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So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”? I’m still not understanding how robi

So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”? I’m still not understanding how robinhood lost money in the first place.

015a 6y ago
That's an accurate enough analogy. When you sell a stock on Robinhood, it takes ~2 days to "clear" the transaction. So, Robinhood credits your account, but Robinhood doesn't see that money for 2 days. They don't allow you to withdraw the money from Robinhood until its cleared, but you can purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don't self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of "float" to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is. Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they're in the app, they're probably using the Instant Deposits feature to trade on up-to $1000 they've started transferring but which hasn't cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float. If that float hits zero, that's basically like, imagine your company's bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn't go up. In fact, people couldn't even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can't. They're angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm's reputation. IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn't actually "lost" money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid. But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.
- krupan 6y ago
  “But, the deeper issue is the US financial system and its molasses speed of moving money around.” Sorry, I’m going to be That Guy here and point out that when people accuse Bitcoin of having slow transactions, this is what they should be comparing against, not Visa card transactions. Actual settled transactions. Bitcoin takes 10 minutes. US financial system takes days.
  - 015a 6y ago
    I do think, if more people knew the extent to which the US financial system is a house of cards, cryptocurrency would be even more popular. Not necessarily concerning fundamentals, as the US is still fundamentally strong. Primarily concerning the edges of the system and the institutions we interface with every day. I know Robinhood, and other firms, are trying to downplay what happened yesterday (and is continuing to happen right now!). Its possible their version of the story is accurate. It feels more likely that its not the whole truth. We were treading really close to a 2007-level market event yesterday, though not due to bad ratings, rather liquidity. It wasn't just robinhood that was impacted; robinhood and IB both said that they made the decision internally, but WeBull said they were instructed by their clearing house to cease trading, and even large firms like TDA started enforcing limits. It was very close to going systemic, and not because of bad fundamentals, not because of an economic downturn, all because an unprecedented number of Americans wanted to join in on the stock market they're entitled to join in on, but our financial institutions were not ready for it. When you lay out the reality of our system; that money moves so slow that every single institution who wants to handle money, for nearly any purpose, needs a bank account billions upon billions of dollars large just to be able to move as fast as people expect the system to move, and if that bank account gets too low the problem near-instantly spreads to the next bank in line; the system is very fundamentally broken, and people need to demand change, because our financial system runs EVERYTHING. Moreover; if WSB's theory on this is correct, and if these WSB stocks like GME/NOK/BB/etc don't reduce in value; we missed a meteor yesterday, but a second one is still coming. This isn't just about bankrupting a hedge fund. When the margin calls on these short positions start coming in over time, the price of these stocks continues to rise, and eventually, the current "diamond hands" (as WSB call them) will sell their shares. We're talking about billions of dollars here; that's a massive liquidity spike that our institutions are still not ready to handle. Granted, as always, its the IDIOTIC institutions who got us into this by taking out the INDEFENSIBLE short positions in the first place, but they're systemic; they know they can do whatever the hell they want and get away with it, because if they go down they take every American with them.

015a 6y ago

That's an accurate enough analogy. When you sell a stock on Robinhood, it takes ~2 days to "clear" the transaction. So, Robinhood credits your account, but Robinhood doesn't see that money for 2 days. They don't allow you to withdraw the money from Robinhood until its cleared, but you can purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don't self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of "float" to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is. Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they're in the app, they're probably using the Instant Deposits feature to trade on up-to $1000 they've started transferring but which hasn't cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float. If that float hits zero, that's basically like, imagine your company's bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn't go up. In fact, people couldn't even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can't. They're angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm's reputation. IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn't actually "lost" money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid. But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.

krupan 6y ago
“But, the deeper issue is the US financial system and its molasses speed of moving money around.” Sorry, I’m going to be That Guy here and point out that when people accuse Bitcoin of having slow transactions, this is what they should be comparing against, not Visa card transactions. Actual settled transactions. Bitcoin takes 10 minutes. US financial system takes days.
- 015a 6y ago
  I do think, if more people knew the extent to which the US financial system is a house of cards, cryptocurrency would be even more popular. Not necessarily concerning fundamentals, as the US is still fundamentally strong. Primarily concerning the edges of the system and the institutions we interface with every day. I know Robinhood, and other firms, are trying to downplay what happened yesterday (and is continuing to happen right now!). Its possible their version of the story is accurate. It feels more likely that its not the whole truth. We were treading really close to a 2007-level market event yesterday, though not due to bad ratings, rather liquidity. It wasn't just robinhood that was impacted; robinhood and IB both said that they made the decision internally, but WeBull said they were instructed by their clearing house to cease trading, and even large firms like TDA started enforcing limits. It was very close to going systemic, and not because of bad fundamentals, not because of an economic downturn, all because an unprecedented number of Americans wanted to join in on the stock market they're entitled to join in on, but our financial institutions were not ready for it. When you lay out the reality of our system; that money moves so slow that every single institution who wants to handle money, for nearly any purpose, needs a bank account billions upon billions of dollars large just to be able to move as fast as people expect the system to move, and if that bank account gets too low the problem near-instantly spreads to the next bank in line; the system is very fundamentally broken, and people need to demand change, because our financial system runs EVERYTHING. Moreover; if WSB's theory on this is correct, and if these WSB stocks like GME/NOK/BB/etc don't reduce in value; we missed a meteor yesterday, but a second one is still coming. This isn't just about bankrupting a hedge fund. When the margin calls on these short positions start coming in over time, the price of these stocks continues to rise, and eventually, the current "diamond hands" (as WSB call them) will sell their shares. We're talking about billions of dollars here; that's a massive liquidity spike that our institutions are still not ready to handle. Granted, as always, its the IDIOTIC institutions who got us into this by taking out the INDEFENSIBLE short positions in the first place, but they're systemic; they know they can do whatever the hell they want and get away with it, because if they go down they take every American with them.