I'm confused. Why is everyone getting mad at Robinhood? Wasn't it the market makers who stopped them from trading GME? And doesn't Robinhood have the right to sell margin stocks bought on margin?
If you read the article at all, it clearly mentions that the traders in question don't believe they bought the shares on margin. Whether or not this is user error, who knows. And Citadel have gone on the record repeatedly stating they did not influence Robinhood's trading halt. The information available makes it seem as though Robinhood were told they needed to deposit more into their DTCC (clearinghouse) accounts to allow trades to continue - essentially, that Robinhood got called on their own margins at the clearinghouse level.
There have been rumors of robinhood simply being buggy for some time before this. Things like orders being processed after being cancelled, orders being processed out of order causing conflicts, orders being executed massively delayed after the client threw an error message. Basically, if their database infrastructure is buggy and unstable, then combined with heavy load, something like this could happen. And notably robinhood does not provide use client side action logs, only server side actions logs on demand.
I think it could have happened, but I very much doubt they ever did it intentionally, and it is practically guaranteed people would claim this happened to them, regardless of if it did actually happen to them.
If they process an order 'late' the price change could swing in their favor and they would end up netting the difference. FXCM got caught for this in FX years ago, skimming fractions of pennies off the trades for millions in profit. I'd be interested to know if those late trades always went in one direction.
I think one way to look at it is that RH based their company off of amassing a huge number of retail customers and selling their deal flow. They then pissed off a huge number of those retail customers with a surprise and un-announced change to their trading rules (no more buying GME) in the middle of those retail customer's massively successful effort to make a bunch of money using their product. Their customers then pretty quickly lost a bunch of money.
Regardless of where the fault lies that seems like a recipe for pissing of a lot of your customers, and from there it seems reasonable that the customers would be pissed at the company who sold them the product (as opposed to one of their vendors/customers).
In that light, and particularly w/ a finance app, it might seem even weirder if their angry customers _weren't_ mad at Robinhood and were willing to accept "it wasn't our fault" for any reason.
Reading between the lines, they ran out of capital to post the required collateral for the trades.
They've been dancing around the subject because they don't want to trigger a bank run, but this is likely why they had to suddenly raise $1 billion and draw down their credit lines yesterday.
It appears they reached a point where they simply couldn't afford to support the buy orders on the volatile stocks any more. They likely had 2 options:
1) Shut down the entire platform until they could raise enough additional capital to post the required collateral. It's difficult to retain users and raise another round if you literally have to turn your service off on the hottest trading day every.
2) Shut down buy orders on the few stocks that were driving the capital requirements over the limit, at least allowing users to continue to sell.
Frankly, I think the narrative that Robinhood users are driving this situation has been greatly exaggerated. A few weeks or months from now, I think we'll learn that the majority of volume came from institutional investors rather than retail users. Redditors may have sparked the situation, but hedge funds are certainly capitalizing on it.
Ok, but if they had banned selling and there was a large price drop anyway (forcing investors to eat a loss, unable to sell), they would have been catastrophically screwed legally.
Robinhood doing anything unilaterally about this sounds and feels extremely sketchy and screams illegal to me (if it isn't it should be). It's one thing if the SEC stops all GME trade coz that would be fair across the board. But Robinhood effectively being able to block trades for retail while institutional investors do whatever screams market manipulation.
a) It's not clear these were margin calls. If they were, absolutely, they were in the right. If these were cash accounts, this would be... bad.
b) The MM's almost certainly didn't force RH to shut down buys. Current speculation is it was likely a combination of pressure from clearing houses and their own internal risk management.
Odds are they didn't have enough capital on hand to deal with settlement given the level of volatility, and if they let more people buy, it would've pushed them over allowable levels.
And note, I say this is speculation because RH has been completely opaque about what happened here. All they say is "we have regulatory requirements", and we're left filling the blanks.
"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment."
This does obliquely point to the issues I mention above, and is enough to unpack what happened here if you have an understanding of the structural mechanics of stock trading. Though it'd be nice if they were a lot more direct in their language, here. If I was a layman investor this'd look like meaningless obfuscation.
But it's certainly (somewhat) better than some of the early interviews and reporting...
This might indicate that, at least for this sort of fintech, "lean" can't be an option: there will need to be some form of deep-pocket backing in order to stop the company from going belly-up due to a short-term credit crunch. Fortunately RH had sufficient funding for that, but it's conveivable that the next time if there's an even bigger collateral call by the clearing houses (or some other issue) they won't be able to cover it-- sort of like Bear Sterns in 2008, which collapsed more because of lack of confidence than actual liabilities, which it could otherwise have weathered, but panic set it, they lacked credit necessary to stay afloat, and were basically liquidated at crazy fire sale prices. (I'm Not saying they didn't have a lot of responsibility in their downfall: they played fast & loose, and when that collapsed it caused a general panic on them as a whole)
> This might indicate that, at least for this sort of fintech, "lean" can't be an option: there will need to be some form of deep-pocket backing in order to stop the company from going belly-up due to a short-term credit crunch.
Honestly, I think this is tough. Building a regulatory regime for a six sigma event is extremely difficult.
That being said, there probably needs to be a better mechanism--maybe a market wide 24 hour circuit breaker plus some sort of emergency credit backstop--to ensure liquidity for these types of events without disadvantaging any particular market participants.
I dunno, I'm making shit up here and don't know what the hell I'm talking about.
Seems complicated though...
Now, I will say, if you ask me, it's about time to start putting in even more short-side controls.
Allowing these massive funds to build gigantic positions with infinite loss potential clearly represents systemic risk, particularly given we've seen over and over and over again that, as much as these institutions are supposed to be "professionals", their risk management is utterly inadequate.
Start with totally banning naked shorts. Increase margin requirements on short positions. Maybe flat out ban shorting over a certain percentage of float. How about limit the amount of short-side risk a firm can hold as a percentage of its total portfolio.
RH is in many ways a victim of a much much larger structural market dysfunction.
> Fortunately RH had sufficient funding for that,
So that I don't agree with.
RH had to completely stop buy-side activity on their platform yesterday and then massively curtailed it today. Not only did they not have sufficient funding to support BAU, they still don't!
Meanwhile, the controls they put in place to allow them to limp along single-handedly produced a massive drop in the price. Then, to add insult to injury, they increased margin requirements and margin called accounts, forcing liquidation at substantially reduced prices, thereby locking in losses for their clients.
My guess is they're buying time, right now, by limiting buy-side volume and dipping into credit lines, until the 1B cash infusion lands on their books, all while preparing for the class action lawsuits and congressional investigations.
Good point, and is actually the thing I have the most problem with here with other institutions but you're right that RH did the same thing: only weathered the storm by a few mechanisms, one of which upended democratic access to the market.
RH probably had a bad choice to make: The clearing houses were demanding more collateral, RH had to figure it out. RH was still wrong, but the fundamental problems were those mechanisms that allowed lack of collateral to discriminatorily disadvantaged on class of investors in favor of others. I doubt that was the deliberate intent when these mechanisms arose, but it sure is the result, and needs to be fixed.
I'm not convinced on the theory of efficient markets & allocation of capital. WSB making decisions knowingly contrary to the underlying finances of a company sort of undermines that theory. Those theories pretty much rely on people making, mostly, fundamentally, financial decisions, even if they're wrong or poorly informed. WSB was making more a philosophical decision (along with some pile on FOMO, sure) and that method of decision making is definitely not covered by the theory of efficient markets.
Though I suppose the GME incident, with the peripheral stocks like AMC, could be viewed as the first round of an iterated prisoner's dilemma. It was a "defection" that worked this time. But, if the institutions impacted and those watching are left to respond on their own instead of through artificial protection, they might very well come up with strategies that would thwart the philosophical decision making of WSB in this situation.
Which is kind of crazy: It looks like their default margin is 100% of your cash balance.
It would be much more transparent to be opt-in & say "Hey, you deposited $1k. If you want, we're willing to loan you an additional $1k." I think more people might refrain from margin trading if it was presented that way. But it would reduce trading volume, and therefore a major revenue source in the form of trading data they sell to market makers, so of course they don't do that.
As it stand though, to my outsider's eyes it makes their theoretical liabilities twice their collateral. Normally that's probably fine, gains & losses on large volumes of divers stockes will even out. But in unique circumstances (um, right now) the collapse of a single stock (or worse, a highly correlated asset class) puts them on the hook for an amount equal to their customers' losses.
Considering their retail clientele, it's probably fair to assume that many of their customers can't (or won't) cover those loses by depositing more cash... hence the suicide a while back.
Ugh, I know. Honestly, I will be more than happy if RH doesn't survive this. Gamifying investing and all but encouraging gambling behaviour, defaulting to allowing trading on margin, and now their behaviour over the past couple of days... there are far better options out there these days.
Robinhood blocked its users from buying or opening new positions in GME. But allowed selling. From the outside, it appears to be a coordinated effort to drive the price down to protect the overgeneralized billionaire hedge owners. The CEO of Robinhood did interviews to 'explain' why they did it, but it was really just a word salad of an explanation.
CORRECTION: "60% of its users owned GME at the time." appears to have been incorrectly reported and since corrected.
60% of RH users owning GME is false (or if they do, it's indirectly through ETF's that they can still sell). This was misreporting and corrected by the original reporter.
Naturally, many longs were in on margin. RH asserted their right under their TOS to margin call without notice. This might be legal, but it looks like mining the retail investors for gold. I think it should NEVER happen. A firm like RH should instead gather its fortitude and fund itself to ride such events out, and ALWAYS give accounts five days to respond to a margin call. To do otherwise is to "undermine market confidence" in the words of the SEC.
Well, they've published a blog post. And got CEO on the news. But what they offered was not an explanation.
The explanation they offered in their blog post:
"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today."
That's not an explanation, that's just hot air.
What financial requirements? What capital obligations and clearinghouse deposits? Which requirements fluctuate based on volatility? How do these requirements protect the investors and the markets? And ultimately, how exactly any of this leads to them blocking buy orders on $GME?
We have so many sources, from multiple brokerages, about increased capital requirements to clear GME and AMC trades that it has revived discussions about whether there are bad unintended consequences of the Dodd-Frank regulations that centralized clearing, which have the impact of transmuting private company risk management policies (that protect systemically important firms like DTCC) into global financial policy. But you've managed to dismiss all this as "hot air", thus, I would suggest, confirming my suggestion that Very Online People simply don't accept the fairly clear explanation of what happened.
It seems reasonable to fault Robinhood for shitty comms (though, as 'JumpCrisscross pointed out yesterday, the general rule is "aviate, navigate, then communicate"), but the endemic message board pathology is to use shitty comms to justify conspiracy theories, which are more fun to talk about than reality and take over these threads like algae.
Everybody here correctly divined what you mention, and then could confirm it after other trading apps went on to actually shed some light towards what's going on.
My point is exactly the shitty comms of Robin Hood - they were the first to make this move, they gave no reasonable explanation. It doesn't matter what we know now. What matters is that RH's users didn't know then.
In light of this comment I can't really understand what you meant by the last paragraph of your last comment. Were you actually asking? Or did you know, and know that RH's answers to those questions were in fact not nefarious, and just want to keep the drama alive a bit longer?
I get the high-level picture, I'm somewhat unclear about the details, and I'm not sure iff this even applies to Robin Hood, because they didn't confirm any of this. That's all irrelevant, though.
The top-level question here was, why people are angry at Robin Hood. My explanation is simple: they cut a lot of people off buying at the moment they wanted to buy, and provided no explanation. Any theory as to why they did that comes from taking explanations of other traders and the mechanics, not from anything RH said.
If you think what they published was sufficient explanation (and remember, the target audience is mostly regular folks with even less clue about stock market than I have), then why did RH's CEO get drilled by the news on the same questions I'm listing? Apparently the newscasters and their audiences also don't believe he answered anything.
Second: I'm not interested in the binary of whether or not people are mad at Robinhood. People should be mad at Robinhood for a variety of reasons, most notably that it is an online casino masquerading as an investment app.
I am very interested in the conspiracy theory that says Robinhood halted GME orders as part of an effort to protect hedge funds. That conspiracy was repeated by a number of legislators yesterday, seemingly encouraging ordinary people to follow on this terribly risky GME bubble. The conspiracy appears to be false.
Alright, so we were talking past each other. Sorry for not picking up on it sooner.
I don't subscribe to the conspiracy theory - the "mundane", mechanical explanation seems perfectly adequate. My only opinion on Robinhood is that the current backlash they face could've been avoided if they were communicating honestly and in details. The angry mob ultimately isn't after them.
> And doesn't Robinhood have the right to sell margin stocks bought on margin?
Only if they issue a margin call. But what if they were the ones responsible for the conditions that lead to the margin call in the first place (blocking buys on a specific stock)?
Even if that is the case (which I don't disagree with you on) Robinhood has done, and continues to do, such a shitty job education it's users on what they're actually buying that they don't know this.
So is this action Robinhood's fault? Not really. Is the fact that the user doesn't understand this at all Robinhood's fault? 100% absolutely.
I'm not buying it. Lots of other brokers also did the same. I think RH were the first. I find it hard to believe this move wasn't coordinated in some fashion.
Some (e.g. TD A) imposed increased margin requirements, but that's perfectly normal for high volatility stocks or options in margin accounts, and to be honest I'm amazed it didn't happen sooner.
This comes down to those brokers that are their own clearing house versus those brokers that rely on a company like Apex.
It looks like Robinhood, Webull, IBKR, and others, all ran into the same capital requirements issues as their customers loaded up on a high value, high volatility stock. Their clearing houses basically told them they had to pony up more cash, or they had to stop allowing customers to increase their positions.
So this was "coordinated" insofar as they all used a clearing house (I believe RH and Webull both use Apex, but don't quote me on that) that made what amounts to a margin call on the brokerage.
To be clear, this should not have happened. It's entirely a function of the companies being under-capitalized as a result of inadequate risk management practices in this very strange market environment.
Ah, yup, I stand corrected, they moved off of Apex. I told you not to quote me on that! ;)
Nevertheless, they still have capital requirements they have to adhere to in order to ensure settlement can occur, and it appears they were on the verge of being unable to meet those requirements.
> They allowed people to sell; you can't sell unless there's a buyer.
There are many other exchanges. The buy side of those sells might be on TD Ameritrade or Schwab or other brokerages where purchases were still allowed, not to mention institutional buyers looking to hedge calls or cover short positions.
What this prevented was RH customers specifically loading up on more stock.
I think your confusion might be thinking "they" all blocked buys, but that couldn't be further from the truth. A couple of brokerages blocked buys, but the majority did not.
There is a thundering herd of people with no experience buying a stock at 100x what it was a few months ago and vowing to lose their savings by never selling. It shouldn't be a surprise when they ultimately get outraged at the biggest target.
RH might well be incompetent - I dont understand why we are discussing them when their offering is inferior to basically all other brokerages. people should switch away from bad products / services
