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Brokers are not allowed to touch client money to submit the deposit. That the purchases are settled cash on the user's account makes no difference, because none

Brokers are not allowed to touch client money to submit the deposit. That the purchases are settled cash on the user's account makes no difference, because none of that money Robinhood could use to clear the deposit.

zaroth 6y ago
But it’s not client money the second the trade executes?
- tptacek 6y ago
  At what point does the client's money belong to Robinhood? You're not buying stocks from Robinhood.
  - zaroth 6y ago
    Robinhood is on the hook to do their part in settling the trade and delivering the shares to their client and cash to the seller. Obviously once funds are used to execute a trade, they are no longer client funds. It seems obvious that the cash at that moment would be held separately as the shares settle. That's discretely identifiable hard cash that is fully funding that specific share purchase. I completely grok the various ways that cash that "looks like" it's in the account might not be; deposits that haven't actually cleared, prior trades that haven't actually settled.. and in those cases the brokerage is actually extending credit to their client, and that credit can run dry. But if I have hard cash and a trade executes, that cash is gone from the account. The counterparty risk at that point is the shares not being delivered, which seems to me like it would be collateral that the seller needs to be posting to DTCC (likely DTC already holds the shares). The buyer needs to show they have the hard cash, and they can easily do that. I guess I can't get around the fact that if the purchase is fully funded with hard cash that's in the account, that is cleared cash that can be sent off to DTCC/NSCC during the end-of-day settlement via FedWire.
    - tptacek 6y ago
      I think the margin stuff is pretty much a red herring. The customer's cash doesn't belong to Robinhood. Robinhood is required to provide its own cash as collateral, because it's ensuring the market against itself. Those collateral rules aren't just for margin purchases. Would love to be corrected here if I'm wrong, but I'm not sure margin has really much to do with what's going on, and it seems to be most of what we're talking about.
      - NovemberWhiskey 6y ago
        This is right; in fact the article says "this is not about margin accounts".
      - zaroth 6y ago
        I think--like most outsiders trying to have a technical discussion--you can peel back the onion only so many layers. A true insider would alternatively laugh or cringe at our crude analogies and simplifications of what's really happening inside the factory.
        tptacek 6y ago
        Yeah, I'm trying to use more question marks and hedging "as I understand its" here. I've pentested huge clearing systems before. But I'm not going to lie and say I understood what the hell they were doing (also, the people at those firms made fun of clearing as the most boring conceivable stuff to look at). But (1) lots of experts keep saying that Robinhood can't use customer cash as collateral to DTCC, and (2) DTCC's published rules seem to say that Robinhood owes collateral margin or not. So like, I'm willing to bet that the margin stuff is a red herring, but I'm not willing to WSB-bet it.
        Tenoke 6y ago
        The margin accounts seem to be a small part of it but they do tie up RH's cash further thus limiting what they have available for collateral.
      - 6y ago
- stu2b50 6y ago
  It's client money until it settles.
  - zaroth 6y ago
    Assuming this is true, what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. Suppose a 3% interest rate (which seems high for guaranteed cleared funds), $1 billion for 24 hours is $82,000.
    - stu2b50 6y ago
      The Broker isn't allowed to borrow against client money either - it's client money, partitioned off from the broker's fungible funds, and not the Broker's to offer as collateral. But debt is the natural answer, and Robinhood did get as much in loans as they can[0]. [0]https://finance.yahoo.com/news/robinhood-said-draw-credit-lines-214509076.html https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
    - gruez 6y ago
      >what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. and that's exactly what they did. On thursday night they secured a $1B loan.
      - sokoloff 6y ago
        That's not exactly what they did. What they did was to get $1B in funding against other assets that are actually theirs. Just because your house is worth $1M doesn't mean that I (being "not you") can go get a mortgage pledging your house as collateral.
- toast0 6y ago
  It's client money until the trade settles at T+2, at which point it's the counterparty's money. It's never Robinhood's money (unless they're the counterparty, but I don't believe they do propriatary trading)
totalZero 6y ago
If you think brokers are not allowed to use a customer funds to settle that customer's transactions, I've got news for you buddy.
- stu2b50 6y ago
  Of course they are allowed to use it to _settle_, but not for the clearing fund deposit.

zaroth 6y ago

But it’s not client money the second the trade executes?

tptacek 6y ago
At what point does the client's money belong to Robinhood? You're not buying stocks from Robinhood.
- zaroth 6y ago
  Robinhood is on the hook to do their part in settling the trade and delivering the shares to their client and cash to the seller. Obviously once funds are used to execute a trade, they are no longer client funds. It seems obvious that the cash at that moment would be held separately as the shares settle. That's discretely identifiable hard cash that is fully funding that specific share purchase. I completely grok the various ways that cash that "looks like" it's in the account might not be; deposits that haven't actually cleared, prior trades that haven't actually settled.. and in those cases the brokerage is actually extending credit to their client, and that credit can run dry. But if I have hard cash and a trade executes, that cash is gone from the account. The counterparty risk at that point is the shares not being delivered, which seems to me like it would be collateral that the seller needs to be posting to DTCC (likely DTC already holds the shares). The buyer needs to show they have the hard cash, and they can easily do that. I guess I can't get around the fact that if the purchase is fully funded with hard cash that's in the account, that is cleared cash that can be sent off to DTCC/NSCC during the end-of-day settlement via FedWire.
  - tptacek 6y ago
    I think the margin stuff is pretty much a red herring. The customer's cash doesn't belong to Robinhood. Robinhood is required to provide its own cash as collateral, because it's ensuring the market against itself. Those collateral rules aren't just for margin purchases. Would love to be corrected here if I'm wrong, but I'm not sure margin has really much to do with what's going on, and it seems to be most of what we're talking about.
    - NovemberWhiskey 6y ago
      This is right; in fact the article says "this is not about margin accounts".
    - zaroth 6y ago
      I think--like most outsiders trying to have a technical discussion--you can peel back the onion only so many layers. A true insider would alternatively laugh or cringe at our crude analogies and simplifications of what's really happening inside the factory.
      - tptacek 6y ago
        Yeah, I'm trying to use more question marks and hedging "as I understand its" here. I've pentested huge clearing systems before. But I'm not going to lie and say I understood what the hell they were doing (also, the people at those firms made fun of clearing as the most boring conceivable stuff to look at). But (1) lots of experts keep saying that Robinhood can't use customer cash as collateral to DTCC, and (2) DTCC's published rules seem to say that Robinhood owes collateral margin or not. So like, I'm willing to bet that the margin stuff is a red herring, but I'm not willing to WSB-bet it.
        Tenoke 6y ago
        The margin accounts seem to be a small part of it but they do tie up RH's cash further thus limiting what they have available for collateral.
    - 6y ago
stu2b50 6y ago
It's client money until it settles.
- zaroth 6y ago
  Assuming this is true, what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. Suppose a 3% interest rate (which seems high for guaranteed cleared funds), $1 billion for 24 hours is $82,000.
  - stu2b50 6y ago
    The Broker isn't allowed to borrow against client money either - it's client money, partitioned off from the broker's fungible funds, and not the Broker's to offer as collateral. But debt is the natural answer, and Robinhood did get as much in loans as they can[0]. [0]https://finance.yahoo.com/news/robinhood-said-draw-credit-lines-214509076.html https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
  - gruez 6y ago
    >what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. and that's exactly what they did. On thursday night they secured a $1B loan.
    - sokoloff 6y ago
      That's not exactly what they did. What they did was to get $1B in funding against other assets that are actually theirs. Just because your house is worth $1M doesn't mean that I (being "not you") can go get a mortgage pledging your house as collateral.
toast0 6y ago
It's client money until the trade settles at T+2, at which point it's the counterparty's money. It's never Robinhood's money (unless they're the counterparty, but I don't believe they do propriatary trading)

totalZero 6y ago

If you think brokers are not allowed to use a customer funds to settle that customer's transactions, I've got news for you buddy.

stu2b50 6y ago
Of course they are allowed to use it to _settle_, but not for the clearing fund deposit.