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Where exactly do you think the money is going to come from? These people are taking $2k and making trades that are losing $500k. They never had $500k. Robinhood

by zajd 7y ago

Where exactly do you think the money is going to come from? These people are taking $2k and making trades that are losing $500k. They never had $500k. Robinhood is still out of that money, regardless of their guilt or whether they are convicted/sued/etc. There is no money to chase after. That's why this sort of thing is so insane.

ryandrake 7y ago
What happens in a normal brokerage when someone, despite the brokerage’s risk management checks, manages to get a margin deficiency that they cannot possibly rectify by liquidating their holdings or depositing cash? Serious non-rhetorical question, I have no idea...
- barkingcat 7y ago
  Literally they go out of business. Best example is Barings Bank: "The bank collapsed in 1995 after suffering losses of £827 million (£1.6 billion today) resulting from fraudulent investments, primarily in futures contracts, conducted by its employee Nick Leeson, working at its office in Singapore. " https://en.wikipedia.org/wiki/Barings_Bank https://en.wikipedia.org/wiki/Barings_Bank
  - zenmaster10665 7y ago
    Not quite the same situation, but your point is still valid. Leeson was hiding losses fraudulently in error accounts as a malicious internal actor. In these cases, clients are being extended credit they likely cannot underwrite, leaving RH exposed and liable to any losses theirselves.
- patio11 7y ago
  Credit loss. Brokerages are exposed to a lot less of it than e.g. credit cards, because it isn't baked into the model in the same way (and, indeed, the opposite is baked into the model), but it has been known to happen. See the Interactive Brokers 2018 annual report: Over an extended period in 2018, a small number of the Company’s brokerage customers had taken relatively large positions in a security listed on a major U.S. exchange. The Company extended margin loans against the security at a conservatively high collateral requirement. In December 2018, within a very short timeframe, this security lost a substantial amount of its value. The customer accounts were well margined and at December 31, 2018 they had incurred losses but had not fallen into any deficits. Margin shortfalls were met in a timely manner by delivery of additional shares by the customers. Subsequent price declines in the stock have caused these accounts to fall into deficits, despite the Company’s efforts to liquidate the customers’ positions. Through February 27, 2019, the Company has recognized an aggregate loss of approximately $47 million. The maximum aggregate loss, which would occur if the securities’ prices all fell to zero and none of the debts were collected, would be approximately $59 million. The Company is currently evaluating pursuing the collection of the debts. "Whose money did IKBR lose?" IKBR's. (Mechanically, it's a hit to their shareholder equity, which you can verify with toy math if you like playing balance sheet games.) "What stock was that?" A Chinese firm with no operations which reverse-merged with a NASDAQ-listed entity to do a pump-and-dump. https://www.bloomberg.com/news/articles/2019-04-29/china-firm-s-plunge-is-said-to-cost-interactive-brokers-millions https://www.bloomberg.com/news/articles/2019-04-29/china-fir... c.f. https://hindenburgresearch.com/yangtze-river-port-logistics-total-zero-on-the-ground-research-shows-assets-appear-to-be-largely-fabricated/ https://hindenburgresearch.com/yangtze-river-port-logistics-...
- empath75 7y ago
  They’ll probably face criminal charges but that won’t help recover the money.
- Animats 7y ago
  Collection agency. They'll get something, and probably most of what the customer has.
  - harambaebae69 7y ago
    Presumably you don't pull shenanigans like this if you actually have any savings to lose. https://www.nolo.com/legal-encyclopedia/what-does-judgment-proof-mean.html https://www.nolo.com/legal-encyclopedia/what-does-judgment-p...
- kasey_junk 7y ago
  The more interesting question here is what Robinhood’s clearing house is exposed to. It’s been a while since I looked but they don’t clear themselves and the clearing house may have had exposure. If that’s the case you can expect the relationship to change. Robinhood will either lose some capabilities or will pay more for clearing.
  - aristophenes 7y ago
    Looks like Robinhood is now Robinhood's clearing broker: https://robinhood.com/support/articles/360001397126/whats-clearing-by-robinhood/ https://robinhood.com/support/articles/360001397126/whats-cl...
- amluto 7y ago
  On Jan 15, 2015 (aka Black Thursday), the Swiss National Bank unexpectedly floated the Swiss Franc. Some major, well funded brokerages nearly failed as a result of the huge price movements -- their small customers who made a profit kept the profits, but too many small customers ended up with negative balances, the brokerages couldn't practically recover the losses.
dehrmann 7y ago
Sounds like the old your problem vs bank's problem joke, only with smaller amounts because RH isn't Goldman.

by zajd 7y ago

ryandrake 7y ago

What happens in a normal brokerage when someone, despite the brokerage’s risk management checks, manages to get a margin deficiency that they cannot possibly rectify by liquidating their holdings or depositing cash? Serious non-rhetorical question, I have no idea...

barkingcat 7y ago
Literally they go out of business. Best example is Barings Bank: "The bank collapsed in 1995 after suffering losses of £827 million (£1.6 billion today) resulting from fraudulent investments, primarily in futures contracts, conducted by its employee Nick Leeson, working at its office in Singapore. " https://en.wikipedia.org/wiki/Barings_Bank https://en.wikipedia.org/wiki/Barings_Bank
- zenmaster10665 7y ago
  Not quite the same situation, but your point is still valid. Leeson was hiding losses fraudulently in error accounts as a malicious internal actor. In these cases, clients are being extended credit they likely cannot underwrite, leaving RH exposed and liable to any losses theirselves.
patio11 7y ago
Credit loss. Brokerages are exposed to a lot less of it than e.g. credit cards, because it isn't baked into the model in the same way (and, indeed, the opposite is baked into the model), but it has been known to happen. See the Interactive Brokers 2018 annual report: Over an extended period in 2018, a small number of the Company’s brokerage customers had taken relatively large positions in a security listed on a major U.S. exchange. The Company extended margin loans against the security at a conservatively high collateral requirement. In December 2018, within a very short timeframe, this security lost a substantial amount of its value. The customer accounts were well margined and at December 31, 2018 they had incurred losses but had not fallen into any deficits. Margin shortfalls were met in a timely manner by delivery of additional shares by the customers. Subsequent price declines in the stock have caused these accounts to fall into deficits, despite the Company’s efforts to liquidate the customers’ positions. Through February 27, 2019, the Company has recognized an aggregate loss of approximately $47 million. The maximum aggregate loss, which would occur if the securities’ prices all fell to zero and none of the debts were collected, would be approximately $59 million. The Company is currently evaluating pursuing the collection of the debts. "Whose money did IKBR lose?" IKBR's. (Mechanically, it's a hit to their shareholder equity, which you can verify with toy math if you like playing balance sheet games.) "What stock was that?" A Chinese firm with no operations which reverse-merged with a NASDAQ-listed entity to do a pump-and-dump. https://www.bloomberg.com/news/articles/2019-04-29/china-firm-s-plunge-is-said-to-cost-interactive-brokers-millions https://www.bloomberg.com/news/articles/2019-04-29/china-fir... c.f. https://hindenburgresearch.com/yangtze-river-port-logistics-total-zero-on-the-ground-research-shows-assets-appear-to-be-largely-fabricated/ https://hindenburgresearch.com/yangtze-river-port-logistics-...
empath75 7y ago
They’ll probably face criminal charges but that won’t help recover the money.
Animats 7y ago
Collection agency. They'll get something, and probably most of what the customer has.
- harambaebae69 7y ago
  Presumably you don't pull shenanigans like this if you actually have any savings to lose. https://www.nolo.com/legal-encyclopedia/what-does-judgment-proof-mean.html https://www.nolo.com/legal-encyclopedia/what-does-judgment-p...
kasey_junk 7y ago
The more interesting question here is what Robinhood’s clearing house is exposed to. It’s been a while since I looked but they don’t clear themselves and the clearing house may have had exposure. If that’s the case you can expect the relationship to change. Robinhood will either lose some capabilities or will pay more for clearing.
- aristophenes 7y ago
  Looks like Robinhood is now Robinhood's clearing broker: https://robinhood.com/support/articles/360001397126/whats-clearing-by-robinhood/ https://robinhood.com/support/articles/360001397126/whats-cl...
amluto 7y ago
On Jan 15, 2015 (aka Black Thursday), the Swiss National Bank unexpectedly floated the Swiss Franc. Some major, well funded brokerages nearly failed as a result of the huge price movements -- their small customers who made a profit kept the profits, but too many small customers ended up with negative balances, the brokerages couldn't practically recover the losses.

dehrmann 7y ago

Sounds like the old your problem vs bank's problem joke, only with smaller amounts because RH isn't Goldman.