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I wouldn't call it a flaw. Their product can handle the high volatility, their finances can't. At least, that's what we believe is true since they got a $1B l

I wouldn't call it a flaw. Their product can handle the high volatility, their finances can't. At least, that's what we believe is true since they got a $1B loan yesterday. But Tenev, the CEO, was on TV yesterday saying that it wasn't a solvency issue...so.... Interactive Brokers Chairman, Petterfy, highlights that in his interview. He also said it caused clearing issues and that his firm could afford it. They just, you know, decided to halt trading cause he thinks the squeeze was illegal.

valuearb 6y ago
The only thing Robinhood is lying about is their solvency.
- bilbo0s 6y ago
  I agree. I would bet they don't have available funds. They framed it as, "We're stopping this to help you." But the reality was more like, "We're stopping this because we can't legally facilitate any more of these trades since we don't have the money to spare."
  - pishpash 6y ago
    It is both, they need to help themselves and help customers who would be harmed if Robinhood had gone under suddenly. An orderly unwinding is better for everyone.
- psychlops 6y ago
  I believe this as well. He did not do himself any favors and let himself be cornered on two interviews. I respect that he cannot come out and say they have solvency issues, as his accounts would empty fast turning a potential solvency issue into a real one. But he didn't seem to even have a clear idea of, nor a numerical way to explain why they were having settlement issues. My guess is that they will be spending more money in their clearing department this year.
- shawndrost 6y ago
  Do you believe that about all the brokerages that halted trading on GME et al? Or did Robinhood call a halt due to insolvency, and coincidentally, other brokerages called a halt for unrelated reasons?
  - pmiller2 6y ago
    Suppose you're right. How do you explain the $1B loan Robinhood took out?
    - rdiddly 6y ago
      Taking out a loan, in itself, doesn't indicate insolvency. If it did, nobody would lend, ever. Now defaulting on a loan - that does indicate insolvency.
      - valuearb 6y ago
        You are correct. But an emergency loan indicates increased risk of insolvency. Robinhood isn’t going to borrow money they don’t need, and raise their interest costs. Likely the loans were preexisting credit lines, so they were obligated to find Robinhood upon request. The question is whether it will be enough and if not, whether new loans or investment will be available. Sitting on the outside it’s impossible to know whether this is an eminently comfortable buffer or a last finger in the dike.
  - valuearb 6y ago
    I suspect if they didn’t have liquidity issues, they were just quicker that Robinhood to prevent them. I’m sure they didn’t want to tie up a huge part of their collateral in BME.
    - xenadu02 6y ago
      You think eTrade, owned by Morgan Stanley, had liquidity problems?? That's so outrageous it beggars belief. There was absolutely some kind of coordinated manipulation happening. It is telling that the SEC's statement seems to have scared at least some of the brokers away from trying to prohibit buying (but allowing selling). The market has circuit breakers for a reason and brokers can and do stop all trades on a symbol in certain extraordinary circumstances. But only allowing selling is basically forcing the price down and obvious manipulation.
- cma 6y ago
  Could be something like if Citadel goes insolvent and only makes their payments for flow to Robinhood on a delayed schedule, then Robinhood may not get paid for the last quarter or year of income and incur huge losses.
  - astrange 6y ago
    Citadel (who loaned Melvin a lot of money) and Citadel Securities (who pay RH for order flow) are not the same company - they used to be, but have split up.
    - cma 6y ago
      Corporate veil could be pierced if there was attempt to have one of the companies change Robinhood's behavior on behalf of the other, but that is pure speculation and many of the other explanations make sense too.
- justforyou 6y ago
  If the SEC had done their job RH would have been shut down ages ago due to their platform's facilitation of rampant identity theft.
- hinkley 6y ago
  Tenev said they didn't have a liquidity problem. I think he lied about that, but I think they're solvent. The reserve system required by the securities people mean they have to have a cash position proportional to the total flux of trades. There were some laws passed a few years back that reduce how quickly you can turn unsettled trades into new trades. Without that they'd probably need a much larger cash position. I suspect he was thinking of bank runs. If people think they aren't solvent, then it becomes true. If he says they have a liquidity problem (which I agree the loan they took out is a confession of that fact), then they could have a solvency problem if everyone without a margin account cashes out.
- adrr 6y ago
  I wonder if they have s-1 confidentiality filed and they are in quiet period.
pageandrew 6y ago
Sorry, as a noob, why does Robinhood need lots of cash to facilitate trades, and what connection does that have to volatility?
- hi5eyes 6y ago
  [irrelevant link]
  - pageandrew 6y ago
    Couldn't Robinhood just disable margin trading without disrupting cash trading?
    - throwaheyy 6y ago
      That link was pretty irrelevant to your original question. The answer is that even cash-settled trades take 2 days to settle, which most traders would consider an unacceptable wait to take delivery of their shares in this day and age. Seeing the shares appear in your account immediately after buying is merely an abstraction provided by brokers, and the brokers need to have their own cash on deposit to secure this.
      - totalZero 6y ago
        Strictly speaking, most traders of US listed stocks wait two days to settle trades. Robinhood will give you an advance on your funds but that doesn't make T+2 settlement "unacceptable...in this day and age" lol. BTW a few years ago, it was T+3.
    - nrmitchi 6y ago
      The person you are responding to posted that link... incorrectly? There is no context, but it's just not directly applicable. Yes, if Robinhood is letting people trade on margin, then Robinhood needs to have the cash to support that margin. That is one thing. And they have largely, as far as I know, disabled that already. The other part is that they are required to have reserves and collateral for trades that are "cash" until they settle, as all brokerages are. I am not an expert here, but my understanding is that this requirement increases as volatility goes up, as as correlation of trades goes up (ie, if all of the volume is in a couple stocks, it's highly correlated, and thus the reserve requirement is higher). This must be, by regulation, Robinhood's money (ie, not customer funds), and Robinhood just didn't have the money to keep opening new positions. As for the underlying why of the requirement, I don't know. I assume it has something to do with preventing brokerages from accepting increasingly risk trades during high volatility events (which, ya, is what's happening right now). But either way, it's the current rule, and as a brokerage, they have to follow it.
ogre_codes 6y ago
> Their product can handle the high volatility, their finances can't. Multiple times both here and previously, RH has demonstrated that their product cannot handle unexpected high volumes of traffic. Also, their finances are part of their product. They are a financial services company. Money and finance is what they do.
- psychlops 6y ago
  I admit, I am not aware of their products capacity, but they never mentioned it as an issue, nor has their product crashed this week (that I am aware of). It was a conscious decision to stop trading. They cannot control the volatility of the products they sell and the subsequent increase in the cost of doing business. They can't control their whole supply chain and do not sell GME and other products out of inventory so have to buy it from someone else.
  - ogre_codes 6y ago
    The problem here is fundamentally Robinhood is in an industry where screwing up has huge consequences for their customers. If Apple has a supply chain issue and my phone is 10 days late, I might be irritated but the most it will cost me is a few days frustration. If Robinhood fails to execute a trade for me, it can and has potentially cost a user tens of thousands of dollars. What happens when the share price starts to give way and Robinhood fails to execute trades as the share-price is dropping rapidly? If I owned shares in GME (or AMC etc) on Robinhood, I'd be getting out now because they've done nothing to suggest they are capable of serving users when things get sketchy. I don't own GME, and will never put money in RH at this point.
deleted 6y ago
[deleted]
throwaway34241 6y ago
I saw the Interactive Brokers interview [0] and his explanation actually made a lot of sense to me (I don't know about Robinhood other than it has had many previous problems). He said that they were worried about counterparty risk. They are only taking one side of a trade (on behalf of their customers) and depend on the other side to make good on their promise. In this environment they are not certain that the other side can deliver on (for example) certain GameStop options trades, and they don't want to be stuck holding the bag. When the interviewer asked about customers being angry about the rules changing "in the middle of the game", he said he viewed the game as market manipulation, which is illegal. But isn't he correct? Jeff Bezos or Bill Gates could almost certainly achieve what the Reddit mob is doing and engineer a short squeeze. But how would that not be market manipulation? Probably almost no Redditors believe the long term value of GameStop is $350, market manipulation is the whole point, the new part is that it's crowdsourced. IMO both of his explanations are extremely reasonable. But if you look at the comments on the video (and on Reddit), the take away is overwhelmingly, "he is so honest about the fraud", "He should be in a jail cell", that he is covering up insolvency, etc (just look at the linked video, it's not just one or two comments). This one interview probably isn't a huge deal in the big scheme of things, but I think it's very illustrative of a larger trend. It seems like the level of distrust in our society is so high (particularly towards our institutions) that, increasingly, straightforward explanations for things are rejected in favor of conspiracies. And once we are at this point, it is hard to see how it doesn't only accelerate. After all, believing one thing happened just makes the anger increase and believing the next one even more plausible. People will inevitably lose their shirt buying GameStop at $350 a share (when it's only been worth <$15 for years) then blame the whole system being "rigged" against them. The number of people who want to burn it all down is only increasing and it makes it hard to be optimistic about the future. [0] https://www.youtube.com/watch?v=7RH4XKP55fM https://www.youtube.com/watch?v=7RH4XKP55fM
- psychlops 6y ago
  Very well thought out, thank you for taking the time to reply. Indeed his explanation makes sense in a certain context. However, if he shut it down because it was illegal, then he needs no other explanation. Consider that his primary explanation, the first thing he says is that he's worried about the clearing system. Not the legality...this raises an eyebrow. Not saying he's wrong, just that framed in the context of deep-pocketed, connected market players losing money then he'd better be pretty damned specific. Like you, I won't bother to dignify the comments on the video. There is a mob with pitchforks out there. The ending will not be pretty and the repercussions will be felt for a long time.

valuearb 6y ago

The only thing Robinhood is lying about is their solvency.

bilbo0s 6y ago
I agree. I would bet they don't have available funds. They framed it as, "We're stopping this to help you." But the reality was more like, "We're stopping this because we can't legally facilitate any more of these trades since we don't have the money to spare."
- pishpash 6y ago
  It is both, they need to help themselves and help customers who would be harmed if Robinhood had gone under suddenly. An orderly unwinding is better for everyone.
psychlops 6y ago
I believe this as well. He did not do himself any favors and let himself be cornered on two interviews. I respect that he cannot come out and say they have solvency issues, as his accounts would empty fast turning a potential solvency issue into a real one. But he didn't seem to even have a clear idea of, nor a numerical way to explain why they were having settlement issues. My guess is that they will be spending more money in their clearing department this year.
shawndrost 6y ago
Do you believe that about all the brokerages that halted trading on GME et al? Or did Robinhood call a halt due to insolvency, and coincidentally, other brokerages called a halt for unrelated reasons?
- pmiller2 6y ago
  Suppose you're right. How do you explain the $1B loan Robinhood took out?
  - rdiddly 6y ago
    Taking out a loan, in itself, doesn't indicate insolvency. If it did, nobody would lend, ever. Now defaulting on a loan - that does indicate insolvency.
    - valuearb 6y ago
      You are correct. But an emergency loan indicates increased risk of insolvency. Robinhood isn’t going to borrow money they don’t need, and raise their interest costs. Likely the loans were preexisting credit lines, so they were obligated to find Robinhood upon request. The question is whether it will be enough and if not, whether new loans or investment will be available. Sitting on the outside it’s impossible to know whether this is an eminently comfortable buffer or a last finger in the dike.
- valuearb 6y ago
  I suspect if they didn’t have liquidity issues, they were just quicker that Robinhood to prevent them. I’m sure they didn’t want to tie up a huge part of their collateral in BME.
  - xenadu02 6y ago
    You think eTrade, owned by Morgan Stanley, had liquidity problems?? That's so outrageous it beggars belief. There was absolutely some kind of coordinated manipulation happening. It is telling that the SEC's statement seems to have scared at least some of the brokers away from trying to prohibit buying (but allowing selling). The market has circuit breakers for a reason and brokers can and do stop all trades on a symbol in certain extraordinary circumstances. But only allowing selling is basically forcing the price down and obvious manipulation.
cma 6y ago
Could be something like if Citadel goes insolvent and only makes their payments for flow to Robinhood on a delayed schedule, then Robinhood may not get paid for the last quarter or year of income and incur huge losses.
- astrange 6y ago
  Citadel (who loaned Melvin a lot of money) and Citadel Securities (who pay RH for order flow) are not the same company - they used to be, but have split up.
  - cma 6y ago
    Corporate veil could be pierced if there was attempt to have one of the companies change Robinhood's behavior on behalf of the other, but that is pure speculation and many of the other explanations make sense too.
justforyou 6y ago
If the SEC had done their job RH would have been shut down ages ago due to their platform's facilitation of rampant identity theft.
hinkley 6y ago
Tenev said they didn't have a liquidity problem. I think he lied about that, but I think they're solvent. The reserve system required by the securities people mean they have to have a cash position proportional to the total flux of trades. There were some laws passed a few years back that reduce how quickly you can turn unsettled trades into new trades. Without that they'd probably need a much larger cash position. I suspect he was thinking of bank runs. If people think they aren't solvent, then it becomes true. If he says they have a liquidity problem (which I agree the loan they took out is a confession of that fact), then they could have a solvency problem if everyone without a margin account cashes out.
adrr 6y ago
I wonder if they have s-1 confidentiality filed and they are in quiet period.

pageandrew 6y ago

Sorry, as a noob, why does Robinhood need lots of cash to facilitate trades, and what connection does that have to volatility?

hi5eyes 6y ago
[irrelevant link]
- pageandrew 6y ago
  Couldn't Robinhood just disable margin trading without disrupting cash trading?
  - throwaheyy 6y ago
    That link was pretty irrelevant to your original question. The answer is that even cash-settled trades take 2 days to settle, which most traders would consider an unacceptable wait to take delivery of their shares in this day and age. Seeing the shares appear in your account immediately after buying is merely an abstraction provided by brokers, and the brokers need to have their own cash on deposit to secure this.
    - totalZero 6y ago
      Strictly speaking, most traders of US listed stocks wait two days to settle trades. Robinhood will give you an advance on your funds but that doesn't make T+2 settlement "unacceptable...in this day and age" lol. BTW a few years ago, it was T+3.
  - nrmitchi 6y ago
    The person you are responding to posted that link... incorrectly? There is no context, but it's just not directly applicable. Yes, if Robinhood is letting people trade on margin, then Robinhood needs to have the cash to support that margin. That is one thing. And they have largely, as far as I know, disabled that already. The other part is that they are required to have reserves and collateral for trades that are "cash" until they settle, as all brokerages are. I am not an expert here, but my understanding is that this requirement increases as volatility goes up, as as correlation of trades goes up (ie, if all of the volume is in a couple stocks, it's highly correlated, and thus the reserve requirement is higher). This must be, by regulation, Robinhood's money (ie, not customer funds), and Robinhood just didn't have the money to keep opening new positions. As for the underlying why of the requirement, I don't know. I assume it has something to do with preventing brokerages from accepting increasingly risk trades during high volatility events (which, ya, is what's happening right now). But either way, it's the current rule, and as a brokerage, they have to follow it.

ogre_codes 6y ago

> Their product can handle the high volatility, their finances can't. Multiple times both here and previously, RH has demonstrated that their product cannot handle unexpected high volumes of traffic. Also, their finances are part of their product. They are a financial services company. Money and finance is what they do.

psychlops 6y ago
I admit, I am not aware of their products capacity, but they never mentioned it as an issue, nor has their product crashed this week (that I am aware of). It was a conscious decision to stop trading. They cannot control the volatility of the products they sell and the subsequent increase in the cost of doing business. They can't control their whole supply chain and do not sell GME and other products out of inventory so have to buy it from someone else.
- ogre_codes 6y ago
  The problem here is fundamentally Robinhood is in an industry where screwing up has huge consequences for their customers. If Apple has a supply chain issue and my phone is 10 days late, I might be irritated but the most it will cost me is a few days frustration. If Robinhood fails to execute a trade for me, it can and has potentially cost a user tens of thousands of dollars. What happens when the share price starts to give way and Robinhood fails to execute trades as the share-price is dropping rapidly? If I owned shares in GME (or AMC etc) on Robinhood, I'd be getting out now because they've done nothing to suggest they are capable of serving users when things get sketchy. I don't own GME, and will never put money in RH at this point.

deleted 6y ago

[deleted]

throwaway34241 6y ago

I saw the Interactive Brokers interview [0] and his explanation actually made a lot of sense to me (I don't know about Robinhood other than it has had many previous problems). He said that they were worried about counterparty risk. They are only taking one side of a trade (on behalf of their customers) and depend on the other side to make good on their promise. In this environment they are not certain that the other side can deliver on (for example) certain GameStop options trades, and they don't want to be stuck holding the bag. When the interviewer asked about customers being angry about the rules changing "in the middle of the game", he said he viewed the game as market manipulation, which is illegal. But isn't he correct? Jeff Bezos or Bill Gates could almost certainly achieve what the Reddit mob is doing and engineer a short squeeze. But how would that not be market manipulation? Probably almost no Redditors believe the long term value of GameStop is $350, market manipulation is the whole point, the new part is that it's crowdsourced. IMO both of his explanations are extremely reasonable. But if you look at the comments on the video (and on Reddit), the take away is overwhelmingly, "he is so honest about the fraud", "He should be in a jail cell", that he is covering up insolvency, etc (just look at the linked video, it's not just one or two comments). This one interview probably isn't a huge deal in the big scheme of things, but I think it's very illustrative of a larger trend. It seems like the level of distrust in our society is so high (particularly towards our institutions) that, increasingly, straightforward explanations for things are rejected in favor of conspiracies. And once we are at this point, it is hard to see how it doesn't only accelerate. After all, believing one thing happened just makes the anger increase and believing the next one even more plausible. People will inevitably lose their shirt buying GameStop at $350 a share (when it's only been worth <$15 for years) then blame the whole system being "rigged" against them. The number of people who want to burn it all down is only increasing and it makes it hard to be optimistic about the future. [0] https://www.youtube.com/watch?v=7RH4XKP55fM https://www.youtube.com/watch?v=7RH4XKP55fM

psychlops 6y ago
Very well thought out, thank you for taking the time to reply. Indeed his explanation makes sense in a certain context. However, if he shut it down because it was illegal, then he needs no other explanation. Consider that his primary explanation, the first thing he says is that he's worried about the clearing system. Not the legality...this raises an eyebrow. Not saying he's wrong, just that framed in the context of deep-pocketed, connected market players losing money then he'd better be pretty damned specific. Like you, I won't bother to dignify the comments on the video. There is a mob with pitchforks out there. The ending will not be pretty and the repercussions will be felt for a long time.