This time it is different. Previously they had glitches etc. This time they by choice restricted users which lead their users loose.
Whole concept they broke. If any investor still uses robinhood they are stupid. Your money and stock is not safe with Robinhood. They can restrict you any time.
Totally right, and furthermore, Robinhood is facing some serious solvency issues. Their PR releases claiming this was clearing house related was already highly dubious, and is self-contradicting because they are blaming it on a liquidity issue while saying it's not a liquidity issue.
But this is happening at the same time was mass account withdrawals/closures, and we're now learning this not only threatens their general solvency but ability to execute trades. This could easily cause a feedback loop that empties their accounts, at which point people are going to be unable to withdraw their cash which is goign to cause a bank run and drill the nails into their coffin even further. Healthy companies don't need to emergency borrow a billion dollars. If you have less than $250,000 on Robinhood, your account is FDIC insured so you'll eventually get your money back...but I think most people would prefer not to go through that process.
Robinhood is on a death spiral and prudent financial advice is to move any assets you have off of it as soon as possible.
The solvency issue is the root cause leading me to leave Robinhood personally. The limitation on market orders was the symptom; the cause was a rotten core. This is the true reason why everyone should leave Robinhood. I do not want to deal with realizing FDIC/SIPC insurance preferably ever in my lifetime.
You dealt with it when you eg had a Wachovia bank account before they became Wells Fargo. You saw it happen en masse in 2008.
FDIC guarantees funds to the bank. If the bank fails FDIC ensures YOU continue to access your account. If this means taking the bank into receivership and changing owners so be it. You can go to the FDIC website to see what banks have failed. Many do over the course of a year but the account owners are never at risk outside of the insurance amount on a single deposit account.
I hope you don’t keep more than 250,000 in an fdic insured account without additional insurance (which is silly because you could just open another account at the institution for additional coverage)
This is tangential to RH, but never the less 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?
An investment in an ETF or other mutual fund is putting your money in the hands of the managers of the fund. They set out objectives for the fund, but they don't necessarily have an obligation to meet those objectives or to keep the same objectives. They can change the objectives within the processes required by the bylaws of the fund. Most of the objectives will have weasel words for management discretion in case of volatile markets.
They have quarterly reporting obligations, and you can review those reports to see how they're doing. If you don't like what you see, you can sell the funds and/or file a shareholders' lawsuit and/or file a SEC complaint.
If you don't like that, the good news is with zero comissions as the norm, and fractional shares at many brokerages, you could build up your portfolio to match an index of your choice, without significant monetary transaction costs. It would take a lot of time to setup and when you made contributions, and dividend processing effort could be significant.
> Healthy companies don't need to emergency borrow a billion dollars.
Sure, move your holdings out of RH. I don't have an account there, and never had, and probably won't ever.
But, regardless of RH's health or lack thereof, most companies don't have a sudden change in collateral requirements.
If what I understand from forum posts and twitter threads and youtube interviews or CEOs on speakerphone is accurate,
On thursday morning, DTCC changed requirements so that net buy orders for GME pending settlement would need to have 100% of the value of the shares posted as collateral (marked to market at end of day). I don't know what the requirement was on Wednesday, apparently 1-2% is common, but I'd hope it was already elevated earlier in the week.
And that colateral has to be owned by the clearing firm (which is RH for RH), and apparently can't be formed from clients' money, possibly including settled cash from the clients who made the buy?
This isn't a long term cash need, it's only while there's a large amount of net buys in volatile stocks awaiting settlement. Assuming either clients stop buying so much (because some are selling, or it gets borint) after a while or the price stops moving so quickly, collateral requirements should go back down and RH can return the money. As long as their clients don't stiff them on the buys anyway.
That they were able to quickly get a billion dollars hints toward fine enough health (or crazy lenders).
More worrisome is that they apparently didn't have a plan for managing trading in stocks with high collateral requirements (some established brokerages had enough collateral to do nothing, others limited trading to settled cash and similar trades with reduced credit risk for the brokerage). I don't necessarily expect an upstart brokerage to have unlimited collateral, but planning and managing around insufficient collateral should have been done; and more transparency would be nice. Maybe they had done some planning though, I certainly wouldn't be able to get a $1 B loan in a single day, although who knows what it cost them.
Your claim that RH restricted users by choice seems false. RH is required by NSCC/DTCC rules to post collateral for trades in the process of settlement. As a result of volatility, the collateral requirements for meme stocks shot up from something like single digits to something perhaps approaching 100%. Robinhood was apparently forced to draw down a $600MM line of credit just to cover the trades it had already allowed.
Sounds like Robinhood was setup to fail from the beginning, if so. If you make it as easy as possible to do trades but then start getting "rate-limited" essentially, it was never gonna scale in the first place.
Gonna be interesting to see what gets to replace Robinhood for easy and reliable trades in the future.
I believe this explanation but I do still have questions.
Why didn't they just restrict buying like they did in Friday instead of halting it completely? By halting it completely they caused a panic which caused lots of people to sell.
Why didn't they halt or restrict buying of any other stocks? Why only the meme stocks? It should have affected their financial responsibilities to the clearinghouse the same ways, no?
Why did they give no warning and explanation for what was about to come? The abruptness of it was obviously going to contribute to the panic.
The standard expiration date for meme stock options was the day after they halted buying. This caused their own customers holding those contracts to lose money. Why did they claim they were doing this "to protect their customers" when it was their customers who got screwed by this?
No, clearinghouse requirements can apparently be per-symbol, and it's been reported that that's exactly what happened this week. It's a function of the volatility of the stock and also the proportion of the stock to all stocks being traded at a particular brokerage. There's an actual published formula somewhere on NSCC's site.
Why did they give no warning? I don't know, I think they're a clownfire.
This is for stock sales which they did not restrict. Robinhood stopped the purchase of stock which does not require a collateral because the money is coming directly from the users cash balance. Don’t believe whatever they say, RH action was specifically to stop the short squeeze.
The clearinghouse collateral requirements in part protect the clearinghouse from things that can go wrong at the brokerage, like if Robinhood had a vulnerability that let people place huge orders without paying for them, and they were, like, put out of business overnight.
The DTCC requirements are all about protecting brokerages (and other counter parties) from each other. Basically (and I’m not an expert in this) it’s a risk sharing scheme where if Robinhood (or any other broker) goes under all the other members cover the positions.
I don’t think it has anything to do with margin vs non-margin accounts for instance. It’s just a formula where you split up the outstanding shares by the VaR as I’d get a capital requirement.
Thanks. I don't use Robinhood but I thought your buying fund there consisted of actually-deposited cash. In that case why can't they use a customer's money to cover the collateral? Is it a business practice or a requirement for some other reason?
A) no they, and most brokers will let you start trading as soon as you “deposit” money even though you have many days to reverse those deposits. But:
B) your shares trading immediately is a fiction. It takes days for those trades to settle. And any subsequent trades you make with those funds are all subject to credit risk. The central clearing house collateral rules are about risk management around that multi day float.
I think but am not an expert on this that the DTCC times explicitly require the capital to come from the brokerage not the clients. I don’t know why but can guess that it’s because it’s the brokerages taking on the risk not the individuals.
You state all this as though their choices were not deliberate. Of course they are acting within the rules, while trying to foster an appearance of all you can eat buffet instant buy/sell, when the market really doesn't work that way. However, users came to expect that convenience. That business model may be inherently untenable in the face of events like this.
Your argument is that Robinhood "chose" to create the impression that people could trade any meme stock they wanted with impunity on their platform, but didn't do the work to ensure that they could. I agree, that's a choice they made.
The comment upthread argues that Robinhood "chose" to retrict trading in meme stocks. That argument appears to be false. Robinhood did not have a choice whether or not to restrict trading; it simply didn't have the money to cover the clearing for those trades.
Even assuming you're right, they've taken a massive PR hit and the public is convinced that RH screwed over their users by choice, and made a profit out of it. I don't think they'll come back in one piece, unless no one capitalizes on the movement and gets some competition going for a while.
They reported this morning that their clearing costs 10x'd, and it was reported in the NYT and (I think?) WSJ yesterday. Further, other retail brokerages and clearing brokerages unrelated to Robinhood reported the same thing.
The traditional explanation of clearing is that it’s to solve the problem where I buy a share of Microsoft from you for $100. The trade won’t complete for a couple days so there’s a risk that either I don’t show up with the money or you don’t show up with the share.
This might happen because I went bankrupt, or MS starts trading for 1000 and you’d rather not give up the share, or whatever. To solve this，there are clearing houses that have collateral requirements to help ensure that the trade is executed as it was supposed to.
Most stocks don’t change that rapidly, so there’s relatively low risk that someone blows up. But GME has both extremely high volatility and is highly overvalued, which makes the risk of someone trying to walk away from it can’t meet their obligations much higher.
Yeah....except all the more legitimate brokerages didn't limit anything. TD Ameritrade made me place limit orders, but that is not even close to the same thing.
A casino definitely can't shut down a blackjack game in the middle. That is not true.
What are you even arguing here? That the purpose of a brokerage is to take customers money and play weird games with it to maximize profits and is allowed to just not have enough money to cover all cash purchases?
That is like if a bank just didn't let customers withdraw their money, and kept operating like nothing was wrong. Clearly illegal.
Robinhood stopped allowing you to play new games of blackjack. You're suggesting that, as a casino customer, you could say "you can't shut this table down! I was going to make back my money on the next hand!" which is pretty funny.
I don't think this is at all like a bank that won't let you withdraw your money. I think it's like a brokerage that has to post 100% collateral --- out of their money --- for every share of GME that you ask it to buy, doesn't have the money to post that collateral, and thus can't buy any more GME for you.
No, that analogy doesn't fit. Fully half of robinhood users owned GME stock. They were in the middle of a bet. RH created a situation where the stock could only go down.
"I think it's like a brokerage that has to post 100% collateral --- out of their money"
How is this not the customers money? You deposited 100% of the collateral with RH. Banks can take your money and make loans with it so the bank can make profit, but only so long as they have your money for you when you want to use it.
Again, this is pretty funny. It really does sound like you're saying the casino can't kick you out if you're in the middle of playing some blackjack strategy. "I'm not done yet!"
I'm pretty sure everyone retained their ability to get cash out of Robinhood, for whatever that's worth.
You can clearly see that the price was going to infinity because there weren't enough sellers. This absolutely ruins anyone underwriting options because they now have to immediately cover all outstanding calls at whatever the ask is.
This is what r/wallstreetbets was after. Forcing people to buy at $1000+. Robinhood should've had collateral for people buying stock in all cash. If they don't they are basically a busted bank, and they cheated all GME holders.
No, you are trying to suggest that these are all new blackjack games, not the middle of one. If you are holding 21 and they shut the game down in the middle that is illegal. HALF of robinhood users bought and were holding GME. They were holding 21 and Robin Hood shut them down in the middle, turning their winning hand into a losing hand. That is the difference.
When they bought the stock they had absolutely no reason to think the brokerages would stop selling shares.
They were selling call options that are in the money at $500, while simultaneously not actually allowing GME to go to $500. That is outrageous.
Right before robin hood shut down GME they closed people's positions out at a price of over $2000 per share. The holders literally broke through the sells and were forcing the short squeeze to happen. Robin hood then forced GME into the floor. That is absurd and should absolutely be illegal. It is a crooked casino. They should've been forced to close out everyone's position at the ask price, but they didn't want to so they cheated.
If you are operating a brokerage that can't cover when people are buying stock with all cash then you should be in breach and be forced to shut down and/or forced into bankruptcy by owing all the stockholders of the stocks in question the actual damages you caused them.
Your only real job is to operate fair and unbiased bid/ask spreads and execute trades fairly. If you aren't going to do that then you are running a scam on your customers.
How is this fundamentally different then you placing a bet at a roulette table and the casino changing the rules mid-spin to make sure you will lose?
I think one thing people are very confused by is the “all cash” part of your sentiment. If you “deposit” money with Robinhood (or any other broker) and can trade it immediately (or any timeframe less than a few days) you are not trading cash. Cash takes days to move from 1 account to another without taking on credit risk.
Similarly if you sell shares in 1 symbol and buy shares in another in less of a time frame than a few days you aren’t using cash. You are using credit (because it takes days for sales to settle).
All of that credit risk is all currently legislated to go through a few bottlenecks who have the power to enforce their own credit rules.
Analogies are dumb but it would be like if Amex called all the casinos and said “everyone has 90% less credit than they did 2 minutes ago”. If you had a roulette ball running based on your previous credit line at Amex you can bet the Casino would grab that ball. Especially if it had 200k Amex lendees in their pits.
Are you suggesting RH should have only restricted new positions to people that A) hadn’t added new money to their accounts and also B) hadn’t liquidated any other positions in the last 2 days?
I suppose you could make that argument and if you wanted to encode that as law I wouldn’t vote against it, but recognize it’s going to manifest in brokerage behavior where you can’t trade as fast or you have to keep more cash in your brokerage account.
[edit] I’d also love for you to cite what law a casino would be breaking by shutting down a game mid roll because I have no direct experience there but my mental model is that Casinos have wide latitude on allowing the games to run or not.
I mean most normal brokerage accounts clearly show you when you are buying on margin and exactly how much settled cash you have to trade with. This is not unreasonable, and as far as I am aware is the status quo.
Both my Vanguard and Fidelity brokerage account lets me immediately trade with funds from trades prior to them settling with the DTCC. I don’t see any indication in their GUI (maybe I’m missing it?) that the trades are anything but complete once the orders are filled.
A casino will absolutely shut a machine or a table down whenever the hell they want.
I don't understand your argument. RH either has the money to put up collateral or they don't. They didn't this week. That seems like the end of the story. They can't just "choose" to have more cash on hand than they actually have.
Does not matter. You are dealing with brokage. Its on the brokrage to maintain the service and whenever I want to buy/sell my share I could. Not get restricted.
There is no restriction from SEC. Its money in app not privacy issue me/people would compromise.
Maybe it's stupid, but I could forgive the outages, maybe because I wasn't doing any time critical trades when they happened. But deliberately limiting trades on dozens of stocks is so far past the line for me that I'm leaving Robinhood as soon as I find another brokerage I like.
During the other times, was their the perception that they were screwing their users over due to pressure by large financial institutions? That's a pretty salient difference for their brand.
This wasn't "going down", it was active blocking of specific stocks because RH exposed themselves to massive risk by assuming the hedge funds they were pimping their customers out to would never be swiftly bankrupted.
RH was essentially letting their users pay full price for a stock, then lending that stock to hedge funds so they could use it against the actual stock owner by selling it short. Since the borrowed stock has already been resold (the stock the HF didn't own to begin with), now the question is if the HF can even afford to buy them all back. This is why the entire market dropped the other day, because HFs were selling off other positions to come up with the money. Sell offs could get a lot worse considering $GME is still currently shorted over 100%.
If the govt steps in to save the hedge funds at the expense of millions of average Joe's, or if the hedge funds pull some sort of bankruptcy loophole card resulting in the average Joe's holding the bag while they continue on, we could see people revolt against the entire financial system as we know it.
Yet their userbase grows and their users come back. They'll be fine.