5 ms·

This isn't just about margin, absolutely, this is about all sorts of order flow agreements, credit lines and clearing agreements that break down when your entir

This isn't just about margin, absolutely, this is about all sorts of order flow agreements, credit lines and clearing agreements that break down when your entire customer base has decided they all want to go long the same incredibly volatile stock at the same time. >"If you wanna buy GME you gotta have the cash in your account to cover it". That's great, but that isn't the only relationship in this agreement, RH has agreements with its brokers about capital requirements. It's fairly likely that the attitude of "You need to have cash on hand for everything" basically means "You're done". That's the entire point of these risk management strategies - you are covered for what might reasonably happen so that you're making efficient use of capital.

andy_ppp 6y ago
If this is true Robinhood should be explaining this to their customers. The silence for me is deafening and indicative that something more sinister is happening.
- jonp888 6y ago
  They have. There is no silence. They made a blog post saying pretty much exactly this: https://blog.robinhood.com/news/2021/1/28/an-update-on-market-volatility https://blog.robinhood.com/news/2021/1/28/an-update-on-marke... - they had capital and deposit obligations which they couldn't meet due to volatility, but having sorted this out they can resume trding.
  - DangitBobby 6y ago
    Their first statement was nothing like that [1]. Why do we choose to believe the second thing over the first thing? Because it makes them look better? 1. https://blog.robinhood.com/news/2021/1/28/keeping-customers-informed-through-market-volatility https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
- XorNot 6y ago
  It's likely both are true and that's the point: RH definitely will have some actual contractual and legal concerns... But how they react to that is almost certainly bring governed by whatever would help Citadel's other investments the most. Any good lie is based on some truth. That veneer of plausibility makes everyone else carry your water for free.
- coliveira 6y ago
  The whole point is that these Wall Street companies enter into agreements that they don't want to disclose to their customers. This is just a small example.
pgsimp 6y ago
I don't understand what you mean? Somebody offers to sell the stock for X, somebody else (with the money stored on the stock exchange) offers the buy for the price X. Person A gets the money, person B gets the stock. That probably happens a billion times every day. Why should it make a difference which stock is being traded?
- imladyboy 6y ago
  According to this interview[0], a similar firm's CEO is saying it's not that simple, and their clearing firm stopped the trades due to the costs > Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days... our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. [0] https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict...
- TeMPOraL 6y ago
  I don't know anything about stock trading, but I think I can piece an idea from some HN comments I've seen earlier. The exchange between A and B isn't direct, or instantaneous. The actual money transfer takes days, and there are parties in between that make it possible to pretend it's immediate - much like with insta-transfers of money between the banks. Apparently, these parties are on the hook for any money that is "in flight", so they need to have a substantial buffer. Once you get this many people trading on a stock this volatile, apparently the buffer in the middle isn't sufficient to cover the risk, so the parties in the middle stop accepting these trades. EDIT: 'imladyboy quotes the source from which I pieced most of the interpretation above. See also 'JumpCrisscross here: https://news.ycombinator.com/item?id=25951475 https://news.ycombinator.com/item?id=25951475.
- ABeeSea 6y ago
  Because the trade isn’t instant. It takes 2 days to settle the clearinghouse during which time RH has to put down cash as collateral that they won’t go bankrupt in those two days.
LatteLazy 6y ago
Sorry to pile on but... What issues does it create if your whole client base suddenly want to buy GME? I guess if volumes overall go up a lot, you might need to post more capital? But since your revenue should be up too, that's a good thing right? And its only for a while, I don't think anyone thinks this will go on for months do they? And surely it's easier for your clearing house to clear 1 name than 10,000 names? For no-frills, long, equity positions, it feels like it should be the easiest thing in the world to do. I'm happy to be corrected, I'm aware back office logistics is a dark art so maybe I and other readers can learn something? Edit: I'm honestly not trying to be snarky here. I just don't get why it would be that big of a problem. I'd be happy to be rescued from my ignorance.
- sroussey 6y ago
  Go ask Apex Holdings. https://twitter.com/public/status/1354826467184578571?s=21 https://twitter.com/public/status/1354826467184578571?s=21
  - LatteLazy 6y ago
    This whole thing is a confusing mess. Do you know why Apex Holdings decided that? Why would a clearing firm do that, they're at no risk afaik...
    - saddlerustle 6y ago
      Almost all US equities are settled by DTC. Settlement is not clearing, clearing firms still have obligations to DTC
      - LatteLazy 6y ago
        Thanks, but I'm still left wondering: why would dtc be unable to settle those trades? It seems like it would be easier for dtc to settle RobinHood trades if they were all (worst case) in one symbol than it is when clients trade 101 different names...
dalbasal 6y ago
Could be all sorts of things. The simple fact is that market makers are being protected against long tail risk while retail investors are being denied long term returns... the very thing they are being paid to do. That's what these put contracts are: long tail risk. They sold an option. Limited risk for long tail risk... What you are saying amounts to "when long tail stuff happens," order flow agreements, credit lines and clearing agreements that break down." This, very directly insulates them (Citadel, other contract originators, RH) from the actual risk they are supposedly being paid for. It's also ostensibly the reason why retail investors can't have access to the same vehicles as financial firms. Retail investors can't reliably back that long term risk. Here is yet another example of loss limits for insiders. No one is saying that you are not right. You are. The contractual complex does melt down at this point. The rage is people who think this is not ok.
- kryogen1c 6y ago
  > retail investors are being denied long term returns excuse me? what part of inflating GME to $400 is a deserved long term return? this is effectively a pump and dump scheme, whether or not most of the participants think so. once the squeeze stops, no ones buying GME over $100 and everyone left holding shares better have bought two weeks ago or theyre gonna lose money.
  - dalbasal 6y ago
    I never said "deserved long term return." I'm saying that a hedge funds made bets, deals, ultimately with these WSB crazies. That position represents risks that they are being shielded from. Most of these people aren't holding any stocks. They're buying derivatives, so they technically have no stocks to dump. They will likely bet like crazy on the downward part too.
    - cma 6y ago
      But if Robinhood has some preexisting deal where they have to loan out X% of long shares to shorters, why should they have to take on the risk of defunct shorters if it is within their rights to just stop allowing trades in the symbol, without any goal of overall price manipulation?
yudlejoza 6y ago
> This isn't just about margin, absolutely, this is about all sorts of order flow agreements, credit lines and clearing agreements that break down when your entire customer base has decided they all want to go long the same incredibly volatile stock at the same time. In other words, the situation is "too complicated," and the only solution is that the not-rich person should not do what they're doing with GME right now. Got it.

andy_ppp 6y ago

If this is true Robinhood should be explaining this to their customers. The silence for me is deafening and indicative that something more sinister is happening.

jonp888 6y ago
They have. There is no silence. They made a blog post saying pretty much exactly this: https://blog.robinhood.com/news/2021/1/28/an-update-on-market-volatility https://blog.robinhood.com/news/2021/1/28/an-update-on-marke... - they had capital and deposit obligations which they couldn't meet due to volatility, but having sorted this out they can resume trding.
- DangitBobby 6y ago
  Their first statement was nothing like that [1]. Why do we choose to believe the second thing over the first thing? Because it makes them look better? 1. https://blog.robinhood.com/news/2021/1/28/keeping-customers-informed-through-market-volatility https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
XorNot 6y ago
It's likely both are true and that's the point: RH definitely will have some actual contractual and legal concerns... But how they react to that is almost certainly bring governed by whatever would help Citadel's other investments the most. Any good lie is based on some truth. That veneer of plausibility makes everyone else carry your water for free.
coliveira 6y ago
The whole point is that these Wall Street companies enter into agreements that they don't want to disclose to their customers. This is just a small example.

pgsimp 6y ago

I don't understand what you mean? Somebody offers to sell the stock for X, somebody else (with the money stored on the stock exchange) offers the buy for the price X. Person A gets the money, person B gets the stock. That probably happens a billion times every day. Why should it make a difference which stock is being traded?

imladyboy 6y ago
According to this interview[0], a similar firm's CEO is saying it's not that simple, and their clearing firm stopped the trades due to the costs > Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days... our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. [0] https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict...
TeMPOraL 6y ago
I don't know anything about stock trading, but I think I can piece an idea from some HN comments I've seen earlier. The exchange between A and B isn't direct, or instantaneous. The actual money transfer takes days, and there are parties in between that make it possible to pretend it's immediate - much like with insta-transfers of money between the banks. Apparently, these parties are on the hook for any money that is "in flight", so they need to have a substantial buffer. Once you get this many people trading on a stock this volatile, apparently the buffer in the middle isn't sufficient to cover the risk, so the parties in the middle stop accepting these trades. EDIT: 'imladyboy quotes the source from which I pieced most of the interpretation above. See also 'JumpCrisscross here: https://news.ycombinator.com/item?id=25951475 https://news.ycombinator.com/item?id=25951475.
ABeeSea 6y ago
Because the trade isn’t instant. It takes 2 days to settle the clearinghouse during which time RH has to put down cash as collateral that they won’t go bankrupt in those two days.

LatteLazy 6y ago

Sorry to pile on but... What issues does it create if your whole client base suddenly want to buy GME? I guess if volumes overall go up a lot, you might need to post more capital? But since your revenue should be up too, that's a good thing right? And its only for a while, I don't think anyone thinks this will go on for months do they? And surely it's easier for your clearing house to clear 1 name than 10,000 names? For no-frills, long, equity positions, it feels like it should be the easiest thing in the world to do. I'm happy to be corrected, I'm aware back office logistics is a dark art so maybe I and other readers can learn something? Edit: I'm honestly not trying to be snarky here. I just don't get why it would be that big of a problem. I'd be happy to be rescued from my ignorance.

sroussey 6y ago
Go ask Apex Holdings. https://twitter.com/public/status/1354826467184578571?s=21 https://twitter.com/public/status/1354826467184578571?s=21
- LatteLazy 6y ago
  This whole thing is a confusing mess. Do you know why Apex Holdings decided that? Why would a clearing firm do that, they're at no risk afaik...
  - saddlerustle 6y ago
    Almost all US equities are settled by DTC. Settlement is not clearing, clearing firms still have obligations to DTC
    - LatteLazy 6y ago
      Thanks, but I'm still left wondering: why would dtc be unable to settle those trades? It seems like it would be easier for dtc to settle RobinHood trades if they were all (worst case) in one symbol than it is when clients trade 101 different names...

dalbasal 6y ago

Could be all sorts of things. The simple fact is that market makers are being protected against long tail risk while retail investors are being denied long term returns... the very thing they are being paid to do. That's what these put contracts are: long tail risk. They sold an option. Limited risk for long tail risk... What you are saying amounts to "when long tail stuff happens," order flow agreements, credit lines and clearing agreements that break down." This, very directly insulates them (Citadel, other contract originators, RH) from the actual risk they are supposedly being paid for. It's also ostensibly the reason why retail investors can't have access to the same vehicles as financial firms. Retail investors can't reliably back that long term risk. Here is yet another example of loss limits for insiders. No one is saying that you are not right. You are. The contractual complex does melt down at this point. The rage is people who think this is not ok.

kryogen1c 6y ago
> retail investors are being denied long term returns excuse me? what part of inflating GME to $400 is a deserved long term return? this is effectively a pump and dump scheme, whether or not most of the participants think so. once the squeeze stops, no ones buying GME over $100 and everyone left holding shares better have bought two weeks ago or theyre gonna lose money.
- dalbasal 6y ago
  I never said "deserved long term return." I'm saying that a hedge funds made bets, deals, ultimately with these WSB crazies. That position represents risks that they are being shielded from. Most of these people aren't holding any stocks. They're buying derivatives, so they technically have no stocks to dump. They will likely bet like crazy on the downward part too.
  - cma 6y ago
    But if Robinhood has some preexisting deal where they have to loan out X% of long shares to shorters, why should they have to take on the risk of defunct shorters if it is within their rights to just stop allowing trades in the symbol, without any goal of overall price manipulation?

yudlejoza 6y ago

> This isn't just about margin, absolutely, this is about all sorts of order flow agreements, credit lines and clearing agreements that break down when your entire customer base has decided they all want to go long the same incredibly volatile stock at the same time. In other words, the situation is "too complicated," and the only solution is that the not-rich person should not do what they're doing with GME right now. Got it.