9 ms·

The RH apologists are going on long winded explanations about clearing houses (and to some extent there’s elements of “it’s too complex for your little brain”).

The RH apologists are going on long winded explanations about clearing houses (and to some extent there’s elements of “it’s too complex for your little brain”). But even to the extent it’s true, if I put in 5k from my checkings into RH and buy stock, why does Rh need all this liquidity to get orders filled? I understand turning margin accounts off, but that’s it . Past that, at best robinhoods business model is highly flawed , at worst it’s fraudulent. Because ultimately, all the finance whiz bang talk doesn’t change common sense that only allowing trades in one direction is unfair, and is incredibly bad optics when that direct benefits a huge player filled with conflicts of interest. But honestly I think the “robinhood is committing fraud” is being underweighted amongst “serious “ discussion.

jonny383 6y ago
Sorry, but if you signed up to use Robin Hood and agreed to their terms and conditions, you don't have a leg to stand on.
snypher 6y ago
I think with Robinhood Instant you can by stock before the bank transfer has cleared, so they need cash on hand to fill the orders. The rising demand x rising order amount means they probably blew out their liquidity allowance. With new accounts starting with Instant capability, they are all on margin until the transfer clears.
- Rapzid 6y ago
  I know with Vanguard I can make trades without the funds in my money market. But that's perhaps because the trades can be covered by liquidating other holdings(I have x days to get the money in and they say they will liquidate to cover it if the money isn't there).
- samtheprogram 6y ago
  That would make sense, except they allowed sells instead of buys. Right?
  - gruez 6y ago
    AFAIK they weren't limiting to sells. They were limiting to close your position, which for most people is "sell".
- stainforth 6y ago
  > their liquidity allowance. But only on specific stocks they selected? They still had liquidity for other stocks?
  - amluto 6y ago
    I have no actual knowledge about securities clearing, but: If I were a clearer, and Robinhood were my client, and they had some collateral in deposit with me and a ridiculously large long position in GME in excess of the posted collateral, and GME were suddenly extremely volatile, then I would consider requiring more collateral and/or telling Robinhood that they may not purchase more GME. Because my #1 job as a clearer is to make sure that, at the end of the day, all the money I am owed is actually there. If GME crashes, then the total portfolio of Robinhood and its clients will lose a lot of value. In theory, Robinhood and its clearer has no skin the the GME game, but, in practice, there are quite a few examples of financial companies taking massive hits when their clients go under. So yes, the clearer could easily be willing to let Robinhood buy more stock that is seen as uncorrelated to GME but be extremely uncomfortable with the size of Robinhood’s position. This is similar to how Robinhood won’t let its clients hold positions when they have insufficient margin to cover the anticipated possible loss.
  - dbt00 6y ago
    The reserve requirements scale with both volatility and price. The clearing house needs enough money from you to be able to go buy those shares in the open market 2 days from now if you vanish overnight tomorrow. If the stock is going up or down 2% a day, it's a lot easier to predict how much they would need than if it's going up or down 200% a day.
toast0 6y ago
My understanding from other threads is that RH accounts default to being a margin account, and that most people don't opt-out of margin. I would never apologize for RH, I thank them for pushing mainstream retail commissions to $0, but I don't do business with them (and never have) because they don't seem to have focused on the important parts of being a brokerage.
- markdown 6y ago
  > I thank them for pushing mainstream retail commissions to $0 This isn't a positive. Had they charged fees, they wouldn't today be doing the bidding of of their real clients.
  - shmoogy 6y ago
    $0 commissions are huge, and allow people to (Along with partial stock buys) invest little amounts on a recurring basis. Robinhood forced the major brokers to do $0 stock trades, just need a few others to do $0 option trades too. The fees aren't crazy, but they add up if you do lots of spreads.
  - smnrchrds 6y ago
    Matt Levine has explained that even before the fees going to zero, the fees represented a small percentage of brokerage revenues. Elimination of the fees had an almost negligible effect on brokerage bottom lines—certainly not enough to change their entire behaviour. > Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue. https://www.bloomberg.com/opinion/articles/2019-10-02/the-trades-will-be-free-now https://www.bloomberg.com/opinion/articles/2019-10-02/the-tr...
  - toast0 6y ago
    Market makers were paying for order flow when I had to pay a $20 commission to sell my equity based compensation, and they still paid for order flow when I had to pay a $0 commission. I'm much happier paying $0 than $20 for the privilege of turning my compensation into cash. The spreads decreased a bit over that time too, which is also nice.
  - 6y ago
deleted 6y ago
[deleted]
neximo64 6y ago
- If you bought with $5k, $5k of stock - no leverage - If you waited 3 business days for your deposit to clear - If you waited for stock settlement before buying other stock. Basically no margin, no 'instant' deposits, and needing 25k+. You wouldn't even bother using robinhood.
colechristensen 6y ago
A whole lot goes on behind the scenes with securities trading, your interface to it as a retail trader buying and selling is only the tip of the iceberg. Most of the people talking about various conspiracy theories about brokerages have clearly very little idea of how brokerages work on the back end (and not very many people do know this) or what regulatory duties brokerages have and hwo that might inform decisions they make. If you are a bit of a masochist, you can read all about it in After the Trade is Made https://www.amazon.com/After-Trade-Made-Processing-Transactions/dp/1591841275 https://www.amazon.com/After-Trade-Made-Processing-Transacti...
- blhack 6y ago
  Could you give us a rough overview? If I click "sell" on a share of tesla right now on my robinhood account, what happens then?
  - colechristensen 6y ago
    No, I know “enough to be dangerous” but not enough to be able to teach a well abstracted lesson about what goes on. It’s also just not very simple. Here is a place to start: https://en.wikipedia.org/wiki/Settlement_(finance) https://en.wikipedia.org/wiki/Settlement_(finance)
  - shaklee3 6y ago
    Read this: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
  - colechristensen 6y ago
    https://blog.robinhood.com/news/2021/1/29/what-happened-this-week https://blog.robinhood.com/news/2021/1/29/what-happened-this... Straight from the horse’s mouth
kapuasuite 6y ago
> Because ultimately, all the finance whiz bang talk doesn’t change common sense that only allowing trades in one direction is unfair Trump’s executive order in November is forcing Americans to divest from a bunch of Chinese companies - liquidating orders only.
yakz 6y ago
Hopefully some (many) people will take it to heart that Robinhood users are suckers. This wasn't "just" privacy violations or psychological manipulation with ads, this was Robinhood deciding what to do with YOUR money to cover their ass. Whether they lent it to you or not doesn't matter, because if the bad trade were going the other way, then you, the sucker, would absolutely be on the hook. Whether it's fraud or flawed or whatever else is beyond my experience or knowledge, but after today I think ending up on the wrong side of the deal with Robinhood again will rightfully be met with suggestions that you should have known better.
- newacct583 6y ago
  > Hopefully some (many) people will take it to heart that Robinhood users are suckers. While this is all true (and realistically Robinhood has killed their brand and probably won't survive), those same users were also suckers for falling for this ridiculous GME pump. What Robinhood did was absolutely in self-interest, but it was trying to cover up a mess that fundamentally wasn't of its own devising. They were either going to get sued by a bunch of people that got fleeced in a clear pump and dump scam or they were going to get sued by users they prevented from losing money, and they chose the latter.
  - roywiggins 6y ago
    Didn't Robinhood's competitors do the same thing, more or less? Why does this kill Robinhood and not E-Trade?
  - nightski 6y ago
    I've been watching the market for years. Pump & dumps happen. They are usually over in a few hours max. Sometimes much quicker. This has been going on for days (the majority of the week) and shows no signs of stopping. In fact tomorrow could be the most volatile day yet. I'm not sure what is making you think all of the RH users were suckers, many of them have made quite a bit off of this. I don't personally use RH currently (although I have in the past). Ideally the bag holder in this situation would be those covering their short positions. But there is no doubt some will get burned. It's far from over though and there has been plenty of opportunity to cash out. In fact it's way up in aftermarket again this evening.
snowwrestler 6y ago
I think any attempt to understand what Robinhood did today, that does not also try to account for the other brokerages that limited GME trading today, is probably going to miss the mark.
irjustin 6y ago
It's your "Instant" account. That's where all the float has to live and all newly opened accounts are Instant. It's a great marketing tool and definitely had a hand in getting RH to where it is today. Personally, I like the instant settling. Ideally RH would have just turned off trading to specific securities that required float. i.e. "Cash" accounts can still trade everything, but maybe they can't make that separation... simply on for all or not at all.
B4CKlash 6y ago
https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict... It sounds like FINCEN requirements require a 2-day settlement period. This period allows fractional trading to work (they pool orders and execute on day 2). Those same restrictions also appear to restrict a broker/dealer from using customer funds to cover this float. From there it's pretty easy to interpret the end results - risk rises, fees rise, and suddenly RH has to pony up massive amounts of liquidity to cover the DTC float. Fuckery is certainly possible. This explanation still begs the question; at what point can a business decide not to cover the 'cost of doing business' and instead, create explicit downward pricing pressure.
- fny 6y ago
  Ask yourself: why didn't they just freeze trading these securities instead of forcing liquidations across retail brokerages and putting everyone in sell only mode? They're covering for the market makers and shorts who are on the hook for all the options bought and shares shorted. Institutions could enough to ameliorate their pain while the only option given to everyone else was sell. They should have instead stopped trading so everyone could borrow whatever they needed to pay for the bets they lost.
  - eachro 6y ago
    Who is "they" here?
  - ericpauley 6y ago
    So you're arguing that, instead of just disabling buying, they should have disabled buying and selling? That would expose them to far more substantial and direct liability than disabling new positions.
    - fny 6y ago
      These securities should have been frozen so people could capitalize enough to supply the liquidity that was demanded instead of just letting institutions buy whatever they needed to cover their positions while forcing liquidations across the board.
JohnJamesRambo 6y ago
https://www.wsj.com/articles/robinhood-faces-sec-probe-related-to-deals-with-high-speed-traders-11599074891 https://www.wsj.com/articles/robinhood-faces-sec-probe-relat... They've been defrauding people for quite some time already. I remember reading this on HN in September.
PragmaticPulp 6y ago
One of Robinhood’s innovations was that they gave everyone a margin account, but hid the details. When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen. Likewise, when you buy or sell a stock, the trade doesn’t settle for t+2 days. Robinhood again transparently loans you the money while waiting for the stock trade to settle. If Robinhood exceeds the SEC-mandated limits for margin they can extend, or their creditors decide it’s too risky to continue loaning them the money, the whole show grinds to a halt. They chose to press the pause button on the primary meme stocks driving them toward this cliff. I imagine the only alternative was to hit the pause button on the entire platform until the credit issue was resolved, but it’s much harder to get additional credit when your service has ground to a halt.
- llboston 6y ago
  > When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen. Then they can reduce the purchasing power for certain stocks to just the money already transferred.
  - PragmaticPulp 6y ago
    There are additional capital requirements for brokering stocks, as mandated by regulations including Dodd-Frank, that made it extremely expensive to handle GME trades during the frenzy. This thread explains the math in detail: https://twitter.com/kralctrebor/status/1354952686165225478?s=21 https://twitter.com/kralctrebor/status/1354952686165225478?s... I know the popular narrative is that this was some sort of conspiracy, but the truth is likely far more banal. Unprecedented volatility and volume are exceeding the limits of these systems. No one budgeted for a single stock dominating news headlines and swinging wildly while millions of retail investors tried to enter at the exact same time.
    - cacarr 6y ago
bonestamp2 6y ago
I'm not an apologist, but the fact is that Robinhood has gotten beaten up by the SEC over the years for not looking out for their users enough (rightfully so). But that also means I can see why they'd tread very carefully around protecting their users from losing their savings on GME. It's hard to have it both ways.
drewcon 6y ago
Sigh. In a different life, I worked for a well known discount brokerage in 2005 processing corporate actions. Mergers, splits, divided payments, proxy voting, exercising bond contract provisions, warrants, short covering etc.for retail customers. Not glamorous work to be sure. I can tell you unequivocally that to deliver the simplicity, affordability, and transaction efficiency we now take for granted, many MANY layers of broker/dealer process and manpower are built on top of pretty archaic systems and processes and regs. I’m sure that’s something most HN readers would roll their eyes at because of how low tech and antiquated it was. But that’s how the market actually functionally works for retail investors. And those regs are often granular and exist because of historical failure. Just being able to buy stock, and not worry about getting the literal paper stock in your own name is an innovation we take for granted by having securities held in street name. We in fact had some paper stock in a safe because some clients insisted having in their name. When we processed shorts we literally would hold the short against a specific humans named account or go borrow shares by picking up the phone and calling another broker. Shorts don’t happen out of thin air. It’s someone else stock you’re selling. In 2005 I would log into a black screen DTC terminal and pull money down at a firm level by manually typing the values in (lord knows what happens if this gets messed up). If accounts went over minimum margin requirements we would pick up the phone and call them to explain why they needed to close positions or add collateral. One time we closed the entire account an mailed them a check for the balance because they kept ignoring. When corporate action transactions settled (T+5) we would manually allocate them to accounts, and then print out the accounts affected for manual QA. The print out went into a filing cabinet for compliance reasons. All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing. In reality it’s more like an anthill built on top of a Rube Goldberg machine. You may not want to believe that RH and other brokerages have to abide by insanely complex and Byzantine rules and regs and systems and interactions because they make a drop dead simple experience in their app...but they almost certainly do.
- xaduha 6y ago
  > All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing. Exactly, just because it's abstracted away doesn't mean it isn't there. What else can this startup be other than a client application to a service that isn't theirs?
tedfernau 6y ago
Well maybe common sense tells us how the system should work, but in a regulated industry in the real world the technical details matter. Hope we can get to the ideal solution after enough of these fiascos. Robinhood needs to be at the cutting edge to keep their customers.
kelnos 6y ago
Yup. If I had my holdings at a brokerage that suddenly decided to restrict trading that was previously allowed, without some sort of law change or lawful order from the SEC (presumably something that would apply to all brokerages), I would immediately transfer all my assets out. Doesn't even matter if their restriction didn't affect me at the time. I would not want to give my business to a company that would do that.
ROARosen 6y ago
I don't even really get all the anger directed just at Robinhood. Apex clearing, which clears for virtually every other new age trading platform (and back in the day RH) also halted these stocks. I'm not sure of the biz aspect of this, but given the criticism RH historically got for pay-for-flow schemes (even while they were using Apex) I would assume it was RH which got the market-flow kickbacks - not Apex. So it's safe to assume that's how it still works today. Yet, Apex also halted orders for these tickers. This goes to show you the very real risk these types of retail clearing companies are facing in this market. So, I'm not absolving RH just saying they might have some real reason to have paused. All this also shows you "there is nowhere to hide". There will always be somewhere somecompany which will put its perceived viability or PR before "sacrificing" for their loyal customers. Especially, given the fact that most of these platforms just one company for clearing anyhow.
- Karunamon 6y ago
  Robinhood screwed themselves thrice over. If their clearing outfit wouldn't handle these transactions anymore at reasonable prices, that's out of their control. Fine. RH didn't have to send out a patronizing "we're doing this for your own good" email. RH didn't have to continue failing at anything resembling forthright communication. (Including their tweets, blog posts, and outright false in-app messages that implied users sold their own shares and cancelled their own orders) Worst of all, RH absolutely didn't have to sell people's shares out from under them at a dip in GME's price. They were going to burn some amount of goodwill, but that could have been reduced from company-destroying magnitude to mere bad day had they simply not acted shady at every possible point. That last point is probably going to land them in severe legal hot water, their ToS won't mean much especially if/when the SEC comes knocking.
  - ROARosen 6y ago
    Your totally right especially about these emails. See here: https://news.ycombinator.com/item?id=25952525 https://news.ycombinator.com/item?id=25952525
deleted 6y ago
[deleted]

jonny383 6y ago

Sorry, but if you signed up to use Robin Hood and agreed to their terms and conditions, you don't have a leg to stand on.

snypher 6y ago

I think with Robinhood Instant you can by stock before the bank transfer has cleared, so they need cash on hand to fill the orders. The rising demand x rising order amount means they probably blew out their liquidity allowance. With new accounts starting with Instant capability, they are all on margin until the transfer clears.

Rapzid 6y ago
I know with Vanguard I can make trades without the funds in my money market. But that's perhaps because the trades can be covered by liquidating other holdings(I have x days to get the money in and they say they will liquidate to cover it if the money isn't there).
samtheprogram 6y ago
That would make sense, except they allowed sells instead of buys. Right?
- gruez 6y ago
  AFAIK they weren't limiting to sells. They were limiting to close your position, which for most people is "sell".
stainforth 6y ago
> their liquidity allowance. But only on specific stocks they selected? They still had liquidity for other stocks?
- amluto 6y ago
  I have no actual knowledge about securities clearing, but: If I were a clearer, and Robinhood were my client, and they had some collateral in deposit with me and a ridiculously large long position in GME in excess of the posted collateral, and GME were suddenly extremely volatile, then I would consider requiring more collateral and/or telling Robinhood that they may not purchase more GME. Because my #1 job as a clearer is to make sure that, at the end of the day, all the money I am owed is actually there. If GME crashes, then the total portfolio of Robinhood and its clients will lose a lot of value. In theory, Robinhood and its clearer has no skin the the GME game, but, in practice, there are quite a few examples of financial companies taking massive hits when their clients go under. So yes, the clearer could easily be willing to let Robinhood buy more stock that is seen as uncorrelated to GME but be extremely uncomfortable with the size of Robinhood’s position. This is similar to how Robinhood won’t let its clients hold positions when they have insufficient margin to cover the anticipated possible loss.
- dbt00 6y ago
  The reserve requirements scale with both volatility and price. The clearing house needs enough money from you to be able to go buy those shares in the open market 2 days from now if you vanish overnight tomorrow. If the stock is going up or down 2% a day, it's a lot easier to predict how much they would need than if it's going up or down 200% a day.

toast0 6y ago

My understanding from other threads is that RH accounts default to being a margin account, and that most people don't opt-out of margin. I would never apologize for RH, I thank them for pushing mainstream retail commissions to $0, but I don't do business with them (and never have) because they don't seem to have focused on the important parts of being a brokerage.

markdown 6y ago
> I thank them for pushing mainstream retail commissions to $0 This isn't a positive. Had they charged fees, they wouldn't today be doing the bidding of of their real clients.
- shmoogy 6y ago
  $0 commissions are huge, and allow people to (Along with partial stock buys) invest little amounts on a recurring basis. Robinhood forced the major brokers to do $0 stock trades, just need a few others to do $0 option trades too. The fees aren't crazy, but they add up if you do lots of spreads.
- smnrchrds 6y ago
  Matt Levine has explained that even before the fees going to zero, the fees represented a small percentage of brokerage revenues. Elimination of the fees had an almost negligible effect on brokerage bottom lines—certainly not enough to change their entire behaviour. > Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue. https://www.bloomberg.com/opinion/articles/2019-10-02/the-trades-will-be-free-now https://www.bloomberg.com/opinion/articles/2019-10-02/the-tr...
- toast0 6y ago
  Market makers were paying for order flow when I had to pay a $20 commission to sell my equity based compensation, and they still paid for order flow when I had to pay a $0 commission. I'm much happier paying $0 than $20 for the privilege of turning my compensation into cash. The spreads decreased a bit over that time too, which is also nice.
- 6y ago

deleted 6y ago

[deleted]

neximo64 6y ago

- If you bought with $5k, $5k of stock - no leverage - If you waited 3 business days for your deposit to clear - If you waited for stock settlement before buying other stock. Basically no margin, no 'instant' deposits, and needing 25k+. You wouldn't even bother using robinhood.

colechristensen 6y ago

A whole lot goes on behind the scenes with securities trading, your interface to it as a retail trader buying and selling is only the tip of the iceberg. Most of the people talking about various conspiracy theories about brokerages have clearly very little idea of how brokerages work on the back end (and not very many people do know this) or what regulatory duties brokerages have and hwo that might inform decisions they make. If you are a bit of a masochist, you can read all about it in After the Trade is Made https://www.amazon.com/After-Trade-Made-Processing-Transactions/dp/1591841275 https://www.amazon.com/After-Trade-Made-Processing-Transacti...

blhack 6y ago
Could you give us a rough overview? If I click "sell" on a share of tesla right now on my robinhood account, what happens then?
- colechristensen 6y ago
  No, I know “enough to be dangerous” but not enough to be able to teach a well abstracted lesson about what goes on. It’s also just not very simple. Here is a place to start: https://en.wikipedia.org/wiki/Settlement_(finance) https://en.wikipedia.org/wiki/Settlement_(finance)
- shaklee3 6y ago
  Read this: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
- colechristensen 6y ago
  https://blog.robinhood.com/news/2021/1/29/what-happened-this-week https://blog.robinhood.com/news/2021/1/29/what-happened-this... Straight from the horse’s mouth

kapuasuite 6y ago

> Because ultimately, all the finance whiz bang talk doesn’t change common sense that only allowing trades in one direction is unfair Trump’s executive order in November is forcing Americans to divest from a bunch of Chinese companies - liquidating orders only.

yakz 6y ago

Hopefully some (many) people will take it to heart that Robinhood users are suckers. This wasn't "just" privacy violations or psychological manipulation with ads, this was Robinhood deciding what to do with YOUR money to cover their ass. Whether they lent it to you or not doesn't matter, because if the bad trade were going the other way, then you, the sucker, would absolutely be on the hook. Whether it's fraud or flawed or whatever else is beyond my experience or knowledge, but after today I think ending up on the wrong side of the deal with Robinhood again will rightfully be met with suggestions that you should have known better.

newacct583 6y ago
> Hopefully some (many) people will take it to heart that Robinhood users are suckers. While this is all true (and realistically Robinhood has killed their brand and probably won't survive), those same users were also suckers for falling for this ridiculous GME pump. What Robinhood did was absolutely in self-interest, but it was trying to cover up a mess that fundamentally wasn't of its own devising. They were either going to get sued by a bunch of people that got fleeced in a clear pump and dump scam or they were going to get sued by users they prevented from losing money, and they chose the latter.
- roywiggins 6y ago
  Didn't Robinhood's competitors do the same thing, more or less? Why does this kill Robinhood and not E-Trade?
- nightski 6y ago
  I've been watching the market for years. Pump & dumps happen. They are usually over in a few hours max. Sometimes much quicker. This has been going on for days (the majority of the week) and shows no signs of stopping. In fact tomorrow could be the most volatile day yet. I'm not sure what is making you think all of the RH users were suckers, many of them have made quite a bit off of this. I don't personally use RH currently (although I have in the past). Ideally the bag holder in this situation would be those covering their short positions. But there is no doubt some will get burned. It's far from over though and there has been plenty of opportunity to cash out. In fact it's way up in aftermarket again this evening.

snowwrestler 6y ago

I think any attempt to understand what Robinhood did today, that does not also try to account for the other brokerages that limited GME trading today, is probably going to miss the mark.

irjustin 6y ago

It's your "Instant" account. That's where all the float has to live and all newly opened accounts are Instant. It's a great marketing tool and definitely had a hand in getting RH to where it is today. Personally, I like the instant settling. Ideally RH would have just turned off trading to specific securities that required float. i.e. "Cash" accounts can still trade everything, but maybe they can't make that separation... simply on for all or not at all.

B4CKlash 6y ago

https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict... It sounds like FINCEN requirements require a 2-day settlement period. This period allows fractional trading to work (they pool orders and execute on day 2). Those same restrictions also appear to restrict a broker/dealer from using customer funds to cover this float. From there it's pretty easy to interpret the end results - risk rises, fees rise, and suddenly RH has to pony up massive amounts of liquidity to cover the DTC float. Fuckery is certainly possible. This explanation still begs the question; at what point can a business decide not to cover the 'cost of doing business' and instead, create explicit downward pricing pressure.

fny 6y ago
Ask yourself: why didn't they just freeze trading these securities instead of forcing liquidations across retail brokerages and putting everyone in sell only mode? They're covering for the market makers and shorts who are on the hook for all the options bought and shares shorted. Institutions could enough to ameliorate their pain while the only option given to everyone else was sell. They should have instead stopped trading so everyone could borrow whatever they needed to pay for the bets they lost.
- eachro 6y ago
  Who is "they" here?
- ericpauley 6y ago
  So you're arguing that, instead of just disabling buying, they should have disabled buying and selling? That would expose them to far more substantial and direct liability than disabling new positions.
  - fny 6y ago
    These securities should have been frozen so people could capitalize enough to supply the liquidity that was demanded instead of just letting institutions buy whatever they needed to cover their positions while forcing liquidations across the board.

JohnJamesRambo 6y ago

https://www.wsj.com/articles/robinhood-faces-sec-probe-related-to-deals-with-high-speed-traders-11599074891 https://www.wsj.com/articles/robinhood-faces-sec-probe-relat... They've been defrauding people for quite some time already. I remember reading this on HN in September.

PragmaticPulp 6y ago

One of Robinhood’s innovations was that they gave everyone a margin account, but hid the details. When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen. Likewise, when you buy or sell a stock, the trade doesn’t settle for t+2 days. Robinhood again transparently loans you the money while waiting for the stock trade to settle. If Robinhood exceeds the SEC-mandated limits for margin they can extend, or their creditors decide it’s too risky to continue loaning them the money, the whole show grinds to a halt. They chose to press the pause button on the primary meme stocks driving them toward this cliff. I imagine the only alternative was to hit the pause button on the entire platform until the credit issue was resolved, but it’s much harder to get additional credit when your service has ground to a halt.

llboston 6y ago
> When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen. Then they can reduce the purchasing power for certain stocks to just the money already transferred.
- PragmaticPulp 6y ago
  There are additional capital requirements for brokering stocks, as mandated by regulations including Dodd-Frank, that made it extremely expensive to handle GME trades during the frenzy. This thread explains the math in detail: https://twitter.com/kralctrebor/status/1354952686165225478?s=21 https://twitter.com/kralctrebor/status/1354952686165225478?s... I know the popular narrative is that this was some sort of conspiracy, but the truth is likely far more banal. Unprecedented volatility and volume are exceeding the limits of these systems. No one budgeted for a single stock dominating news headlines and swinging wildly while millions of retail investors tried to enter at the exact same time.
  - cacarr 6y ago

bonestamp2 6y ago

I'm not an apologist, but the fact is that Robinhood has gotten beaten up by the SEC over the years for not looking out for their users enough (rightfully so). But that also means I can see why they'd tread very carefully around protecting their users from losing their savings on GME. It's hard to have it both ways.

drewcon 6y ago

Sigh. In a different life, I worked for a well known discount brokerage in 2005 processing corporate actions. Mergers, splits, divided payments, proxy voting, exercising bond contract provisions, warrants, short covering etc.for retail customers. Not glamorous work to be sure. I can tell you unequivocally that to deliver the simplicity, affordability, and transaction efficiency we now take for granted, many MANY layers of broker/dealer process and manpower are built on top of pretty archaic systems and processes and regs. I’m sure that’s something most HN readers would roll their eyes at because of how low tech and antiquated it was. But that’s how the market actually functionally works for retail investors. And those regs are often granular and exist because of historical failure. Just being able to buy stock, and not worry about getting the literal paper stock in your own name is an innovation we take for granted by having securities held in street name. We in fact had some paper stock in a safe because some clients insisted having in their name. When we processed shorts we literally would hold the short against a specific humans named account or go borrow shares by picking up the phone and calling another broker. Shorts don’t happen out of thin air. It’s someone else stock you’re selling. In 2005 I would log into a black screen DTC terminal and pull money down at a firm level by manually typing the values in (lord knows what happens if this gets messed up). If accounts went over minimum margin requirements we would pick up the phone and call them to explain why they needed to close positions or add collateral. One time we closed the entire account an mailed them a check for the balance because they kept ignoring. When corporate action transactions settled (T+5) we would manually allocate them to accounts, and then print out the accounts affected for manual QA. The print out went into a filing cabinet for compliance reasons. All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing. In reality it’s more like an anthill built on top of a Rube Goldberg machine. You may not want to believe that RH and other brokerages have to abide by insanely complex and Byzantine rules and regs and systems and interactions because they make a drop dead simple experience in their app...but they almost certainly do.

xaduha 6y ago
> All of this is to say...it seems like HN model of how retail financial markets work is like super efficient APIs that transact like magic plumbing. Exactly, just because it's abstracted away doesn't mean it isn't there. What else can this startup be other than a client application to a service that isn't theirs?

tedfernau 6y ago

Well maybe common sense tells us how the system should work, but in a regulated industry in the real world the technical details matter. Hope we can get to the ideal solution after enough of these fiascos. Robinhood needs to be at the cutting edge to keep their customers.

kelnos 6y ago

Yup. If I had my holdings at a brokerage that suddenly decided to restrict trading that was previously allowed, without some sort of law change or lawful order from the SEC (presumably something that would apply to all brokerages), I would immediately transfer all my assets out. Doesn't even matter if their restriction didn't affect me at the time. I would not want to give my business to a company that would do that.

ROARosen 6y ago

I don't even really get all the anger directed just at Robinhood. Apex clearing, which clears for virtually every other new age trading platform (and back in the day RH) also halted these stocks. I'm not sure of the biz aspect of this, but given the criticism RH historically got for pay-for-flow schemes (even while they were using Apex) I would assume it was RH which got the market-flow kickbacks - not Apex. So it's safe to assume that's how it still works today. Yet, Apex also halted orders for these tickers. This goes to show you the very real risk these types of retail clearing companies are facing in this market. So, I'm not absolving RH just saying they might have some real reason to have paused. All this also shows you "there is nowhere to hide". There will always be somewhere somecompany which will put its perceived viability or PR before "sacrificing" for their loyal customers. Especially, given the fact that most of these platforms just one company for clearing anyhow.

Karunamon 6y ago
Robinhood screwed themselves thrice over. If their clearing outfit wouldn't handle these transactions anymore at reasonable prices, that's out of their control. Fine. RH didn't have to send out a patronizing "we're doing this for your own good" email. RH didn't have to continue failing at anything resembling forthright communication. (Including their tweets, blog posts, and outright false in-app messages that implied users sold their own shares and cancelled their own orders) Worst of all, RH absolutely didn't have to sell people's shares out from under them at a dip in GME's price. They were going to burn some amount of goodwill, but that could have been reduced from company-destroying magnitude to mere bad day had they simply not acted shady at every possible point. That last point is probably going to land them in severe legal hot water, their ToS won't mean much especially if/when the SEC comes knocking.
- ROARosen 6y ago
  Your totally right especially about these emails. See here: https://news.ycombinator.com/item?id=25952525 https://news.ycombinator.com/item?id=25952525

deleted 6y ago

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