Additionally, Robinhood isn't the only one in a bind right now.
TD Ameritrade has restricted a lot of options trading on a lot of these stocks, requiring you to call in to sell certain types of derivatives plays which have a level of risk but highly profitable for experienced traders.
It's left a VERY sour taste in my mouth to know I have to call into a call center, and wait 90 minutes to speak to someone to execute a trade that puts 100% of my capital at work using zero margin (sell cash covered puts on GME and AMC).
You can buy on eTrade, Fidelity, Vanguard, Schwab, WeBull, and others. As of 4pm EST RH has allowed for each user to have 20 shares of GME, an increase from 1 share which was the max at the opening bell.
It's affecting people even for unrelated transactions. For a wire unrelated to stock investing, I was on hold with Schwab a total of 1 hour over since yesterday, although part of that was from giving up twice.
Um, no. The "war chest" is in order to meet the capital requirements. It says so right in the article.
I mean, you think the owners are diluting their ownership just for fun? Nobody does that.
Also why do you think the capital requirements are untrue? There have been plenty of factual articles describing the precise increase that was required and how it was spread across different trading platforms.
If they have the capital why aren't the opening up trading on GME fully? I'm not saying the capital requirements aren't real, I'm saying that's not the complete and honest explanation for why they're restricting trading on GME. Anyone with two brain cells to rub together can see their conflict of interest here.
Having capital is not binary. It's not like once you meet a magic threshold, you can then allow for unlimited trades. Robinhood raised $1B on Thursday, then another $2.5B or whatever today. By your logic, they had the capital on Thursday, so why would they need to raise more today?
I find it very hard to believe hundreds of thousands of new accounts were created since Thursday. Everyone I know trading on RH is now actively in the process of transferring out, once they close up their short term trades like GME.
But Thursday is when they stopped trading GME. I can't believe that people would be stupid enough to go into RH to trade when the entire WSB is talking about how RH screwed them.
I'm curious if this is to address the current potential of a large shift of users moving to different brokerages and to keep Robinhood afloat until IPO in which it will have to fend for itself. I've seen a large sentiment online, and in public spaces expressing how angry the consumer is about RH restricting trading.
People still use Bank of America and Wells Fargo despite the incredibly customer-hostile things they've done in the past. I will not be surprised if Robinhood weathers this pretty well after a short term hit.
Everybody needs to bank, those pay checks gotta go somewhere.
The portion of people who invest -- outside of forced investing through 401k, etc. -- is pretty small in comparison.
Those that are using an investment application to speculate on stocks on their phone are a smaller yet demographic. And I'll bet that, dollars to donuts, they're more informed about everything, and more willing to shop.
When doing the right thing takes more work than the current situation, people are probably going to do nothing as long as it's not too uncomfortable. It's akin to canceling subscriptions.
I lazily left my 401k at my previous job "running" for 18 months before finally rolling it into my personal IRA. I'm sure I'm not alone in this.
I'm personally of the opinion that it's limited choices. Banks have been merging and suppressing new entries to the business for decades. Around here, there are basically two large banks and a handful of credit unions.
Wells Fargo literally opened accounts for people without their consent, pushing balances below critical thresholds and causing their customers to lose money they had no right to lose to fees. BoA foreclosed on homes they never should have foreclosed on.
These weren't one-off incidents (Robinhood has not, yet, established a trend), these were systemic issues with these banks. And people still go to them. They're getting new accounts daily, not subsisting off of legacy accounts.
Lots of chatter on /wsb talking about Fidelity migration. I'm not sure how that translates into actuals - like the WhatsApp migration it may be severe or it might be a tempest in a teapot.
But at least it identifies who are they real customers for RobinHood.
Fidelity opened an account, took my money and I was able to trade this morning w/o restriction.
Robinhood,on the other hand is still tumbling thumbs on their ACH transfer I did last monday. No margin was accessed.
Going to close the RH account, I see no value in it. I do most of my trading on another platform, but felt like playing with fun money to see how it'd be.
not quite the same as whatsapp, you're isolated. you dont need your friends to move, it's something you can do on your own.
"reports" that i'd read said that fidelity were getting something like 600% increase in signups (who knows if thats because of this movement or because people hate RH).
Very true. But on the other hand, it ties up your investments for several days.
Moving means totally removing yourself from the market precisely at the time when big swings are happening, which many people might not want to risk. So it's actually pretty tricky, not frictionless or anything.
This is a fascinating game to watch. I watched The Big Short yesterday for the first time, as it's trending on Netflix and was suggested, and this moment feels similar to exposing a weakness in the system that needs to be addressed - and hopefully not to strengthen the wrong position; I didn't realize the incredible actors cast for it, obviously they took on the roles as it's an incredibly important story for the general public to be educated about, to understand.
Feels like a good day to watch The Wolf of Wall Sreet.
Yes. If you read what the ultimate intent of the /r/wallstreetbets crowd is, they're not just trying to exercise the same right to make money off of the financial system that billionaires have.
A year ago, the person that started this detected a situation where GME was a company that didn't have long term prospects, wasn't losing money, but was still shorted to 140% of it's value. It's not supposed to be possible to go over 100% any more since 2008, by the way.
Because of the shorting, he deduced that hedge funds and other influential people in the financial system were planning to encourage GME to go bankrupt, thus getting their short shares forgiven, because a bankrupt company is written off as a loss by the actual share owner.
So the hedge funds' plan was to short shares at some price as much as they could get away with, then make the shares worthless by encouraging bankruptcy. Since the shares would then be written off, they would pocket all the money they took from selling the shares they borrowed to short. Nice racket.
What WSB did is make the price go in the opposite direction, which is important for a lot of reasons, but one huge one is that the risk of shorting is proportional to the reward. If the price of a shorted stock goes up, then the borrower (person doing the short) still has to return it to the owner. No matter how high the price goes.
So they realized if they drive the price WAY up, then the people who were doing the 140% shorts on a company they planned to drive out of business would get screwed by their own system.
Some of the folks on WSB are making money and lots of it, but many of them just want to see the whole unfair system burn. By exploiting this weakness, they're trying to force the government to reform the whole finance industry.
>It's not supposed to be possible to go over 100% any more since 2008, by the way.
This is fundamentally untrue.
Abusive naked shorting with the goal of driving down prices is illegal. >100% short interest doesn’t require naked shorting at all.
If person A borrows a stock from person B then sells it to person C, they can borrow the stock back from person C and sell it again. No naked short involved.
In any case, the important limit here is that financial firms are not supposed to allow hedge funds or other entities to assume short positions for more stock than exists, because if it becomes necessary to execute the trades to resolve the shorts, that extra 40% will fail to deliver, because those shares don't exist.
The SEC actually keeps a list of trading companies with high rates of failure to deliver as a means of detecting naked shorting.
> that extra 40% will fail to deliver, because those shares don't exist.
That's only true if you force all shorts to be covered at once without a chain of trades. That's not how it happens.
Person A covers their short by buying a share from Person B and returning to Person C. Person D then buys that share from Person C and returns to Person E to cover their short. That's 2 short shares covered with a single underlying share and no failure to deliver.
Yes, the SEC does track failure to deliver, but >100% short interest does not mean there is naked shorting nor does it imply there will be failure to deliver.
In this situation, there's no theoretical upper limit, is there? How is this any better than it was before the naked short selling "ban" was instituted?
That might make a moral difference, but I'm more concerned about the effect of the financial system on firms in the economy. It doesn't seem obvious that "naked" short-selling has a worse effect than "recursive" short-selling.
Naked shorts let you create stock out of nothing, which you can sell to drive prices down (and ultimately make money off of, since you can rebuy more cheaply).
If you can’t do that then you at least have to get the cooperation of someone who does own the stock in sufficient quantities - and their interests are probably against yours since they, y’know, own the stock.
Banning recursive shorting would be a nightmarish enterprise, since each individual share would need to be tracked to see if it was already shorted. Banning naked shorts supposedly does enough to discourage the behavior. We may be seeing that to not be the case.
> If person A borrows a stock from person B then sells it to person C, they can borrow the stock back from person C and sell it again. No naked short involved.
Naive question: Why would that ever happen? Wouldn't this scenario just cost person C commissions with no opportunity for gain?
In this scenario, Person C still owns the stock and will gain/lose with the stock's rise/fall. Person A borrowing from C at the end is just borrowing, not buying. At some point Person A needs to return stock to Person C.
So in this example person A could keep selling the same share over and over again? How would the multiple “owners” realize their gains if they all decided to sell on the same day?
Person A can only sell the number of shares they've borrowed. If Person A borrows a share from Person C, they can sell that one share only. To sell more without borrowing additional shares would be naked shorting, which is prohibited.
You might be asking instead about the following scenario, though, where a single share is borrowed and sold short multiple times:
Person A borrows from Person C and sells to Person B
Person D borrows from Person B and sells it to Person E
Well, the covering of the shorts doesn't have to happen in an atomic transaction; there are thousands to millions of trades of a single ticker every day. Just as a single share can create a chain of multiple shorts (borrows and sales), a single share can cover multiple shorts too through a chain of trades.
Call it a scantily-clad short then. A share that is already lent out to a short seller should not be eligible to be lent out again for the same reason I can't get two mortgages to buy the same house - the underlying collateral would be owed to multiple parties.
This is not true. Party A has a contract that party B owes them a share - not the share that they originally loaned. The whole idea is for party B to buy a share later to balance the trade.
A better analogy to understand why short interest can rise above 100% is fractional reserve lending and the effect that it has on money supply.
A share is a share is a share. You can’t tell which one was loaned out and which one wasn’t. And it’s not used as collateral, money is posted as collateral instead.
Except you're completely conflating terms and numbers here. A stock can have over 100% short interest with no naked shorting occurring. >100% short interest DOES NOT imply that there is naked shorting.
It doesn't guarantee that it's occurring, but it's strong indicator that something sketchy is happening.
In this case, the important point is that a hedge fund with a 140% short position is more vulnerable to loss than a hedge fund with a 100% short position.
> In this case, the important point is that a hedge fund with a 140% short position is more vulnerable to loss than a hedge fund with a 100% short position.
Sure, but only in the sense that a fund is also more vulnerable to loss at 80% short than 40% short. Nothing magic happens between 99% and 101% short.
That's the myth, and it's been pretty effectively sold to redditors. The reality is that there are hedge funds who profit on both sides of the trade. There were a few shorts who did lose a lot of money, but that is part of the risk of shorting stock and it's kind of incredible that people think that those hedge funds believed that their trade was risk free.
I think now, the cat is out of the bag, and astroturfing a pump-and-dump on reddit/twitter/discord is going to be a pretty lucrative thing now for some entities, at least until there's some kind of regulatory action against it. Comments like this: "I'm trying to jump in but can you eli5 what a market order is please?" get translated to "Come eat my lunch please! I would like to give away my money."
They want to see the whole unfair system burn, which I totally get, but this is not how you make that happen. Regular people do have a lot of power over our financial system, but when they try to exercise it like this... it's difficult to watch. So many people are going to eat shit on this. They'll be left holding the bag and wondering why everyone else on Wall Street got so rich off their backs.
If you're reading this and you think you might be sticking it to the hedge funds by buying in: there are plenty -- PLENTY -- of hedge funds who are willing to sell you GME at $350 per share.
I think you need to seriously consider the possibility that the people spreading this narrative are doing so dishonestly in order to pump the stock. Short interest is now far below 100% (https://www.bloomberg.com/news/articles/2021-02-01/gamestop-...), yet /r/wallstreetbets is still full of hold memes rather than victory speeches.
Also the possibility that people spreading the narrative that people are dishonestly spreading narratives to pump the stock.
My summary above is rough, and it's based on most of the information I've read about the situation. As always, there are voices on both sides for every single fact.
Time will tell how this all falls out, but right now there are a lot of finance firms grinding their teeth, which is a victory in itself.
Also, apparently Gamestop itself used the gain in stock price to settle some debts by being able to issue more stock to meet demand at the higher price, thus getting a cash infusion.
>Also, apparently Gamestop itself used the gain in stock price to settle some debts by being able to issue more stock to meet demand at the higher price, thus getting a cash infusion.
False -- if you're going to spread information about financial nuances across this thread, you should look it up first. Go read the SEC filings for GME (SEC EDGAR is your friend), there has been no additional issuance since GME took off. Nor would it be realistically possible given the volatility.
The exact number definitely isn't known, given that the Bloomberg article includes two estimates of 39% and 50%. I'm not familiar with how these numbers are generated; is it plausible that the real number could be close to 100% even with such low estimates?
Thank you for this simple explanation. I've read a lot on this the past week or so and it wasn't clear what was going on other than the surface level info about shorting.
It’s a fabulous movie. It perfectly balances the nuances of the 2008 crash with the human side of the story. I watch it once a few month and discover a new aspect.
I recommend “Margin Call”. Though I felt it overbalanced on the human drama it nicely complemented The Big Short.
Imagine you found a number one trading platform and end up having to dilute your stake by a factor of 2 (or more likely) within a week because of a meme stock. I actually feel bad for the founding members at RH.
I feel bad for the employees. I always feel bad for the employees (as their equity is always most at risk compared to others on the cap table, from all forms of devaluation or inability to obtain liquidity). But their lottery ticket is no different then folks jumping into a meme stock except they got sold on the idea they had to work for theirs.
But the founders of Robinhood who built the Zynga of the capital markets? Not much empathy for them.
On the other hand, though, they might have far more users than they ever anticipated if some of the new retail investors stick around. If their brand doesn't end up completely dead and buried, at least.
I transferred all of my liquid capital out of RH this morning. I'm putting it back in Fidelity. I can live without the fancy interface; I cannot trust RH with my money or my business. And I didn't have that much there but once my positions are liquid I will be deleting RH.
Who knows how aware they were of it, but this didn't happen just this week or just because of a meme. They built the business to operate in a certain way and then let it grow without ensuring they had the capital reserves to sustain those operations.
"Sustain" is not really an accurate word here. The underlying assumptions behind Robinhood's operations changed suddenly, drastically, and unexpectedly. They were notified at 3am Thursday that they needed to put down a $3B deposit, which they have subsequently needed to raise from investors in a matter of days. So it's really not clear that all of this is because they weren't prepared to sustain their operations.
Getting the underlying assumptions wrong or at least completely out of step with day to day operations is what I am getting at. It didn't happen overnight that they had extended customers more margin than they were able to secure.
That's correct. The DTCC requires brokers to post collateral until settlement of the trades, and even fully funded customer accounts accounts with <100% leverage can not be touched, the customer money cannot be used as collateral.
On top of that, my opinion of the DTCC (I worked at a self-clearing firm for a while, so we had to interact with them) is that they are intentionally dumb and conservative when it comes to asking for collateral. And until now, this hasn't really drawn much attention, mostly because the rest of the firms out there are a lot better capitalized than RH. My guess for why they're better capitalized is just that they're larger (in AUM), older, and operate in more markets.
I don't like RH, but I wouldn't blame them for getting blindsided by the DTCC to the amount that they did. Props to them for being able to raise the cash, I hope it wasn't all equity, since they won't need that cash in a couple of months. I saw recently that they had $12B in AUM--it doesn't make sense to run with $3B in operating capital.
Founders AND who ever does their communication. Their email about the volatility of stocks was so belittling. Even had a hyper link of "economics 101".
From what I understand now, them having to halt buys on $GME wasn't really their call. However, given the tone of their emails, I can only blame them for the theories that they did it on behalf of HF.
yeah I agree completely on the communication front.
it just surprises me that the HN crowd preaches the gospel of growth at any cost and then when it blows up in robinhood's face everyone runs here to say that they should have known. seems like a lot of after-the-fact rationalization to me.
This is temporary relief for people who have totally uninsured crypto on RH. If RH fails, all the crypto disappears. You can't move crypto off of RH to a personal wallet and if you sell to get it off, you take a ~30% tax hit.
Where did the Robin Hood CEO lie? Or what issues have they downplayed?
I haven't seen any actual reporting of any lies. Just a bunch of people speculating they were colluding in halting trading, when the actual reason was later demonstrated to be capital requirements.
If you have actual recent examples of lying, however, I'm curious.
Cuomo: "If you don't have a liquidity issue, but you have to stop the trading because you couldn't meet certain capital requirements, how does that reconcile with itself?"
The funny part is people migrating to brokers who are even less prepared than Robinhood, not realizing that the only reason the same thing didn't happen to those brokers is because they didn't have the volume that Robinhood had.
Citadel, 1.8 mill shares missing because of naked short selling, because they are counterfeit, because all hedge funds are doing this , because connect the dots, because the game is rigged, because it is illegal. At the end RH is in the game selling the stock owned by investors without their consent.
It puzzles me how people still think Robinhood can remain competitive knowing they sell user's order flow to hedge funds and restricted free market movement of capital in the markets. Still restricting purchases of GME and looks like this was just to keep the lights on.
There isn't going to be an IPO after this GME fiasco. The founders played themselves and possibly will never be trusted again.
Also the people who invested in RH and its unscrupulous practices, Andreesen, Sequoia etc., are myopic if they don't think people will forget.
"The fish rots from the head." - old Russian proverb.
We never forget. We never forgive. We are Wall Street Bets.
> It puzzles me how people still think Robinhood can remain competitive knowing they sell user's order flow to hedge funds
Many brokers do this. They get better execution services from hedge funds / electronic traders than they could possibly build themselves. Given rules like NBBO for equities, this can really matter. It saves them money in engineering a hard problem AND makes them money from the other side.
You cut off the end of the proposition: "...and restricted free market movement of capital in the markets."
It is relatively common for brokers to sell order flow. It is not unheard of for brokers to stop trading in a security for limited periods. It is very strange for brokers to enforce one-way trading in a security as Robbinhood did, and highly suspicious on top of that when the resulting asymmetric trading regime is of enormous commercial benefit to the biggest purchaser of their order flow.
If they restricted sells too, they would have been lambasted, likely even more than they currently are, by people trying to get out of their positions either to capture gains or avoid loss.
Robinhood's only move was to mitigate the fall-out with customers through messaging, which they failed miserably at. It's unclear to me whether this failure was due to incompetence or because they were (or thought they were) restricted from providing certain information by law or contract.
Those other cases seem fairly obscure, prevented people from buying plummeting assets, and might not have been so defensible themselves. The reason cited was to protect foolish small investors. This is fundamentally a different thing than intentionally damping the rise of a security that has been up over 100% for nearly a week. That didn't protect any small investors. Whom did it protect?
Somehow I doubt perjury attaches to an untranscripted chat on a celebrity-only private audio app. Everything at that third link seems highly lawyered: "From our perspective", "I wouldn’t impute", passive voice, etc. From a guy named "Vlad" who looks like Dracula. I guess it was just prejudice that caused me to expect someone from Sherwood...
> That didn't protect any small investors. Whom did it protect?
This question is irrelevant in the case of Robinhood, because they had no choice. It seems like that is also fundamentally why they didn't restrict selling — because they wren't required to, whereas they were required to restrict buying. I.e. they imposed the minimum necessary restrictions. This is exactly what you would want from someone in Robinhood's position. You don't want them making their own decisions about who can buy or sell.
> Somehow I doubt perjury attaches to an untranscripted chat on a celebrity-only private audio app. Everything at that third link seems highly lawyered: "From our perspective", "I wouldn’t impute", passive voice, etc.
If something was highly lawyered, do you really think they would go with a lie that would be this easy to disprove? I.e. a lie that relies on people with no interest in Robinhood to uphold it?
> From a guy named "Vlad" who looks like Dracula. I guess it was just prejudice that caused me to expect someone from Sherwood...
I don't know that it makes sense to base whether or not you believe him on things he has no control over.
That part I entirely agree with you on. I just wanted to point out that the practice of selling flow to companies who do really good execution is commonplace and sort of expected. I’d bet 10,000 robinhood could never build trade execution as good as citadel or any number of electronic trading firms.
But to your latter point, it seems almost criminal. At the least, I hope the class action against robinhood is won by the clients.
> It is very strange for brokers to enforce one-way trading in a security as Robbinhood did, and highly suspicious on top of that
My understanding is that brokers must execute their customers trades if possible. The collateral requirement they ran into only affected purchases, hence why buys were restricted but sells were not.
I think that there's a bit of a disconnect between asserting that Robinhood's IPO is dead and being in the comments of an article about them raising "more [cash] than the company has raised in total up until [this] point". Investors clearly see potential in the company.
