This is a generic follow-up post rather than one that adds significant new information (SNI). Those aren't great submissions when there's a MOT (Major Ongoing Topic), because it will just produce the same generic discussion that's happening over and over: https://news.ycombinator.com/item?id=25933543. Better to wait for SNI.
The RH apologists are going on long winded explanations about clearing houses (and to some extent there’s elements of “it’s too complex for your little brain”). But even to the extent it’s true, if I put in 5k from my checkings into RH and buy stock, why does Rh need all this liquidity to get orders filled? I understand turning margin accounts off, but that’s it . Past that, at best robinhoods business model is highly flawed , at worst it’s fraudulent. Because ultimately, all the finance whiz bang talk doesn’t change common sense that only allowing trades in one direction is unfair, and is incredibly bad optics when that direct benefits a huge player filled with conflicts of interest. But honestly I think the “robinhood is committing fraud” is being underweighted amongst “serious “ discussion.
One of Robinhood’s innovations was that they gave everyone a margin account, but hid the details.
When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen.
Likewise, when you buy or sell a stock, the trade doesn’t settle for t+2 days. Robinhood again transparently loans you the money while waiting for the stock trade to settle.
If Robinhood exceeds the SEC-mandated limits for margin they can extend, or their creditors decide it’s too risky to continue loaning them the money, the whole show grinds to a halt. They chose to press the pause button on the primary meme stocks driving them toward this cliff. I imagine the only alternative was to hit the pause button on the entire platform until the credit issue was resolved, but it’s much harder to get additional credit when your service has ground to a halt.
>> When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin.
The solution would be to disallow this feature, not to stop trading of certain tickets on all accounts, most of which are seasoned and funded
Also, it’s not realistic to expect them to completely retool their entire app and infrastructure in a matter of hours to disallow margin-based trades of only certain securities. If this was a long-term concern I’m sure they’d do exactly what you suggested. However, this even ramped up in only a couple of days. Let’s be realistic about what they can re-engineer, test, and deploy to end users in that timeframe.
It's also hard to believe that their margin based algorithm doesn't have parameters that can be tuned easily. It's not the first time that a single stock has crazy volatility and speculation.
A financial institution didn't foresee a black swan financial event? Color me shocked.
If I'm reading the Twitter thread right, what killed Robinhood was the component of ">30% of your flow is in one stock", which is something that I could absolutely see never having happened to Robinhood until now.
If you want to side with current customers, another easy fix is to disallow new customers (if they cannot allow auto-margin for new customers.) How hard a change would it be to disable new account creation...at worst commenting out /customer/new on the route file for a day until they can fix the actual problem?
To be perfectly honest, given the way that narrative of the entire debacle has been built up to "hoi polloi stick it to the evil financial gurus", I don't think there is anything Robinhood could have done that wouldn't have immediately been spun as "THEY'RE TRYING TO BAIL OUT THE HEDGE FUNDS!"
> Also, it’s not realistic to expect them to completely retool their entire app and infrastructure in a matter of hours to disallow margin-based trades of only certain securities.
They do have the ability to change the margin requirements for a particular stock, as well as disable “instant deposits”. They don’t let you withdrawal money until it’s cleared so adding the ability to hold the funds in the account until they clear wouldn’t be hard if it’s not already there.
I suspect that removing that functionality would take more work than can be accomplished in 1 day, which is why they temporarily suspended it and why they're adding "limited buys" tomorrow
Fidelity - and probably other brokerages - let you buy with unsettled cash, you just can’t sell and buy something else until the cash settles or it’s a good faith violation. You can also enable margin and do it that way. That’s an interesting approach RH takes. Is margin just available and automatic when you sign up? I saw a lot of people on wsb apparently buying on margin and having no idea what it was.
It is. The default Robinhood account is a margin account branded as Robinhood Instant; if you don't want to trade on margin, you have to downgrade (their term, not mine) to Robinhood Cash.
Robinhood Instant is not the same thing as a margin account. You're thinking of Robinhood Gold. FINRA rules say you can't open a margin account with less than $2k.
Margin investing is offered to eligible customers through Robinhood Gold, a suite of premium investing products including Nasdaq Level 2 market data and Morningstar Research Reports, for only $5 a month. The first $1,000 of margin is included in the $5 monthly fee. After that, customers pay a flat 2.5% yearly interest rate on any amount used above $1,000. Our pricing is straightforward and the same for every eligible customer, regardless of their account size.
That choice of language seems very poor IMO, because the regulation clearly specifies the $2k number for margin trading of any size. Take a look for yourself:
"(4) equity of at least $2,000 except that cash need not be deposited in excess of the cost of any security purchased (this equity and cost of purchase provision shall not apply to "when distributed" securities in a cash account). The minimum equity requirement for a "pattern day trader" is $25,000 pursuant to paragraph (f)(8)(B)(iv)a. of this Rule.
Withdrawals of cash or securities may be made from any account which has a debit balance, "short" position or commitments, provided it is in compliance with Regulation T and Rules 400 through 406 of SEC Customer Margin Requirements for Security Futures and Rules 41.42 through 41.49 under the CEA, and after such withdrawal the equity in the account is at least the greater of $2,000 ($25,000 in the case of a "pattern day trader") or an amount sufficient to meet the maintenance margin requirements of this Rule."
Obviously Fidelity is taking on some risk by letting you do this if the transaction does not clear. However, normally, customers depositing are going to buy a variety of normal, not too volatile assets. If your deposit doesn't clear, they just sell whatever you bought and get their money back.
If a large percentage of their customers were new, young, fairly low income (and thus more likely to have their transactions bounce), and they all wanted to buy long positions in a stock that very likely could drop 90% in the next two days, the risk is far higher.
> When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen.
Then they can reduce the purchasing power for certain stocks to just the money already transferred.
There are additional capital requirements for brokering stocks, as mandated by regulations including Dodd-Frank, that made it extremely expensive to handle GME trades during the frenzy.
I know the popular narrative is that this was some sort of conspiracy, but the truth is likely far more banal. Unprecedented volatility and volume are exceeding the limits of these systems. No one budgeted for a single stock dominating news headlines and swinging wildly while millions of retail investors tried to enter at the exact same time.
"To let you trade instantly, we lend you money. Because lending is risky, we won't let you use it on high-volatility stocks like GME. We screwed up by applying the same restrictions to confirmed deposits, which no longer involve loan risks. Our team is working on a fix."
> One of Robinhood’s innovations was that they gave everyone a margin account, but hid the details.
In the old days one would have to formally request margin. Then the broker would give you stern warnings, have you sign a form, mail you a nice booklet explaining margin, options and shorting. I assumed it was a legal requirement, but maybe not?
> Robinhood again transparently loans you the money while waiting for the stock trade to settle.
Well, kind of. If you use the proceeds to do another stock trade, that second trade also settles T+2, so it doesn't require RH to put any of its own capital up.
If this were the core issue, they should have disabled new account creation or funding, right? Why could I open an account and buy Google stock, as it would also technically be on margin.
Hopefully some (many) people will take it to heart that Robinhood users are suckers.
This wasn't "just" privacy violations or psychological manipulation with ads, this was Robinhood deciding what to do with YOUR money to cover their ass. Whether they lent it to you or not doesn't matter, because if the bad trade were going the other way, then you, the sucker, would absolutely be on the hook.
Whether it's fraud or flawed or whatever else is beyond my experience or knowledge, but after today I think ending up on the wrong side of the deal with Robinhood again will rightfully be met with suggestions that you should have known better.
> Hopefully some (many) people will take it to heart that Robinhood users are suckers.
While this is all true (and realistically Robinhood has killed their brand and probably won't survive), those same users were also suckers for falling for this ridiculous GME pump.
What Robinhood did was absolutely in self-interest, but it was trying to cover up a mess that fundamentally wasn't of its own devising. They were either going to get sued by a bunch of people that got fleeced in a clear pump and dump scam or they were going to get sued by users they prevented from losing money, and they chose the latter.
I've been watching the market for years. Pump & dumps happen. They are usually over in a few hours max. Sometimes much quicker. This has been going on for days (the majority of the week) and shows no signs of stopping. In fact tomorrow could be the most volatile day yet.
I'm not sure what is making you think all of the RH users were suckers, many of them have made quite a bit off of this. I don't personally use RH currently (although I have in the past). Ideally the bag holder in this situation would be those covering their short positions. But there is no doubt some will get burned. It's far from over though and there has been plenty of opportunity to cash out. In fact it's way up in aftermarket again this evening.
> This has been going on for days (the majority of the week) and shows no signs of stopping.
It seems that the reddit community has been expecting this for quite a while, though maybe they didn't expect it to get noticed outside of wallstreetbets.
I can't speak for the original commenter, but the completely nonsensical claims I've been constantly seeing over the past few days are what's making me think the bulk of them will end up being suckers.
A friend was telling me a few hours ago that she's exiting once GME hits $5000 - yes, five thousand dollars, I specifically checked that was what she meant. She (and a few other friends who didn't name dollar amounts) have been misled about what a short squeeze is, and believe there's some specific future event called "the short squeeze" where they're guaranteed to make money if they're holding GME when it happens.
Stock market is a 0 sum game. Someone is going to pay in the end. It’s not the hedge fund, they already covered to the tune of $2 billion and someone has pocketed that money and it’s not retail investors.
I think the reality with the stock market seems to be that eventually the tax payer is left with the bags whether they owned any stocks themselves or not.
This isn’t always true though. If I buy an equity for 10$ and sell it to you for 11$ who then sells it for 13$ none of us have lost money. Only panic sells and crashes are zero sum in the way you are imagining.
I'd honestly be surprised if "don't loan money to people that fall for a ridiculous GME pump" wasn't directly in opposition to some of Robinhood's objectives until it bit them right in the ass.
OR they didn't it because a small percentage of their users were causing them a lot of grief for little gain and they decided to stop them for the long term benefit of their customer base as a whole (as well as for the operating model). I'm willing to bet if you dig through their TOS they are allowed to do such things. Whether it's legal or not I guess we'll see what the SEC does about it.
In a different life, I worked for a well known discount brokerage in 2005 processing corporate actions. Mergers, splits, divided payments, proxy voting, exercising bond contract provisions, warrants, short covering etc.for retail customers. Not glamorous work to be sure.
I can tell you unequivocally that to deliver the simplicity, affordability, and transaction efficiency we now take for granted, many MANY layers of broker/dealer process and manpower are built on top of pretty archaic systems and processes and regs. I’m sure that’s something most HN readers would roll their eyes at because of how low tech and antiquated it was. But that’s how the market actually functionally works for retail investors. And those regs are often granular and exist because of historical failure.
Just being able to buy stock, and not worry about getting the literal paper stock in your own name is an innovation we take for granted by having securities held in street name. We in fact had some paper stock in a safe because some clients insisted having in their name.
When we processed shorts we literally would hold the short against a specific humans named account or go borrow shares by picking up the phone and calling another broker. Shorts don’t happen out of thin air. It’s someone else stock you’re selling.
In 2005 I would log into a black screen DTC terminal and pull money down at a firm level by manually typing the values in (lord knows what happens if this gets messed up).
If accounts went over minimum margin requirements we would pick up the phone and call them to explain why they needed to close positions or add collateral. One time we closed the entire account an mailed them a check for the balance because they kept ignoring.
When corporate action transactions settled (T+5) we would manually allocate them to accounts, and then print out the accounts affected for manual QA. The print out went into a filing cabinet for compliance reasons.
All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing. In reality it’s more like an anthill built on top of a Rube Goldberg machine. You may not want to believe that RH and other brokerages have to abide by insanely complex and Byzantine rules and regs and systems and interactions because they make a drop dead simple experience in their app...but they almost certainly do.
> All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing.
Exactly, just because it's abstracted away doesn't mean it isn't there. What else can this startup be other than a client application to a service that isn't theirs?
My understanding from other threads is that RH accounts default to being a margin account, and that most people don't opt-out of margin.
I would never apologize for RH, I thank them for pushing mainstream retail commissions to $0, but I don't do business with them (and never have) because they don't seem to have focused on the important parts of being a brokerage.
> they don't seem to have focused on the important parts of being a brokerage.
That's because they don't. The entire application and order flow seem designed to limit the amount of information given to the actual user, in order to make them more confident in the decision. More confident users trade more stock.
I guess you could argue that "a brokerage makes more money the more stocks are traded, so they are doing the best of the brokerages", but would personally argue that a brokerage should have a responsibility to at least partially work in the best interest of their clients.
Out of curiousity I went through their option buying flow the other day (100% expecting to lose that money); it felt more like buying a lottery ticket than a financial investment.
I feel gross agreeing with Robinhood here, but it doesn't really sound like they were in a position to not take the action they did (this time).
They could add lots of disclaimers and dozens of I agree and I know what I am doing checkboxes but not allowing to buy certain stocks but only to sell them is like a partially blocked intersection with the only open road leading to a ravine. Not cool RH, not cool. It's really an insult to the legend of Robin Hood, he was robbing the rich and giving to the poor not the other way around.
Would you have preferred that if they were unable to take new buy orders, that they also prevented people who already owned from having the ability to sell it? While everyone else "sold ahead of them" and the users lost money "because Robinhood wouldn't let me sell"?
Robinhood may be able to control what happens on their own platform (typically heavily based on regulation), but that doesn't mean they can stop buy/sell activity on the whole market.
Their mobile experience awesome. I did this with other platforms and didn’t like it as much. Believe it or not, even in serious applications, user experience matters.
This is similar to thanking Google for bringing the cost of email down to $0. There sure is a lot of upside to the average user, but a lot of the costs are just shifted behind the scenes (data collection, privacy).
I'm not saying it has no place in the market, but a more informed user might calculate the risk and decide to use a fee-based brokerage instead (like ProtonMail vs Gmail).
> They give their users inferior prices and then collect on the arbitrage.
That’s false. They’re legally required to get the national best bid or ask just like any other broker. Routing trade flow doesn’t change that, it just gives the recipient the ability to match or beat those prices. If there was a better price elsewhere they’re mandated by law to attain that price. If they’re not doing that the SEC would be en route.
If a Robinhood trade is being matched with a better price after it routes then Robinhood didn't offer them the best price. It's how Robinhood makes money. This is the heart of their deal with Citadel Securities. And, yes, the SEC is indeed on their case about this. It's how we know about it.
Robinhood basically sells right of first refusal on "dumb flow," which is valuable. The buyer can route it to someone else if they don't like it, but they get to decide before them. Also they get information from retail investor orders before the rest of the market gets to see them and can adjust pricing on other offers in related symbols before others get to react.
Maybe Gmail was not the first free email, but was definitely the first massively adopted free email with a very high storage capacity.
At Gmail's launch, Hotmail was offering only 2MB of free space, while Gmail was offering 1GB. At the time, that was a game changer, and how they captured a good chunk of the market.
> At Gmail's launch, Hotmail was offering only 2MB of free space, while Gmail was offering 1GB. At the time, that was a game changer, and how they captured a good chunk of the market.
The 1GB storage was so ridiculously large, that many assumed it was an April Fool's joke (also because GMail was launched on April 1st).
Market makers were paying for order flow when I had to pay a $20 commission to sell my equity based compensation, and they still paid for order flow when I had to pay a $0 commission.
I'm much happier paying $0 than $20 for the privilege of turning my compensation into cash. The spreads decreased a bit over that time too, which is also nice.
$0 commissions are huge, and allow people to (Along with partial stock buys) invest little amounts on a recurring basis.
Robinhood forced the major brokers to do $0 stock trades, just need a few others to do $0 option trades too. The fees aren't crazy, but they add up if you do lots of spreads.
Matt Levine has explained that even before the fees going to zero, the fees represented a small percentage of brokerage revenues. Elimination of the fees had an almost negligible effect on brokerage bottom lines—certainly not enough to change their entire behaviour.
> Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue.
A non-margin account can “Instant deposit” and begin using $1,000 immediately prior to the transaction clearing. Now, whether this is considered ‘traditional’ margin to the masses or Robinhood for the purposes of this freeze, I’m not sure.
A whole lot goes on behind the scenes with securities trading, your interface to it as a retail trader buying and selling is only the tip of the iceberg.
Most of the people talking about various conspiracy theories about brokerages have clearly very little idea of how brokerages work on the back end (and not very many people do know this) or what regulatory duties brokerages have and hwo that might inform decisions they make.
It sounds like FINCEN requirements require a 2-day settlement period. This period allows fractional trading to work (they pool orders and execute on day 2). Those same restrictions also appear to restrict a broker/dealer from using customer funds to cover this float. From there it's pretty easy to interpret the end results - risk rises, fees rise, and suddenly RH has to pony up massive amounts of liquidity to cover the DTC float.
Fuckery is certainly possible. This explanation still begs the question; at what point can a business decide not to cover the 'cost of doing business' and instead, create explicit downward pricing pressure.
Ask yourself: why didn't they just freeze trading these securities instead of forcing liquidations across retail brokerages and putting everyone in sell only mode?
They're covering for the market makers and shorts who are on the hook for all the options bought and shares shorted.
Institutions could enough to ameliorate their pain while the only option given to everyone else was sell.
They should have instead stopped trading so everyone could borrow whatever they needed to pay for the bets they lost.
This stock was short over 100% of the float and dealers were short gamma. They got out of this in the way that would guarantee they could save themselves, forced liquidation.
They picked the least painful option for themselves. Three options existed:
- Halt all trading
- Halt buying
- Halt selling
Everyone is pissed no matter what. The first is perhaps the most fair. The last helps the big institutions in this circumstance, the second retail traders.
So you're arguing that, instead of just disabling buying, they should have disabled buying and selling? That would expose them to far more substantial and direct liability than disabling new positions.
These securities should have been frozen so people could capitalize enough to supply the liquidity that was demanded instead of just letting institutions buy whatever they needed to cover their positions while forcing liquidations across the board.
I think with Robinhood Instant you can by stock before the bank transfer has cleared, so they need cash on hand to fill the orders. The rising demand x rising order amount means they probably blew out their liquidity allowance.
With new accounts starting with Instant capability, they are all on margin until the transfer clears.
I have no actual knowledge about securities clearing, but:
If I were a clearer, and Robinhood were my client, and they had some collateral in deposit with me and a ridiculously large long position in GME in excess of the posted collateral, and GME were suddenly extremely volatile, then I would consider requiring more collateral and/or telling Robinhood that they may not purchase more GME. Because my #1 job as a clearer is to make sure that, at the end of the day, all the money I am owed is actually there.
If GME crashes, then the total portfolio of Robinhood and its clients will lose a lot of value. In theory, Robinhood and its clearer has no skin the the GME game, but, in practice, there are quite a few examples of financial companies taking massive hits when their clients go under.
So yes, the clearer could easily be willing to let Robinhood buy more stock that is seen as uncorrelated to GME but be extremely uncomfortable with the size of Robinhood’s position. This is similar to how Robinhood won’t let its clients hold positions when they have insufficient margin to cover the anticipated possible loss.
The reserve requirements scale with both volatility and price.
The clearing house needs enough money from you to be able to go buy those shares in the open market 2 days from now if you vanish overnight tomorrow. If the stock is going up or down 2% a day, it's a lot easier to predict how much they would need than if it's going up or down 200% a day.
I know with Vanguard I can make trades without the funds in my money market. But that's perhaps because the trades can be covered by liquidating other holdings(I have x days to get the money in and they say they will liquidate to cover it if the money isn't there).
Yup. If I had my holdings at a brokerage that suddenly decided to restrict trading that was previously allowed, without some sort of law change or lawful order from the SEC (presumably something that would apply to all brokerages), I would immediately transfer all my assets out. Doesn't even matter if their restriction didn't affect me at the time. I would not want to give my business to a company that would do that.
I don't even really get all the anger directed just at Robinhood. Apex clearing, which clears for virtually every other new age trading platform (and back in the day RH) also halted these stocks.
I'm not sure of the biz aspect of this, but given the criticism RH historically got for pay-for-flow schemes (even while they were using Apex) I would assume it was RH which got the market-flow kickbacks - not Apex. So it's safe to assume that's how it still works today.
Yet, Apex also halted orders for these tickers. This goes to show you the very real risk these types of retail clearing companies are facing in this market. So, I'm not absolving RH just saying they might have some real reason to have paused.
All this also shows you "there is nowhere to hide". There will always be somewhere somecompany which will put its perceived viability or PR before "sacrificing" for their loyal customers. Especially, given the fact that most of these platforms just one company for clearing anyhow.
Robinhood screwed themselves thrice over. If their clearing outfit wouldn't handle these transactions anymore at reasonable prices, that's out of their control. Fine.
RH didn't have to send out a patronizing "we're doing this for your own good" email.
RH didn't have to continue failing at anything resembling forthright communication. (Including their tweets, blog posts, and outright false in-app messages that implied users sold their own shares and cancelled their own orders)
Worst of all, RH absolutely didn't have to sell people's shares out from under them at a dip in GME's price.
They were going to burn some amount of goodwill, but that could have been reduced from company-destroying magnitude to mere bad day had they simply not acted shady at every possible point. That last point is probably going to land them in severe legal hot water, their ToS won't mean much especially if/when the SEC comes knocking.
Well maybe common sense tells us how the system should work, but in a regulated industry in the real world the technical details matter. Hope we can get to the ideal solution after enough of these fiascos. Robinhood needs to be at the cutting edge to keep their customers.
I think any attempt to understand what Robinhood did today, that does not also try to account for the other brokerages that limited GME trading today, is probably going to miss the mark.
It's your "Instant" account. That's where all the float has to live and all newly opened accounts are Instant.
It's a great marketing tool and definitely had a hand in getting RH to where it is today. Personally, I like the instant settling.
Ideally RH would have just turned off trading to specific securities that required float. i.e. "Cash" accounts can still trade everything, but maybe they can't make that separation... simply on for all or not at all.
I'm not an apologist, but the fact is that Robinhood has gotten beaten up by the SEC over the years for not looking out for their users enough (rightfully so). But that also means I can see why they'd tread very carefully around protecting their users from losing their savings on GME. It's hard to have it both ways.
It's been a while since I did this, but last time I transferred shares from one brokerage to another, it took several days.
It seems to me that if you are holding GME, the last possible thing you want is being stuck in a position for a while.
For this particular case, it might be a better choice is to liquidate your position, cash out and just open another brokerage account. I know this is the total opposite of what the WSBs are looking for but the alternative is transferring a position with $50k and when you can trade again its only worth $500.
I've transferred to and from multiple financial and brokerage firms including crypto and have never been charged a fee. Not one dollar. Robinhood is charging $75.
*As others have mentioned, this is an ACAT not just ACH transfers. ACATS usually have fees. I also have done an ACAT but it was by chance that it was with one of the three companies listed in the link with $0 fees.
Etrade charges the same $75 fee for total account closure, but i think the fee for ACATs without closing the account is lower. It's not entirely uncommon to screw customers already severing ties with their brokerage, but the receiving brokerage is usually happy to cover it or throw you some other bone to incentivize you.
Anecdotal reports are pointing to this being very true.
People who opt to transfer shares are going to be locked out of trading them for days, maybe weeks.
When the GME stock comes crashing down (it will), you don’t want to be locked out of selling. Despite what the memes are saying, you won’t come out on top by holding the stock forever (while everyone else sells)
Further, at the moment there are still 62m outstanding short positions (with 71m yesterday). However, there was only 50m (likely revolving) trading volume today on GME.
Honestly, it looks like the redditors are going to successfully cause a squeeze.
WallStreetBets is a heavily moderated subreddit. They remove any posts or comments that don’t toe the line.
Make no mistake, it’s a pump-and-dump group. They’ve been honing the narrative and it finally triggered all the right points to go viral.
This idea that Redditors are only hurting hedge funds is completely false at this point. They’re also going to be taking a lot of money from each other on the way down.
None of them have any gains until they press the sell button.
The early buyers will probably sell a little bit to lock in profits. This drives the price down. They’ll then go on to social media and pump GameStop everywhere with memes and stories about taking down Wall Street. This brings in new money to pump the price back up.
This is what they’re already doing: Pumping the stock to bring in new money, which they collect by selling the new entrants some of their shares. The new entrants catch on to the game and start recruiting more people to pump the price further, and so on.
Eventually people realize this can’t go on forever. New entrants might see their value drop 50% as old entrants cash out. They’ll panic and sell everything, which triggers more people to panic and sell, which drives the price down.
Some will try to buy the dip, but eventually the pump will run out of steam and new players will get tired of bleeding money for a mythical “infinity squeeze” that never happens.
> New entrants might see their value drop 50% as old entrants cash out.
New entrants are the bag-holders. The ones left holding the bag after everyone has pulled the money out.
Actually the bag holders are likely anyone foolish enough to try and transfer GME to another brokerage and ends up watching the share price plunge while they wait for them to show up in their new account.
> Humor me for a second - what happens the the (unlikely event) they ALL hold until it hits $10,000, and the "infinity squeeze" really does happen?
At some point, you can't squeeze infinite money out of short sellers. In theory, if they're still short when the price passes a threshold higher than their margin limits, they'll get margin called and forced to sell. If the brokers and clearing houses didn't get the risk math right, they'll have to cover some of the difference. This is part of why RH had to pay (a lot) extra into collateral pools just to trade GME at all today. I don't exactly know which parties bear the risk in extreme scenarios.
Practically speaking, if they suspect a squeeze is happening they'll start competing against each other to get order fills. If they all set sell limits at $10K, they risk losing out to someone who sets their sell at $9999. That person risks losing out to someone who sells at $9800, and so on down the line. Again, there isn't actually infinite money to be extracted from the system, so it becomes a competition to sell before your WSB peers.
Even worse, the subreddit will be full of posts about "buy the dip" and "diamond hands" that encourage the naive players to not exit the trade. This creates more room for savvy players to get their sells in before the situation resolves and the price comes crashing back down. Again, it's a race to the bottom.
Sadly, much of the profit going to WSBers will come not from hedge funds, but from other WSBers who think they're "buying the dip" or front-running a short squeeze when in reality they're just buying shares from other WSBers.
The hedge funds have to pay them, when they go out of business the brokerages are on the hook. Realistically the govt will bail them out or change the rules of the game.
The price is fueled not by holding a stock, the price changes when the stock sells. The current blitz is being fueled by Johnny come lately bag-holders.
At some point the buyers will run out, the price will go down and the only ones left will be the broke bag-holders.
there is a lot of misinformation out there about what happened today. its starting to to look like this all happened due to default concerns and the resulting changes in necessary collateral.
I have no skin in this game (neither GME or Robinhood), but lets try to stay informed and not grab pitchforks based on non proven allegations.
Robinhood lost trust when they initially lied to their investors about why buying was halted. (Saying they cared about the little guy and these stocks were too volatile for them to handle)
Then they came out and said it was a liquidity issue. If it was simply a liquidity issue, why weren't just margin orders halted? Why did they stop people with cash in their hand from buying stock?
None of Robinhood's statements provide a full explanation.
People are within their right to be absolutely livid at this moment and demand answers.
Some facts:
1) There is a conflict of interest when Robinhood routes the majority of trades through a high frequency trading firm that has an interest in short positions. Citadel bailed out Melvin who [probably] illegally naked shorted 150% of the float.
2) The CNBC interview explaining the liquidity issues that aired today was filmed yesterday.
3) Mainstream media has been feeding lies to the public. Who is buying the stock? (It's foreign entities who hate America and capitalism!)
Will the SEC come after the little guy?! Can they sue these investors?! (Absolutely not. Why the hell are you trying to put fear and doubt in the heads of these people?)
These facts along with Robinhood's BS explanations lead people to believe that the reason that this happened is simply that the WRONG PEOPLE LOST MONEY.
Their initial statement is clearly a lie, full agreement there.
Also there are still outstanding questions regarding liquidity issues: why did they not first disallow margin buying, then possibly with unsettled funds? did these knobs not exist? was there some sort of mismanagement on their side?
I think there is plenty of room for RH to come out of this poorly even if the citadel story ends up being false and it was in fact a liquidity issue.
At Melvin scale it most likely is illegal, if they didn’t have a reasonable chance at getting the shares they needed (which at ~140% of float, they don’t).
Person A has 100 shares. Melvin borrows 40 shares from A, and sells it to Person B.
Person A + Person B now have 140 shares combined (while Melvin has -40 shares). If PersonA + PersonB agree to loan shares to Melvin for another short sell, they've become able to drop to -140 shares, by borrowing 60 of Person A's remaining shares, and then 40 shares from B.
Nothing illegal here, as long as Person A and Person B agree to the terms.
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And again: Melvin seemed to hold puts, not shorts. So this entire point is moot anyway. Puts are a bear-bet, but they're kind of unrelated to short-selling.
Your speculation and saying “a lot of misinformation out there” doesn’t help.
Allowing traders to only sell, and blocking buying is wrong. Who is allowed to buy at that point? Very few retail traders, but every major player who has an upside down stake still can. The price was then tamped down during the lock out so hedges and old money are able to minimize their loses. Anyone pretending this didn’t happen is delusional. RH enabled it.
RH lost a lot of their customers. Possibly millions of them by the time this is over.
To be fair though, it wasn’t just RH and GME either though. Multiple brokers locked out multiple symbols.
Off the top of my head I recall etrade, fidelity, schwab, and TD ameritrade allowed people to buy GME. I understand being able to buy on margin has been restricted almost everywhere, though.
I'm not sure if the following is correct but according to the post on WSB, they ran out of Stock. There was a couple of folks who said their market order was filled at 5k for a share. Something wonky happened and they had to force sales.
RobinHood has served the purpose of getting the other "real" brokerages to eliminate fees on trades. Now that they're not the only discount show in town, and given their track record of anti-user behavior, it's past time to move on
There are a decent number of people who eschew free products support by advertising. Such providers are daemonized for "selling your data" (or even "stealing your data"). You'll hear some quips as "if the product costs nothing, you are the product".
What I find fascinating is these same people think nothing of the downside of Robinhood being commission-free. It's no secret that one way Robinhood makes money is by selling their order flow and choosing the exchange to fill your order that makes them the most money. Oh and that order flow goes to Capital. This enables frontrunning of retail orders.
How can you have issues with privacy and user data and be OK with being monetized by Robinhood, which literally costs you money through poorer trade prices and reporting on customer trades to a party who seeks to profit off that information?
So it's not a bad idea to transfer your shares out but the reasons for that predate GME.
Oh and if you look at the likes of Schwab as a replacement, which is also commission free. They also sell order flow.
Sometimes it's just better to pay for a service. At least then your interests are largely aligned (although with brokerage the provider has an incentive to encourage churn).
How does one of these transfers of stock work from a technical perspective? Is it all just paper transfers that are physically sent in the mail, or is there some kind of digital backing that can be transferred like crypto?
Stocks have been digitally backed since the late 60s. To quote the inimitable Matt Levine:
> Nobody owns stock. What you own is an entitlement to stock held for you by your broker. But your broker doesn't own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co., which is a nominee of the Depository Trust Company, which is a company that is in the business of owning everyone's stock for them. This system sounds convoluted but actually makes it easy to keep track of things: If I sell stock to you, I don't have to courier over a paper share certificate, or call up the company and have it change its shareholder register. Our brokers just change some electronic entries at their DTC accounts and everything is cool.
That simplifies things a bit, but basically yes, no paper transfers ever. There's a warehouse somewhere with all the paper certificates in it, they all technically belong to Cede & Co, and when (say) dividends are paid out, they all go to Cede & Co, who transfers the correct amounts to the various brokerages, who transfer the correct amount to their customers.
(Although it should be noted, it works fine for an absurdly large volume of transactions; the story is interesting because it is unusual, not because it reveals any deep flaws in the system.)
Could be way worse given the amount of existing brokerage alternatives and the fact that nowadays they are all basically the same.
I put a request to transfer today for just a single reason and it has nothing to do with me me being mad at them for halting trades. I simply don’t trust Robinhood anymore. I feel they are too leveraged and too exposed to the cross-winds of retail investors. Flashmob trading is officially a thing and Robinhood will be the most exposed brokerage when it comes to volatility and lack of liquidity.
After what happened today it’s clear they can’t be trusted with my securities and even less with my liquid cash.
I don’t want to have any kind of money in Robinhood because I have the weird feeling it could go down. That’s how much I distrust them at this point.
If they really halted transactions because of lack of liquidity, imagine what could happen with them if we experience a bubble burst or any other major economic event that impacts public markets.
I’m certain I’m not the only one feeling like this. If I could I would sell and re-buy at another brokerage but I want to avoid a tax event.
I also put in a transfer request today, but from Merril Lynch->TDAmeritrade. ML blocked me from buying AMC this morning.
The message they displayed was:
Due to recent volatility in certain securities and to reduce risk of market volatility, we will be placing restrictions on certain securities, including increased margin requirements and/or limiting transactions. Game Stop (GME) and AMC Entertainment Holdings (AMC) are now blocked for opening transactions and they have also been moved to a 100% margin requirement for existing positions. Additionally, opening orders for GME and AMC will be cancelled including Day and Good-till-Cancelled (GTC) orders.
I believe the more apt comparison is to the recent changes made to WhatsApp's privacy policy to integrate it closer to Facebook. The difficulty of moving to a different platform is relatively lower than getting rid of a social media network like Facebook (lower network effect, overlapping functionality with other offerings), which means a large hiccup like this can easily trigger mass migration to other brokerages.
Robin hood is done. Potentially thousands and thousands of dollars could have been lost. Maybe it was a liquidity issue, who knows, but not even giving your customers some sort of warning that they would block purchasing? Completely unacceptable.
Please note that this is a slow process and the stocks may be worthless by the time you completed the transfer. They will also likely freeze your ability to do anything with those stocks during that time. Some people say up to 15 days.
If you're doing the meme stock with RH, it is probably safer to leave it there for a bit.
The most fascinating thing, to me, about all of this is the potential for large groups of retail investors to invest in a company not because it's doing well, or they think it's undervalued, but because they want it to do well-- investing with the specific intent to give it the resources needed to do well. Perhaps unintended, this seems to be the net result with AMC. A few days ago they probably wondered how to keep the lights on. Now they've sold some stock at a premium and have a lot more cash on hand to trudge along as (hopefully) vaccines mostly resolve their issues.
I can imagine the emergence of a different sort of activist investor: large groups that find distressed companies they really want to do well, and instead of the company getting eaten by a private equity shark, they're given the resources for a turn around. (Some-- many? -- would fail anyway)
I recognize this probably unrealistically optimistic, but I imagine some Occupy Wall Street veterans are having a big laugh right now either way.
I mean, that's a pretty legitimate reason to invest, no?
Softbank bought Sprint with the intent to give it the resources needed to do well. They pumped money into the company to cover debt service until eventually it merged with T-Mobile.
AMC got out of $600mm of debt as a result of its share price appreciation in all this madness.
Sure: I guess what I find novel is that rather than a Softbank, a self-organizing process of retail investors would drive the process.
For AMC debt: wow, that's pretty insane. Lots more cash, much less debt. They should encourage employees to become premium reddit members as a thank-you
Who is supposed to buy the stock if nobody else in the app is allowed to enter positions? It's strictly forcing the transfer of the stock from a retail investor to a market maker. It's the antithesis of a free market where any market participant can act as buyer or seller.
I don't think it implies there's a huge conspiracy, but it does implicate certain bad actors in the financial system. No, not everyone is bad. But the idea of some participants evading the rules is extremely plausible. It's happened in the past (see: 2008 GFC). Saying everyone thinks it's a 'huge conspiracy' is a straw man fallacy of the more legitimate concerns raised today.
Everyone would rather believe that trillions of dollars worth of companies and dozens of government officials are all conspiring because one (not terribly well liked) short seller and his fund exploded.
Likely because they were the first, and the rest caved in shortly thereafter (though in some cases, it was the clearing houses who stopped taking orders). In RH's case, it was RH's management itself that made the call, which makes them more accountable to the decision. They can't point to their clearing house and say, "don't blame us: it was the clearing house".
If you are going to transfer your stock just make sure you are transferring it to a broker that is self clearing. Or at the very least make sure the broker doesn't use Apex. Which has a long history of being terrible.
Many brokerages will probably cover the transfer fee, if you move to them. Alternatively, just leave the minimum value behind (though can be annoying since you have to migrate each position itself).
I've had pretty good luck with TD Ameritrade myself. I don't trade enough and when I do, the cup of coffee and bagel fee doesn't really impact my earnings. Back when Etrade was the "Discount" broker at $25/ trade fees bothered me a lot more.
It's not an option. It's common stock and a long position.
A margin call you can settle with cash. There's nothing here that says "you didn't deposit cash so we're selling your position(s) of value to make margin"
I mean it's possible, but I'm in no way going to default to that explanation absent evidence.
Edit: it explicitly cites the "risk of brokering your position" in GME shares. If this isn't faked it's an astoundingly, jaw droppingly, nakedly and utterly amazing thing to do.
I don’t believe it was enforced across the board. I have yet to see a list but TastyWorks is an APEX customer and there were no restrictions put in place that I’m aware of. Surely there will be a compiled list of offenders and they will likely include the most heavily used retail “app brokers”.
> Apex Clearing, who acts as the custodian of all tastyworks accounts, has informed us that the following symbols (AMC, GME, & KOSS) will be set to closing only order status immediately. You will only be able to submit orders to close out any open positions that you have in these symbols.
> New opening orders will not be accepted at this time. We will update our clients should the clearing firm lift the Closing Only status in the near future.
Thanks for the link. “Halted” doesn’t mean blocked though. Maybe bad wording by the OP on that thread. It was halted multiple times this week throughout each day. Multiple short interest stocks were many times.
Yes. The calculus in their heads that the SEC fines for doing this would be less than their losses from allowing trading to continue needs to die. The penalty for violating the law must always be greater than the consequences of following it.
Are wsb members also subject to the jailing for market manipulation? If not why not? The behavior of certain members is closer to the classic definition than anything the brokers have done.
I’m not an impartial player. I’m largely disgusted by the pass the insiders at wsb have gotten for their part in a recent market condition that is going to cost retail traders tons of money before this is done. It looks exactly like the mobbed up boiler rooms we used to see in the markets just transitioned to new technology.
I’ve in the past worked for hedge funds and prop trading firms but none implicated in any of this (they mostly don’t exist anymore). I have no current position in GME (I made $0.40 this week pretax trading GmE shares on Robinhood). I’ve traded on Robinhood for a few years after leaving the trading industry but more than 99% of my trades and positions are in vanguard indexes.
I’ve not worked for a trading desk, hedge fund or prop trader in more than 5 years and don’t have any outstanding trades, agreements or contracts in place that I know of.
What else would you like me to clear up before you impugn my reputation more?
They didn’t put a blanket halt in, just dramatically raised margin requirements. I’m trying to get a feel for what risk mitigation techniques are going to be prison worthy in our new Reddit fueled future.
I’m trying to figure out what risk mitigation techniques and what trading pricing regimes are going to land people in prison after the fact in the Reddit future.
No one person is short selling over 100% of the stock. Its a combination of many different actors each one of them shorting a small %. What % of a company can you short without going to jail do you predict?
Unrealized gains don’t exist, and read their TOS, this was inevitable. Robinhood is just one of many brokers limiting their exposure to a highly volatile stock of little intrinsic value with temporary trading halts.
You are lucky the NYSE hasn’t shut down BME trading for all of February. Yet.
Read up on what T+2 settlement period is. When you buy GME Robinhood is on hook for two days before it closes and has to post collateral with the clearinghouse (DTC) during that time. As BME volatility exploded the collateral demanded of Robinhood skyrocketed.
Actually I would have loved to see Robinhood do nothing do when GME inevitably crashes back down below $10 it’s forced into bankruptcy holding the bag on so many non paying accounts.
Market manipulation is the wrong crime and requires actual transactions. People keep saying he committed a crime but have failed to provide an actual law he violated. Or they point at some SEC violation which aren’t crimes and handled in civil court.
>Market manipulation is the wrong crime and requires actual transactions.
You can be charged for securities fraud just by tweeting baloney if you are important enough. Ask Mr Musk. This is 100X worst. So no, you dont need actual transactions to be charged with fraud.
- They automatically liquidate your options positions
- They don't let any retailer buy stocks(i'm not even talking about options/leverage).
- They only let retailers sell only (to hedge funds).
- Then they come up with the " clearing houses" explanations...sure..but the price moved in the "right" direction right? Probably the hedge funds shorted even more as the bet was sure: block them from buying and the stock surely won't go up!
- Good news: the situation in monitored and "limited" trading will be allowed tomorrow...probably enough to make people dump the stock and let the hedge fund managers cover their naked shorts.
Let's hope the retailers will not get scared off, hold their ground and push the hedge funds into gamma squeeze!
I've read that you shouldn't do this because it will tie things up for a while. Liquidating the stock and moving your assets apparently is more immediate.
Liquidating your stocks to transfer them between firms has significant tax implications, both because it can cause a large number of capital gains events and can be seen as potential for being categorised as a wash sale.
The problem is that if people in aggregate liquidate the stock, the shorts get to buy more cheaply that they otherwise would. It's unlikely you'd get to rebuy at the exact price you sold for either.
When brokerages aren’t allowing buys but only sells, this is exactly what they want (in the case of brokerages affiliated with institutional short sellers). Just stop buying on that platform.
We proudly call it "free market" in the USA, what a joke. Same goes for 'free speech' which was proven not to be true by big tech. USA is run by monopolies and powerful people.
Just open an account on some real broker website like DEGIRO that does not engage in to pay for order flow like RobinHood and Trade Republic do.
I can still buy GME if I want to there, although I am not doing it.
Note DEGIRO is a Dutch broker that requires strict residency requirements. They are covered by a regulatory regime that outlaws payment for order flow.
You’ll pay a fee for trading through them even if you are engaging in activity that would get you a rebate on the exchange so they are taking their cut in other ways.
DeGiro is an excellent broker, though. They're basically _the_ serious broker in Europe - for wealthy Europeans it's either them or IBKR.
Also, exchange rebates are usually very small amounts of the total trade, so for people who the fixed fees matter the most (people with less money in their account) the rebates would be insignificant.
Regulations state you should always get best price and there has been modifications to law to prevent gaming. I can’t speak with knowledge on effectiveness of the regulations.
The fact that so many of these bandwagoners didn't understand what a margin call is demonstrates that Robinhood was right to save them from themselves.
I don't see much promise in the business model of selling physical copies of video games at mall retail stores. Yes, I've heard what the stock promoters are saying about the company turning around but color me unconvinced.
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This approach goes back to the Great Snowden Snow-In of 2013, and has served HN well since then.
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