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It sounds like you think that what happened is related to margin accounts. I don't think that is accurate (see the blog post this thread is on). Robinhood doe

It sounds like you think that what happened is related to margin accounts. I don't think that is accurate (see the blog post this thread is on). Robinhood does keep the equivalent of auto insurance, by the way of the deposits they make with the DTC (and probably other measures). So the analogy is that you keep insurance, and you suffer some catastrophic accident due to some crazy driver coming out of nowhere. Are you at fault? But I do agree that they didn't do their job, with respect to PR / communications. And I agree that this blog post seems designed to mitigate the effects of that.

ashtonkem 6y ago
I'm not sure why you're acting like this is just something that came out of the blue and hit RH without any possible warning. They purposefully courted new, low information traders and gamified trading. Even before GME you could find complaints and warnings about how Robinhood was gamifying trading. And now they're surprised that this results in new trader behavior? Come on. To complete the analogy, this is like deciding to go out and do unnecessary driving after midnight on new years eve. Maybe they're not legally at fault if they get hit by a drunk driver, but they sure as hell put themselves at a higher risk of this happening.
- swampthing 6y ago
  Because that is basically what happened. There is a reason why WSB and GME have been in the news. It's because what happened is surprising. Sure, in hindsight, you can identify causes for the phenomenon. But if you rewind back to January 1, I don't think most of us would have predicted this at any level of certainty beyond a theoretical possibility. I agree with you that Robinhood did put itself at higher risk of this happening, but I don't think that means they did something wrong. Just like I don't think most people would blame the innocent driver in your hypothetical. Who, if we were to make the analogy more applicable, might be an Uber driver trying to make some extra cash.
  - ashtonkem 6y ago
    For the record, back when I worked in finance I heard plenty of conversations about margin requirements going up, often forcing desks to liquidate positions that they otherwise wanted to keep. The idea that margin requirements might change is something finance has had to deal with for a very long time, and RH should have been prepared for the possibility. Better still, they should have had the controls in place to cool down the GME trade once it started to spiral, such as reducing the amount of leverage they let their customers have.
    - swampthing 6y ago
      I don't know that it would be accurate to assume that Robinhood was not prepared for the possibility of their deposit requirements changing. I think it's more likely that they were unprepared for the magnitude of changes in a lot of their underlying assumptions. There were 600k downloads of their app on Friday alone, which is roughly 4x the previous daily high water mark, which itself was an anomaly. On top of that, most of those people are signing up to purchase shares in just a very small number of companies. I think there are very, very few businesses that are prepared for a black swan event of a magnitude that Robinhood experienced. I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue. You can say that Robinhood could have anticipated that at some point it may need to back up 100% of the activity of their customers with deposits, given that it is a possibility that is laid out in the DTC rules. But I don't think any brokerage is well-capitalized enough to handle that for every scenario. But I understand that Robinhood has had other problems (reliability, customer support, etc.), and has also gamified stock trading in a way that is probably harmful. I am sympathetic to those criticisms.
      - ashtonkem 6y ago
        > I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue ... given that it is a possibility that is laid out in the DTC rules These two clauses contradict each other. If it's in the rules, it can't be "out of the blue". If anything, the clearing house raising margin requirements in this situation is both expected and desirable behavior. It's the clearing house's job to both prevent RH from getting over-leveraged and to step in and cover in the case RH goes insolvent. And frankly it looks like RH was way over-extended, and that the clearing house was totally right in stepping in to stop them. Who knows how much worse this might have gotten without their interference. > But I don't think any brokerage is well-capitalized enough to handle that for every scenario. Which is why you don't let yourself get into this situation. You'll note that other brokerages did things like raise margin requirements on GME, block margin trading on GME entirely, or stop trading on GME options. These are tools that brokerages have available to them to both cool off the market shift the burden of margin requirements onto their customers. Other brokerages did this specifically to avoid ending up in RH's position, which is why RH had to raise more money and they did not. And they did this even though the bulk of GME trades weren't even on their systems. RH either did not have these controls in place, or they waited far too long to use them

ashtonkem 6y ago

I'm not sure why you're acting like this is just something that came out of the blue and hit RH without any possible warning. They purposefully courted new, low information traders and gamified trading. Even before GME you could find complaints and warnings about how Robinhood was gamifying trading. And now they're surprised that this results in new trader behavior? Come on. To complete the analogy, this is like deciding to go out and do unnecessary driving after midnight on new years eve. Maybe they're not legally at fault if they get hit by a drunk driver, but they sure as hell put themselves at a higher risk of this happening.

swampthing 6y ago
Because that is basically what happened. There is a reason why WSB and GME have been in the news. It's because what happened is surprising. Sure, in hindsight, you can identify causes for the phenomenon. But if you rewind back to January 1, I don't think most of us would have predicted this at any level of certainty beyond a theoretical possibility. I agree with you that Robinhood did put itself at higher risk of this happening, but I don't think that means they did something wrong. Just like I don't think most people would blame the innocent driver in your hypothetical. Who, if we were to make the analogy more applicable, might be an Uber driver trying to make some extra cash.
- ashtonkem 6y ago
  For the record, back when I worked in finance I heard plenty of conversations about margin requirements going up, often forcing desks to liquidate positions that they otherwise wanted to keep. The idea that margin requirements might change is something finance has had to deal with for a very long time, and RH should have been prepared for the possibility. Better still, they should have had the controls in place to cool down the GME trade once it started to spiral, such as reducing the amount of leverage they let their customers have.
  - swampthing 6y ago
    I don't know that it would be accurate to assume that Robinhood was not prepared for the possibility of their deposit requirements changing. I think it's more likely that they were unprepared for the magnitude of changes in a lot of their underlying assumptions. There were 600k downloads of their app on Friday alone, which is roughly 4x the previous daily high water mark, which itself was an anomaly. On top of that, most of those people are signing up to purchase shares in just a very small number of companies. I think there are very, very few businesses that are prepared for a black swan event of a magnitude that Robinhood experienced. I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue. You can say that Robinhood could have anticipated that at some point it may need to back up 100% of the activity of their customers with deposits, given that it is a possibility that is laid out in the DTC rules. But I don't think any brokerage is well-capitalized enough to handle that for every scenario. But I understand that Robinhood has had other problems (reliability, customer support, etc.), and has also gamified stock trading in a way that is probably harmful. I am sympathetic to those criticisms.
    - ashtonkem 6y ago
      > I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue ... given that it is a possibility that is laid out in the DTC rules These two clauses contradict each other. If it's in the rules, it can't be "out of the blue". If anything, the clearing house raising margin requirements in this situation is both expected and desirable behavior. It's the clearing house's job to both prevent RH from getting over-leveraged and to step in and cover in the case RH goes insolvent. And frankly it looks like RH was way over-extended, and that the clearing house was totally right in stepping in to stop them. Who knows how much worse this might have gotten without their interference. > But I don't think any brokerage is well-capitalized enough to handle that for every scenario. Which is why you don't let yourself get into this situation. You'll note that other brokerages did things like raise margin requirements on GME, block margin trading on GME entirely, or stop trading on GME options. These are tools that brokerages have available to them to both cool off the market shift the burden of margin requirements onto their customers. Other brokerages did this specifically to avoid ending up in RH's position, which is why RH had to raise more money and they did not. And they did this even though the bulk of GME trades weren't even on their systems. RH either did not have these controls in place, or they waited far too long to use them