get to (well, I guess they do) shut down part of the market just because they'll lose money if they don't. That's the risk! It's not always a great system, but if anyone knows the rules and goes in eyes-wide-open, it's these institutions. No excuses, no "but but but collateral, T+2" and so on. You don't get to take other people's money (well, again, I guess you do) just because if you don't do it you'll lose a bunch of your own.
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.
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.
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.
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?
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."
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
"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."
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.
>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.
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.
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"
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.
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.
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.
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.
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.
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.
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.
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...