Being prevented from being able to buy a stock if the brokerage can not afford to legally sell it to you is the expected outcome. If you want to argue that Robinhood should have been bigger, and thus had more flexibility and been able to handle this, sure. Why not. But then you're complaining that the company you're dealing with isn't big enough to float your risky position.
Would you have preferred the alternative where Robinhood risks exploding, has no liquidity, triggers a rush where everyone tries to get their stock out of Robinhood at the same time, fails, and every Robinhood customer is stuck waiting on SPIC for some undetermined amount of time?
Or would you have preferred the alternative where Robinhood didn't allow you to sell either? And then it the stock went down during that time, you can't try to get out?
Robinhood is a shitty company for a lot of reasons, but preventing themselves from being over-extended into bankruptcy isn't really one of those reasons.
A large part of Robinhood's entire product is papering over the difference between a cash account and a margin account, and hiding the intracacies and timing of the underlying market.
> Your cash is transferred and deposited.
When you open a new account, and start a transfer from your bank, that is not instantaneous. "Cash" doesn't magically appear in Robinhoods' account. Until that deposit clears, you are effectively operating on margin.
If you recently sold something on Robinhood, and want to buy something else, "cash" isn't in your account yet, because that original sale hasn't settled. Robinhood is papering over that as well. This one in particular I'm not saying they shouldn't paper over, since I believe it's less of a risk.
But each of these "Robinhood covering your unsettled positions" adds a little bit of risk. This risk adds up.
The suggestion of Robinhood only letting people trade with cash that is fully settled into their accounts would completely swap the underlying paradigm of Robinhood's product.
Even so, new trades you want to make would have to settle. And as discussed elsewhere, Robinhood has to funds and deposits to cover potential risk associated with those trades until they settle.
There is a lot under the hood that is abstracted away by Robinhood, and now those intricacies are leaking out (and completely mis-understood, because one of the premises of Robinhood's product is that you shouldn't have to understand, or even know about, them)
> No, not all Robinhood accounts are margin accounts,
I don't think I said that; I said that Robinhood papers over the differences in a way such that the end user doesn't explicitly interact in a hugely different way, and it's not explicitly clear what kind of account you have.
I did imply that new accounts are all technically margin accounts. The link you provided seems to prove that?
> When you sign up for a new account, you’ll automatically start with a Robinhood Instant account, which is a margin account.
> 2. Yesterday, all Cash accounts were disabled from trading GME
Yes, but I didn't say that this was because they were "margin". I said that this appears to be because Robinhood, as the broker, still requires additional cash on hand to cover these positions until they settle. This is a different thing than the margin issue.
> 3. Trading with a margin accounts and trading on margin is different.
Yes you're right. But a new user that just signed up may be thinking they are using a cash account, but it's actually a margin account. It also appears that you have to manually downgrade from an "Instant" (margin) account, to a "Cash" account[0], and I highly suspect that most people didn't do that, and thus are still using a margin account.
I will not argue with you about what Robinhood did to any of the margin accounts, if people borrowed money to trade stocks and Robinhood think that's risky, they have the right to close positions as part of standard risk management.
But I am against what they did to the cash accounts (and margin accounts not borrowing money to trade). It seems that you think it's a small portion of all of the accounts, which I disagree.
Even if it's only a small portion, what Robinhood did to these cash accounts was unprecedented and unacceptable as a broker.
For point 2, I think you are referring to the clearing process. Brokers were liable to cover if clearing houses do not[0]. But that is Robinhood's liquidity issue and not does justify Robinhood disabling cash accounts from buying stocks.
I'm not spending the time to watch some Youtube video you're posting, especially if you don't link to a specific timestamp/context. I highly suspect that the link you're saying is that a broker would be responsible to cover loses on trades they made if the clearing house does not; not that the brokerage is required to accept unlimited risk just because someone wants them too.
> But that is Robinhood's liquidity issue and not does justify Robinhood disabling cash accounts from buying stocks.
Robinhood having a liquidity issue 100% justifies them not offering services that they may not be able to actually cover. Because the alternative is way, way worse. You want Robinhood to just... make up money that they owe people but don't actually have? I'm fairly confident that financial institutions can't just make up numbers in order to manipulate their way into compliance.
I very much dislike Robinhood as a company, but what you're suggesting doesn't make sense.
> services that they may not be able to actually cover.
That’s exactly the point the parent commenter is making: there is nothing to cover for stock purchases on accounts with a balance. No liquidity issues can arise from that. You can say it’s easier to just turn off everything at once, but there is no actual reason to prevent stock purchases without margin, the buyer bears all risk.
Except for rules put into place by Dodd-Frank make that a legal requirement for all brokers (to remove systemic risk from DTCC). You can argue that it doesn't make sense for fully covered cash accounts - but it's not a decision Robinhood could make on their own - they are mandated by law to post that collateral from their own operating capital, and not use client assets (like the cash in their account).
You are papering over the fact that even cash accounts require Robinhood to have sufficient cash to cover amounts liable until the trade is actually settled. There is an entire web of relationships between DTCC, robinhood, bank LOCs, etc. that make robinhood's capital requirements explode when GME stock explodes 1000% up and becomes the most traded share in the entire universe of stocks.
In a volatile market - a single share may trade many times a day - and Robinhood has to have enough to cover each trade (not share) - so the market cap is not a ceiling. It's likely RH didn't have enough money to adequately cover the levels of volatility (or they projected they wouldn't, soon).
Apple alone had a volume of 170M on Friday, for a total of $0.9B cover required, GME had 50M or $10B cover needed at ~$200.
There would have to be an insane ratio of meme-stock trading vs SP500 for GME alone to impact their cash requirements - if that’s the case it seems they dug their own grave...
Dodd-Frank and rules around trade settlement - in particular brokers have to post collateral based on complicated calculation to the clearance firm (DTCC) until the trade clears (usually T+2). Unfortunately it looks like DTCC increased that percentage to 100% for a few names (like GME) - https://twitter.com/KralcTrebor/status/1355172567242469377
Would you have preferred the alternative where Robinhood risks exploding, has no liquidity, triggers a rush where everyone tries to get their stock out of Robinhood at the same time, fails, and every Robinhood customer is stuck waiting on SPIC for some undetermined amount of time?
Or would you have preferred the alternative where Robinhood didn't allow you to sell either? And then it the stock went down during that time, you can't try to get out?
Robinhood is a shitty company for a lot of reasons, but preventing themselves from being over-extended into bankruptcy isn't really one of those reasons.