
Robinhood maxed out credit line last month amid market tumult - omarchowdhury
https://www.bloomberg.com/news/articles/2020-03-10/robinhood-maxed-out-credit-line-last-month-amid-market-tumult
======
alexpotato
I've worked in "FinTech DevOps" for the past 10 years and this reminds me of a
story from a past job:

We hired the Global Head of Clearing [0] from a big bank and on their first
day they were giving a presentation on their background and how financial
clearing works.

Someone asked "What is your nightmare scenario?"

The response:

 _We have a large overnight position in a security. Our Prime Broker (PB) [1]
comes back and says "We disagree with you on the position so you can't trade."
Even if it turns out that the PB is wrong, by the time it all gets sorted out,
the market has moved so much in that security that it bankrupts us. I've seen
it happen to other firms and it's not pretty._

I also started at Knight right after their big outage. [2] People like to talk
about the big tech outages sinking financial firms but it can just as easily
be plain old issues with bookkeeping that can blow up a firm.

0 -
[https://www.investopedia.com/terms/c/clearing.asp](https://www.investopedia.com/terms/c/clearing.asp)

1 -
[https://www.investopedia.com/articles/professionals/110415/r...](https://www.investopedia.com/articles/professionals/110415/role-
prime-broker.asp)

2 - [https://www.thestreet.com/investing/stocks/knight-capital-
sh...](https://www.thestreet.com/investing/stocks/knight-capital-shuts-down-
trading-on-electrical-outage-11752932)

~~~
dickjocke
Totally talking out of my butt here, I have no finance knowledge. But just as
a matter of general game theory stuff I understand that sometimes you have to
push all your chips in on a position, but that doesn't seem sustainable? Like
how often is it reasonable for a big bank to have a position in a single
security that could bankrupt them?

~~~
btilly
For some companies, every single night!

Money chases the sun. At the end of trading in New York you make a swap with a
company in Japan that at the end of trading in Japan does the same with London
then back to New York. Any money not swapped doesn't make money overnight.

This is called the overnight repo market. But if you don't get your money back
in the morning, you've got a problem.

~~~
7373737373
Is it possible to quantify how much "active" vs "passive" money/capital there
is?

~~~
btilly
I doubt that it is possible to properly quantify how much capital there is,
let alone to classify it.

[http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivati...](http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf)
is nearly 20 years old, but Warren Buffet's criticism of how we account for
the value of derivatives is as true today as it was then.

------
volak
“We determined it was prudent to draw on our credit line during the week of
Feb. 24 in light of market volatility. That capital was returned in full last
week.”

Headline should read "Robinhood used credit that was available to them and
paid it back"

But that wouldn't generate the desired panic or clicks now would it

~~~
caymanjim
> “Companies don’t tap their credit line unless they need to,” said David
> Ritter, an analyst at Bloomberg Intelligence, who spoke generally about the
> issue without commenting directly on Robinhood. When companies do, it’s
> “perhaps not a good signal with regard to their cash burn, which could make
> creditors nervous.”

It's yet another sign that this company is teetering on the edge of collapse.
That isn't irrational panic. They were completely offline for an entire day
during the biggest market rally in over a decade, and have had smaller outages
during other recent volatile trading days.

This company deserves to crash and burn. Anyone who still keeps a balance
there is insane. People have lost millions and are going to continue to lose
because Robinhood is run by amateur clowns.

~~~
brianpgordon
> Anyone who still keeps a balance there is insane.

Robinhood accounts are protected by the SIPC. Although with other discount
brokers introducing free trading, I would tend to agree with you that
continuing to use RH with its simplistic interface and appalling execution is
pretty silly.

~~~
JumpCrisscross
> _Robinhood accounts are protected by the SIPC_

This is correct. But SIPC reimbursement can take months. For non-trivial
balances, one may need a lawyer to prove ownership.

After that, an accountant would likely be needed to reconcile records,
including for tax purposes. (Tax forms are not automatically generated for
brokerages in receivership.)

~~~
pesfandiar
We have a similar insurance for cash deposits in Canada. I've always imagined
that for some balance (perhaps in thousands of dollars), you're better off
just letting it go if the company goes down. Now that you mention taxes, I
think letting go may not even be an option.

------
shanxS
As a small investor (investing around few thousand USD), how do I know which
app to trust? There is Robinhood and Stash for ETFs and Stocks and then there
are robot-wealth mangers like WealthFront etc.

Should I always stick to big firms like Vanguard or Fidelity? Thing I don't
like about firms like Vanguard and Fidelity is that you cannot buy fraction of
a unit which Robinhood/Stash allow you to do.

Any advice?

~~~
smeyer
Haven't both Vanguard and Fidelity started supporting fractional shares? E.g.
[https://www.fidelity.com/trading/fractional-
shares](https://www.fidelity.com/trading/fractional-shares)

~~~
atombender
M1 is the only one that has full support for fractional share trading, I
believe.

Fidelity has started to offer fractional shares, but it has some limitations:
Only market and limit orders, only trades through the basic trade ticket in
the mobile app, limited to NYSE/NASDAQ stocks, etc. [1] Another thing to watch
out for is that fractional shares can't be transferred; they must be
liquidated if you want to switch brokers.

Schwab has said they'll be launching fractional shares over the summer.

Note that most brokers already support fractional shares indirectly through
DRIP [2], but that's unrelated to _trading_.

[1] [https://www.fidelity.com/trading/fractional-
shares](https://www.fidelity.com/trading/fractional-shares)

[2]
[https://www.investopedia.com/terms/d/dividendreinvestmentpla...](https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp)

~~~
gnicholas
> _Another thing to watch out for is that fractional shares can 't be
> transferred; they must be liquidated if you want to switch brokers._

What happens if I buy .5 shares of AAPL every week for 53 weeks? Do I have 26
undivided shares that can be transferred and one half-share that has to be
liquidated, or do they treat it as 53 half-shares that all must be liquidated?

If the latter, seems like a great way to keep people locked-in. But the former
could be a headache for basis reporting, especially if you could transfer to a
brokerage that doesn't natively support fractional shares.

~~~
atombender
I don't know for sure, but I'm pretty sure they're combined behind the scenes.
Fractional shares are really abstractions over an underlying instrument. The
_broker_ is the actual owner of the shares, and you have an indirect
ownership. Among other things, it leads to a situation where you cannot take
part of normal shareholder activites such as voting. The broker still needs to
keeps records of the cost basis of each fraction you purchased, of course.

~~~
ipqk
This is generally true of whole shares too – that the brokerage technically
owns the shares. And why brokerages will set up proxy voting for shareholder
activities.

------
harryh
Why would they have needed to draw down their credit line and then pay it back
over a two week period? I don't have an answer to this question.

~~~
bonestamp2
I can't get past the paywall, so maybe the article answers this question. But,
in case not, one major reason could be margin. If you pay Robinhood $5/month
then you have access to borrow money from them to buy stock. The first $1000
is interest free and additional "margin" incurs interest.

When the stock market plunges, some people will see that as an opportunity to
buy more stock at a reduced price. If they don't have any liquid funds in
their account, borrowing money from the broker is instantaneous (assuming
you've previously enabled it). I don't know what happened, but I could see
their line of credit getting eaten up very quickly if enough investors decided
to leverage their available margin.

If investors sold those shares within two weeks, they could pay back the
credit line.

------
brenden2
I hope they aren't insolvent yet, there's a 3-6 business day waiting period
for transferring your positions/balances to a different broker with ACATS.

Does anyone know what happens to any open positions in the event that they do
become non-operational?

~~~
Ameo
What would even lead you to believe they are in _danger_ of becoming
insolvent? They had some severe technical issues and a ridiculously long
downtime yes, but at the end of the day their company is still operating just
the same as before.

~~~
brenden2
There are a lot of unhappy customers which are probably trying to get all of
their money out of Robinhood ASAP, myself included. It's not unthinkable that
they may run into problems and become insolvent due to the unexpected
outflows.

~~~
rwmj
It might be a naive question, but if you buy shares through Robinhood then
don't you just own those shares? It might take some time to transfer them to
your preferred broker, but I don't understand why you'd lose anything in an
insolvency. Plus any cash you had would be held in a customer account, so
again it's simply a matter of dividing up that cash between customers
according to their balances. (Note: I've never used Robinhood, so I'm assuming
they're a regular stockbroker with added Silicon Valley hype, rather than
something else)

~~~
yellowapple
I think that is indeed the case for actual shares (I was certainly able to
participate in Rite-Aid's most recent Board of Directors election, solely
based on the shares I bought through Robinhood), but I'm curious about how
it'd apply to cryptocurrency, since Robinhood (last I checked) doesn't expose
the private keys for the underlying wallets or otherwise offer a mechanism to
transfer crypto assets out of Robinhood.

Not that it really matters for the, what, $2 I put into Dogecoin, but still.

------
whatok
It's almost always a prudent decision for a company to draw on loan facilities
if they think things are going south. Draw while you still can and before you
trip a covenant.

------
HenryBemis
Let me reword some things in the article:

> and is now backed by venture capital firms including Index Ventures,
> Andreessen Horowitz and Sequoia

So these big players (aka "Smart Money") have granular access to everyone's
personal & financial details, have access to trading information, are gaining
deep knowledge on how Retail (aka "dumb money") operate/trade, their patterns,
per age/gender/region/etc. That information is priceless, and then this
happens: Sardine Feeding Frenzy: Whale, Shark, Dolphin and Sea Lions | The
Hunt | BBC Earth
[https://www.youtube.com/watch?v=6zOarcL1BSc](https://www.youtube.com/watch?v=6zOarcL1BSc)

~~~
bernardom
You think the VC investors of a brokerage get access to individual customer
transaction data?

I'm sure it's happened before, but I have to imagine such a thing is
incredibly rare and illegal if violating the stated privacy policy (due to GLB
law).

~~~
HenryBemis
VC that have equity, yes. Because if they got equity and they own part of that
business they sure as hell will siphon the data and nobody and nothing can
stop them. It is like telling me that a Holdings company does not have access
to a Subsidiary's client data.

~~~
matthewowen
I can go out and buy Schwab equity tomorrow. Will they turn over their data to
me?

I recognise that's reductio ad absurdum, and I'm not saying it's impossible
that data is misused. But the idea that equity holders of regulated financial
institutions can just get whatever data they want out of that institution
is... not true.

~~~
HenryBemis
I have seen this happening in every Bank I've ever worked in/with that was big
enough to expand or small enough to be M&A-ed. When a bank buys out a
significant part of an Insurance, Factoring, Securities, etc. company, the
next day the clients get a nice letter (or email nowadays) about the news and
that is that. And a few weeks later the vertical sales begin. All banks that
grow through M&A (mostly As) do exactly that. I will assume RH to be
Securities since they don't seem to be doing something else (give out loans,
hold deposits). So, again, if those fine people that have £€¥$ to RH are JUST
VCs the above is not happening. But if they DO have equity, and that would be
north of 5-10%, and they BDO have some management over RH (BYOCommitees) it is
naive (not mean to insult you or anyone) to think that they don't siphon data.
It is like saying that MS didn't get a copy of LinkedIn the very next day, or
that FB didn't get their hands on WhatsApp's phone numbers, or that a BANK who
just bought a Securities company for which they are NOW LIABLE in the eyes of
SEC did not get ALL the data to run KYC/AML/OFAC etc. That company has a
$1.7bn valuation where own funds where...? And three big players may own
60-70% of that?

I have seen this happening so many times.

And there are myriad ways to get the data. The easy ones is through their DWH
where suddenly (with the correct mapping) all reports etc work on day1 with
the new data.

If you know this from experience (ran due diligence pre M&A, worked with the
DWH post M&A) or have some other experience on the matter, feel free to share
names. I will only share two SocGen and BofA and leave it at that.

------
neonate
[https://archive.md/E9zBL](https://archive.md/E9zBL)

------
wiredfool
The irony of credit is that it's least likely to be available when you really
need it.

------
vnchr
Misleading headline from Bloomberg, at least in effect.

------
ptah
credit is so cheap nowadays. i'm sure their creditors were happy for the
business

------
kissickas
> Robinhood said last week that a confluence of factors -- record account
> sign-ups along with highly volatile and historic market conditions -- led to
> unprecedented stress on the firm’s infrastructure.

> That heavy load caused the so-called Domain Name System, or DNS, to fail.

Not a developer. Is it not customary just to hard-code IP addresses instead of
domain names when the app is communicating with your own servers? I would
assume that would make every interaction faster and is something that would be
done anyway.

~~~
ohiovr
Straight ip addresses can't have tls certs afaik.

~~~
gruez
counter-example: [https://1.1.1.1](https://1.1.1.1)

~~~
ohiovr
Interesting

