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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 implica

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.
    - SilasX 4y ago
      But that wouldn’t make sense as being a constraint that the Robinhood’s upstream counterparties would demand, since the collateral is purportedly to protect them. No one has ever argued this point in terms of “oh we just wanted to make sure no one took your money without giving shares”, or, if they did, they are really bad at communication. Edit: note that this other authoritative explanation claims the failure mode is RH holding the bag for a client not depositing funds as promised.
      - deschutes 4y ago
        It makes perfect sense for a regulation that intends to protect the retail customer's interests. I suspect Robinhood would put customer money up for collateral if they were allowed to do so.
        SilasX 4y ago
        What is that responding to? The problem is the lack of a consistent threat model for whom you're protecting and what you're protecting them from. Half the time it's "the consumer could reneg on the purchase" and half the time it's "the shares could be stoken from the consumer". And 100% of the time, the super-confident, I-get-this-and-you-don't explainer doesn't realize the inconsistency.
        deschutes 4y ago
        I'm not sure what you're driving at. The sibling clearly outlines a scenario where the collateral is lost. But it almost doesn't matter so long as you assume the clearinghouse isn't some vestigial intermediary. I can't answer why customers with cash in hand couldn't directly settle the trade. Maybe most of the time it doesn't matter and it's easier for brokers to have one settlement process. Maybe the industry has come to depend on the delayed settlement in some unrelated way. Maybe it's something that hasn't fully been adopted due to change taking time. Maybe the referenced regulations get in the way of an uncollateralized process.
ketzo 4y ago
> does that have different collateral implications to selling GME to buy GME an hour later? Yes, it does. Robinhood is buying GME for you. They’re buying it on credit (for two days) from a clearinghouse. GME became an extremely volatile asset. That meant that it was much more expensive to buy on credit. Robinhood did not have enough collateral to back up these extremely expensive purchases.
sandworm101 4y ago
>> just stop letting customers trade with unsettled funds. I can think of nothing an app-based brokerage could do that would anger customers more. The entire point of the app is to facilitate quick and easy trading. The job of the app providers is to abstract away all of the backroom accounting. Requiring customers to wait for settlement would cause a riot.
- wonnage 4y ago
  You can't trade with unsettled funds, it's an SEC violation
  - gruez 4y ago
    Only in cash accounts. Margin accounts (which I think all robinhood accounts are?) don't have that limitation.
  - winenbug 4y ago
    Instant deposits are definitely not settled funds from your account -> Robinhood perspective.
  - WoahNoun 4y ago
    RH defaults accounts to margin accounts to support their "instant deposit" feature.
- thebean11 4y ago
  > I can think of nothing an app-based brokerage could do that would anger customers more. Disagree, I think this would have angered customers less than what actually happened..
Majromax 4y ago
> If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? Yes. Stock trades don't settle instantly, and brokers must put up collateral to ensure that parties don't walk away if the price moves against them between the order and the settlement. Thanks to the meme-stock volatility, DTCC (the clearing house) imposed special collateral requirements for Gamestop stock. Also thanks to it being a meme stock, Robinhood was "net long" in its purchases -- its users weren't making offsetting transactions. The overall result was that Robinhood was on the hook for stupidly high (and unexpectedly high) collateral requirements for Gamestop, but most other stocks were business-as-usual. That's also why Robinhood would allow users to close out (sell) Gamestop positions even during the purchase freeze: doing so would reduce Robinhood's collateral requirement. None of this has anything to do with unsettled customer funds. Usually DTCC's operations are invisible to retail investors, so it's a huge surprise when the exceptional happens.
- thebean11 4y ago
  Ah TIL that the requirements would be different per-stock. It still seems to me that Robinhood should be able to fulfill orders for customers who had fully settled funds in the account. If I have money in my account (fresh from my bank account) that money is enough for 100% collateral.
  - winenbug 4y ago
    Assuming that the average meme-stock chaser trades with settled funds, though.
    - thebean11 4y ago
      Right, that's my point. Why stop trading with settled funds, when it was only unsettled funds causing the issue?
  - drexlspivey 4y ago
    They can't use customer funds for collateral to the clearing house, they must use their own funds
justinsaccount 4y ago
> If I sell GME to buy AMZN, does that have different collateral implications Yes. Have you ever heard the word "Volatility" ? AMZN is not going to go from 2500 to 25000 back to 2500 in the span of a week.
WoahNoun 4y ago
The formula for reserve requirements includes volatility as a variable. Before the meme stock frenzy, GME only required <5% of cash collateral before settlement. When volatility surged, this went to close to 100% cash collateral. RH didn't have enough cash.

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.
  - SilasX 4y ago
    But that wouldn’t make sense as being a constraint that the Robinhood’s upstream counterparties would demand, since the collateral is purportedly to protect them. No one has ever argued this point in terms of “oh we just wanted to make sure no one took your money without giving shares”, or, if they did, they are really bad at communication. Edit: note that this other authoritative explanation claims the failure mode is RH holding the bag for a client not depositing funds as promised.
    - deschutes 4y ago
      It makes perfect sense for a regulation that intends to protect the retail customer's interests. I suspect Robinhood would put customer money up for collateral if they were allowed to do so.
      - SilasX 4y ago
        What is that responding to? The problem is the lack of a consistent threat model for whom you're protecting and what you're protecting them from. Half the time it's "the consumer could reneg on the purchase" and half the time it's "the shares could be stoken from the consumer". And 100% of the time, the super-confident, I-get-this-and-you-don't explainer doesn't realize the inconsistency.
        deschutes 4y ago
        I'm not sure what you're driving at. The sibling clearly outlines a scenario where the collateral is lost. But it almost doesn't matter so long as you assume the clearinghouse isn't some vestigial intermediary. I can't answer why customers with cash in hand couldn't directly settle the trade. Maybe most of the time it doesn't matter and it's easier for brokers to have one settlement process. Maybe the industry has come to depend on the delayed settlement in some unrelated way. Maybe it's something that hasn't fully been adopted due to change taking time. Maybe the referenced regulations get in the way of an uncollateralized process.

ketzo 4y ago

> does that have different collateral implications to selling GME to buy GME an hour later? Yes, it does. Robinhood is buying GME for you. They’re buying it on credit (for two days) from a clearinghouse. GME became an extremely volatile asset. That meant that it was much more expensive to buy on credit. Robinhood did not have enough collateral to back up these extremely expensive purchases.

sandworm101 4y ago

>> just stop letting customers trade with unsettled funds. I can think of nothing an app-based brokerage could do that would anger customers more. The entire point of the app is to facilitate quick and easy trading. The job of the app providers is to abstract away all of the backroom accounting. Requiring customers to wait for settlement would cause a riot.

wonnage 4y ago
You can't trade with unsettled funds, it's an SEC violation
- gruez 4y ago
  Only in cash accounts. Margin accounts (which I think all robinhood accounts are?) don't have that limitation.
- winenbug 4y ago
  Instant deposits are definitely not settled funds from your account -> Robinhood perspective.
- WoahNoun 4y ago
  RH defaults accounts to margin accounts to support their "instant deposit" feature.
thebean11 4y ago
> I can think of nothing an app-based brokerage could do that would anger customers more. Disagree, I think this would have angered customers less than what actually happened..

Majromax 4y ago

> If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? Yes. Stock trades don't settle instantly, and brokers must put up collateral to ensure that parties don't walk away if the price moves against them between the order and the settlement. Thanks to the meme-stock volatility, DTCC (the clearing house) imposed special collateral requirements for Gamestop stock. Also thanks to it being a meme stock, Robinhood was "net long" in its purchases -- its users weren't making offsetting transactions. The overall result was that Robinhood was on the hook for stupidly high (and unexpectedly high) collateral requirements for Gamestop, but most other stocks were business-as-usual. That's also why Robinhood would allow users to close out (sell) Gamestop positions even during the purchase freeze: doing so would reduce Robinhood's collateral requirement. None of this has anything to do with unsettled customer funds. Usually DTCC's operations are invisible to retail investors, so it's a huge surprise when the exceptional happens.

thebean11 4y ago
Ah TIL that the requirements would be different per-stock. It still seems to me that Robinhood should be able to fulfill orders for customers who had fully settled funds in the account. If I have money in my account (fresh from my bank account) that money is enough for 100% collateral.
- winenbug 4y ago
  Assuming that the average meme-stock chaser trades with settled funds, though.
  - thebean11 4y ago
    Right, that's my point. Why stop trading with settled funds, when it was only unsettled funds causing the issue?
- drexlspivey 4y ago
  They can't use customer funds for collateral to the clearing house, they must use their own funds

justinsaccount 4y ago

> If I sell GME to buy AMZN, does that have different collateral implications Yes. Have you ever heard the word "Volatility" ? AMZN is not going to go from 2500 to 25000 back to 2500 in the span of a week.

WoahNoun 4y ago

The formula for reserve requirements includes volatility as a variable. Before the meme stock frenzy, GME only required <5% of cash collateral before settlement. When volatility surged, this went to close to 100% cash collateral. RH didn't have enough cash.