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As I understand it, Robinhood had a cash problem because of the various collaterals required for high-risk securities during the clearing process. When each sha

by cmckn 6y ago

As I understand it, Robinhood had a cash problem because of the various collaterals required for high-risk securities during the clearing process. When each share traded needs a high amount of collateral (1:1, even), and you have a high number of those trades happening, you might not have the cash to pony up. I think this is a downside to their business model (and probably moreso their scale and age). There are many upsides to their business model. The interview I saw with their CEO on CNN was laughable. I would have a lot more respect for the company if the CEO could get in the weeds a bit more. The reality is that what Robinhood and most retail brokers provide is a convenient illusion, hiding the complexity of trading securities. Why can't they say that? Edit: I almost certainly don't know what I'm talking about; but hey, this has been a fun story to follow, eh?

wavefunction 6y ago
Robinhood wasn't fulfilling orders though as far as I understand it? More like lead generation for Citadel, their market-maker? That seems like an issue for Citadel to be concerned with rather than Robinhood.
- astrange 6y ago
  Robinhood is their own clearing broker. They send some market orders through people like Citadel Securities because it improves the price, but not all of them. (Note, RH was fined by the SEC for possibly not improving the price as much as they could. But they were not giving you a bad price, it was still better than the NBBO price!)
fsociety 6y ago
I think the PR strategies of these companies is something along the lines of, say the vague things which have no risk of backlash as opposed to explaining what happened which has higher risk of backlash.
viscanti 6y ago
Apple trades an order of magnitude more per day than any of the stocks that were halted. Somehow the clearinghouses have no trouble with the Apple volume.
- JumpCrisscross 6y ago
  > Apple trades an order of magnitude more per day than any of the stocks that were halted. Somehow the clearinghouses have no trouble with the Apple volume. The clearinghouse had no problem with GME volumes either. They just required collateral. Had Robinhood not been able to meet its obligations yesterday and thus gone under, that collateral would help settle its trades with other brokerages. Collateral requirements are re-calculated daily. That means there is risk between the last collateral calculation and where an asset is trading today. That risk is a function of volatility. So for a stock like Apple, the DTCC may only require 2% of the value of the trade be put up as collateral. For a stock like GameStop, it may require 100%.
- pgwhalen 6y ago
  It’s because considerably less capital is required to clear an Apple trade, because it is a much less volatile stock.
- usmannk 6y ago
  Firstly, this isn't true. Just this week AMC was trading tens of billions of dollars worth of shares per day, which is about equal to AAPL. GME is seeing >twice as much. Second, the insane amount of volatility and concentration in these tickers makes the clearinghouses charge the brokerages way way more. You have fees (quoted in %) for expected change and also lack of diversity.
nayuki 6y ago
An interview with Webull CEO Anthony Denier explained much more about the underlying mechanics of clearing houses, collateral requirements, and the Deposit Trust Company (DTC). https://www.youtube.com/watch?v=4RS4JIEVyXM https://www.youtube.com/watch?v=4RS4JIEVyXM
dalbasal 6y ago
Definitely a fun one. A recurring theme when these things happen is people being incensed as they peek at the way things work. We scream "obvious market manipulation" and then learn how normative this is. This story has been exceptionally good to follow because the mechanisms, as well as one half of the trades are all relatively simple and public. This isn't a scheme with super-complicated instruments and acronyms making their first appearances in the news. It's a simple strategy. Simple stocks. Simple shorts. Simple companies. These /wsb nutters just found stocks that was aggressively and irresponsibly shorted. I've heard 140% of the total shares in existence. In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price. There are only so many shares for sale, and the buyers have no choice. The /wsb nutters (and now also everyone who hates hedge funds) are holding to spite them. Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal. This kind of makes sense, there are theoretical market conditions where prices go to infinity... which is the ultimate stretch goal for wsb right now.
- iamacyborg 6y ago
  > In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price. This assumes that the old shorts haven't already been closed. Existing shorts could very well just be those that've been created within the last couple days at the current overvalued price. > Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal. Yup, the Chairman of Interactive Brokers was pretty explicit. > We are worried about the integrity of the marketplace and the clearing system https://www.cnbc.com/2021/01/28/interactive-brokers-restricted-gamestop-trading-to-protect-the-market-says-chairman-peterffy.html https://www.cnbc.com/2021/01/28/interactive-brokers-restrict...
  - dalbasal 6y ago
    Riddle me this, if you know... How is it possible that a $20bn company threatens the stability of clearing houses. Tesla moves by $20bn regularly. How does one affect the clearing house as a whole differently from the other?
astrange 6y ago
> As I understand it, Robinhood had a cash problem because of the various collaterals required for high-risk securities during the clearing process. When each share traded needs a high amount of collateral (1:1, even), and you have a high number of those trades happening, you might not have the cash to pony up. Something like that. But note that it isn't related to margin trading - Robinhood has to post their own cash as collateral with NSCC/DTCC, they can't use their customers' cash. So if a customer wanted to opt out of the margin account this wouldn't actually help. (I don't know what this rule is for, but it's in the rules.)

by cmckn 6y ago

wavefunction 6y ago

Robinhood wasn't fulfilling orders though as far as I understand it? More like lead generation for Citadel, their market-maker? That seems like an issue for Citadel to be concerned with rather than Robinhood.

astrange 6y ago
Robinhood is their own clearing broker. They send some market orders through people like Citadel Securities because it improves the price, but not all of them. (Note, RH was fined by the SEC for possibly not improving the price as much as they could. But they were not giving you a bad price, it was still better than the NBBO price!)

fsociety 6y ago

I think the PR strategies of these companies is something along the lines of, say the vague things which have no risk of backlash as opposed to explaining what happened which has higher risk of backlash.

viscanti 6y ago

Apple trades an order of magnitude more per day than any of the stocks that were halted. Somehow the clearinghouses have no trouble with the Apple volume.

JumpCrisscross 6y ago
> Apple trades an order of magnitude more per day than any of the stocks that were halted. Somehow the clearinghouses have no trouble with the Apple volume. The clearinghouse had no problem with GME volumes either. They just required collateral. Had Robinhood not been able to meet its obligations yesterday and thus gone under, that collateral would help settle its trades with other brokerages. Collateral requirements are re-calculated daily. That means there is risk between the last collateral calculation and where an asset is trading today. That risk is a function of volatility. So for a stock like Apple, the DTCC may only require 2% of the value of the trade be put up as collateral. For a stock like GameStop, it may require 100%.
pgwhalen 6y ago
It’s because considerably less capital is required to clear an Apple trade, because it is a much less volatile stock.
usmannk 6y ago
Firstly, this isn't true. Just this week AMC was trading tens of billions of dollars worth of shares per day, which is about equal to AAPL. GME is seeing >twice as much. Second, the insane amount of volatility and concentration in these tickers makes the clearinghouses charge the brokerages way way more. You have fees (quoted in %) for expected change and also lack of diversity.

nayuki 6y ago

An interview with Webull CEO Anthony Denier explained much more about the underlying mechanics of clearing houses, collateral requirements, and the Deposit Trust Company (DTC). https://www.youtube.com/watch?v=4RS4JIEVyXM https://www.youtube.com/watch?v=4RS4JIEVyXM

dalbasal 6y ago

Definitely a fun one. A recurring theme when these things happen is people being incensed as they peek at the way things work. We scream "obvious market manipulation" and then learn how normative this is. This story has been exceptionally good to follow because the mechanisms, as well as one half of the trades are all relatively simple and public. This isn't a scheme with super-complicated instruments and acronyms making their first appearances in the news. It's a simple strategy. Simple stocks. Simple shorts. Simple companies. These /wsb nutters just found stocks that was aggressively and irresponsibly shorted. I've heard 140% of the total shares in existence. In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price. There are only so many shares for sale, and the buyers have no choice. The /wsb nutters (and now also everyone who hates hedge funds) are holding to spite them. Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal. This kind of makes sense, there are theoretical market conditions where prices go to infinity... which is the ultimate stretch goal for wsb right now.

iamacyborg 6y ago
> In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price. This assumes that the old shorts haven't already been closed. Existing shorts could very well just be those that've been created within the last couple days at the current overvalued price. > Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal. Yup, the Chairman of Interactive Brokers was pretty explicit. > We are worried about the integrity of the marketplace and the clearing system https://www.cnbc.com/2021/01/28/interactive-brokers-restricted-gamestop-trading-to-protect-the-market-says-chairman-peterffy.html https://www.cnbc.com/2021/01/28/interactive-brokers-restrict...
- dalbasal 6y ago
  Riddle me this, if you know... How is it possible that a $20bn company threatens the stability of clearing houses. Tesla moves by $20bn regularly. How does one affect the clearing house as a whole differently from the other?

astrange 6y ago

> As I understand it, Robinhood had a cash problem because of the various collaterals required for high-risk securities during the clearing process. When each share traded needs a high amount of collateral (1:1, even), and you have a high number of those trades happening, you might not have the cash to pony up. Something like that. But note that it isn't related to margin trading - Robinhood has to post their own cash as collateral with NSCC/DTCC, they can't use their customers' cash. So if a customer wanted to opt out of the margin account this wouldn't actually help. (I don't know what this rule is for, but it's in the rules.)