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One possible legitimate reason is the risk to Robinhood themselves. They allow margin trading and I think anybody would agree that buying GME at these crazy pri

by cactus2093 6y ago

One possible legitimate reason is the risk to Robinhood themselves. They allow margin trading and I think anybody would agree that buying GME at these crazy prices on margin is incredibly risky. If the traders can't pay, Robinhood or their bank/insurers are on the hook. Also even though the narrative here is Robinhood traders vs hedge funds, surely there are also a lot of shorts on Robinhood too, so there's more margin risk from those too. However why not just disable margin trading on these stocks instead of shutting them off altogether? I don't really know enough to say. Maybe there are additional risks somewhere unrelated to margins? Or maybe the upstream market makers are forcing their hand. Or maybe it's some combination of reasons, including pressure from people who are on the losing sides of these bets. > Why should Robinhood pick a winner (siding against their own customers) As others have often pointed out, Robinhood is in some ways analagous to social media companies. Their end users are not their customers, because it's a free service. The customers are the businesses on the other end, in Robinhood's case the market makers who are paying for the right to front-run trades. If this is no longer profitable for them due to crazy volatility, they can apparently stop allowing trades at any time.

andrewmunsell 6y ago
> Or maybe the upstream market makers are forcing their hand. I'm not a lawyer, but to me, that seems like it would be very very illegal.
- cactus2093 6y ago
  I agree, with how much regulation is there is in every other aspect of the markets, I am surprised there is not more explicit process around just shutting off trades they don't like.
lottin 6y ago
> However why not just disable margin trading on these stocks instead of shutting them off altogether? Yes... or simply increase the margin.
- cactus2093 6y ago
  Well I think we're in such uncharted territory here that it would be difficult to trust any risk model, so just increasing the margin may be hard to get right.
backzerman 6y ago
> The customers are the businesses on the other end, in Robinhood's case the market makers who are paying for the right to front-run trades. Front-running is super illegal. You're referring to payment for order flow (PFOF), in which a sell-side party like Citadel pays Robinhood for the right to route your order to the exchange. But there's a catch: Citadel is allowed to take the other side of your trade without routing it to an exchange, but it legally has to match the exchange price or cut you a discount. If Citadel can't do either, your order MUST be routed to an exchange. PFOF makes up a somewhat negligible source of revenue for no-fee/discount brokerages. The bulk of revenue comes from a much more mundane source: interest rate spreads. Earn X% interest on customer cash deposits while providing customers less than X% interest on their deposits. If your order isn't making its way to an exchange, PFOF isn't your problem, and you shouldn't be day trading. Your real problem is that the professionals think you over-bid/under-asked to such an extent that they're willing to cut you a deal just to take the other side of your trade. Unless you're a professional options trader, betting against professional market makers will cost you a lot more money than the imaginary transaction costs would have. (This is just a summary of an old HN favorite: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...)

andrewmunsell 6y ago

> Or maybe the upstream market makers are forcing their hand. I'm not a lawyer, but to me, that seems like it would be very very illegal.

cactus2093 6y ago
I agree, with how much regulation is there is in every other aspect of the markets, I am surprised there is not more explicit process around just shutting off trades they don't like.

lottin 6y ago

> However why not just disable margin trading on these stocks instead of shutting them off altogether? Yes... or simply increase the margin.

cactus2093 6y ago
Well I think we're in such uncharted territory here that it would be difficult to trust any risk model, so just increasing the margin may be hard to get right.

backzerman 6y ago

> The customers are the businesses on the other end, in Robinhood's case the market makers who are paying for the right to front-run trades. Front-running is super illegal. You're referring to payment for order flow (PFOF), in which a sell-side party like Citadel pays Robinhood for the right to route your order to the exchange. But there's a catch: Citadel is allowed to take the other side of your trade without routing it to an exchange, but it legally has to match the exchange price or cut you a discount. If Citadel can't do either, your order MUST be routed to an exchange. PFOF makes up a somewhat negligible source of revenue for no-fee/discount brokerages. The bulk of revenue comes from a much more mundane source: interest rate spreads. Earn X% interest on customer cash deposits while providing customers less than X% interest on their deposits. If your order isn't making its way to an exchange, PFOF isn't your problem, and you shouldn't be day trading. Your real problem is that the professionals think you over-bid/under-asked to such an extent that they're willing to cut you a deal just to take the other side of your trade. Unless you're a professional options trader, betting against professional market makers will cost you a lot more money than the imaginary transaction costs would have. (This is just a summary of an old HN favorite: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...)