4 ms·

Can anyone answer me this question: if they needed to cover themselves from the margins that people were using, why didn't they keep enabled the ability to buy

Can anyone answer me this question: if they needed to cover themselves from the margins that people were using, why didn't they keep enabled the ability to buy shares with cash?

lovehashbrowns 6y ago
So apparently, a buy trade takes two days to clear. It just looks instant on the app. During the time it takes for your cash to go to rh to dtc to the other end, robinhood has to put up a collateral for some guarantee that the cash for the transaction will exist. Usually this collateral is between 1-3%. Because of how volatile gme is at the moment, dtc upped the percentage to 100%. So for every buy, rh has to put up cash collateral equal to the price of the purchase of gme. Obviously this isn't a big deal if gme is at $50. This is a big deal if gme is at $350. This is an even bigger deal if robinhood is doing this for millions of trades a day. The reason these mechanics exist is if you sell your stock, you should be guaranteed to get your money for the stock. Whether that money comes from a user of RH, or RH, or dtc, does not matter. Someone will give you the money for your stock. Therefore, sell trades are not restricted. Buy trades are because they require collateral. Some firms have cash on hand to cover the collateral. That's why some firms are letting you buy while others like RH aren't. RH paused buying of gme, took out a billion dollar loan and got hundreds of millions from investors, and will now enable buying again now that they have more cash on hand for collateral. Anyone please feel free to correct me on anything. This is my understanding from WeBull's CEO. Full video: https://youtu.be/4RS4JIEVyXM https://youtu.be/4RS4JIEVyXM
- nikanj 6y ago
  So in left pocket RH has $200 from me, cash. And RH can't make a buy order for $200, because they need $200 in right pocket as collateral? Why not just use my cash as the cash collateral? I still don't see how they need a billion-dollar cash hoard for non-margin buyers.
  - lovehashbrowns 6y ago
    Lots of things can happen to the cash in your account between the time you hit buy and when that cash finishes transferring to DTC. DTC is trying to guarantee that the person selling the stock that you are buying is going to get their money. DTC does that by telling Robinhood to have collateral in case something happens to the cash that you are using to buy the stock. Something like Robinhood going bankrupt, for example. Because what happens if Robinhood can't, for whatever reason, put up the cash for the buy transaction? Some one still has to pay up. The problem is that eventually these failures start piling up moving up the system until eventually the government has to step in and hand out bailouts again. Collateral is a way of trying to prevent that. If Robinhood goes bankrupt, and they're dealing with this highly volatile stock, well at least they have enough collateral to cover transactions and the failure stops with Robinhood instead of moving up the system. This is all info I've gathered from reading around and I'm not an expert. Please anyone feel free to correct anything I'm saying. Also you kinda saw a hint of this when there was that Robinhood bug with infinite leverage. People turned $5,000 into tens of thousands via the glitch, and at the end of it all, Robinhood was one the that had to pay up for these glitches. Then they had to start hunting people down to try and recover the debt. Someone, at the end of the day, is going to pay for any of these transactions. DTC is just trying to ensure that the bag holder stops with Robinhood.
- lovehashbrowns 6y ago
  My understanding on how collateral works is wrong. This is more accurate: https://twitter.com/KralcTrebor/status/1354952686165225478 https://twitter.com/KralcTrebor/status/1354952686165225478
- abluecloud 6y ago
  thanks a lot, that makes perfect sense.

Can anyone answer me this question: if they needed to cover themselves from the margins that people were using, why didn't they keep enabled the ability to buy shares with cash?

lovehashbrowns 6y ago

So apparently, a buy trade takes two days to clear. It just looks instant on the app. During the time it takes for your cash to go to rh to dtc to the other end, robinhood has to put up a collateral for some guarantee that the cash for the transaction will exist. Usually this collateral is between 1-3%. Because of how volatile gme is at the moment, dtc upped the percentage to 100%. So for every buy, rh has to put up cash collateral equal to the price of the purchase of gme. Obviously this isn't a big deal if gme is at $50. This is a big deal if gme is at $350. This is an even bigger deal if robinhood is doing this for millions of trades a day. The reason these mechanics exist is if you sell your stock, you should be guaranteed to get your money for the stock. Whether that money comes from a user of RH, or RH, or dtc, does not matter. Someone will give you the money for your stock. Therefore, sell trades are not restricted. Buy trades are because they require collateral. Some firms have cash on hand to cover the collateral. That's why some firms are letting you buy while others like RH aren't. RH paused buying of gme, took out a billion dollar loan and got hundreds of millions from investors, and will now enable buying again now that they have more cash on hand for collateral. Anyone please feel free to correct me on anything. This is my understanding from WeBull's CEO. Full video: https://youtu.be/4RS4JIEVyXM https://youtu.be/4RS4JIEVyXM

nikanj 6y ago
So in left pocket RH has $200 from me, cash. And RH can't make a buy order for $200, because they need $200 in right pocket as collateral? Why not just use my cash as the cash collateral? I still don't see how they need a billion-dollar cash hoard for non-margin buyers.
- lovehashbrowns 6y ago
  Lots of things can happen to the cash in your account between the time you hit buy and when that cash finishes transferring to DTC. DTC is trying to guarantee that the person selling the stock that you are buying is going to get their money. DTC does that by telling Robinhood to have collateral in case something happens to the cash that you are using to buy the stock. Something like Robinhood going bankrupt, for example. Because what happens if Robinhood can't, for whatever reason, put up the cash for the buy transaction? Some one still has to pay up. The problem is that eventually these failures start piling up moving up the system until eventually the government has to step in and hand out bailouts again. Collateral is a way of trying to prevent that. If Robinhood goes bankrupt, and they're dealing with this highly volatile stock, well at least they have enough collateral to cover transactions and the failure stops with Robinhood instead of moving up the system. This is all info I've gathered from reading around and I'm not an expert. Please anyone feel free to correct anything I'm saying. Also you kinda saw a hint of this when there was that Robinhood bug with infinite leverage. People turned $5,000 into tens of thousands via the glitch, and at the end of it all, Robinhood was one the that had to pay up for these glitches. Then they had to start hunting people down to try and recover the debt. Someone, at the end of the day, is going to pay for any of these transactions. DTC is just trying to ensure that the bag holder stops with Robinhood.
lovehashbrowns 6y ago
My understanding on how collateral works is wrong. This is more accurate: https://twitter.com/KralcTrebor/status/1354952686165225478 https://twitter.com/KralcTrebor/status/1354952686165225478
abluecloud 6y ago
thanks a lot, that makes perfect sense.