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"To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, require
by ajsharp 6y ago
"To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation."
Non-zero chance had they not haulted trading on those symbols they would've been insolvent by close of trading today, depending on the size of their credit line.
I watched the CEO on CNN tonight, and while I found him pretty difficult to watch, this is a very difficult position to be in. If you admit on TV that your company is experiencing liquidity issues -- even if temporary in nature such as with clearing custodianship requirements -- you run the risk of triggering a greater panic through customer withdrawals/redemptions.
This could turn into a run on the brokerage pretty quickly, and probably already has in some measure, especially after a day of massively lost customer trust. He certainly didn't help it by going on TV and lying about their liquidity issues. They probably would've been better off by issuing a statement and keeping him off TV.
- peytn 6y agoI’m not keeping my money with a financial institution that lies to me. End of story. Transfer initiated on my cash, and I’ll deal with moving stocks in the morning.
- MattGaiser 6y agoWould you have kept it with a near insolvent one? I suspect they lost you as a customer either way.
- killaken2000 6y ago>I suspect they lost you as a customer either way. yes
- peytn 6y agoThey’ve had a number of technical issues over the past year, and I’ve given them the benefit of the doubt. This is the last straw for me personally.
- deleted 6y ago[deleted]
- ric2b 6y agoYeah, well, there are more competent players in the space. We owe them nothing.
- gryz 6y agoDo users actually lose the stocks, if something that happens to the Robinhood itself? I live under assumption that it is not happening. In any case stocks should stay belonging to the folks who purchased them.
- conceptme 6y agoThat is normally what happens if the broker goes bankrupt the stocks should still be yours.
- MattGaiser 6y agoYes, but it can be a messy process: https://www.investopedia.com/articles/investing/050515/what-happens-when-stock-broker-goes-bust.asp https://www.investopedia.com/articles/investing/050515/what-...
- Elv13 6y agoStocks don't belong to you, unless you have the actual physical stock. Everybody borrow them from 3rd party who borrow them from 3rd party who borrow them from 3rd party, who actually lended them multiple time to short the stock, who borrow them from a 3rd party, who actually have the physical piece of paper in a vault somewhere. I am not even joking. And it's the same for transactions or your bank balance. The bank doesn't keep your money and give it back to you. At least, for banks, they are backed by the government and IMF. For stocks and gift card balance, I am not so sure.
- mkl 6y agoIf I understand correctly, it's actually even stranger: "Nobody owns stock. What you own is an entitlement to stock held for you by your broker. But your broker doesn't own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co., which is a nominee of the Depository Trust Company, which is a company that is in the business of owning everyone's stock for them." - https://www.bloomberg.com/opinion/articles/2015-07-14/banks-forgot-who-was-supposed-to-own-dell-shares https://www.bloomberg.com/opinion/articles/2015-07-14/banks-...
- throwaway23819 6y agoThis is why I prefer my money be with IBKR. I already know when it comes to volatility, they are going to choose IBKR over my account which is good because usually "my account" is fine but its the others who are doing really crazy things. I know IBKR will be around in the morning. That's why I love them.
- nullc 6y agoIBKR's highly visible and active risk management-- e.g. their proactive increase in margin requirements in advance of recent political events-- is a major positive point in their favour.
- throwaway23819 6y agoExactly. And it turns out, if you are a good trader, you can negotiate your margin.
- throwawaaaaay17 6y agoI am a big fan of IBKR, but if you want someone who will be there in the morning... Pick someone bigger. Fidelity, for example, is Too Big To Fail. They will get bailed out if something happens. Not 100% sure that Interactive brokers will be.
- throwaway23819 6y agoDoes Fidelity have an API?
- MrMan 6y agoMy rep at fidelity said they don’t really have the same offerings.
- danr4 6y agoHave you seen the CNBC interview [1] with IBKR chairman, basically saying "once the stock goes back to the price we want we'll let retail investor trade it again"? [1] https://www.youtube.com/watch?v=7RH4XKP55fM https://www.youtube.com/watch?v=7RH4XKP55fM
- onion2k 6y agoI’m not keeping my money with a financial institution that lies to me. I know for a fact my bank lies. They've been fined hundreds of millions of dollars for money laundering (it's HSBC). A few years ago I looked in to moving to a more honest bank, but I couldn't find one that also met basic criteria like having access to cash points in the UK and having a half decent mobile banking app. Literally every major bank that operates in the UK has stories of doing frankly awful things. Since then I've joined Monzo, who do seem to be genuinely above board, but finding an honest financial institution is really hard.
- mprev 6y agoYou didn’t look at Nationwide or the other handful of building societies that offer current accounts? Or Triodos if you want to go the full way.
- dustinmoris 6y agoStarling or Monzo?
- celticninja 6y agoStarling Starlink is the space internet from Musk
- dustinmoris 6y agoAuto correct what can I do. Of course I meant Starling, they were the first challenger bank to offer business accounts as well and I’m very happy so far.
- Jake232 6y agoStarling is neat except you need to request a special exemption from them for EVERY payment you send over £25,000. Only takes them an hour or so to approve it for you, but it gets pretty old having to do it 3-5x per week.
- swarnie_ 6y ago> I’m not keeping my money with a financial institution that lies to me. End of story. So you're keeping cash under the mattress then i assume?
- klodolph 6y agoCouldn’t be your own mattress, obviously. You’d have to find a robot with a bed and use that.
- neximo64 6y agoYour bank actually has to lie to you to remain solvent. All banks do. The Central Bank also encourage it. Last year you saw both that banks were 'forced' to withhold dividends and they were perfectly capitalised. Both cant be true of course. If they hide it from you your money and everyones money is safe. If they tell the truth everyone loses, so it is actually the best outcome for you and everyone else. The fractional reserve system relies on not everyone withdrawing their money at once.
- pishpash 6y agoThat's why there should be no banks, only money market funds. Every deposit is an investment decision. You may as well reap the rewards if you take all the risks of lending and cut out the middleman. I've been using a brokerage account for banking for years.
- nly 6y agoTaking those risks has trade offs most people aren't prepared to make. The online P2P lending boom here in the UK from financial crisis onward gave people this opportunity. The end result, 10+ years in, has been subdued returns (relative to e.g. stocks) and crippling illiquidity, as you are exposed to all those late payments, defaults, and have no access to a functional secondary market. Honestly you're lucky if you can get most people to even use a separate savings account. I know many people who keep 100% of their savings in their current (checking) account.
- shadowgovt 6y agoLying in what sense?
- gruez 6y agoFractional reserve.
- jaywalk 6y agoLying about the fact that your money is actually there. Individually, the money in each account is at the bank. You can go withdraw all of the money in your account without any issue. But collectively, all of the money in all of the accounts is definitely not there.
- short_sells_poo 6y agoHint: every broker will do this. If you think any broker (let alone retail) will let the client's risk taking threaten their existence, you are deluding yourself. It's a little bit like insurance: as long as most clients take diversified risks and don't push the system to it's limits, the system works. When a significant portion (majority?) of the clients all pile into an increasingly hairy position, the broker will step in and prevent the clients exacerbating the situation further.
- victor106 6y agoDitto. Shutting down my account. Enough is enough. Robinhood has proven its intentions by its actions all the other things they say is just marketing and PR bullshit
- awb 6y agoChamath would agree with you: https://twitter.com/chamath/status/1354947541125611526?s=20 https://twitter.com/chamath/status/1354947541125611526?s=20
- disgrunt 6y agoI'd be more concerned with how illiquid Robin Hood apparently is here.
- walleeee 6y agoSince finance itself is a socially convenient system of alignment fabrication, you might as well start subsistence farming. It's turtles all the way down. You could say trust emerges when people agree to believe in a shared lie.
- blueblisters 6y agoAre brokerage deposits / holdings protected by insurance? I'm genuinely fearful of losing my holdings in Robinhood at this point.
- ArtTimeInvestor 6y agoYour holdings in cash or your holdings in shares?
- blueblisters 6y agoBoth. I suspect there is some kind of FDIC-like insurance but not sure of the specifics.
- ajhurliman 6y agoYes, it's called SIPC, you're fine unless you have over $500,000 in robinhood.
- dagw 6y agoWith the (potentially huge) caveat that any losses you suffer due to not being able to sell your stocks in the period where you SIPC claim is being processed is not covered.
- dagw 6y agoYes, it's called SIPC and is (kind of) equivalent to the FDIC for banks. However it only covers up to $500k, only covers cash, stocks, bonds, CDs, and (I think) mutual funds. It does not cover options or future contracts. Also it will only attempt to return the securities you 'lost' not their cash value. If you lose a lot of money due to not being able to sell your stocks for several days, that is not covered. So if you held 2000 stocks of GME, the SIPC will (eventually) give you back 2000 stocks of GME, not the cash value of those stocks when Robinhood went bankrupt.
- 6y ago
- ajhurliman 6y agoA brokerage run? Unlikely for an SIPC insured institution.
- briefcomment 6y agoIt would be more of a run based on principle and fear rather than practicality. I can see why an investor would move to a competitor after seeing that RH can just stop anyone from trading, anytime.
- deepGem 6y agoOK, how hard it is to increase your credit line in real time. We are not talking 100s of billions here. Had RH reached out to the likes of Chamath or Musk, they would have gotten a credit line in minutes. This is no excuse for screwing retail investors. Horrible management. I mean, I am some random dude who can think of these, these are professionals running multi billion dollar enterprises, c'mon.
- Gene_Parmesan 6y agoIf you are just some "random dude," then perhaps there are issues with your suggestion that the professionals know about and you do not?
- deleted 6y ago[deleted]
- csunbird 6y agoThis looks like a preparation for defense against the lawsuit(s) for disabling trading for a couple of stocks. They will use the "We were not manipulating the market, we were trying to stay afloat!" excuse.
- ummonk 6y agoI don't understand their PR strategy though. The Webull CEO has been much more transparent about the kind of collateral requirements their exchange was dealing with via DTCC. RobinHood could have explained the same - it's not their fault for having insufficient liquidity when the DTCC's collateral requirements go up.
- MaxBarraclough 6y ago> He certainly didn't help it by going on TV and lying about their liquidity issues. Aren't there laws against lying to investors?
- MrMan 6y agoMaking an app and running a brokerage - who would have thought they are two different things.
- michaelt 6y ago> Non-zero chance had they not haulted trading on those symbols they would've been insolvent by close of trading today, depending on the size of their credit line. Perhaps you can help me understand something. In the absence of margin trading, if I deposit $100 of cash at my brokerage, then I order my broker to buy $100 worth of Stock A, how does credit and the possibility of bankruptcy enter into the transaction at all? After all, if I give my kid $5 and send him to the store to buy some milk, he doesn't need to find 'liquidity' or a 'credit line' or risk bankruptcy.
- toyg 6y agoNot an expert by any means, but I know in the world of trading there is often the requirement of guarantees before transactions are accepted. It's like your kid, at the store, was asked to show he actually had $100, before his $5 could be accepted and milk handed over.
- irjustin 6y agoIn RH everyone who opens an account starts as an Instant amount. The Instant means any security sold you can immediately use that cash. Normally you can't go that. You have to wait 3 days for it to settle in the clearing House. The Instant accounts are using margin to make the cash instantly available.
- devoutsalsa 6y agoAnother small example. Robinhood gave me one share of GE when I joined. I didn’t want it, so I sold it and withdrew the money. I initiated the withdrawal request yesterday for $10.69. It’d be amusing to me to find they would have been fine if I only withdrew $10.68.
- itronitron 6y agoBased on my very limited knowledge, it is my understanding that banks/brokers don't actually consider the deposit to be valid until several days after the transaction. Even if you deposited cash they would probably find some way to delay letting you use the funds pending some 'internal checking'. So in Robinhood's case if there are many people depositing dollars to buy stock then that could be their reason or excuse to not have funds available for trading. Just a guess.
- economusty 6y agoI already started liquidating and transferring out, this situation has me angry enough to lose the long term cap gain tax break. That's right I'm paying more taxes to avoid dealing with robinhood.
- zoobab 6y ago"I watched the CEO on CNN tonight, and while I found him pretty difficult to watch, this is a very difficult position to be in. If you admit on TV that your company is experiencing liquidity issues -- even if temporary in nature such as with clearing custodianship requirements -- you run the risk of triggering a greater panic through customer withdrawals/redemptions." A Bankrun!
- shadowgovt 6y agoThe key difference is that Robinhood isn't a bank. Bank runs are bad because banks are assumed to be massively liquid---in the average case, if you walk in and provide the proper ID, they can hand you the cash you're asking for. If they can't, one of their primary value propositions is at risk and people start demanding their money out because the bank isn't able to provide the services of a bank. This is not (and is not expected to be) true of stock brokerage. Nobody generally has an expectation of moment-to-moment liquidity (or even closure of deals), even in a stock with significant availability. However, a brokerage deciding independently "You're not allowed to buy this one stock" is unusual, and can cause people to start backing towards the exits.
- tehjoker 6y agoThis dude allowed only selling of GME, not a full freeze. People would be mad but not livid if he hadn't done that, which stinks of corruption.
- wernst 6y ago"The first rule of having a liquidity problem is dont talk about your liquidity problem"
- CivBase 6y ago"Guys, we had to lie to everyone! It was for PR!" And why exactly did they have to let people sell GME shares? In light of the current situation, it sounds to me like the responsible and impartial thing would have been for them to temporarily suspend all trading of GME - not just buying.
- aphextron 6y agoRobinhood is a joke. Not just because of these shenanigans, but because their lack of technical stability and customer service is unacceptable. They reliably crash on every major trading day. And there's no US based support. Never ever use a broker where you can't pick up the phone and talk to a real human being. They all have zero commissions now so there's no excuse.
- nrmitchi 6y agoThey're also a joke because they are, as far as I'm concerned, not a "brokerage". They are an app designed to convince people that they understand how to trade stocks, in order to sell them stocks. A real brokerage should, in my opinion, and some sort of duty to act in the best interest of its clients. A brokerage should not have huge backlash because its users got margin called, and those users didn't even know what a margin call was. They should not have huge backlash because its users stop-loss orders were triggered, and then executed at a lower price. This is just confusion that shouldn't exist, because a reasonable brokerage shouldn't be luring people into these risky positions just to make a buck on the sale.
- bobsmooth 6y agoGetting margin called is one thing. Being prevented from buying a stock is something completely different.
- nrmitchi 6y agoBeing prevented from being able to buy a stock if the brokerage can not afford to legally sell it to you is the expected outcome. If you want to argue that Robinhood should have been bigger, and thus had more flexibility and been able to handle this, sure. Why not. But then you're complaining that the company you're dealing with isn't big enough to float your risky position. Would you have preferred the alternative where Robinhood risks exploding, has no liquidity, triggers a rush where everyone tries to get their stock out of Robinhood at the same time, fails, and every Robinhood customer is stuck waiting on SPIC for some undetermined amount of time? Or would you have preferred the alternative where Robinhood didn't allow you to sell either? And then it the stock went down during that time, you can't try to get out? Robinhood is a shitty company for a lot of reasons, but preventing themselves from being over-extended into bankruptcy isn't really one of those reasons.
- snickms 6y agoWould it make sense for these companies to make bets against their customer's trades? My guess it that the customers are wrong most of the time.
- brute 6y agohttps://xkcd.com/2270/ https://xkcd.com/2270/
- exporectomy 6y agoHow could they trigger a "run"? Surely they have the money to repay every single customer what's in their account and you're not implying they're doing a Mt.Gox? Some customers may leave, but that won't hurt the remaining customers, will it?
- billylindeman 6y agoI pulled my settled cash out yesterday and will be pulling out the rest of my cash ASAP. They lost my trust yesterday.
- ig1 6y agoThey wouldn't have been insolvent, they just wouldn't be able to process additional transactions until previous transactions had settled. The trade-off was suspending trading on some stocks vs suspending trading on everything when they hit their limit.