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>I have no idea how necessary their actions were It was financially unavoidable for Robinhood because they didn't have the _extra_ billions$ in collateral depo

by jasode 4y ago

>I have no idea how necessary their actions were It was financially unavoidable for Robinhood because they didn't have the _extra_ billions$ in collateral deposited at the clearinghouse to back up their customers' trades (e.g. GME). Various stories about it having to raise extra billions in an emergency: https://www.google.com/search?q=robinhood+emergency+raise+billions https://www.google.com/search?q=robinhood+emergency+raise+bi... But retail traders (not the professional traders like George Soros) don't understand that the "Robinhood smartphone app" is a leaky abstraction over final trade settlement at traditional clearing houses. The real-world aspect that "leaked out" was that Robinhood didn't have enough billions in cash. So the ramifications to the UI/UX (the stuff the smartphone user sees) is that you can't transact GME. All that "trade settlement accounting" is too much complexity for non-professionals to understand so the easier narrative to believe is that Robinhood was part of a conspiracy theory to screw the little guy. Yes, being underfunded made them look bad. **EDIT to add extra link explaining why Robinhood has to post their own collateral to buy stocks on behalf of their customers: https://money.stackexchange.com/questions/136272/why-would-collateral-be-required-to-make-a-stock-purchase https://money.stackexchange.com/questions/136272/why-would-c...

dnadler 4y ago
I don't know that I'd lay the blame at retail traders not being sophisticated enough to understand this. I'd lay the blame with the company that had such poor risk controls that they allowed this to happen in the first place.
- gruez 4y ago
  >I don't know that I'd lay the blame at retail traders not being sophisticated enough to understand this. I'm not sure how you got the impression that the parent comment was laying the blame on the user. I interpreted it as excusing the behavior of robinhood. Blame isn't a zero sum game, it's possible to argue that robinhood is less blameworthy without saying that the retail traders are to blame. >I'd lay the blame with the company that had such poor risk controls that they allowed this to happen in the first place. What risk controls? As per the parent comment, it's an issue with settlement/collateral requirements, and robinhood not being prepared to satisfy them in light of a stock going 10x in a short period of time. I'm not sure how "risk controls" would have helped.
  - rurp 4y ago
    Maybe I'm missing something, but isn't the answer to simply have more collateral? Given that RH was able to raise emergency funds around this time it seems really likely that they could have been better capitalized before the turbulence started, and gotten the money on better terms than an emergency deal. They probably didn't do this because they underestimated the need for it (poor risk models), or simply didn't want to pay the extra cost.
- michaelgrosner2 4y ago
  In a way I sympathize with RH. If they were truthful that they didn't have enough money, they would have had to publicly admit they couldn't cover the purchases, which could have led to a run on them and everyone pulling out of Robinhood at once. In some ways, pulling the buy button was the best option they had. Too bad they didn't account for the fact that it would spawn a thousand conspiracy theories.
  - lovecg 4y ago
    It’s the classic “do you lie or do you cause a stampede” dilemma. Similar to the masks shortage debacle in the early pandemic.
  - cco 4y ago
    I do as well to a degree, in fact those clearing houses turned the absolute _screws_ to Robinhood, increasing the collateral requirements quite above and beyond what is normal. Robinhood was stuck between a rock and a hard place, squeezed from both sides, but unfortunately they chose to stay "silent" and stonewall their users, the wrong move imo. They had an opportunity to rail at the system and cast themselves as the vanguard and champion of their users's rights. They were doing everything they could to cover the collateral obligations, but the big bad clearing houses and various market makers were dead set at dousing a bit of water on the fire. Instead they kept to the line, "There is no liquidity problem", which was a bald faced lie to protect against a run and/or loss of faith as you point out. If there was any lesson to take from GME/meme stocks, "lack of faith" due to poor fundamentals is not a problem haha. Users would have LOVED Robinhood more if they perceived them as helping them fight "the power". But they chose not to and anecdotally any of my friends that were caught up cooled considerably on Robinhood, I don't know a single of my dozen or so acquaintances still using it fearing that Robinhood will fail them when it is critical.
thebean11 4y ago
They had enough money to cover users' trades in securities other than GME, though, right? If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? If I send them a bank transfer for $10k, they should have that money as soon as it clears right? There are many other ways they could have handled it beyond halting buying (and buying only) in an individual stock. The most obvious being just stop letting customers trade with unsettled funds.
- gruez 4y ago
  >they should have that money as soon as it clears right? You'd think so, but no. The brokerages can't use customer funds to do that. They have to front the cost themselves. >We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict...
  - SilasX 4y ago
    FYI to anyone reading: gruez and I had an exchange a while back where I tried to pin down what the collateral is accomplishing and why the customers couldn’t buy even with settled funds. I don’t think it resulted in a satisfactory explanation but it goes over a bunch of the same questions being asked on this story, and I still think it’s useful to help isolate what part doesn’t make sense. https://news.ycombinator.com/item?id=27693578 https://news.ycombinator.com/item?id=27693578
    - deschutes 4y ago
      Here's what I gather from that thread. The bottom line is that the retail trader stays whole in the case the trade fails to clear. If the broker was allowed to use the retail trader's money for collateral it would either not really be collateral or it would be at risk of being forfeit. You can't have it both ways.
      - 4y ago
thehoff 4y ago
I forget, weren't there others that did the same? Were they also in that same boat (not enough funds on hand to cover trades)?
- dmoy 4y ago
  Yes. Some other brokers decided paying the premium to cover gme trades for the short term wasn't worth it, so they cut it off. To varying degrees Schwab and TDA (which was already or was about to be bought by Schwab?) both put some limits on, like options or something. Some other brokers did not (Fidelity I think?)
rurp 4y ago
I don't know, not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement, it's the normal way the system works. RH failed to adequitely plan for a surge in activity, which seems like an odd thing to blame retail trader ignorance on.
- paulgb 4y ago
  > normal operations But that's the thing, a bunch of their userbase aping into one stock isn't (or rather, wasn't) normal operations. It's the financial markets equivalent of jumping in an elevator.
  - j-bos 4y ago
    Can't help but say, elevator's are designed to handle jumping, even many people jumping.
    - paulgb 4y ago
      There's a good chance you'd trigger the failsafe though, right?
      - gruez 4y ago
        Specifically a failsafe that temporarily halts the operation of the elevator ;)
    - Dma54rhs 4y ago
      They gave safety modes as well even things get out of ordinary.
- gruez 4y ago
  > I don't know, not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement, it's the normal way the system works. Yeah, but the high volume of people buying a specific stock, and that stock being exceedingly volatile (which meant higher collateral requirements) was unknown.
8jy89hui 4y ago
The problem isn't that they blocked the trades but rather the lack of transparency surrounding it. Robinhood took multiple days to put out a comprehensive explanation of the event. They have a user-alert system. They easily could have expressed apologies at the time instead of begging for forgiveness later.
dangerlibrary 4y ago
"Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell. It wasn't a symmetric freeze - it was a deliberate action that could only have one outcome on the stock price. It doesn't matter what the reason is - underfunded collateral or otherwise. The experience they provided to their customers was "you can only sell this stock, nobody can buy it." That's not their customers' fault. It just isn't. Also, not for nothing, I don't think that many of the larger retail traders in e.g. /r/superstonk are as confused about clearing houses' role as you believe them to be.
- dragontamer 4y ago
  > "Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell. It wasn't a symmetric freeze - it was a deliberate action that could only have one outcome on the stock price. Because Robinhood didn't have enough margin to keep buying GME. But if you sold GME, that reduced the margin Robinhood had to keep. ------- In other words: Robinhood has no more money to buy GME on behalf of its customers. It could sell however, because selling unwound Robinhood's GME position. Robinhood (and Robinhood's partners) are "on the hook" for all GME for the 2-days in the T-2 transaction period of modern US trading law. Trades take 2 days to take place, so somebody needs to be "the risky bagholder" whenever a stock's price changes dramatically. Robinhood only had enough money to support X amount of buys. When that money ran out, Robinhood was unable to buy, and could only sell GME. Of course, this only happened for 2 days as the stocks / money exchanged hands. But 2 days is apparently an eternity and none of these stock buyers were buying GME for the long term, just for the hype of it all. So it was all over by the time Robinhood was able to buy again.
  - dangerlibrary 4y ago
    I'm not confused why they did what they did. I understand the situation they were in. I'm saying they shouldn't have done it, and that there is an obvious conflict of interest when there's a short squeeze on hedge funds going on, and Robin Hood's paying customers are hedge funds. Stock freezes happen. They are, all things considered, fairly routine affairs. This was not a stock freeze - it was a company that got out over its skis, ran out of money, and screwed their users to ~unfuck the situation~ unwind their position.
itronitron 4y ago
Doesn't the customers' money in their account provide the collateral for the trade?
gm3dmo 4y ago
> so the easier narrative to believe is that Robinhood was part of a conspiracy theory to screw the little guy. Do Robinhood have big guys as customers? Their name suggests they should serve the little guy. If they cannot do that, then there is no reason for little guys to use them.
- Fomite 4y ago
  They market themselves as helping and serving the little guy, because of their commission-free trades. As with most things that are free, one needs to realize that if you're not the customer, you're the product. Robinhood makes its money on the interest in customer's accounts, margin lending, and selling trade data to high frequency traders. Only one of those is "little guy" neutral - margin lending is extremely dangerous for inexperienced investors, and HFTs aren't the little guy.
  - kasey_junk 4y ago
    Nitpick. They aren’t selling trade data to high frequency traders, they are selling the right to trade with you to high frequency traders. Payment for order flow is the term of art if you want to learn more.
HideousKojima 4y ago
The real issue to me is that Robinhood said they were halting GME trading to "protect users" or something along those lines. The CEO of one of their direct competitors, Webull, came out and was honest with people, and straight up told them that the clearinghouses raised collateral requirements to 100% for GME trades. Not sure how Webull's revenue did in comparison, but I'm hoping their policy of being honest was better for them than Robinhood's lame PR lies.
xiphias2 4y ago
It had nothing to do with retail traders being dumb: the CEO was interviewed and he didn't explain that the clearing houses needed more deposit. He could have published all the inner working details so that retail investors can review them, but he didn't do it. Robinhood should either fullfill the abstraction, or be clear about when and how the abstraction breaks down.

by jasode 4y ago

dnadler 4y ago

I don't know that I'd lay the blame at retail traders not being sophisticated enough to understand this. I'd lay the blame with the company that had such poor risk controls that they allowed this to happen in the first place.

gruez 4y ago
>I don't know that I'd lay the blame at retail traders not being sophisticated enough to understand this. I'm not sure how you got the impression that the parent comment was laying the blame on the user. I interpreted it as excusing the behavior of robinhood. Blame isn't a zero sum game, it's possible to argue that robinhood is less blameworthy without saying that the retail traders are to blame. >I'd lay the blame with the company that had such poor risk controls that they allowed this to happen in the first place. What risk controls? As per the parent comment, it's an issue with settlement/collateral requirements, and robinhood not being prepared to satisfy them in light of a stock going 10x in a short period of time. I'm not sure how "risk controls" would have helped.
- rurp 4y ago
  Maybe I'm missing something, but isn't the answer to simply have more collateral? Given that RH was able to raise emergency funds around this time it seems really likely that they could have been better capitalized before the turbulence started, and gotten the money on better terms than an emergency deal. They probably didn't do this because they underestimated the need for it (poor risk models), or simply didn't want to pay the extra cost.
michaelgrosner2 4y ago
In a way I sympathize with RH. If they were truthful that they didn't have enough money, they would have had to publicly admit they couldn't cover the purchases, which could have led to a run on them and everyone pulling out of Robinhood at once. In some ways, pulling the buy button was the best option they had. Too bad they didn't account for the fact that it would spawn a thousand conspiracy theories.
- lovecg 4y ago
  It’s the classic “do you lie or do you cause a stampede” dilemma. Similar to the masks shortage debacle in the early pandemic.
- cco 4y ago
  I do as well to a degree, in fact those clearing houses turned the absolute _screws_ to Robinhood, increasing the collateral requirements quite above and beyond what is normal. Robinhood was stuck between a rock and a hard place, squeezed from both sides, but unfortunately they chose to stay "silent" and stonewall their users, the wrong move imo. They had an opportunity to rail at the system and cast themselves as the vanguard and champion of their users's rights. They were doing everything they could to cover the collateral obligations, but the big bad clearing houses and various market makers were dead set at dousing a bit of water on the fire. Instead they kept to the line, "There is no liquidity problem", which was a bald faced lie to protect against a run and/or loss of faith as you point out. If there was any lesson to take from GME/meme stocks, "lack of faith" due to poor fundamentals is not a problem haha. Users would have LOVED Robinhood more if they perceived them as helping them fight "the power". But they chose not to and anecdotally any of my friends that were caught up cooled considerably on Robinhood, I don't know a single of my dozen or so acquaintances still using it fearing that Robinhood will fail them when it is critical.

thebean11 4y ago

They had enough money to cover users' trades in securities other than GME, though, right? If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? If I send them a bank transfer for $10k, they should have that money as soon as it clears right? There are many other ways they could have handled it beyond halting buying (and buying only) in an individual stock. The most obvious being just stop letting customers trade with unsettled funds.

gruez 4y ago
>they should have that money as soon as it clears right? You'd think so, but no. The brokerages can't use customer funds to do that. They have to front the cost themselves. >We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict...
- SilasX 4y ago
  FYI to anyone reading: gruez and I had an exchange a while back where I tried to pin down what the collateral is accomplishing and why the customers couldn’t buy even with settled funds. I don’t think it resulted in a satisfactory explanation but it goes over a bunch of the same questions being asked on this story, and I still think it’s useful to help isolate what part doesn’t make sense. https://news.ycombinator.com/item?id=27693578 https://news.ycombinator.com/item?id=27693578
  - deschutes 4y ago
    Here's what I gather from that thread. The bottom line is that the retail trader stays whole in the case the trade fails to clear. If the broker was allowed to use the retail trader's money for collateral it would either not really be collateral or it would be at risk of being forfeit. You can't have it both ways.
    - 4y ago

thehoff 4y ago

I forget, weren't there others that did the same? Were they also in that same boat (not enough funds on hand to cover trades)?

dmoy 4y ago
Yes. Some other brokers decided paying the premium to cover gme trades for the short term wasn't worth it, so they cut it off. To varying degrees Schwab and TDA (which was already or was about to be bought by Schwab?) both put some limits on, like options or something. Some other brokers did not (Fidelity I think?)

rurp 4y ago

I don't know, not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement, it's the normal way the system works. RH failed to adequitely plan for a surge in activity, which seems like an odd thing to blame retail trader ignorance on.

paulgb 4y ago
> normal operations But that's the thing, a bunch of their userbase aping into one stock isn't (or rather, wasn't) normal operations. It's the financial markets equivalent of jumping in an elevator.
- j-bos 4y ago
  Can't help but say, elevator's are designed to handle jumping, even many people jumping.
  - paulgb 4y ago
    There's a good chance you'd trigger the failsafe though, right?
    - gruez 4y ago
      Specifically a failsafe that temporarily halts the operation of the elevator ;)
  - Dma54rhs 4y ago
    They gave safety modes as well even things get out of ordinary.
gruez 4y ago
> I don't know, not having enough collateral to fund normal operations seems like a failure on the company's part to me. It's not like the collateral was an unknown requirement, it's the normal way the system works. Yeah, but the high volume of people buying a specific stock, and that stock being exceedingly volatile (which meant higher collateral requirements) was unknown.

8jy89hui 4y ago

The problem isn't that they blocked the trades but rather the lack of transparency surrounding it. Robinhood took multiple days to put out a comprehensive explanation of the event. They have a user-alert system. They easily could have expressed apologies at the time instead of begging for forgiveness later.

dangerlibrary 4y ago

"Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell. It wasn't a symmetric freeze - it was a deliberate action that could only have one outcome on the stock price. It doesn't matter what the reason is - underfunded collateral or otherwise. The experience they provided to their customers was "you can only sell this stock, nobody can buy it." That's not their customers' fault. It just isn't. Also, not for nothing, I don't think that many of the larger retail traders in e.g. /r/superstonk are as confused about clearing houses' role as you believe them to be.

dragontamer 4y ago
> "Not being able to transact GME" is one thing, but they disabled the ability to buy, and kept the ability to sell. It wasn't a symmetric freeze - it was a deliberate action that could only have one outcome on the stock price. Because Robinhood didn't have enough margin to keep buying GME. But if you sold GME, that reduced the margin Robinhood had to keep. ------- In other words: Robinhood has no more money to buy GME on behalf of its customers. It could sell however, because selling unwound Robinhood's GME position. Robinhood (and Robinhood's partners) are "on the hook" for all GME for the 2-days in the T-2 transaction period of modern US trading law. Trades take 2 days to take place, so somebody needs to be "the risky bagholder" whenever a stock's price changes dramatically. Robinhood only had enough money to support X amount of buys. When that money ran out, Robinhood was unable to buy, and could only sell GME. Of course, this only happened for 2 days as the stocks / money exchanged hands. But 2 days is apparently an eternity and none of these stock buyers were buying GME for the long term, just for the hype of it all. So it was all over by the time Robinhood was able to buy again.
- dangerlibrary 4y ago
  I'm not confused why they did what they did. I understand the situation they were in. I'm saying they shouldn't have done it, and that there is an obvious conflict of interest when there's a short squeeze on hedge funds going on, and Robin Hood's paying customers are hedge funds. Stock freezes happen. They are, all things considered, fairly routine affairs. This was not a stock freeze - it was a company that got out over its skis, ran out of money, and screwed their users to ~unfuck the situation~ unwind their position.

itronitron 4y ago

Doesn't the customers' money in their account provide the collateral for the trade?

gm3dmo 4y ago

> so the easier narrative to believe is that Robinhood was part of a conspiracy theory to screw the little guy. Do Robinhood have big guys as customers? Their name suggests they should serve the little guy. If they cannot do that, then there is no reason for little guys to use them.

Fomite 4y ago
They market themselves as helping and serving the little guy, because of their commission-free trades. As with most things that are free, one needs to realize that if you're not the customer, you're the product. Robinhood makes its money on the interest in customer's accounts, margin lending, and selling trade data to high frequency traders. Only one of those is "little guy" neutral - margin lending is extremely dangerous for inexperienced investors, and HFTs aren't the little guy.
- kasey_junk 4y ago
  Nitpick. They aren’t selling trade data to high frequency traders, they are selling the right to trade with you to high frequency traders. Payment for order flow is the term of art if you want to learn more.

HideousKojima 4y ago

The real issue to me is that Robinhood said they were halting GME trading to "protect users" or something along those lines. The CEO of one of their direct competitors, Webull, came out and was honest with people, and straight up told them that the clearinghouses raised collateral requirements to 100% for GME trades. Not sure how Webull's revenue did in comparison, but I'm hoping their policy of being honest was better for them than Robinhood's lame PR lies.

xiphias2 4y ago

It had nothing to do with retail traders being dumb: the CEO was interviewed and he didn't explain that the clearing houses needed more deposit. He could have published all the inner working details so that retail investors can review them, but he didn't do it. Robinhood should either fullfill the abstraction, or be clear about when and how the abstraction breaks down.