5 ms·

They're offering 2x margin, if I read the article correctly. So it's at best 1/3 secured, and probably a lot less than that if you need to make a margin call a

by jbooth 9y ago

They're offering 2x margin, if I read the article correctly. So it's at best 1/3 secured, and probably a lot less than that if you need to make a margin call and try to collect. The gigantic risk to Robin Hood isn't that they'll have problems collecting occasionally. They can make up for that by fiddling with their fees to come ahead in the average case. It's that some big market move busts everyone at once and they go bankrupt overnight.

wfunction 9y ago
Question: if they do go bankrupt then you still own your stocks, right? Do customers lose anything?
- omarchowdhury 9y ago
  Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).
  - wfunction 9y ago
    Thanks!
- sobani 9y ago
  You will always be the owner of the stocks you purchase. If Robinhood is set up like most (all?) brokerages, then your assets are held in a separate entity that would be unaffected by a bankruptcy. So creditors of Robinhood can't go after your assets, even when they are managed by Robinhood. Of course, should Robinhood go under, don't expect easy access to your assets, until some other brokerage takes it over.
ThrustVectoring 9y ago
Uhm, what? That's still fully secured. It's actually 4/3rds secured, not 1/3rds. If you have $1000 in your account and borrow $2000 to buy stocks, you've got $3000 worth of stocks that they can sell to cover a $2000 loan. Whenever this ratio goes near or below 1, they can sell the secured stocks to cover it.
- jbooth 9y ago
  If the stocks (or wacky option/derivative trade) still have value, then yeah, there's no problem. The problem is when people make a bet that doesn't work out. There are a lot of exotic trades that can clean you out completely in an instant if you bet wrong.
  - jfim 9y ago
    It doesn't even need exotic trades. If you're doing margin trading on a stock for which there is a sudden dip in stock price (as in previous flash crashes), then there will be a margin call and from the customer's perspective, all their money and shares will evaporate. I wonder how Robinhood will handle it when it happens.
presto8 9y ago
How can they offer 2x margin? This seems afoul of federal regulations. From http://www.investopedia.com/terms/m/minimummargin.asp http://www.investopedia.com/terms/m/minimummargin.asp: "When you buy on margin, there are key levels - as governed by the Federal Reserve Board's Regulation T - that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call."

by jbooth 9y ago

wfunction 9y ago

Question: if they do go bankrupt then you still own your stocks, right? Do customers lose anything?

omarchowdhury 9y ago
Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).
- wfunction 9y ago
  Thanks!
sobani 9y ago
You will always be the owner of the stocks you purchase. If Robinhood is set up like most (all?) brokerages, then your assets are held in a separate entity that would be unaffected by a bankruptcy. So creditors of Robinhood can't go after your assets, even when they are managed by Robinhood. Of course, should Robinhood go under, don't expect easy access to your assets, until some other brokerage takes it over.

ThrustVectoring 9y ago

Uhm, what? That's still fully secured. It's actually 4/3rds secured, not 1/3rds. If you have $1000 in your account and borrow $2000 to buy stocks, you've got $3000 worth of stocks that they can sell to cover a $2000 loan. Whenever this ratio goes near or below 1, they can sell the secured stocks to cover it.

jbooth 9y ago
If the stocks (or wacky option/derivative trade) still have value, then yeah, there's no problem. The problem is when people make a bet that doesn't work out. There are a lot of exotic trades that can clean you out completely in an instant if you bet wrong.
- jfim 9y ago
  It doesn't even need exotic trades. If you're doing margin trading on a stock for which there is a sudden dip in stock price (as in previous flash crashes), then there will be a margin call and from the customer's perspective, all their money and shares will evaporate. I wonder how Robinhood will handle it when it happens.

presto8 9y ago

How can they offer 2x margin? This seems afoul of federal regulations. From http://www.investopedia.com/terms/m/minimummargin.asp http://www.investopedia.com/terms/m/minimummargin.asp: "When you buy on margin, there are key levels - as governed by the Federal Reserve Board's Regulation T - that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call."