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Robinhood in a tough position as it faces a wave of lawsuits over GameStop saga

42 points by deegles 6y ago

joncrane 6y ago
Is it really in a tough position, though? I'm pretty sure they have the right to suspend/restrict trading in any security at their sole discretion. Yes they have to spend time and money defending these lawsuits but they are mostly frivolous AFAIK.
- j_walter 6y ago
  Do they have that right? Could this been seen as market manipulation by locking out a significant amount of stock market customers? When all of a sudden you say...you can't buy X, but if you own it you can sell it...that will drive the price of X down.
  - ABeeSea 6y ago
    Since the collateral requirements were based on their net position, sells reduced their collateral requirements while buys increased it. This was a risk management decision and since they don’t profit directly from the price moving one way or another, it would be pretty hard to argue it wasn’t just risk management to protect the rest of their users from RH running out of cash and going into receivership.
    - jec99 6y ago
      The Webull CEO was saying that independent of this logic, there would never be a scenario where users be unable to close their accounts. For the user, it's much worse for RH to prevent me from accessing my money than to prevent me from opening new positions.
    - LorenPechtel 6y ago
      Risk management in that they don't want to be left holding the bag when the investors go bankrupt.
      - j_walter 6y ago
        OK, but they didn't let any users purchase the stock. Ones that have settled funds and don't trade on margin. I get not letting a brand new account with unsettled funds trade on margin for huge positions...but if I've got $100K cash in my account there should be no reason to limit my purchasing.
    - playingchanges 6y ago
      It is interesting to note that buying was also limited for cash accounts where collateral should not have been an issue.
      - ABeeSea 6y ago
        They can't use customer funds for collateral. If you give $100 to RH for a stock, RH gives $3 of their own money to the clearinghouse. Two days later you get your stock, the buyer gets your $100, and RH gets their $3 back. The $3 turned into the full $100 and RH can't use any of your $100 to pay it.
  - joncrane 6y ago
    Yes they do and it's in the TOS of every single retail brokerage account you sign up for.
    - toomuchtodo 6y ago
      I won't disagree with this point (companies put forth garbage TOS on the regular), but I am curious to see how this stands up to renewed regulatory (FINRA, SEC) and Congressional scrutiny. Several brokerages (Fidelity, Vanguard) did not limit trading of GME in any way during high volatility last week, despite DTCC/NSCC's risk model calling for 100% collateral on GME for a duration of time.
      - ABeeSea 6y ago
        Fidelity and Vanguard run their own clearinghouses and don’t touch DTCC. Robinhood technically does as well, but they still do the vast majority of their clearing through DTCC. Pretty likely RH will invest in their clearing operations this year.
        toomuchtodo 6y ago
        That doesn't solve their undercapitalization issue [1]. RH has a license to perform their own clearing [2], but they're still going to have capital requirements governed by NSCC collateral requirements (which is put forth by Dodd-Frank) [3]. If regulators require capitalization to support outlier volatility market conditions instead of allowing brokerages to stop trades due to undercapitalization (whether because of credit line availability, the amount of the market they've captured, etc), ¯\_(ツ)_/¯. Would it be right and proper (for FINRA and/or Congress) to allow Robinhood to exist to push order flow to institutions only when seas are calm? That does not sound like a functional broker to me. [1] https://finance.yahoo.com/news/robinhood-said-draw-credit-lines-214509076.html https://finance.yahoo.com/news/robinhood-said-draw-credit-li... (Robinhood Is Said to Draw on Bank Credit Lines Amid Tumult) [2] https://blog.robinhood.com/news/2018/10/9/introducing-clearing-by-robinhood https://blog.robinhood.com/news/2018/10/9/introducing-cleari... (Introducing Clearing by Robinhood, October 2018) [3] https://dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co... (NSCC Disclosure Framework, PDF) Disclaimer: Thoughts and opinions are my own.
- mox1 6y ago
  so whats stopping a hedge fund from paying them $$$ to "suspend" trading on a particular stock for a given time frame? If what they are doing is legal, than certainly that would be legal?
  - joncrane 6y ago
    So here's the thing: there's plausible deniability at play here. RH isn't the only brokerage to suspend/limit trading in volatile stocks. The reason given (liquidity issues for the broker and clearinghouse) is entirely plausible. While it's possible, it's (I believe) very difficult to prove that that's what happened, and frankly, there's a more obvious answer. Hanlon's razor applies here.
    - deleted 6y ago
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    - ouid 6y ago
      Do you mean Ockham's razor? Hanlon's razor is completely incompatible with the efficient market hypothesis, and really just finance in general.
      - joncrane 6y ago
        Hanlon's razor is "Never ascribe to malice that which is sufficiently explained by incompetence." The "incompetence" explanation is that RH is a baby newcomer as far as retail brokerages go and made a desperate move to placate NSCC and save their butts. They got in over their heads and cast about to figure out how to make it through this week. The "malice" explanation would be a sinister cabal led by Citadel (RH's MM who pays them for order flow) pulled strings via a back room threat to make RH suspend buying of GME. The
  - ABeeSea 6y ago
    Intent matters. In your hypothetical, they wouldn’t be able to rely on the argument of risk management if their risk profile hadn’t changed.
- ramblerman 6y ago
  > I'm pretty sure they have the right to suspend/restrict trading in any security at their sole discretion Not if it's market manipulation. That's like saying I'm pretty sure a CEO is allowed to trade stock at their discretion. Sure but not if they do it with insider knowledge.
  - gruez 6y ago
    >Not if it's market manipulation. But what's the evidence for that? The evidence I've seen so far were some vague/contradictory statements the CEO made on TV, and that citadel/melvin stood to benefit. Not exactly a slam dunk imo.
- Justsignedup 6y ago
  Someone also pointed out that they announced the limit BEFORE allowing trade executions, not retroactively. This is likely fully legal. Their inability to pay up front was the cause. Its another one of those "we'll worry about it later" problems, that once they hit, they acquired like 3.4 billion dollars and can continue. So yeah, I doubt any of those lawsuits will yield anything.
- twox2 6y ago
  Even if they do, they have major solvency/liquidity issues as a result of this fiasco and they are feeling the pressure. Folks are moving to other brokerages in large quantities.
ABeeSea 6y ago
They just got a $1B and it’s looking like everything they did was legal and within their rights. If anything good comes out of this whole fiasco, can it be the end of ACH and the beginning of an instant bank settlement system? Extend that to stock and options and make a T+1 and T+2 disappear. If it can’t be instant due to settlement derivatives, at least settle at close of business.
- aserafini 6y ago
  I’m reluctant to be ‘that guy’, but it really seems like this space is ripe for disruption by a blockchain solution. Surely a stock can be modelled almost directly as a scarce digital asset token traded anywhere or exchanged directly if desired. Voting rights could be implemented with a smart contract.
  - jqpabc123 6y ago
    Sorry, blockchain is still a solution in search of a real world problem. Stock trades happen in real time or as close to it as possible --- and at extremely high volumes at times. Any delay can cost someone a lot of money. No one wants to wait for a blockchain to try and reach a consensus.
    - aserafini 6y ago
      My very basic understanding is that Robinhood is only creating an illusion for its customers that the stocks are settling instantly: in reality it can still takes days behind the scenes to really exchange shares.
      - jqpabc123 6y ago
        No one waits days to buy/sell stocks. Average execution time with the top brokers is a fraction of second. https://www.brokerage-review.com/investing-firm/broker-trade-execution-time-and-quality.aspx https://www.brokerage-review.com/investing-firm/broker-trade...
Ir0nMan 6y ago
They should have just been honest about the situation from the start: "We were caught without enough capital to settle all your trades, we are sorry and will do better next time". Instead they made it seem like they were protecting traders and doing them a favor. They didn't have enough cash on hand to settle trades and meet the capital requirements. They messed up on that front and are in the process of fixing that with additional investment from their wealthy shareholders. It may be too late however as everyone I know that did trade on RH is now in the process of migrating to another more established brokerage.

42 points by deegles 6y ago

Is it really in a tough position, though? I'm pretty sure they have the right to suspend/restrict trading in any security at their sole discretion. Yes they have to spend time and money defending these lawsuits but they are mostly frivolous AFAIK.

j_walter 6y ago
Do they have that right? Could this been seen as market manipulation by locking out a significant amount of stock market customers? When all of a sudden you say...you can't buy X, but if you own it you can sell it...that will drive the price of X down.
- ABeeSea 6y ago
  Since the collateral requirements were based on their net position, sells reduced their collateral requirements while buys increased it. This was a risk management decision and since they don’t profit directly from the price moving one way or another, it would be pretty hard to argue it wasn’t just risk management to protect the rest of their users from RH running out of cash and going into receivership.
  - jec99 6y ago
    The Webull CEO was saying that independent of this logic, there would never be a scenario where users be unable to close their accounts. For the user, it's much worse for RH to prevent me from accessing my money than to prevent me from opening new positions.
  - LorenPechtel 6y ago
    Risk management in that they don't want to be left holding the bag when the investors go bankrupt.
    - j_walter 6y ago
      OK, but they didn't let any users purchase the stock. Ones that have settled funds and don't trade on margin. I get not letting a brand new account with unsettled funds trade on margin for huge positions...but if I've got $100K cash in my account there should be no reason to limit my purchasing.
  - playingchanges 6y ago
    It is interesting to note that buying was also limited for cash accounts where collateral should not have been an issue.
    - ABeeSea 6y ago
      They can't use customer funds for collateral. If you give $100 to RH for a stock, RH gives $3 of their own money to the clearinghouse. Two days later you get your stock, the buyer gets your $100, and RH gets their $3 back. The $3 turned into the full $100 and RH can't use any of your $100 to pay it.
- joncrane 6y ago
  Yes they do and it's in the TOS of every single retail brokerage account you sign up for.
  - toomuchtodo 6y ago
    I won't disagree with this point (companies put forth garbage TOS on the regular), but I am curious to see how this stands up to renewed regulatory (FINRA, SEC) and Congressional scrutiny. Several brokerages (Fidelity, Vanguard) did not limit trading of GME in any way during high volatility last week, despite DTCC/NSCC's risk model calling for 100% collateral on GME for a duration of time.
    - ABeeSea 6y ago
      Fidelity and Vanguard run their own clearinghouses and don’t touch DTCC. Robinhood technically does as well, but they still do the vast majority of their clearing through DTCC. Pretty likely RH will invest in their clearing operations this year.
      - toomuchtodo 6y ago
        That doesn't solve their undercapitalization issue [1]. RH has a license to perform their own clearing [2], but they're still going to have capital requirements governed by NSCC collateral requirements (which is put forth by Dodd-Frank) [3]. If regulators require capitalization to support outlier volatility market conditions instead of allowing brokerages to stop trades due to undercapitalization (whether because of credit line availability, the amount of the market they've captured, etc), ¯\_(ツ)_/¯. Would it be right and proper (for FINRA and/or Congress) to allow Robinhood to exist to push order flow to institutions only when seas are calm? That does not sound like a functional broker to me. [1] https://finance.yahoo.com/news/robinhood-said-draw-credit-lines-214509076.html https://finance.yahoo.com/news/robinhood-said-draw-credit-li... (Robinhood Is Said to Draw on Bank Credit Lines Amid Tumult) [2] https://blog.robinhood.com/news/2018/10/9/introducing-clearing-by-robinhood https://blog.robinhood.com/news/2018/10/9/introducing-cleari... (Introducing Clearing by Robinhood, October 2018) [3] https://dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co... (NSCC Disclosure Framework, PDF) Disclaimer: Thoughts and opinions are my own.
mox1 6y ago
so whats stopping a hedge fund from paying them $$$ to "suspend" trading on a particular stock for a given time frame? If what they are doing is legal, than certainly that would be legal?
- joncrane 6y ago
  So here's the thing: there's plausible deniability at play here. RH isn't the only brokerage to suspend/limit trading in volatile stocks. The reason given (liquidity issues for the broker and clearinghouse) is entirely plausible. While it's possible, it's (I believe) very difficult to prove that that's what happened, and frankly, there's a more obvious answer. Hanlon's razor applies here.
  - deleted 6y ago
    [deleted]
  - deleted 6y ago
    [deleted]
  - ouid 6y ago
    Do you mean Ockham's razor? Hanlon's razor is completely incompatible with the efficient market hypothesis, and really just finance in general.
    - joncrane 6y ago
      Hanlon's razor is "Never ascribe to malice that which is sufficiently explained by incompetence." The "incompetence" explanation is that RH is a baby newcomer as far as retail brokerages go and made a desperate move to placate NSCC and save their butts. They got in over their heads and cast about to figure out how to make it through this week. The "malice" explanation would be a sinister cabal led by Citadel (RH's MM who pays them for order flow) pulled strings via a back room threat to make RH suspend buying of GME. The
- ABeeSea 6y ago
  Intent matters. In your hypothetical, they wouldn’t be able to rely on the argument of risk management if their risk profile hadn’t changed.
ramblerman 6y ago
> I'm pretty sure they have the right to suspend/restrict trading in any security at their sole discretion Not if it's market manipulation. That's like saying I'm pretty sure a CEO is allowed to trade stock at their discretion. Sure but not if they do it with insider knowledge.
- gruez 6y ago
  >Not if it's market manipulation. But what's the evidence for that? The evidence I've seen so far were some vague/contradictory statements the CEO made on TV, and that citadel/melvin stood to benefit. Not exactly a slam dunk imo.
Justsignedup 6y ago
Someone also pointed out that they announced the limit BEFORE allowing trade executions, not retroactively. This is likely fully legal. Their inability to pay up front was the cause. Its another one of those "we'll worry about it later" problems, that once they hit, they acquired like 3.4 billion dollars and can continue. So yeah, I doubt any of those lawsuits will yield anything.
twox2 6y ago
Even if they do, they have major solvency/liquidity issues as a result of this fiasco and they are feeling the pressure. Folks are moving to other brokerages in large quantities.

ABeeSea 6y ago

They just got a $1B and it’s looking like everything they did was legal and within their rights. If anything good comes out of this whole fiasco, can it be the end of ACH and the beginning of an instant bank settlement system? Extend that to stock and options and make a T+1 and T+2 disappear. If it can’t be instant due to settlement derivatives, at least settle at close of business.

aserafini 6y ago
I’m reluctant to be ‘that guy’, but it really seems like this space is ripe for disruption by a blockchain solution. Surely a stock can be modelled almost directly as a scarce digital asset token traded anywhere or exchanged directly if desired. Voting rights could be implemented with a smart contract.
- jqpabc123 6y ago
  Sorry, blockchain is still a solution in search of a real world problem. Stock trades happen in real time or as close to it as possible --- and at extremely high volumes at times. Any delay can cost someone a lot of money. No one wants to wait for a blockchain to try and reach a consensus.
  - aserafini 6y ago
    My very basic understanding is that Robinhood is only creating an illusion for its customers that the stocks are settling instantly: in reality it can still takes days behind the scenes to really exchange shares.
    - jqpabc123 6y ago
      No one waits days to buy/sell stocks. Average execution time with the top brokers is a fraction of second. https://www.brokerage-review.com/investing-firm/broker-trade-execution-time-and-quality.aspx https://www.brokerage-review.com/investing-firm/broker-trade...

Ir0nMan 6y ago

They should have just been honest about the situation from the start: "We were caught without enough capital to settle all your trades, we are sorry and will do better next time". Instead they made it seem like they were protecting traders and doing them a favor. They didn't have enough cash on hand to settle trades and meet the capital requirements. They messed up on that front and are in the process of fixing that with additional investment from their wealthy shareholders. It may be too late however as everyone I know that did trade on RH is now in the process of migrating to another more established brokerage.