4 ms·

And these businesses have contracts specifying that they can increase prices absurdly high from one day to the other?

JumpCrisscross 6y ago
> these businesses have contracts specifying that they can increase prices absurdly high from one day to the other? The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on. Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker. There are clear rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If something goes up and down more, ceteris paribus, small mistakes are more likely to become firm-ending ones.) Again, these are well-known formulas. Unusually, however, Robinhood didn't build this into their fee model. Given market makers, their revenue source, stopped making markets in GME on account of how volatility effects their risk profile, executing GME trades would leave Robinhood sending orders to an exchange, which may cost money, and ponying up collateral, which also costs money. In my opinion, that's what they should have done. Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug. [1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_... [2] https://www.dtcclearning.com/products-and-services/settlement/settlement-services/risk-management/296-risk-management-overview/2277-collateral-valuation-of-securities.html https://www.dtcclearning.com/products-and-services/settlemen...
- CSSer 6y ago
  This is probably the most fascinating thing I've read so far on the subject. Given that many other brokerages seem to be doing the same as Robinhood, is it safe to assume they also are not accounting for such situations? Also, another user shared a link above where Robinhood claims there are two types of brokers, introducing and clearing, and describes themselves as the latter[0]. Is that at all relevant here? If I understand correctly, "clearing house" is still a distinct concept that is very much involved. [0]: https://robinhood.com/us/en/support/articles/whats-clearing-by-robinhood/ https://robinhood.com/us/en/support/articles/whats-clearing-...
  - JumpCrisscross 6y ago
    Thanks! > Robinhood claims there are two types of brokers, introducing and clearing Clearing brokers interface directly with the the clearinghouse, i.e. the DTCC. Introducing brokers clear through a clearing broker. (Who in turn interacts with the clearinghouse.)
- stainforth 6y ago
  A modern service whose whole concept is built on scale and somehow they couldn't handle the scale here. I don't buy it.

> these businesses have contracts specifying that they can increase prices absurdly high from one day to the other? The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on. Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker. There are clear rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If something goes up and down more, ceteris paribus, small mistakes are more likely to become firm-ending ones.) Again, these are well-known formulas. Unusually, however, Robinhood didn't build this into their fee model. Given market makers, their revenue source, stopped making markets in GME on account of how volatility effects their risk profile, executing GME trades would leave Robinhood sending orders to an exchange, which may cost money, and ponying up collateral, which also costs money. In my opinion, that's what they should have done. Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug. [1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_... [2] https://www.dtcclearning.com/products-and-services/settlement/settlement-services/risk-management/296-risk-management-overview/2277-collateral-valuation-of-securities.html https://www.dtcclearning.com/products-and-services/settlemen...

CSSer 6y ago
This is probably the most fascinating thing I've read so far on the subject. Given that many other brokerages seem to be doing the same as Robinhood, is it safe to assume they also are not accounting for such situations? Also, another user shared a link above where Robinhood claims there are two types of brokers, introducing and clearing, and describes themselves as the latter[0]. Is that at all relevant here? If I understand correctly, "clearing house" is still a distinct concept that is very much involved. [0]: https://robinhood.com/us/en/support/articles/whats-clearing-by-robinhood/ https://robinhood.com/us/en/support/articles/whats-clearing-...
- JumpCrisscross 6y ago
  Thanks! > Robinhood claims there are two types of brokers, introducing and clearing Clearing brokers interface directly with the the clearinghouse, i.e. the DTCC. Introducing brokers clear through a clearing broker. (Who in turn interacts with the clearinghouse.)
stainforth 6y ago
A modern service whose whole concept is built on scale and somehow they couldn't handle the scale here. I don't buy it.