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How Robinhood Misled the Poor and Rewarded the Rich

96 points by iamspoilt 6y ago

h_anna_h 6y ago
They should rename the app to "Sheriff of Nottingham".
- IndySun 6y ago
  "Men In Stocks"
tedunangst 6y ago
No mention of any other brokerage doing pfof? I think RH is pretty shady overall, but that seems kinda relevant context.
- Scoundreller 6y ago
  The others all do too. RH realized there’s a lot more order flow to sell when there’s no commissions. Meme stocks may have more profitable order flow, I dunno. I’m still unsure of what RH did so wrong here that other brokers didn’t/aren’t. I think RH is making a lot more off securities lending than it is on order flow imo. Lending out highly shorted and hard-to-borrow shares can earns them tons of interest.
- getToTheChopin 6y ago
  All brokerages make money from PFOF -- but it is a much larger revenue stream for RH compared to other brokers. https://www.morningstar.com/articles/1015686/robinhood-was-indeed-too-good-to-be-true https://www.morningstar.com/articles/1015686/robinhood-was-i... "That Robinhood sold its order flow is unremarkable, but the scale of its activities certainly merits comment. Forbes reports that in the first quarter 2020, 70% of Robinhood’s revenues derived from payments for order flows, as opposed to 17% for E-Trade and just 3% for Schwab. Yes, Robinhood has observed standard practice–but with distinctly above-average enthusiasm."
  - tedunangst 6y ago
    Now I want to know where schwab gets the other 97% from.
  - valuearb 6y ago
    Why is this a surprise to anyone? How did customers think Robinhood was making money?
u678u 6y ago
I'm getting really sick of the Saga. Plus the poor are not the people buying $$$ worth of gamestop last week, they're trying to afford basic bills. Bored middle class millennials maybe, more likely just other rich people and hedge funds.
- syntaxing 6y ago
  I would agree but I would say all bored Millennials are buying stocks because the RH app is truly addicting and makes buying stocks as easy as giving a like on FB. It’s pretty much a slot machine in your pocket. The biggest problem though is “Millenials” is no longer a term for the young but rather a term for majority of the countries work force.
- lm28469 6y ago
  > more likely just other rich people and hedge funds. I have at least two friends with absolutely no experience in any kind of investments who installed mobile trading apps and bought GME shares a few days ago at $300+ a pop I'm fairly certain that a lot of people who are far from rich are buying GME stocks right now because a lot of other people are telling them the stock will "likely go over $10k a share" (I've seen it on the wsb subreddit a lot). FOMO is a serious thing, low barrier to entry + constant media coverage = people want to be part of "it", even if they don't know what "it" is, especially when you tell them they could get rich.
jrochkind1 6y ago
> Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices. Is there any way for the casual consumer to compare the quality of execution of various brokers?
- tedunangst 6y ago
  Those contracts are generally secret. You have to trust your broker will negotiate a good split on your behalf. (Or hope the SEC will smack them if they don't, as happened to RH.)
- getToTheChopin 6y ago
  I don't think that info is public. Also, Citadel Securities (the MM who is Robinhood's largest source of revenue) has been fined for front-running customer orders in the past. https://www.bloomberg.com/news/articles/2020-07-21/citadel-securities-fined-by-finra-for-trading-ahead-of-clients https://www.bloomberg.com/news/articles/2020-07-21/citadel-s...
beervirus 6y ago
> As we saw above, Robinhood’s main revenue source comes from selling customer trade data to other firms. This is a controversial practice known as “Payment for Order Flow” (PFOF in financial regulatory lingo). It's only controversial among people who don't understand how market transactions work.
- twirlock 6y ago
  So like the SEC, when they fined Robinhood?
- Pfhreak 6y ago
  Payment for order flow can certainly be controversial among people who understand the market. Also, there are plenty of people who understand the market who find the concept of the market controversial. Your circles might all be comfortable with PFOF, but I wouldn't say it is controversial only with those who don't understand the market -- it's dismissive of contrary opinions.
- getToTheChopin 6y ago
  PFOF is banned in Canada: https://www.gbm.scotiabank.com/content/dam/gbm/market-insights/etf/october/2019-10-02-Free-Trading.pdf https://www.gbm.scotiabank.com/content/dam/gbm/market-insigh... PFOF creates huge conflicts of interest between brokers and market markers. That is why RH was fined $65M by the SEC. https://www.sec.gov/news/press-release/2020-321 https://www.sec.gov/news/press-release/2020-321
- crispyambulance 6y ago
  The article is a bit confusing. There's "PFOF" which is basically middle-man profit taking. That's not particularly shocking unless it's egregiously delayed. But then there's selling data to high frequency traders. This sentence in the article conflates these two very different things... > As we saw above, Robinhood’s main revenue source comes from selling customer trade data to other firms. This is a controversial practice known as “Payment for Order Flow” (PFOF in financial regulatory lingo). I am not getting this? Is it the case that ordering stock shares from a market maker like Citadel is identically selling data to high frequency traders? FWIW, I admit I don't _really_ understand how market transactions work, and I definitely don't feel alone!
twirlock 6y ago
I don't see why we're scapegoating Robinhood so hard when we should be focused on DTCC and their convenient-for-insiders collateral requirements spanning multiple stocks.
short_sells_poo 6y ago
Robinhood is a shady company preying on the uninformed and as such deserves every punishment it gets. However, Robinhood clients do not get to wash their hands of responsibility, because let's be honest: what did they expect to get for a free service? Are all these people seriously so deluded that they have expected that a company will provide them free service out of the goodness of their heart? Again, Robinhood outright lied, and they must not get away with this. But we have to educate people that there are very few (if any) "free" services that won't have to resort to these antics. They have to make money somehow, and if it's not obvious how, that should be an immediate red flag.
- sillysaurusx 6y ago
  Fortunately, there are rules that Robinhood must abide by. Perhaps in the near future, the SEC might find that Robinhood violated those rules by preventing people from buying more than one GME share. (I get that the clearinghouse was the reason, because they upped their collateral requirement from 3% to 100%, so Robinhood just couldn't cover the trades. Nor could anyone else. But that doesn't change the reality of what happened. I wonder if it's too much to hope that the SEC will aim at the clearinghouse, or congress enact legislation to prevent the clearinghouse from shutting down specific segments of the market by suddenly requiring 33.33x more collateral for certain stocks.)
  - valuearb 6y ago
    Isn’t the reality that the DTCC was forced to increase collateral requirements? You understand that if GME drops to $80 today, a large number of GME trades from last week are going to refuse to settle. What is Congress going to do? Force the DTCC to eat the losses?
    - sillysaurusx 6y ago
      A simple solution would be to turn the 3-day settlement period into 1-day, or 0-day. But of course, DTCC has all the incentive in the world not to go along with that. The trouble is that the 3-day period is a "leaky abstraction." It's the sole reason any of this became an issue. It's not a law of nature that "DTCC must insure 3 days of risk."
gruez 6y ago
I stopped reading at the first image: https://themeasureofaplan.com/wp-content/uploads/2021/01/Robinhood-NOK-order-flow-v3.png https://themeasureofaplan.com/wp-content/uploads/2021/01/Rob..., which implied that the market makers were offering robinhood a worse price than the exchanges, and pocketing the difference. This is not what happens. Matt Levine explains: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.” >More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t. >Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it. In fact, they're specifically prohibited from offering a worse price than the public exchanges due to regulation NBBO (national best bid order). The SEC penalty last year was only for failing to ensure best execution, which is slightly different than offering worse prices than the NBBO, since the former also requires them to take into account other market making firms that might offer a better price.
sillysaurusx 6y ago
The latest action is fascinating: There's a coordinated campaign to push silver. Citadel just so happens to own lots of SLV. Apparently there's article after article saying that silver is the hot new thing, and that you should buy immediately. It makes me wonder how much it costs to run a disinformation campaign. Do journalists have an informal price? Depends on the outlet, I guess. It was comical seeing all the articles pop up simultaneously, and of course /r/wallstreetbets is mocking it all.
- deleted 6y ago
  [deleted]
- CapmCrackaWaka 6y ago
  I, too, am curious what these conversations sound like, or if they even happen at all. When I googled GME this morning I saw article after article claiming that 'Wallstreetbets has set its sights on Silver', however every single post on the WSB subreddit was against the idea. The explanation is probably innocent. Most of these websites rely on ads, and when 1 of them reports on 'the hot new GameStop - Silver!', they probably all jump on. Still, it doesn't help the image that the media is being bought left and right.
andrewmutz 6y ago
This is a terrible write-up. The author only presents the GME Citadel conspiracy theory without even presenting the "capital requirements" theory. He even says that there is no evidence of this conspiracy theory. This is what writing looks like when the author appeals to your emotional distrust of wall street, rather than to actually try to inform you.
- getToTheChopin 6y ago
  Author of the article here -- agreed with you -- a key piece not covered is the relationship between Robinhood and the clearing houses. I've been learning more about that over the past 24 hours thanks to reader comments on reddit. I will amend the article when I finish my research. Some background info: https://www.washingtonpost.com/business/whats-the-dtcc-and-h https://www.washingtonpost.com/business/whats-the-dtcc-and-h... https://twitter.com/KralcTrebor/status/1355356755690139650 https://twitter.com/KralcTrebor/status/1355356755690139650 It looks like the Depository Trust & Clearing Corporation (DTCC) increased margin requirements on GME stock on Thursday -- which forced Robinhood to post more collateral -- which drove Robinhood's decision to prevent users from buying more GME shares. This adds another piece to the puzzle. We need more clarity on: Why did the DTCC make its decision? Was that decision properly communicated to the market, or did some firms get early access to the info? What conflicts of interest do they have? Was the DTCC lobbied by other Wall Street players to make that change on Thursday?
  - valuearb 6y ago
    You should stop writing “in depth” articles when you are so woefully misinformed about this event.
    - dang 6y ago
      Please don't cross into personal attack, even when someone else is misinformed or you feel they are. The cost of a putdown like this is higher than its benefit. Perhaps you don't owe article authors better, but you owe this community better if you're participating here. If you know more, that's great, but then please share some of what you know so the rest of us can learn. https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sort=byDate&type=comment&query=share%20know%20learn%20by:dang https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sor...
bryanrasmussen 6y ago
I believe it went something like this https://youtu.be/irxf3MjDwSs?t=137 https://youtu.be/irxf3MjDwSs?t=137 (humorous depiction of RobinHood disbursing money to users)
CivBase 6y ago
> We should reserve final judgement on this matter until all the facts come out, but it’s clear that this deserves a thorough and transparent investigation. The conflict of interest between Robinhood and Citadel is just too great. This. A thousand times this. I'm so sick of people dismissing everyone's concerns as as conspiracy theories. There is a clear motivation for RH's actions, basically nothing stopping them from acting on that motivation, and billions of dollars on the line. Their alibi seems to check out, but that doesn't mean they acted appropriately or that we shouldn't investigate them to be sure.
- valuearb 6y ago
  There is zero conflict of interest between Robinhood and Citadel investment Group (the investor in Melvin), because they do no significant business together. Robinhood pays Citadel Securities for order flow, which is an entirely different company.
  - getToTheChopin 6y ago
    Citadel Securities and Citadel Investment have the same owner -- Ken Griffin. https://en.wikipedia.org/wiki/Citadel_LLC https://en.wikipedia.org/wiki/Citadel_LLC
    - valuearb 6y ago
      And you suppressed this information in your blog because ???
      - getToTheChopin 6y ago
        The article states: > Citadel is a hedge fund and market maker. Its success has vaulted founder Ken Griffin to a net worth of more than $20 billion. Technically, the two sides of Citadel (hedge fund / market maker) are split into two separate arms — but they are both under one parent company and owned by Ken Griffin.
csours 6y ago
> Over several years, these short trades drove down the price of GME shares to ~$4 per share. People keep saying this, but I just don't see how this would work in the real world. NOTE: I am not a financial professional, what follows is my meager understanding. Please feel free to correct me with facts and information. Here's how it COULD work, but DID NOT work: Hedge funds short so much stock, SO QUICKLY that the increase in virtual inventory drives the share price down. Here's why it DID NOT work that way: The hedge funds did not actually do this. They kept their short position open expecting GME to go to 0. In fact, if hedge funds DID attempt this, it would certainly be market manipulation, which is something the SEC definitely watches for, especially when large players do it. People keep saying things like predatory shorts drove the price down. As far as I can tell, these hedge funds told a story about why they though GME would go bankrupt. In turn, someone started a story about how this particular trade by these particular hedge funds was EVIL, which is just zany to me. ---- I do think that Hedge Funds and Traders accumulate too much money for themselves. I don't think the GME trade is a particularly good way to fix this. There are plenty of other Hedge Funds out there.
- getToTheChopin 6y ago
  I can't vouch for the accuracy of this article, but it's a fascinating read about how wall street can coordinate in a short attack against a stock: https://seekingalpha.com/instablog/11442671-gerald-klein/3096735-anatomy-of-a-short-attack https://seekingalpha.com/instablog/11442671-gerald-klein/309...
  - csours 6y ago
    Right, I would need some strong evidence to believe that actually happened in this case. In the linked case it was a VERY low value stock aka Penny Stock, aka OTC (over the counter, as opposed to a listed stock as in listed on a stock exchange), and the SEC DID take action against the guy. In the case of listed stocks, there is a lot more attention and regulation built into the system.
valuearb 6y ago
Wow, they put so much effort into a multi page blog post, yet 1) Misreport the Melvin funder as the market maker Citadel, when it was the investment fund Citadel. Two different entities. 2) Hand waves away settlement issues altogether (never mentioning the DTCC), when they are the heart of the issue. If Robinhood has to post large amounts of collateral for every GME purchase (and sales reduce the collateral requirements), doesn’t that directly explain their behavior? No conspiracy needed? So little actual insight in a blog reporting to do a “deep dive” into the situation.
- getToTheChopin 6y ago
  Yes, Citadel the hedge fund and Citadel the MM are two separate legal entities, but they are both owned by Ken Griffin. Also, Citadel Securities (the MM) has been fined multiple times for rule violations: https://www.sec.gov/news/pressrelease/2017-11.html https://www.sec.gov/news/pressrelease/2017-11.html https://www.bloomberg.com/news/articles/2020-07-21/citadel-securities-fined-by-finra-for-trading-ahead-of-clients https://www.bloomberg.com/news/articles/2020-07-21/citadel-s... https://www.ft.com/content/16cee174-3b7f-11ea-b232-000f4477fbca https://www.ft.com/content/16cee174-3b7f-11ea-b232-000f4477f...
  - valuearb 6y ago
    So why didn’t you detail this? And what market maker has not been fined for rule violations before? How is this pertinent? We know the DTCC raised the collateral requirements by 30x for GME. Does Ken Griffin own the DTCC too? We know Robinhood suffered a cash crunch and was required to raise an emergency $1B. We know that every GME purchase by its customers increased its collateral requirements, and every sale reduced them. Don’t all known facts directly explain Robinhoods behavior? Wouldn’t Robinhood simply move to another market maker if Citadel got out of line? Does anyone know that Ken Griffin made any demands of Robinhood? So why are we pursuing baseless conspiracy theories when the facts already explain the behavior?
    - getToTheChopin 6y ago
      The article mentions: > Citadel is a hedge fund and market maker. Its success has vaulted founder Ken Griffin to a net worth of more than $20 billion. Technically, the two sides of Citadel (hedge fund / market maker) are split into two separate arms — but they are both under one parent company and owned by Ken Griffin.
getToTheChopin 6y ago
Author of the article here -- a key piece not covered is the relationship between Robinhood and the clearing houses. I've been learning more about that over the past 24 hours thanks to reader comments on reddit. Some background info: https://www.washingtonpost.com/business/whats-the-dtcc-and-how-did-it-stop-gamestop-mania/2021/01/29/b23744bc-6257-11eb-a177-7765f29a9524_story.html https://www.washingtonpost.com/business/whats-the-dtcc-and-h... https://twitter.com/KralcTrebor/status/1355356755690139650 https://twitter.com/KralcTrebor/status/1355356755690139650 It looks like the Depository Trust & Clearing Corporation (DTCC) increased margin requirements on GME stock on Thursday -- which forced Robinhood to post more collateral -- which drove Robinhood's decision to prevent users from buying more GME shares. This adds another piece to the puzzle. We need more clarity on: Why did the DTCC make its decision? Was that decision properly communicated to the market, or did some firms get early access to the info? What conflicts of interest do they have? Was the DTCC lobbied by other Wall Street players to make that change on Thursday?
- gruez 6y ago
  >We need more clarity on: Why did the DTCC make its decision? Was that decision properly communicated to the market, or did some firms get early access to the info? What conflicts of interest do they have? Was the DTCC lobbied by other Wall Street players to make that change on Thursday? Isn't the formula public? https://twitter.com/kralctrebor/status/1354952686165225478 https://twitter.com/kralctrebor/status/1354952686165225478
  - getToTheChopin 6y ago
    Yes, but there is a subjective element to the calculation. From the same author: https://twitter.com/KralcTrebor/status/1355544072652533760 https://twitter.com/KralcTrebor/status/1355544072652533760 > We don't have to guess at the formula. It's public, as are the rules and procedures for implementing them. I've read them. They have an add-on for situations like this. The add-on has a calc. That calc has a parameter they pick, which just multiplies it by whatever they want. > This discretionary part is intentional. It was open to public comment. People commented. DTCC responded. SEC approved. > DTCC is definitely going to see their discretionary use of this "knob" as the system working as designed.
aphextron 6y ago
I'm not really sure how Robinhood survives this debacle. Their brand is toast, and the moat of free commissions is gone now; it's the industry standard at this point. They were looking at being the most anticipated IPO of 2021, all down the drain for a few poor decisions.
- valuearb 6y ago
  They’ll be fine. Not only do they have a massive increase in their equity base (though at a high cost), they’ve also had a record number of downloads the last week, and the entire episode has grown their client base significantly. Most people haven’t heard whining of the Reddit Stonks-Newbs about Robinhood, they’ve heard “Robinhood gives you free stock trades”
albertTJames 6y ago
Another very balanced piece ! I'm so glad this world is only filled with good and bad guys. The author seem to omit how much money customers of Robinhood made since its inception.
ianhawes 6y ago
There are countless controversies involving Robinhood. One that I only learned about a few days ago involves an investor who was erroneously shown a -$700K balance on his Robinhood account and then killed himself as a result[0]. Back in September of 2019, I made a deposit into Robinhood. The next morning I received an automatically generated email saying that the deposit had bounced and that my account was now limited. I checked my bank account and saw that the funds had indeed been removed. The email included the ACH error code "R26", which corresponds to a malformed ACH file. I quickly learned that every single deposit on that date had failed [1]. No worries, I thought, I'll just email support and let them know. Unfortunately their support was completely useless and did not follow through with what they said. I switched to TD Ameritrade (and the thinkorswim platform) and have not looked back. I think Robinhood needs a sort of Uber-style restructuring. It's clear they do not care about their clients. [0] https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/?sh=ac1bbf916384 https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-y... [1] https://www.reddit.com/r/RobinHood/comments/d0joa2/solution_to_the_r26_reversal_issue/ https://www.reddit.com/r/RobinHood/comments/d0joa2/solution_...
- silicon2401 6y ago
  Stories like this are why I've stayed away from Robinhood. After doing more research before starting any trading, I learned that I can buy stocks through Vanguard, which is a platform that I actually do support a lot. One question I have is: what's a safe, secure, reliable alternative to Robinhood for buying crypto as an American? I've read about Coinbase and Binance but seen that some people have had shady experiences with them too.
  - ausbah 6y ago
    sofi is an alternative I've heard about
  - hiimtroymclure 6y ago
    No company has perfect service but Coinbase has always done right by me. Great security and super easy onboarding. Whenever a friend asks me how to buy crypto, I send them to CB. My only criticism would be the lack of some coins with real value and communities like Monero, NANO, or NEO.
socrates1998 6y ago
> This practice meant that trades placed on Robinhood weren’t executed at the best price, costing customer tens of millions of dollars, even after taking into account the savings from not paying a commission This is why I stopped using them last summer. They messed up a few of my trades. Either by giving me a worse price than was quoted or my reversing the trade after it had already gone through. After it happened a second time in a short time frame, I knew something was up. I closed all my trades and took all my money out. What's really weird is that these "errors" started happening only after I started making good trades. When I lost money on a trade (which happened a lot for the first few years of casual trading), I NEVER had an execution error. Then, when I had my first good run of trading in years, all of the sudden I had TWO trades messed up within a week of each other??? It was all too conincidental for me. Either they were messing up my trades because of incompetence or they were letting someone take the other end of my trades. Whichever it was, I left. Robinhood had an insane run of good press and was able to within years of crap product. Now they are finally getting what's coming to them.
iamspoilt 6y ago
Why is this post flagged?
- getToTheChopin 6y ago
  Not sure why either. Melvin and Citadel are lurking here!?
  - mikestew 6y ago
    Oh, enough with the conspiracies already. It's probably flagged because of the poor quality of the article that other commenters have pointed out. The first illustration alone was enough for me to think to myself, "meh, best skip the rest, I don't think the author is knowledgable about how this works."
Shadonototro 6y ago
the poor? buying millions of GME stocks makes you a poor? what about the people who can't even affort trying to gamble money on bubbles? they are "ultra poor"? this whole thing makes me want to puke on this shitty planet

96 points by iamspoilt 6y ago

h_anna_h 6y ago

They should rename the app to "Sheriff of Nottingham".

IndySun 6y ago
"Men In Stocks"

tedunangst 6y ago

No mention of any other brokerage doing pfof? I think RH is pretty shady overall, but that seems kinda relevant context.

Scoundreller 6y ago
The others all do too. RH realized there’s a lot more order flow to sell when there’s no commissions. Meme stocks may have more profitable order flow, I dunno. I’m still unsure of what RH did so wrong here that other brokers didn’t/aren’t. I think RH is making a lot more off securities lending than it is on order flow imo. Lending out highly shorted and hard-to-borrow shares can earns them tons of interest.
getToTheChopin 6y ago
All brokerages make money from PFOF -- but it is a much larger revenue stream for RH compared to other brokers. https://www.morningstar.com/articles/1015686/robinhood-was-indeed-too-good-to-be-true https://www.morningstar.com/articles/1015686/robinhood-was-i... "That Robinhood sold its order flow is unremarkable, but the scale of its activities certainly merits comment. Forbes reports that in the first quarter 2020, 70% of Robinhood’s revenues derived from payments for order flows, as opposed to 17% for E-Trade and just 3% for Schwab. Yes, Robinhood has observed standard practice–but with distinctly above-average enthusiasm."
- tedunangst 6y ago
  Now I want to know where schwab gets the other 97% from.
- valuearb 6y ago
  Why is this a surprise to anyone? How did customers think Robinhood was making money?

u678u 6y ago

I'm getting really sick of the Saga. Plus the poor are not the people buying $$$ worth of gamestop last week, they're trying to afford basic bills. Bored middle class millennials maybe, more likely just other rich people and hedge funds.

syntaxing 6y ago
I would agree but I would say all bored Millennials are buying stocks because the RH app is truly addicting and makes buying stocks as easy as giving a like on FB. It’s pretty much a slot machine in your pocket. The biggest problem though is “Millenials” is no longer a term for the young but rather a term for majority of the countries work force.
lm28469 6y ago
> more likely just other rich people and hedge funds. I have at least two friends with absolutely no experience in any kind of investments who installed mobile trading apps and bought GME shares a few days ago at $300+ a pop I'm fairly certain that a lot of people who are far from rich are buying GME stocks right now because a lot of other people are telling them the stock will "likely go over $10k a share" (I've seen it on the wsb subreddit a lot). FOMO is a serious thing, low barrier to entry + constant media coverage = people want to be part of "it", even if they don't know what "it" is, especially when you tell them they could get rich.

jrochkind1 6y ago

> Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices. Is there any way for the casual consumer to compare the quality of execution of various brokers?

tedunangst 6y ago
Those contracts are generally secret. You have to trust your broker will negotiate a good split on your behalf. (Or hope the SEC will smack them if they don't, as happened to RH.)
getToTheChopin 6y ago
I don't think that info is public. Also, Citadel Securities (the MM who is Robinhood's largest source of revenue) has been fined for front-running customer orders in the past. https://www.bloomberg.com/news/articles/2020-07-21/citadel-securities-fined-by-finra-for-trading-ahead-of-clients https://www.bloomberg.com/news/articles/2020-07-21/citadel-s...

beervirus 6y ago

> As we saw above, Robinhood’s main revenue source comes from selling customer trade data to other firms. This is a controversial practice known as “Payment for Order Flow” (PFOF in financial regulatory lingo). It's only controversial among people who don't understand how market transactions work.

twirlock 6y ago
So like the SEC, when they fined Robinhood?
Pfhreak 6y ago
Payment for order flow can certainly be controversial among people who understand the market. Also, there are plenty of people who understand the market who find the concept of the market controversial. Your circles might all be comfortable with PFOF, but I wouldn't say it is controversial only with those who don't understand the market -- it's dismissive of contrary opinions.
getToTheChopin 6y ago
PFOF is banned in Canada: https://www.gbm.scotiabank.com/content/dam/gbm/market-insights/etf/october/2019-10-02-Free-Trading.pdf https://www.gbm.scotiabank.com/content/dam/gbm/market-insigh... PFOF creates huge conflicts of interest between brokers and market markers. That is why RH was fined $65M by the SEC. https://www.sec.gov/news/press-release/2020-321 https://www.sec.gov/news/press-release/2020-321
crispyambulance 6y ago
The article is a bit confusing. There's "PFOF" which is basically middle-man profit taking. That's not particularly shocking unless it's egregiously delayed. But then there's selling data to high frequency traders. This sentence in the article conflates these two very different things... > As we saw above, Robinhood’s main revenue source comes from selling customer trade data to other firms. This is a controversial practice known as “Payment for Order Flow” (PFOF in financial regulatory lingo). I am not getting this? Is it the case that ordering stock shares from a market maker like Citadel is identically selling data to high frequency traders? FWIW, I admit I don't _really_ understand how market transactions work, and I definitely don't feel alone!

twirlock 6y ago

I don't see why we're scapegoating Robinhood so hard when we should be focused on DTCC and their convenient-for-insiders collateral requirements spanning multiple stocks.

short_sells_poo 6y ago

Robinhood is a shady company preying on the uninformed and as such deserves every punishment it gets. However, Robinhood clients do not get to wash their hands of responsibility, because let's be honest: what did they expect to get for a free service? Are all these people seriously so deluded that they have expected that a company will provide them free service out of the goodness of their heart? Again, Robinhood outright lied, and they must not get away with this. But we have to educate people that there are very few (if any) "free" services that won't have to resort to these antics. They have to make money somehow, and if it's not obvious how, that should be an immediate red flag.

sillysaurusx 6y ago
Fortunately, there are rules that Robinhood must abide by. Perhaps in the near future, the SEC might find that Robinhood violated those rules by preventing people from buying more than one GME share. (I get that the clearinghouse was the reason, because they upped their collateral requirement from 3% to 100%, so Robinhood just couldn't cover the trades. Nor could anyone else. But that doesn't change the reality of what happened. I wonder if it's too much to hope that the SEC will aim at the clearinghouse, or congress enact legislation to prevent the clearinghouse from shutting down specific segments of the market by suddenly requiring 33.33x more collateral for certain stocks.)
- valuearb 6y ago
  Isn’t the reality that the DTCC was forced to increase collateral requirements? You understand that if GME drops to $80 today, a large number of GME trades from last week are going to refuse to settle. What is Congress going to do? Force the DTCC to eat the losses?
  - sillysaurusx 6y ago
    A simple solution would be to turn the 3-day settlement period into 1-day, or 0-day. But of course, DTCC has all the incentive in the world not to go along with that. The trouble is that the 3-day period is a "leaky abstraction." It's the sole reason any of this became an issue. It's not a law of nature that "DTCC must insure 3 days of risk."

gruez 6y ago

I stopped reading at the first image: https://themeasureofaplan.com/wp-content/uploads/2021/01/Robinhood-NOK-order-flow-v3.png https://themeasureofaplan.com/wp-content/uploads/2021/01/Rob..., which implied that the market makers were offering robinhood a worse price than the exchanges, and pocketing the difference. This is not what happens. Matt Levine explains: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.” >More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t. >Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it. In fact, they're specifically prohibited from offering a worse price than the public exchanges due to regulation NBBO (national best bid order). The SEC penalty last year was only for failing to ensure best execution, which is slightly different than offering worse prices than the NBBO, since the former also requires them to take into account other market making firms that might offer a better price.

sillysaurusx 6y ago

The latest action is fascinating: There's a coordinated campaign to push silver. Citadel just so happens to own lots of SLV. Apparently there's article after article saying that silver is the hot new thing, and that you should buy immediately. It makes me wonder how much it costs to run a disinformation campaign. Do journalists have an informal price? Depends on the outlet, I guess. It was comical seeing all the articles pop up simultaneously, and of course /r/wallstreetbets is mocking it all.

deleted 6y ago
[deleted]
CapmCrackaWaka 6y ago
I, too, am curious what these conversations sound like, or if they even happen at all. When I googled GME this morning I saw article after article claiming that 'Wallstreetbets has set its sights on Silver', however every single post on the WSB subreddit was against the idea. The explanation is probably innocent. Most of these websites rely on ads, and when 1 of them reports on 'the hot new GameStop - Silver!', they probably all jump on. Still, it doesn't help the image that the media is being bought left and right.

andrewmutz 6y ago

This is a terrible write-up. The author only presents the GME Citadel conspiracy theory without even presenting the "capital requirements" theory. He even says that there is no evidence of this conspiracy theory. This is what writing looks like when the author appeals to your emotional distrust of wall street, rather than to actually try to inform you.

getToTheChopin 6y ago
Author of the article here -- agreed with you -- a key piece not covered is the relationship between Robinhood and the clearing houses. I've been learning more about that over the past 24 hours thanks to reader comments on reddit. I will amend the article when I finish my research. Some background info: https://www.washingtonpost.com/business/whats-the-dtcc-and-h https://www.washingtonpost.com/business/whats-the-dtcc-and-h... https://twitter.com/KralcTrebor/status/1355356755690139650 https://twitter.com/KralcTrebor/status/1355356755690139650 It looks like the Depository Trust & Clearing Corporation (DTCC) increased margin requirements on GME stock on Thursday -- which forced Robinhood to post more collateral -- which drove Robinhood's decision to prevent users from buying more GME shares. This adds another piece to the puzzle. We need more clarity on: Why did the DTCC make its decision? Was that decision properly communicated to the market, or did some firms get early access to the info? What conflicts of interest do they have? Was the DTCC lobbied by other Wall Street players to make that change on Thursday?
- valuearb 6y ago
  You should stop writing “in depth” articles when you are so woefully misinformed about this event.
  - dang 6y ago
    Please don't cross into personal attack, even when someone else is misinformed or you feel they are. The cost of a putdown like this is higher than its benefit. Perhaps you don't owe article authors better, but you owe this community better if you're participating here. If you know more, that's great, but then please share some of what you know so the rest of us can learn. https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sort=byDate&type=comment&query=share%20know%20learn%20by:dang https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sor...

bryanrasmussen 6y ago

I believe it went something like this https://youtu.be/irxf3MjDwSs?t=137 https://youtu.be/irxf3MjDwSs?t=137 (humorous depiction of RobinHood disbursing money to users)

CivBase 6y ago

> We should reserve final judgement on this matter until all the facts come out, but it’s clear that this deserves a thorough and transparent investigation. The conflict of interest between Robinhood and Citadel is just too great. This. A thousand times this. I'm so sick of people dismissing everyone's concerns as as conspiracy theories. There is a clear motivation for RH's actions, basically nothing stopping them from acting on that motivation, and billions of dollars on the line. Their alibi seems to check out, but that doesn't mean they acted appropriately or that we shouldn't investigate them to be sure.

valuearb 6y ago
There is zero conflict of interest between Robinhood and Citadel investment Group (the investor in Melvin), because they do no significant business together. Robinhood pays Citadel Securities for order flow, which is an entirely different company.
- getToTheChopin 6y ago
  Citadel Securities and Citadel Investment have the same owner -- Ken Griffin. https://en.wikipedia.org/wiki/Citadel_LLC https://en.wikipedia.org/wiki/Citadel_LLC
  - valuearb 6y ago
    And you suppressed this information in your blog because ???
    - getToTheChopin 6y ago
      The article states: > Citadel is a hedge fund and market maker. Its success has vaulted founder Ken Griffin to a net worth of more than $20 billion. Technically, the two sides of Citadel (hedge fund / market maker) are split into two separate arms — but they are both under one parent company and owned by Ken Griffin.

csours 6y ago

> Over several years, these short trades drove down the price of GME shares to ~$4 per share. People keep saying this, but I just don't see how this would work in the real world. NOTE: I am not a financial professional, what follows is my meager understanding. Please feel free to correct me with facts and information. Here's how it COULD work, but DID NOT work: Hedge funds short so much stock, SO QUICKLY that the increase in virtual inventory drives the share price down. Here's why it DID NOT work that way: The hedge funds did not actually do this. They kept their short position open expecting GME to go to 0. In fact, if hedge funds DID attempt this, it would certainly be market manipulation, which is something the SEC definitely watches for, especially when large players do it. People keep saying things like predatory shorts drove the price down. As far as I can tell, these hedge funds told a story about why they though GME would go bankrupt. In turn, someone started a story about how this particular trade by these particular hedge funds was EVIL, which is just zany to me. ---- I do think that Hedge Funds and Traders accumulate too much money for themselves. I don't think the GME trade is a particularly good way to fix this. There are plenty of other Hedge Funds out there.

getToTheChopin 6y ago
I can't vouch for the accuracy of this article, but it's a fascinating read about how wall street can coordinate in a short attack against a stock: https://seekingalpha.com/instablog/11442671-gerald-klein/3096735-anatomy-of-a-short-attack https://seekingalpha.com/instablog/11442671-gerald-klein/309...
- csours 6y ago
  Right, I would need some strong evidence to believe that actually happened in this case. In the linked case it was a VERY low value stock aka Penny Stock, aka OTC (over the counter, as opposed to a listed stock as in listed on a stock exchange), and the SEC DID take action against the guy. In the case of listed stocks, there is a lot more attention and regulation built into the system.

valuearb 6y ago

Wow, they put so much effort into a multi page blog post, yet 1) Misreport the Melvin funder as the market maker Citadel, when it was the investment fund Citadel. Two different entities. 2) Hand waves away settlement issues altogether (never mentioning the DTCC), when they are the heart of the issue. If Robinhood has to post large amounts of collateral for every GME purchase (and sales reduce the collateral requirements), doesn’t that directly explain their behavior? No conspiracy needed? So little actual insight in a blog reporting to do a “deep dive” into the situation.

getToTheChopin 6y ago
Yes, Citadel the hedge fund and Citadel the MM are two separate legal entities, but they are both owned by Ken Griffin. Also, Citadel Securities (the MM) has been fined multiple times for rule violations: https://www.sec.gov/news/pressrelease/2017-11.html https://www.sec.gov/news/pressrelease/2017-11.html https://www.bloomberg.com/news/articles/2020-07-21/citadel-securities-fined-by-finra-for-trading-ahead-of-clients https://www.bloomberg.com/news/articles/2020-07-21/citadel-s... https://www.ft.com/content/16cee174-3b7f-11ea-b232-000f4477fbca https://www.ft.com/content/16cee174-3b7f-11ea-b232-000f4477f...
- valuearb 6y ago
  So why didn’t you detail this? And what market maker has not been fined for rule violations before? How is this pertinent? We know the DTCC raised the collateral requirements by 30x for GME. Does Ken Griffin own the DTCC too? We know Robinhood suffered a cash crunch and was required to raise an emergency $1B. We know that every GME purchase by its customers increased its collateral requirements, and every sale reduced them. Don’t all known facts directly explain Robinhoods behavior? Wouldn’t Robinhood simply move to another market maker if Citadel got out of line? Does anyone know that Ken Griffin made any demands of Robinhood? So why are we pursuing baseless conspiracy theories when the facts already explain the behavior?
  - getToTheChopin 6y ago
    The article mentions: > Citadel is a hedge fund and market maker. Its success has vaulted founder Ken Griffin to a net worth of more than $20 billion. Technically, the two sides of Citadel (hedge fund / market maker) are split into two separate arms — but they are both under one parent company and owned by Ken Griffin.

getToTheChopin 6y ago

Author of the article here -- a key piece not covered is the relationship between Robinhood and the clearing houses. I've been learning more about that over the past 24 hours thanks to reader comments on reddit. Some background info: https://www.washingtonpost.com/business/whats-the-dtcc-and-how-did-it-stop-gamestop-mania/2021/01/29/b23744bc-6257-11eb-a177-7765f29a9524_story.html https://www.washingtonpost.com/business/whats-the-dtcc-and-h... https://twitter.com/KralcTrebor/status/1355356755690139650 https://twitter.com/KralcTrebor/status/1355356755690139650 It looks like the Depository Trust & Clearing Corporation (DTCC) increased margin requirements on GME stock on Thursday -- which forced Robinhood to post more collateral -- which drove Robinhood's decision to prevent users from buying more GME shares. This adds another piece to the puzzle. We need more clarity on: Why did the DTCC make its decision? Was that decision properly communicated to the market, or did some firms get early access to the info? What conflicts of interest do they have? Was the DTCC lobbied by other Wall Street players to make that change on Thursday?

gruez 6y ago
>We need more clarity on: Why did the DTCC make its decision? Was that decision properly communicated to the market, or did some firms get early access to the info? What conflicts of interest do they have? Was the DTCC lobbied by other Wall Street players to make that change on Thursday? Isn't the formula public? https://twitter.com/kralctrebor/status/1354952686165225478 https://twitter.com/kralctrebor/status/1354952686165225478
- getToTheChopin 6y ago
  Yes, but there is a subjective element to the calculation. From the same author: https://twitter.com/KralcTrebor/status/1355544072652533760 https://twitter.com/KralcTrebor/status/1355544072652533760 > We don't have to guess at the formula. It's public, as are the rules and procedures for implementing them. I've read them. They have an add-on for situations like this. The add-on has a calc. That calc has a parameter they pick, which just multiplies it by whatever they want. > This discretionary part is intentional. It was open to public comment. People commented. DTCC responded. SEC approved. > DTCC is definitely going to see their discretionary use of this "knob" as the system working as designed.

aphextron 6y ago

I'm not really sure how Robinhood survives this debacle. Their brand is toast, and the moat of free commissions is gone now; it's the industry standard at this point. They were looking at being the most anticipated IPO of 2021, all down the drain for a few poor decisions.

valuearb 6y ago
They’ll be fine. Not only do they have a massive increase in their equity base (though at a high cost), they’ve also had a record number of downloads the last week, and the entire episode has grown their client base significantly. Most people haven’t heard whining of the Reddit Stonks-Newbs about Robinhood, they’ve heard “Robinhood gives you free stock trades”

albertTJames 6y ago

Another very balanced piece ! I'm so glad this world is only filled with good and bad guys. The author seem to omit how much money customers of Robinhood made since its inception.

ianhawes 6y ago

There are countless controversies involving Robinhood. One that I only learned about a few days ago involves an investor who was erroneously shown a -$700K balance on his Robinhood account and then killed himself as a result[0]. Back in September of 2019, I made a deposit into Robinhood. The next morning I received an automatically generated email saying that the deposit had bounced and that my account was now limited. I checked my bank account and saw that the funds had indeed been removed. The email included the ACH error code "R26", which corresponds to a malformed ACH file. I quickly learned that every single deposit on that date had failed [1]. No worries, I thought, I'll just email support and let them know. Unfortunately their support was completely useless and did not follow through with what they said. I switched to TD Ameritrade (and the thinkorswim platform) and have not looked back. I think Robinhood needs a sort of Uber-style restructuring. It's clear they do not care about their clients. [0] https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/?sh=ac1bbf916384 https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-y... [1] https://www.reddit.com/r/RobinHood/comments/d0joa2/solution_to_the_r26_reversal_issue/ https://www.reddit.com/r/RobinHood/comments/d0joa2/solution_...

silicon2401 6y ago
Stories like this are why I've stayed away from Robinhood. After doing more research before starting any trading, I learned that I can buy stocks through Vanguard, which is a platform that I actually do support a lot. One question I have is: what's a safe, secure, reliable alternative to Robinhood for buying crypto as an American? I've read about Coinbase and Binance but seen that some people have had shady experiences with them too.
- ausbah 6y ago
  sofi is an alternative I've heard about
- hiimtroymclure 6y ago
  No company has perfect service but Coinbase has always done right by me. Great security and super easy onboarding. Whenever a friend asks me how to buy crypto, I send them to CB. My only criticism would be the lack of some coins with real value and communities like Monero, NANO, or NEO.

socrates1998 6y ago

> This practice meant that trades placed on Robinhood weren’t executed at the best price, costing customer tens of millions of dollars, even after taking into account the savings from not paying a commission This is why I stopped using them last summer. They messed up a few of my trades. Either by giving me a worse price than was quoted or my reversing the trade after it had already gone through. After it happened a second time in a short time frame, I knew something was up. I closed all my trades and took all my money out. What's really weird is that these "errors" started happening only after I started making good trades. When I lost money on a trade (which happened a lot for the first few years of casual trading), I NEVER had an execution error. Then, when I had my first good run of trading in years, all of the sudden I had TWO trades messed up within a week of each other??? It was all too conincidental for me. Either they were messing up my trades because of incompetence or they were letting someone take the other end of my trades. Whichever it was, I left. Robinhood had an insane run of good press and was able to within years of crap product. Now they are finally getting what's coming to them.

iamspoilt 6y ago

Why is this post flagged?

getToTheChopin 6y ago
Not sure why either. Melvin and Citadel are lurking here!?
- mikestew 6y ago
  Oh, enough with the conspiracies already. It's probably flagged because of the poor quality of the article that other commenters have pointed out. The first illustration alone was enough for me to think to myself, "meh, best skip the rest, I don't think the author is knowledgable about how this works."

Shadonototro 6y ago

the poor? buying millions of GME stocks makes you a poor? what about the people who can't even affort trying to gamble money on bubbles? they are "ultra poor"? this whole thing makes me want to puke on this shitty planet