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Robinhood was able to raise 1 billion dollars in capital within a very short time frame to cover any later requirements. It might be a stretch to say that it wa

Robinhood was able to raise 1 billion dollars in capital within a very short time frame to cover any later requirements. It might be a stretch to say that it was easy, but since it is being used for collateral (very liquid), they would hypothetically have an easier proposition to raise that capital than if they were using it to grow their business. Source: https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea565e4 https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea56... Excerpt: "Robinhood, the online brokerage at the centre of wild trading in equities this week, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position after a turbulent four days. The company has drawn down at least several hundred million dollars via a credit facility with banks led by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the move."

tptacek 5y ago
They raised $1B against a $3B collateral call. Posted collateral also isn't "very liquid"; the whole point of that money is that if shit goes sideways --- and everything was going sideways at Robinhood --- that money will get spent making counterparties whole. Robinhood couldn't just give the money back to its lenders.
- oakwhiz 5y ago
  I maintain that collateral is very liquid as it increases and decreases every single day and is a product of risk and volume. Collateral has two "outs" where one is simply reducing risk or waiting for risk to go away, and the other is to reduce the volume of the "hot" positions or liquidate those positions. Exchange-traded securities are categorically considered to be liquid, by themselves. Perhaps Robinhood's huge mistakes have made it more difficult for them to post collateral than if they had acted more trustworthy, but that doesn't change the situation surrounding collateral itself. The $3B collateral call was withdrawn just as quickly as it had been made - even better, since they raised $1B against what seems to be no collateral call. Robinhood actually had two ways of resolving the situation. One was to admit fault and either liquidate the underlying securities or have a portion of their clearing position liquidated, which would have resulted in the ability to return collateral and to be on the hook for the losses they caused for their customers. The other, was to restrict purchases on securities that either were thought to contribute to the VaR collateral assessment, or for which Robinhood's bookkeeping did not match between investor accounts and actual cash/security holdings. As it turns out, neither of these options was necessary according to the facts at hand - Robinhood's collateral call was withdrawn prior to Robinhood taking any action at all, and according to media sources in a Fortune article, no negotiation took place between the NSCC and Robinhood. So there must be another reason that Robinhood's books were not balanced. However, Robinhood used the second option anyway. This is the circumstance which has led to the WSB "conspiracy" theory that you discounted in other comments, which explores the idea that Robinhood is somehow involved, either willingly or not, in some type of market manipulation in conjunction with their payment-for-order-flow market maker, Citadel, who fills basically all of their orders for them. I'm not sure that "conspiracy" is the word to use when fines, penalties, and settlements for breaking securities law are commonplace among financial institutions, but that is just my opinion.
  - tptacek 5y ago
    You've basically restated the argument you made earlier, and now added further innuendo like "payment-for-order-flow market maker", as if there was another kind (even IB uses PFOF execution services for their normal accounts).
    - oakwhiz 5y ago
      Yes, and...? It seems worth clarifying. I am concerned that you are perceiving my comments as being fastidious or conspiratorial in attitude, that is definitely not my intention and I apologize if it sounded rude, I am just concerned with the details on "how it all went down" so-to-speak. To address the matter of payment-for-order-flow, it's a practice that is currently banned in countries like Australia, Canada, and the UK, largely due to conflicts of interest. There is actually another way of brokering which these countries use instead - it's simply paying a fee to execute the trades, old-fashioned and usually minus the confetti. That said, market makers are often given a good chunk of direct order flow anyway, which tends to move the flow off-exchange even if they are not paying for the privilege of obtaining order flow.
      - tptacek 5y ago
        I am definitely not perceiving your comments as fastidious.
gruez 5y ago
>Robinhood was able to raise 1 billion dollars in capital within a very short time frame to cover any later requirements What's the implication here, that "they were able to raise capital within a very short time frame so they didn't have to restrict trading"? Of course we know after the fact that they were able to secure funding. What if by 1pm they ran out of money and didn't know whether the funding would be secured or not? Do they continue allow trades and hope that the funding will come through? Do they issue a hasty statement and halt all trading?
- oakwhiz 5y ago
  The implication here is that there were not any "extenuating circumstances," and by that I mean that the circumstances were artificial and were the result of a direct action made by Robinhood as a result of their own poor business practices. It is not an uncommon occurrence for a retail broker to deal in high-risk securities on their clients behalf, and for those high-risk securities to vary wildly in price and liquidity. Collateral requirements are posted to all clearing members every morning during pre-market hours, and they do increase and decrease with respect to the DTC/NSCC VaR (Value-at-Risk) models. Brokers and clearing institutions maintain cash reserves and additional avenues of funding for this very purpose and we can see that Robinhood had no trouble with that aspect of their business - just like every other broker. Likewise, it is not unreasonable for investors to expect that a broker would actually possess the shares that the investor has purchased, and it is expected that the broker would make a timely effort to procure actual shares after acknowledging that an order was filled. It seems that perhaps this expectation was broken by Robinhood's bizarre book-keeping practices. The "extenuating circumstances" are simply a result of Robinhood deciding to play a game of brinkmanship, and rather than owning up to the problem and paying out of pocket for their mistake, they decided to hurt their own customers. EDIT: I'd like to cite some articles which hopefully provide insight into Robinhood scrambling to locate shares on transfers to other brokers, and the unusual amount of reported fails-to-deliver that immediately occurred at the time that Robinhood took action. https://www.cnbc.com/2021/02/05/ftc-sees-surge-in-robinhood-complaints-as-clients-claim-they-cant-leave-the-app.html https://www.cnbc.com/2021/02/05/ftc-sees-surge-in-robinhood-... https://www.bloomberg.com/news/articles/2021-02-17/sec-data-show-359-million-of-gamestop-shares-failed-to-deliver https://www.bloomberg.com/news/articles/2021-02-17/sec-data-...

tptacek 5y ago

They raised $1B against a $3B collateral call. Posted collateral also isn't "very liquid"; the whole point of that money is that if shit goes sideways --- and everything was going sideways at Robinhood --- that money will get spent making counterparties whole. Robinhood couldn't just give the money back to its lenders.

oakwhiz 5y ago
I maintain that collateral is very liquid as it increases and decreases every single day and is a product of risk and volume. Collateral has two "outs" where one is simply reducing risk or waiting for risk to go away, and the other is to reduce the volume of the "hot" positions or liquidate those positions. Exchange-traded securities are categorically considered to be liquid, by themselves. Perhaps Robinhood's huge mistakes have made it more difficult for them to post collateral than if they had acted more trustworthy, but that doesn't change the situation surrounding collateral itself. The $3B collateral call was withdrawn just as quickly as it had been made - even better, since they raised $1B against what seems to be no collateral call. Robinhood actually had two ways of resolving the situation. One was to admit fault and either liquidate the underlying securities or have a portion of their clearing position liquidated, which would have resulted in the ability to return collateral and to be on the hook for the losses they caused for their customers. The other, was to restrict purchases on securities that either were thought to contribute to the VaR collateral assessment, or for which Robinhood's bookkeeping did not match between investor accounts and actual cash/security holdings. As it turns out, neither of these options was necessary according to the facts at hand - Robinhood's collateral call was withdrawn prior to Robinhood taking any action at all, and according to media sources in a Fortune article, no negotiation took place between the NSCC and Robinhood. So there must be another reason that Robinhood's books were not balanced. However, Robinhood used the second option anyway. This is the circumstance which has led to the WSB "conspiracy" theory that you discounted in other comments, which explores the idea that Robinhood is somehow involved, either willingly or not, in some type of market manipulation in conjunction with their payment-for-order-flow market maker, Citadel, who fills basically all of their orders for them. I'm not sure that "conspiracy" is the word to use when fines, penalties, and settlements for breaking securities law are commonplace among financial institutions, but that is just my opinion.
- tptacek 5y ago
  You've basically restated the argument you made earlier, and now added further innuendo like "payment-for-order-flow market maker", as if there was another kind (even IB uses PFOF execution services for their normal accounts).
  - oakwhiz 5y ago
    Yes, and...? It seems worth clarifying. I am concerned that you are perceiving my comments as being fastidious or conspiratorial in attitude, that is definitely not my intention and I apologize if it sounded rude, I am just concerned with the details on "how it all went down" so-to-speak. To address the matter of payment-for-order-flow, it's a practice that is currently banned in countries like Australia, Canada, and the UK, largely due to conflicts of interest. There is actually another way of brokering which these countries use instead - it's simply paying a fee to execute the trades, old-fashioned and usually minus the confetti. That said, market makers are often given a good chunk of direct order flow anyway, which tends to move the flow off-exchange even if they are not paying for the privilege of obtaining order flow.
    - tptacek 5y ago
      I am definitely not perceiving your comments as fastidious.

gruez 5y ago

>Robinhood was able to raise 1 billion dollars in capital within a very short time frame to cover any later requirements What's the implication here, that "they were able to raise capital within a very short time frame so they didn't have to restrict trading"? Of course we know after the fact that they were able to secure funding. What if by 1pm they ran out of money and didn't know whether the funding would be secured or not? Do they continue allow trades and hope that the funding will come through? Do they issue a hasty statement and halt all trading?

oakwhiz 5y ago
The implication here is that there were not any "extenuating circumstances," and by that I mean that the circumstances were artificial and were the result of a direct action made by Robinhood as a result of their own poor business practices. It is not an uncommon occurrence for a retail broker to deal in high-risk securities on their clients behalf, and for those high-risk securities to vary wildly in price and liquidity. Collateral requirements are posted to all clearing members every morning during pre-market hours, and they do increase and decrease with respect to the DTC/NSCC VaR (Value-at-Risk) models. Brokers and clearing institutions maintain cash reserves and additional avenues of funding for this very purpose and we can see that Robinhood had no trouble with that aspect of their business - just like every other broker. Likewise, it is not unreasonable for investors to expect that a broker would actually possess the shares that the investor has purchased, and it is expected that the broker would make a timely effort to procure actual shares after acknowledging that an order was filled. It seems that perhaps this expectation was broken by Robinhood's bizarre book-keeping practices. The "extenuating circumstances" are simply a result of Robinhood deciding to play a game of brinkmanship, and rather than owning up to the problem and paying out of pocket for their mistake, they decided to hurt their own customers. EDIT: I'd like to cite some articles which hopefully provide insight into Robinhood scrambling to locate shares on transfers to other brokers, and the unusual amount of reported fails-to-deliver that immediately occurred at the time that Robinhood took action. https://www.cnbc.com/2021/02/05/ftc-sees-surge-in-robinhood-complaints-as-clients-claim-they-cant-leave-the-app.html https://www.cnbc.com/2021/02/05/ftc-sees-surge-in-robinhood-... https://www.bloomberg.com/news/articles/2021-02-17/sec-data-show-359-million-of-gamestop-shares-failed-to-deliver https://www.bloomberg.com/news/articles/2021-02-17/sec-data-...