It’s pretty obvious (at least to me when I signed up) that the “instant money transfer” means margin. Even if you don’t get the concept of “margin” specific to investing, you should get that you’re borrowing against the transfer when you use it.
Edit:
I just deposited more money into robinhood, and the screen says "your funds will be transfered in next several days... in meantime, we'll give you access to $X while you wait for the funds to clear"
Also, the UI separates your cleared money, from the instant deposit money as 2 line items.
RH can't win here: Previously they came under fire when a user committed suicide after the RH app showed a substantial negative balance due to an offsetting position that hadn't settled yet.
If they reflected it accurately they'd be showing a negative balance until the funds arrived and some users would think they lost all their funds.
The real mistake is that they're extending margin to uninformed and unsophisticated users. ... but pointing that out just brings accusations that it's gatekeeping or limiting access to people who aren't rich.
People hate the gatekeeping but then complain when they get bitten by something they didn't understand. There's only so much you can boil this stuff down and if they don't want gatekeeping then they need to accept personal responsibility when it turns out that they didn't know as much as they thought they did.
> they need to accept personal responsibility when it turns out that they didn't know as much as they thought they did.
aka, RH is between a rock and a hard place - either the clueless user suicides due to poor understanding, and causing bad PR, or they do what they're doing now.
I think RH makes things sufficiently clear. The problem is RH is just a shitty platform that is susceptible to these kinds of problems due to high volatility which forces them into a regulatory corner every once in a blue moon.
I was a user when they had that suicide situation and RH did do a better job of explaining your actual balance when you entered a somewhat complex trade that caused you to have a negative balance. Still a user, who didn't know what he was doing, entered a complex trade, saw something he didn't understand and ended his life. In response Robinhood could have:
1. Made the UI "easier" to understand (i.e. lie) for 99% of situations
2. Raise the entry requirements to ensure people knew what they were doing (Gatekeep)
They chose (and continue to choose) 1, and I don't envy them - how would ever explain all the ways a margin account can put you in trouble on a 4 inch screen? Most users only care about "instant deposits" and will never get into trouble 99% of time. It took 2 "black swan" events (IIRC, the first suicide issue was during the first COVID market crash) for these issues to come to light.
Except their UX is streamlining away things and essentially manipulating users to get higher conversion rates and engagement. As seems to be the norm among successfull apps today. Just that stakes on the user side are more immediate than with news and social media.
They brought this onto themselves by optimizing for growth over healthy and sustainable markets.
Can you explain what specifically is manipulate about robinhood's ux? Maybe is me, but I don't find the ux of robinhood significantly different than the other brokerages I use (Fidelity and Merrill Edge).
This comes from someone who's of the opinion that manipulative dark UX patterns have been normalized - I have not used the competition you speak of, I wouldn't be surprised if they are similar.
The marketing push for options by calling it "instant trading" is pretty BS too.
Is it so black & white? Is it not possible to design an interface that shows the true state but is also indicative of how things should eventually settle?
Sure they can win here. Their advertisement for Gold literally says "access to margin" on one of its selling points. How is anyone without Gold supposed to read that without mistakenly concluding they don't have margin? That's misleading if not outright deceptive. They can easily "win" by... removing that clause, and (optionally, or not) replacing it with something like "access to margin beyond your portfolio value" or something. It's not that they're already doing things as well as they can and the problem is just too complicated to simplify further. They actively mislead people.
And note that "borrowing money" does not imply "have margin" for people either. They might realize they're borrowing money, but not realize that has further implications they might not expect, like the broker being able to sell your stock without your approval. If they actually use the word "margin", people could at least look up what it means and likely realize it's a nontrivial topic. But just saying we'll make $X available to you makes it so much harder for them to understand there are non-obvious implications.
They could certainly have won by being clear on each screen.
They specifically positioned as the “everyman trading platform”, and so even from the drawing board they knew that the majority of app users would be people with little or no experience.
All they had to do to win was to say “Hey, I know this balance looks bad, but it’s actually not the final number and here’s why”, and similarly: to be explicit about why they automatically make margin accounts, and then to again mention that when people purchase stocks.
I think you might underestimate how deeply and inexplicably confused people can get.
I fielded a question from a friend who was furious that his broker wouldn't let him exercise a call yesterday ... a call that he was _short_. But he understood his position enough to understand exercising the call would be very profitable for him. Part of the reason that he thought he could excercise it was because there were notices about call exercise (presumably that it was still available for people who were already long the calls).
It's extremely hard to anticipate all the ways someone might become confused and adding additional material to resolve a potential confusion risks introducing other new and novel confusion. There is a constant trade-off and probably the only universal fix is the ready availability of competent human support, which doesn't exactly fit inside the normal "app" business model.
I think the goal of an actual "everyman trading platform" is essentially achieved by the sorts of interfaces offered on 401k accounts-- geared around not-more-than-daily trades of highly liquid securities (and if not outright curated, at least focusing on diverse relatively safe funds). What RH is doing might be marketed as an everyman trading platform but for many (most?) users it's just a casino.
> I think you might underestimate how deeply and inexplicably confused people can get.
> ...
> It's extremely hard to anticipate all the ways someone might become confused and adding additional material to resolve a potential confusion risks introducing other new and novel confusion.
I actually support this argument. I also concede that it’s easy to point out the information in hindsight. But I will still argue that a vital part of building a company of RH’s size and branding is about taking the time to think deeply about the customer experience. To be the experts. To distill that expertise carefully when designing each service and each app screen.
Just based on how RH potentially “sold shares out from under people”, and how the accounts are automatically margin accounts as apparently stated on some part of the user agreement; RH was specifically aware of how this would violate user expectation and they chose not to address it. It’s very difficult, I feel, for someone to argue on the basis of “well yes, of course they were margin accounts, it’s obvious to anyone who knows about how stock accounts work because <blank>” because RH was specifically designing their platform around people who don’t know how stock accounts work.
Sure. And? It used to be the case (only a couple years ago--) that you had to have an account worth at least $10k and at least represent that you had some experience to get approved for margin at most brokerages.
Although it's been a long time, I spent the first decade with a trading account without margin just fine.
It is also margin trading if you buy and sell before settlement. Buying a stock, selling it a day later, and using the funds to buy something else requires a margin account.
You need margin to engage in day-trading, but you can sell a settled stock & immediately use the funds to buy something else just fine as long as you then hold onto that purchase for 2 days.
Am I missing something here? The winning play is just not having the instant feature or at very least making it an “and also take out a loan” button. Then you have a $0 balance until your transfer settles and then it’s positive. No weirdness.
You can’t blame people for their ignorance when you present them a fiction. If your cute little abstraction leaks then don’t do it.
Actually RH already won: they just got $1B extra from the investors. Also I’m sure what retail investors experience now (dealing with lower lever details of the abstraction they were used to) was known by more experienced traders, but I still think that it’s better to lose money this way than trusting in a pension fund for 50 years that hides everything.
I AM a techie and even I would take RH on their word when they say 'instant'. When I send money to India from a US bank account via an intermediary (so that neither the US bank nor the Indian bank are first-party to the transaction) it is removed from my US account (in USD) and reaches my Indian account (in INR) within seconds, and I can see the balance in my Indian account and spend it right away, so I have no reason to believe it can't happen domestically when it doesn't even involve a currency change.
It's like this in most parts of the world. It's only the perversity of the American banking system where money transfers in this day and age routinely take 2-3 days and no one thinks there's anything bizarre about that.
> When I send money to India from a US bank account via an intermediary (so that neither the US bank nor the Indian bank are first-party to the transaction) it is removed from my US account (in USD) and reaches my Indian account (in INR) within seconds, and I can see the balance in my Indian account and spend it right away
That's actually a lot more complicated. The Banks take loan with one another to make this happen as well from what I read.
It might be so, but I don't work in that field, so my perception will be guided by what I see. Which is my point, unless you are intimately familiar with how ACH etc works it's natural to assume that these transfers are near instantaneous.
The typical RH customer... the one that invests spare change, purchases fractions of a share, and thinks they can get rich off a $100 investment, is not going to know these nuances.
There's good reasons the traditional brokerages have so many rules...
The facts seem to be RH saw a opportunity to prey on uninformed individuals by making investing seem "cool" and "stupid easy".
RH deliberately did not do a good job of A) Putting limits on newbies (like no margin!) so they do not get themselves into trouble and B) Explaining the more complicated concepts behind what RH was allowing literally any mirror-fogging human being to do.
Plenty of people trading for 10k at Schwab don't know either. Plenty of people don't know the details of their bank account, too. I do blame RH but not for this..
People are always going to be uninformed about some things, yes we should minimize that but we shouldn't make services available only to the rich because of it.
Also, not having enough money in the bank, getting charged by the bank to hold on to what little you have, eventually getting charged into negative dollars.
> RH deliberately did not do a good job of A) Putting limits on newbies (like no margin!) so they do not get themselves into trouble
But someone who has initiated a money transfer and then used that pending money to buy stock, technically on margin, is not getting themselves into margin-related trouble. There is no good reason for there to be limits here.
Uh no, as defined by Reg T, brokers are free to let cash accounts immediately buy with unsettled funds. It's only a violation if you sell a security before the funds used to purchase it settle.
Margin accounts have a different legal definition and regulations.
Robin Hood is actually pretty unique in that its cash accounts are always restricted to settled funds; instead they decided to optimize for margin accounts that don't allow for increased leverage. Which is not something other brokers optimize for that I've seen.
OK so as a none techie why is it not genuinely instant? Why can't my cash be exchanged for the stock in real time (where real time is defined as within a minute or two say).
It's cheaper to do it slower - banks don't have to constantly talk to each other all day. Russia actually gave up on same day settlement and called it a modernization.
When I left Australia in 2006, inter bank transfers settled every four hours. Often by ISDN lines between banks. "Constantly talking" is a BS excuse. As far as I know (someone still there can correct me) inter bank transfers there are now down to 5 minutes.
The US banking system is arcane and archaic. It's cheaper not to modernize to be sure. Forgive me for being frustrated at banks cheaping out on this when they average quarter of a trillion dollars in profit every year over the last few years.
Yep, in Europe inter-bank transfers are also instant and if the underlying reason for all these regulations, confusions and trading impact is that US institutions have just been too cheap to upgrade the legacy infrastructure running the biggest store and exchange of value in the world then frankly surprise and anger seems justified.
What my perception was, was that you were being loaned money against the transfer you were sending in. It was not clear at all to me that it was a generic margin account. Because, among other things, I consider margin trading to be a higher risk activity than I care to engage in; if I had known that I was signing up for a margin account, I would have not signed up at all.
That said, I've definitely been edu-ma-cated on this, and I"ll be reading brokerage ToS more carefully from now on.
The whole innovation of RobinHood stood for is to abstract that away from you so you can instantly start trading and continue when you sell stocks. In the end we get to the same point why a lot of things when it comes to trading are made difficult or impossible after big fiasco and collapses - you can't trust the retail not saying I didn't know better when they lose it all.
>What my perception was, was that you were being loaned money against the transfer you were sending in
That is margin trading though. It sounds like you thought only some trading on a loan counts as margin per definition but you knew you weren't trading with your actual money but a loan which is the important part.
margin trading overwhelmingly refers to paying a percentage as a collateral, not a stop-gap loan to cover ACH transfer delays. Yes you have to have a margin account to trade with immediately deposited funds (thanks ACH), but that's not the typical usage of the phrase and as such isn't what you'll find being described when you look up the term.
Ah - I have generally understood it as working on a percentage of the trade; being part and parcel of a leveraged strategy.
It's one thing to loan me $100 when we have shaken hands and contractually already agreed that $100 is on its way. It's another thing to assume control of that $100 when the $100 already agreed to is on its way.
The contract with you says that if it settles, you get that money. The contract on the stock market says that it is supposed to settle. But a non-negligible percentage of the time, participants in the stock market do not make good on their contracts. Maybe they are a day late. Or the trade is reversed and the money or stock for your side comes back to you. You will get whatever happens while executing the trade, but it might not be what you expected to get.
In a cash account, the broker takes your money/stock and you live with the inconvenience. In a margin account, the broker is effectively lending you money to cover unsettled trades and is taking on that inconvenience instead. Given the high volume of trades going through a brokerage relative to the wealth of the brokerage, that inconvenience can become a real operational risk.
How real? Well, Robinhood just had to get an emergency loan for a billion dollars to cover trades that are open and have not settled. Why? Your ability to execute the trades that you made depends on various counterparties all doing what they said that they would, when they said that they would do it. But if they don't, and you prove unable, Robinhood is still legally obligated to make sure that they are able to settle all of their contracts on the stock market which they took on on your behalf.
:) I have, approximately, 99.7% of my invested money in vanguard funds. The other 0.3% goes into the fund for doing trading.
To be honest, it's probable that I should adjust my risk tolerance to 5% ultra-low risk assets and 5% ultra-high risk; the current state of asset allocation is overly correlated with US large cap corporations.
Notably absent here is the fact that planes can land themselves. In fact the plane can do everything on its own besides taxi on the runway and takeoff...most of the time. Yes, pilots are there to take over if needed, but that doesn't change the reality of autopilot which is not just "keep it in a straight line"
Hang out in the Aviation StackExchange long enough and you'll see exactly that question come up. "Why do we even still have pilots?", or "What does a pilot actually do?".
Yes, in general, people are ignorant of what pilots do and what AutoPilot can and cannot do.
This is made even more confusing by recent progress in autopilot with some large jets getting auto-landing features.
And yes... a pilot can program the FMS with waypoints, altitudes, etc, get into the air, push a button... and the plane will indeed fly itself. Modern jets even have automatic throttle/power control too.
A better name for Tesla's system is what it actually is... Driver Asist. But that's not sexy... and we're far off into the weeds.
"Instant" means instant. There is no way to paint it differently.
It's disingenuous to call an ACH transfer "instant" instead of "It'll take several days during which time we'll lend you money", like RH did here.
"15 minutes" to settle cash for next trade is enough "instant" for most traders I think. The part that irritates people is the "2 business days" problem in the regular account.
I have heard it is complicated, but can someone elaborate the "computing cost" of a regular (non-coin) digital transfer?
Btw, transfers within 15 minutes are being done all over the world without the fancy blockchain and coin. I do understand the need for some transfers to be delayed , say liquidating all of one's investment to take a few days just for security reasons.
All of that risk is associated with holding the goods and currency for this delayed period! It all makes sense, but, if ACH was 10 minutes instead of two days, the entire issue would barely matter.
> Complicated enough that it took the invention of Bitcoin to take it out of the bankers hands and move it to the digital realm.
That's not at all what bitcoin does or helps with.
Settlement is not complicated. ACH is complicated, but ACH isn't just settlement. Bank to bank wire transfers are just settlement, and are regularly same-day (even same-hour) with immediate fund availability.
That’s not the same as what parent comment was suggesting. You can’t send money to literally anyone using only an email address. You and the recipient still have to have regular bank accounts within the settlement system. The email address only serves as a more friendly identifier than the account number.
I should've been clearer: as long as the recipient has linked their email and/or mobile to their account (via PayID) settlement is instant and their email/mobile number can be used to address transfers
There is precious little explanation in the article you cite on how this is actually implemented on the back-end.
Banking plumbing is notoriously harder than most folks realize, and I wouldn't be surprised if there wasn't very hard (and very small) limits to how big of an amount / how many TPS you can actually execute with this system.
I might be wrong, but I'd be surprised if you could move 10M pounds instantaneously with this.
In a lot of countries bank transfer is near real time. Chip and pin is the standard for more than a decade. Checks are no longer al primary way to pay anymore.
Yeah, but with lightning you really need enough value along the network path(s) to execute a transaction, possibly causing a similar thing as this to happen. I still think it would be an improvement though, as enthusiastic buyers could expand the network and get their buys through.
> Yeah, but with lightning you really need enough value along the network path(s) to execute a transaction, possibly causing a similar thing as this to happen.
It's atomic, it either completes 100% or it fails, there's no partial state where the money gets stuck in one of the middle-nodes.
I'm a software engineer, so I think I'm more familiar with how apps work than most people, and this wasn't obvious to me! Good thing I only use Robinhood for money I don't care about losing.
Edit: I just deposited more money into robinhood, and the screen says "your funds will be transfered in next several days... in meantime, we'll give you access to $X while you wait for the funds to clear"
Also, the UI separates your cleared money, from the instant deposit money as 2 line items.
It says that its not your money in the UI.