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The simple issue that I saw with RH is that they restricted the ability to buy stocks like GME but not the ability to sell. It’s one thing to freeze the stock i

The simple issue that I saw with RH is that they restricted the ability to buy stocks like GME but not the ability to sell. It’s one thing to freeze the stock in place. It’s an entirely different thing to basically create a situation where your actions drive the price down while only letting investors sell. I will be honest I don’t entirely grasp the situation, but this seems to me like it was not just a bad PR situation but rather that they actually did something wrong.

astrange 6y ago
They didn't do anything wrong, they are not allowed to restrict sales, and they were forced to restrict buys because you can't get $3 billion collateral overnight.
- IgorPartola 6y ago
  Then why are they in this business if they don’t have the collateral? If I have the money in my RH account to buy the stock, why can’t I buy it? I understand restricting buying on margin because obviously that’s affected by volatility, but if I am bringing cash to a transaction, why is it suddenly restricted? I don’t really have a horse in this race, I am just trying to understand how it’s ok for them to put their thumb on the scale in this way and then say that they didn’t have enough collateral and someone that is retail investors’ problem.
  - astrange 6y ago
    > Then why are they in this business if they don’t have the collateral? The grocery store doesn't deserve to go out of business if they run out of paper towels sometimes. > but if I am bringing cash to a transaction, why is it suddenly restricted? They can't use your cash as collateral due to preexisting rules (part of new regulations after 2008). They have to use their own, and in this case it wasn't infinite.
    - IgorPartola 6y ago
      They aren’t a grocery store. If they were out of GME stock to buy nobody would hold it against them. That wasn’t the case. I clearly don’t understand the regulations around this. It seems to me that when stock is volatile is exactly when I should be buying and selling and if my broker can’t make that happen it’s a problem, no? And it’s also a problem that their inability to trade that stock affects the price. So what is the correct solution here?
      - astrange 6y ago
        They effectively were "out of GME stock". They usually have to put up 10% (or something) per share collateral with DTCC to send out more buys, but the volatility meant that it went up to 100% collateral, so they couldn't afford to allow purchases. This happens based on a formula where one of the factors is GME being the #1 stock being purchased that day on RH. > It seems to me that when stock is volatile is exactly when I should be buying and selling and if my broker can’t make that happen it’s a problem, no? If a stock is volatile you should not be buying it, that's how you lose money. The people who profit are market makers like RH's Citadel, who get paid on every trade. > And it’s also a problem that their inability to trade that stock affects the price. So what is the correct solution here? Technological improvements like the one RH's CEO wrote this article about. Btw, for reasons I've forgotten RH's collateral issues got even worse as the price went down again - if it kept going up it'd actually be more possible for them to continue providing buys.
        IgorPartola 6y ago
        Ok so they essentially couldn’t trade outside their own system? Or are trades inside their own platform still subject to clearing through the clearing house?
        astrange 6y ago
        I think they could have traded within their own platform (not 100% sure), but customer interest in buying was so high that they weren't able to fill trades that way. Other brokers had more sales and that's why they didn't have to restrict buys as hard, although they did still restrict them.
- totalZero 6y ago
  > you can't get $3 billion collateral overnight. Tell that to Melvin Capital. https://www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capital-management-11611604340 https://www.wsj.com/articles/citadel-point72-to-invest-2-75-...
tptacek 6y ago
Legality aside, imagine being an RH customer with a $300/shr position in GME locked in. Look where the stock is now, and where it's heading.
- IgorPartola 6y ago
  Which is why they shouldn’t have restricted it at all. Volatility is the name of the game. If they can only trade equities with predictable prices they are probably in the wrong business. And where the price is now is arguably the direct result of their actions. The price would be higher if they didn’t restrict buys while allowing hedge funds to gobble up the panicked sells from retail investors. Judging by the sentiment on WSB it seems that this is far from over. Hedge funds have overshorted several stocks and those guys have figured out that if they simply buy up a large portion of the available stock they can name their price when the hedge funds need to buy to cover the shorts. It is of course impossible to quantify but casually looking at the posts, nobody is talking about selling GME at all, and every dip in price just means more retail investors can afford to buy into this. It’s a bubble for sure but it seems a lot of the users there are mostly interested in using it as a weapon against hedge funds more so than making money off it.
  - tptacek 6y ago
    They had no choice but to restrict buys. They're subject to clearing collateral requirements based in large part on stock volatility. People keep saying RH should have just left it all alone, but if they had, they'd have been insolvent.
    - IgorPartola 6y ago
      Ok but the idea that you can’t buy stock at a time when it is most advantageous to buy it seems like a flaw in the system. So what is the solution then?
      - tptacek 6y ago
        Using brokerages that are sufficiently capitalized to clear the trades you want to make. You might have to pay fees to do that. Having other people assume credit risks on your behalf usually costs some money.
totalZero 6y ago
The reason that I agree with you is that Robinhood's actions spooked buyers, and long-holders who are Robinhood customers lost money as a result...not to mention allowing covering shorts to front-run the retail demand.

astrange 6y ago

They didn't do anything wrong, they are not allowed to restrict sales, and they were forced to restrict buys because you can't get $3 billion collateral overnight.

IgorPartola 6y ago
Then why are they in this business if they don’t have the collateral? If I have the money in my RH account to buy the stock, why can’t I buy it? I understand restricting buying on margin because obviously that’s affected by volatility, but if I am bringing cash to a transaction, why is it suddenly restricted? I don’t really have a horse in this race, I am just trying to understand how it’s ok for them to put their thumb on the scale in this way and then say that they didn’t have enough collateral and someone that is retail investors’ problem.
- astrange 6y ago
  > Then why are they in this business if they don’t have the collateral? The grocery store doesn't deserve to go out of business if they run out of paper towels sometimes. > but if I am bringing cash to a transaction, why is it suddenly restricted? They can't use your cash as collateral due to preexisting rules (part of new regulations after 2008). They have to use their own, and in this case it wasn't infinite.
  - IgorPartola 6y ago
    They aren’t a grocery store. If they were out of GME stock to buy nobody would hold it against them. That wasn’t the case. I clearly don’t understand the regulations around this. It seems to me that when stock is volatile is exactly when I should be buying and selling and if my broker can’t make that happen it’s a problem, no? And it’s also a problem that their inability to trade that stock affects the price. So what is the correct solution here?
    - astrange 6y ago
      They effectively were "out of GME stock". They usually have to put up 10% (or something) per share collateral with DTCC to send out more buys, but the volatility meant that it went up to 100% collateral, so they couldn't afford to allow purchases. This happens based on a formula where one of the factors is GME being the #1 stock being purchased that day on RH. > It seems to me that when stock is volatile is exactly when I should be buying and selling and if my broker can’t make that happen it’s a problem, no? If a stock is volatile you should not be buying it, that's how you lose money. The people who profit are market makers like RH's Citadel, who get paid on every trade. > And it’s also a problem that their inability to trade that stock affects the price. So what is the correct solution here? Technological improvements like the one RH's CEO wrote this article about. Btw, for reasons I've forgotten RH's collateral issues got even worse as the price went down again - if it kept going up it'd actually be more possible for them to continue providing buys.
      - IgorPartola 6y ago
        Ok so they essentially couldn’t trade outside their own system? Or are trades inside their own platform still subject to clearing through the clearing house?
        astrange 6y ago
        I think they could have traded within their own platform (not 100% sure), but customer interest in buying was so high that they weren't able to fill trades that way. Other brokers had more sales and that's why they didn't have to restrict buys as hard, although they did still restrict them.
totalZero 6y ago
> you can't get $3 billion collateral overnight. Tell that to Melvin Capital. https://www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capital-management-11611604340 https://www.wsj.com/articles/citadel-point72-to-invest-2-75-...

tptacek 6y ago

Legality aside, imagine being an RH customer with a $300/shr position in GME locked in. Look where the stock is now, and where it's heading.

IgorPartola 6y ago
Which is why they shouldn’t have restricted it at all. Volatility is the name of the game. If they can only trade equities with predictable prices they are probably in the wrong business. And where the price is now is arguably the direct result of their actions. The price would be higher if they didn’t restrict buys while allowing hedge funds to gobble up the panicked sells from retail investors. Judging by the sentiment on WSB it seems that this is far from over. Hedge funds have overshorted several stocks and those guys have figured out that if they simply buy up a large portion of the available stock they can name their price when the hedge funds need to buy to cover the shorts. It is of course impossible to quantify but casually looking at the posts, nobody is talking about selling GME at all, and every dip in price just means more retail investors can afford to buy into this. It’s a bubble for sure but it seems a lot of the users there are mostly interested in using it as a weapon against hedge funds more so than making money off it.
- tptacek 6y ago
  They had no choice but to restrict buys. They're subject to clearing collateral requirements based in large part on stock volatility. People keep saying RH should have just left it all alone, but if they had, they'd have been insolvent.
  - IgorPartola 6y ago
    Ok but the idea that you can’t buy stock at a time when it is most advantageous to buy it seems like a flaw in the system. So what is the solution then?
    - tptacek 6y ago
      Using brokerages that are sufficiently capitalized to clear the trades you want to make. You might have to pay fees to do that. Having other people assume credit risks on your behalf usually costs some money.

totalZero 6y ago

The reason that I agree with you is that Robinhood's actions spooked buyers, and long-holders who are Robinhood customers lost money as a result...not to mention allowing covering shorts to front-run the retail demand.