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Why Robinhood disabled buys but not sells (stu2b50.dev)
705 points by stu2b50 33 days ago | hide | past | favorite | 680 comments



Everyone assuming a conspiracy theory needs to read this.

Keep in mind that Robinhood also gives everyone a margin account by default. They also let people invest on margin before their inbound bank transfers arrive (Robinhood Instant). The influx of new traders sending money to Robinhood or selling other stocks to buy GME quickly drained their credit lines, reducing the capital they had available for collateral.

Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any new purchases using those proceeds are done on margin.

This was a capital crunch at Robinhood due to an unexpected herd of new traders all looking to do the same thing in unison. It violated the assumptions of their business model, and the only way to keep the platform from grinding to insolvency (or violating regulations) was to slow down the unexpected event by slowing meme stock purchases.

Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?

The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.


I don't think there's a conspiracy, but I also don't think they get a free pass on this. They're going to lose much of their base, and they deserve to – if your whole thing is retail traders, and everything stops working when it matters most, then people are going to look elsewhere.

The CEO lied on TV about the reason, there's rumors that their investors asked them to stop it (I mean, they got $1Bn relief... of course it was at least a topic of conversation), and they make a ton of money ($100M/Q I've seen) from one of the big players in this (Citadel).

I'm not saying there's a conspiracy, exactly... but I am saying when it came down to making hard choices, it doesn't take a full-blown conspiracy for them to make some of the decisions they made that erred on the side of benefiting institutional investors.

All their cash (via both raising capital and selling data to funds) comes from institutional investors rather than average retail investors, and that was recently made clear to a lot of people.


"I don't think there's a conspiracy" followed by hints of conspiracy.

I think Robinhood didn't do anything wrong (or even incompetent), but they are screwed because the prospect of losing money (actually just the potential of more money, they haven't lost any yet if they close now since the mania isn't done) is emotional and triggers outrage and a need for someone to blame.


>I think Robinhood didn't do anything wrong (or even incompetent)

Sure they did. The CEO of Robinhood went onto CNBC and lied about why they restricted trading.

https://www.msn.com/en-us/money/companies/robinhoods-ceo-den...

Also, here is their history of other recent fuckups:

https://www.cbsnews.com/news/robinhood-sec-fine-65-million/

"Robinhood Financial fined $65 million by SEC for misleading users"

Stop making excuses for liars.


It's amazing to me there isn't a system that we can automatically pull from, of trusted channels, that will bring into view these more "hidden" narratives - that get crowded out by the current mainstream media and journalism trying to respond quickly without doing their homework or with doing more quick reads that keep to a narrow scope of a narrative instead of a longer read that requires attention, which in fact will quell the reader's excitement or over excitement - likely leading to less viral sharing due to losing readers who aren't patient enough to read more thorough content.


"It's amazing to me there isn't a system that we can automatically pull from, of trusted channels..."

I like it, but who gets to decide which sources are trusted?


The people visiting the service decide that for themselves; they decide if they think the provider is trustworthy. You personally have to trust the person / people deciding which sources on a matter/story are trustworthy. It's a chain. That trust gets built up over a long period of time ideally, starting typically from a very modest beginning. It's worth noting that sources are often not consistent, they can be trusted on one thing and then get another thing wrong, so it certainly won't be a simple matter of dictating that This Source is good and That Source is bad (for everything).

More challenging than earning that initial trust, is maintaining it, not allowing a perversion to occur over time (where the service becomes biased, irrational). For every service that gains initial trust, most inevitably lose it over time; keeping it long-term is far harder.


It's a chain, it's a hierarchy, it's leadership, governance and accountability systems - protocols and processes - and transparency towards results/outcome. It's why "historically" good brands can get taken over by relative bad actors, perhaps "just" greed, and pillage the good reputation and reach a brand has - and because they already have the resources, processes, and reach - they can maintain it more easily; it's far harder to break through the noise to create a new brand with mass mindshare than to acquire, and why acquisitions happen and conglomerates form - as a form of suppression and to continue maintaining control.


Whatever network(s) or leadership within the system you subscribe to.


There are good sources on this, like Matt Levine's column "Money Stuff" at Bloomberg.

[I just imagine a finance guy after Heartbleed or Stuxnet complaining "woe betide me, the IT coverage on CNN and Foxnews is so bad... I wish there were trusted channels to discuss these, you know, hacker news!"...]

Yes, a meta system that would have the best channels available per topic (HN, Money Stuff, The Aviation Herald/PPRUNE, etc.) would be great, but I imagine it would pretty soon be exploited and overrun... Maybe it has advantages that they are generally somewhat out of the limelight?


If the good leaders aren't exploitable, and they maintain unique channels of gaining momentum and attention - say via word of mouth or succeeding at gaining attention in the news or good at piggybacking on existing amplification systems (e.g. Andrew Yang running as a Democratic, otherwise would have run as Independent, due to understanding the duopoly and mainstream media's amplification of only those two main narratives), eventually the best leaders will outshine whatever bullshit takeover and noise pollution that may try to overtake the system; that still doesn't mean there won't be attempts for manipulation and narrative capture, suppression tactics used, etc.


Do you have a link to the full interview? That first article is just a bunch of short quotes, some incomplete, some seemingly out of context. Some of the quotes address the clearing house deposit requirements. The article doesn't actually give his response AFAICT as to why they paused trading.

I just can't understand how that article supports the accusation of lying.


> The CEO of Robinhood went onto CNBC and lied about why they restricted trading.

I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients; and they suffer more than if the run had not happened. So, what you portray as a huge nefarious plot here is just a CEO of a startup trying to keep things going until they calm down again (which, incidentally, seems to have worked).

Next, the other issue with the $65m fine. As it happens, this has been discussed in depth by Matt Levine in his excellent "Money Stuff" column [1], and it's not quite as nefarious as you portray it either.

Brokerages make money from a couple of sources: 1) interest on customers' cash balance (which they might pass on or not), 2) borrow fees from lending out stock to short sellers, 3) commissions, and 4) payments from market makers for order flow [2], which basically constitute a discount on the bid-ask-spread.

Most brokers used to charge commission (3), but passed on most of the discount (4), giving clients a very good bid-ask-spread. What Robinhood did is charge less commission (3) (namely zero), but keep more of the discount (4), giving clients a worse bid-ask-spread.

If you have small orders, you're better of with the Robinhood model of smaller fixed cost, and a somewhat higher (and hidden) proportional cost, namely a higher bid-ask-spread (ie slightly worse price). But for customers with big orders, a different broker with a small fixed fee, but a better discount = smaller bid-ask-spread = better price might have been better.

(Note, btw, that everyone got prices equal to or better than the national best bid offer! It's just that you got more or less further discount on top of that.)

I agree with Matt Levine that Robinhood had a compelling offer, and should have just positioned it a bit better.

But again, that $65m fine was basically for not telling big clients that btw, with your size you might be better off at the competition where you pay a fixed fee but might get a better price. Yeah, not exactly Mother Theresa, but hardly egregious.

There really really is enough disgusting rent seeking going around in the financial sector (student loans, payday loans, credit cards & merchant fees, HFT, ...) that you should save your ire for that.

[1] section Robinhood(1) https://www.bloomberg.com/opinion/articles/2021-01-07/the-ip...

[2] market makers pay for retail order flow (aka "dumb money") because it tends to be small and uncorrelated and "uninformed", ie not specially predictive on price direction; so they like it better than institutional "informed" flow which might leave them with positions that lose money subsequently (adverse selection). However! As this episode showed, retail money might not be small and uncorrelated and uninformed anymore, so we'll have to see how that shakes out - I as a market maker wouldn't want to pay brokers more for sending the WSB hordes my way instead of hedge funds.


> I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients; and they suffer more than if the run had not happened. So, what you portray as a huge nefarious plot here is just a CEO of a startup trying to keep things going until they calm down again (which, incidentally, seems to have worked).

I dunno. The webull ceo discussed why they had to shut down buying, and his explanation actually made sense. He explained the T+2 system and why that was causing them to run into issues. The Robinhood ceo could have said something similar, and it wouldn't have caused a bank run + it wouldn't have felt like the ceo was hiding something from us (arguably even worse).


WeBull may have had a less dangerous solvency issue.

Either way it’s Monday morning quarterbacking to say RH could have been blunt. They may have been within hours of bankruptcy.


"We were hours away from going bankrupt, that's why we lied publicly"

I'm pretty sure that that is not going to go well for them in front of a judge.


It’s gonna go fine in front of a judge. They will say look at our terms of service, what we did is explicitly allowed. The judge will immediately rule for them and no public interviews of the CEO/Founders will ever be an issue.

Not only is what they said vague, but they had a very clear responsibility not to provoke a run on the bank.


> I'm sorry, but it is a fact of banking that you can never, ever, admit to having liquidity issues. If it triggers a bank run, then the firm is dead, and, notably, not only the employees and managers of the firm suffer, but also the clients

I'm sorry, but "we lied to you for your own good" is still lying.


Why be sorry?

Fact.

Conflating an explanation that says why a lie was necessary somehow with the idea of that making it all not a lie happens a lot.


If he had said that Robinhood put those restrictions in place because of a liquidity crisis, he just lost every Robinhood customer all their money. That’s because Robinhood gets forced to increase collateral with everyone they do business with, everyone try’s to pull their funds out, and Robinhood files an instant bankruptcy. Meaning customers get paid a fraction of their accounts years from now.

He didn’t lie, he mislead. And he did it for you.

Edit: Actually to correct myself, Robinhood accounts are insured, so customers accounts are at no risk in a bankruptcy. It may have meant you couldn’t sell your shares for months, while GME slowly works its way back to $20, so I think the point about bankruptcy hurting customers stands.


That's my point. I don't think there's a conspiracy, where the CEO of Wall Street called the Robinhood CEO and said "shut it down now" and they did.

Rather, I think everyone acted in their own self-interest, and a lot of random retail investors found out that their best interests were the only ones that didn't align with everyone elses.

A lack of a conspiracy doesn't mean the results were any different.


IMO, it's similar to something like institutional racism. There probably are very few people who are openly and unashamedly racist at the highest levels of power (although sadly not zero) - but all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system. Basically what MLK described in his Birmingham jail letter. (and to be clear, I think both of us are on the same page)

But I would say - their underlying intentions are absolutely and totally irrelevant to the discussion. The only thing that matters is that they acted in a way that boosted Wall Street at the expense of retail traders, and thus they are perpetuating a corrupt system, whether they feel like they are or not.


> all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system

I’ll entertain this topic

Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger. If you ask them, they’ll assume its because the black passenger lives in Brooklyn or some other not-Manhattan place and that the driver wont get a good tip and wont be able to get fares at the destination, making it less economical.

The cotton and tobacco trade was also economical.

Economics is never a good reason to make an exception for discrimination.

But an individual may not have specific feelings about race, while they perpetuate a system of discrimination regardless.

It still requires empathy to be able to relate to all parties in an articulate way, to see what needs to change to provide service and access to everyone.

(To the person I replied to, there is nowhere that I’m disagreeing with you, in case you’ve been conditioned to look for that)


> Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger.

A good example for folks on news.yc, instead, would be to look at hiring in tech: In particular gate-keeping by screening in only the traditionally White/Asian universities: https://twitter.com/shaft/status/1355696154990628864 Such institutionalised behaviour has ripple effects of all kinds including people from under-represented backgrounds finding it increasingly difficult to make it in tech.

In India, similar situation plays out with hiring and fund raising: https://twitter.com/arnav_kumar/status/1354780261158801409

Coming back to Robinhood, it isn't far-fetched to really view their decision, subsequent lying, and the follow-up CMA stories to be construed as "don't care about the little guy as much as the big guys" behaviour.


Robinhoods actions were all about saving themselves, and the little guys, ie their customers.

Had nothing to do with benefiting anyone else, because it didn’t benefit anyone else.


That's the very problem, in this case, it _did_ benefit the institution -- the hedge funds. By restricting buys, retail was unable to drive the demand and put shorts into margin calls (we discuss the ethics of this until the cows come home). In this very case, an unknowable amount of money should have been transferred from hedge funds to retail investors but didn't because buyers were unable to buy.


Robinhood is just one part of stock retail demand, and overall a tiny one. And institutional demand is huge, I guarantee you there were Hedge funds buying GME hoping to provoke margin calls for the shorts too.

There is no monolithic blocks here. The conspiracy crap is doo doo.


yeah, in the US it is ironic as the intelligence and defense agencies and contractors do recruit software engineers from other universities, including universities made that were originally made for minorities, most of which are closer to the capitol. this results in encryption standards proliferation and exploits and much more, which shows competence.

"big tech" keeps saying "pipeline problem" while not even touching the universe of possibilities.


You have to solve this problem at a higher level. Why are black passengers more likely to live in poor and far away places?

Obviously it will take time to resolve that. Generations at the least. But we have to do something in the mean time, or we'll be perpetuating the negative effects of social bias. We should change the short term economics using taxes and regulation as much as possible, while clearly telling people why we're doing that.


Honestly, Lyft and Uber mostly solved that while being completely unrelated to that specific cause.

It was a “UX problem” solved by a different program.



the older article is practically supplanted by the newer bloomberg article

your bloomberg article starts off with nothing nearly as extreme as “at all”, specifically using “egalitarian in some ways” such as in the case of exactly the problem I detailed

Introducing new problems and shifting where the bis occurs and for different populations than just people of color

Thank you for the insight, good to know about. I have never thought about overlaying social causes in my profile picture at all let alone on ride hailing apps, but I can see many people doing that


Yes, they show that the problem has persisted over time. Black or Hispanic people still wait longer for a car, which is the problem you described.


yes you're right


> Lets take a yellow cab driver in Manhattan not wanting to pick up a black passenger. If you ask them, they’ll assume its because the black passenger lives in Brooklyn or some other not-Manhattan place and that the driver wont get a good tip and wont be able to get fares at the destination, making it less economical.

This isn’t an example of institutional racism, just regular racism. Institutional racism would be something like legacy preferences for college admittance. Most universities and colleges either explicitly or implicitly banned or discouraged black students from attending for many decades. So, a disproportionate number of legacy students are white because a disproportionate number of past generations allowed to attend were white. Giving preference to legacy students disadvantages black students, not because anyone is being explicitly racist, but because the system is set up in a way that ends up disadvantaging them. No is looking at a black applicant and saying they don’t want them or a white applicant and saying lets pick this person, but the pattern of passing down preferential admittance to the children, grandchildren, etc. of whites who were able to attend because they were white is institutional. Legacy students are just acting in their own self-interest by using the preference system. The school is acting in self-interest by promoting the legacy system as a benefit to attending that will benefit your future children.


> This isn’t an example of institutional racism

Never said it was

Both of our examples highlight the exact same thing that all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system.

this is the most productive aspect to highlight than semantical distinctions that will dilute how much anybody cares.


> semantical distinctions

I would disagree that it is nothing more than semantics. Your example is someone seeing a black person and applying negative stereotypes to them. That is easily recognized as racist. My example does not require anyone to even know the race of anyone involved. Explicit racism is obvious to anyone around it and is low hanging fruit. Institutional racism can often only be identified through actual study of complex interconnected systems and their history.

> This isn’t an example of institutional racism

> Never said it was

You responded to a comment saying “it's similar to something like institutional racism. There probably are very few people who are openly and unashamedly racist at the highest levels of power (although sadly not zero) - but all it takes is the current players acting in their own self interest to keep perpetuating an extremely unfair and totally rigged system”, clearly saying they are not talking about explicit racism, but people acting in self interest not related to race or racial stereotypes. Then you respond with an example of someone that is explicitly racist. That is not what was being talked about and is not a relevant example of what the commenter you are responding to was saying. Discriminating against others, racial or otherwise, for economic self interest is racist and bad. But the point of institutional racism is it can happen without any individual discriminating against anyone based on race.


They acted in the only way that saved themselves and their customers from a painful bankruptcy.

It did nothing to boost Wall Street at all. And has zip to do with “corruption”.


> Rather, I think everyone acted in their own self-interest

Read the article. Robinhood arguably acted against their own interest, since they get paid for order flow (and telling customers they cant execute trades they'd like to make wont be good for customer retention either). Robinhood acted in a way that was contractually required, according to formulas set up long in advance of any of the latest market action.


Sometimes you’re caught between a rock and a hard place. That doesn’t absolve you of the direct consequences of the actions you take. Perhaps a better question to ask is how did they allow themselves to end up in this position where they have absolutely no choice but to make a poor decision in the first place? Were there no adults at the wheel leading up to this? Is this not a sign of an entirely broken system?


You are starting with the assumption they've been forced to do something wrong, I think you have to explain what that is first


All indications are that they promoted themselves as "democratizing finance" and being "for the people" (quotes are the exact words used by Robinhood to describe themselves). But as you mentioned, they were still contractually beholden to larger powers, and when push came to shove, they acted entirely within their own self interest. They lied to our face to gain business. Not only that, but they continue to lie to the media (not making it clear that this was a liquidity issue). Sure, in retrospect, it's evident that it was heading this way all along, but just because a fraud is perpetuated out in the open doesn't make it any less of a fraud.


Everyone is beholden to something to some degree.

Robinhood users grouping together in a sufficiently large and unusual trade to (nearly) take down a hedge fund is unusual enough to mean some things that they didn't anticipate having to do have occurred.


It’s about as wrong as grocery stores running out of a product to sell you.


Maybe (maybe...) they did nothing against the 'rules' but that's not going to help them much when their angry customers transfer their accounts to other brokerages.

In my book, "really pissing off your customers" is "doing something wrong" which is why if you absolutely must do something that will make your customers angry you absolutely must explain yourself as quickly and as transparently as possible.


They did something wrong, like giving everyone a margin account without asking, when they didn't have enough capital to do so. It is in their business model that this would happen. They were just quite cavalier about it!


> they make a ton of money ($100M/Q I've seen) from one of the big players in this (Citadel).

No. Citadel Securities (the market maker) is a separate entity than Citadel Investments (the hedge fund). Citadel Securities is making money hand over fist from GME. As they always do during periods of high volume and volatility. Robinhood shutting down trading in GME almost certainly cost Citadel Securities a fortune in lost profits.

Nor is there even any real evidence that Citadel the hedge fund has a very significant exposure to GME. For the entire month of January the main funds have only lost 1% in GME and 3% total.[1] Probably less in total than the amount Citadel Securities has made off the trading.

[1]https://www.bloomberg.com/news/articles/2021-01-31/the-citad...


There are two separate corporate entities, I understand they have the same ownership.

https://en.wikipedia.org/wiki/Citadel_LLC


> No. Citadel Securities (the market maker) is a separate entity than Citadel Investments (the hedge fund).

I see this line trotted out a lot. Don't disrespect your fellow HN'ers. We're not fools. I have two balls, I can throw them both in whatever direction I want. I have two cars, I can have them driven where ever I want. I have two companies, I can make them do whatever I want.

Citadel Sec and Citadel Inv represent the same people and have the same goal... to make as much money as possible for those people.


There's a legal mandated Chinese firewall between the organizations. They have entirely different employees and reporting structures. If the two were coordinating, it would have to be a conspiracy involving dozens of people in different roles across the groups.

Moreover, even if you assume that they didn't care about breaking the law and going to jail, it'd be stupid. Citadel Securities makes $6 billion a year.[1] Citadel's position in Gamestop represented a less than 1% loss to its hedge funds. At $35 billion AUM and 20% incentive fees, the impact of the Gamestop shorts on Citadel Investment's net income would be about $70 million.

You're telling me that Citadel management decided to risk jail time and a $6 billion/year franchise to save $70 million?

[1]https://www.bloomberg.com/news/articles/2021-01-22/citadel-s... [2]https://www.bloomberg.com/news/articles/2021-01-31/the-citad...


> There's a legal mandated Chinese firewall between the organizations.

You don't seriously believe this nonsense works, do you?

What's legally mandated is irrelevant unless the CEO of each organisation is constantly tracked, their every personal conversation recorded by government at all times.

If I own those companies, I can have lunch with one of my CEO's today, and the other one tomorrow. Now they both know what's expected of them, without there ever being a written record of anything.

These people didn't reach the pinnacle of Wall St by giving a shit about what some lawmakers scratched on paper and told them they had to follow. You're in dream land if you think the honour system works to keep Wall St. bosses honest.


That seems to me an important point, that the amount of losses here -- or even their entire stake in GME -- is actually kind of just peanuts to them. Even regardless of legal firewall, it's peanuts. When people are discussing it as if it's an existential threat to them.

(Also, guess what, no CEO or MBA is likely to lose a single multi-million dollar house over any of this, despite memes taking delight in suggesting they already have... that's not how it works for the rich, they can lose billions, especially of other people's money, and still be rich without even impaired job prospects).


>Citadel's position in Gamestop represented a less than 1% loss to its hedge funds.

So far.


You don't need to think one way or another. There's a process called "Discovery" and we'll likely get to it and find out what happened. Or they'll settle and we won't find out. Given the number of class actions this will happen.


> They're going to lose much of their base, and they deserve to

Where are they going to go? Even with their problems, the RH app is pretty good - especially for the first time trader with a few hundred dollars. My primary brokers app and website works, but is very cumbersome. The closest thing out there might be ToS from when I used to use TDA.


IBRK has a great app, and API access so you can write your own frontend. The explanation of trades isn't as idiot-proof, though, and it won't let you trade options unless you complete a knowledge test.


> and it won't let you trade options unless you complete a knowledge test.

This is honestly for the best, and is a feature I'm surprised Robinhood has not implemented.


The issue with robin hood has nothing to do with options. People were going long on stocks.


IBKR is great but they have fucked up before as well. When oil futures went negative early last year, IBKR's software could not handle a negative sign and led to traders not being able to close their positions. Luckily, IBKR took it to the chin and compensated more than $100 million in losses anything their clients owed below $0.

Source: https://www.bloomberg.com/news/articles/2020-05-08/oil-crash...


How is this even a question?

Online brokerages are from the first dotcom boom. They are over 20 years old. There are many well establish reliable brokers.

And many of them have cut their transaction fees to $0.

All Robinhood seems to have done is layer a fun UI over a weak trading back end and pretend to be empowering their users.


And the apps are still not very good. E-trade, one of the classic ones, works fine on the web but the app was still problematic the last time I used it.

UI/UX matters. RH's core demographic is also more likely to be app first. In some ways this is a standard HN response that completely dismisses the UI/UX.


Hmm I've seen on r/wsb that many are going to Fidelity, while a few are trying weird apps like Webull.

But maybe a better way to put it would be "they're going to lose the trust of much of their base", which might be fine short-term but long-term isn't great for them.


These days there are a number of alternatives out there. Others have mentioned Fidelity, IBRK, TD Ameritrade (Thinkorswim), and WeBull. I'd also recommend looking at ETrade, Tradestation, Schwab, Tastyworks, or Dough.


But some of those other options did the same thing in this instance per the article. WeBull and ETrade both did the same thing as RH and halted buys. TDA and Schwab halted options. The problem RH faced wasn’t a problem unique to them other brokers who didn’t stop buys were just fortunate enough to either have more cash on hand and/or have fewer trades on GME.


You're right. I only meant to shine a light on the alternatives that one has to using Robinhood.

I wouldn't move off of Robinhood for this issue, but there are a number of other reasons that I would advise others from using the platform, including poor order fills[1], constant outages, and overall lack of features.

1. https://www.sec.gov/news/press-release/2020-321


I use Schwab. They have the things that are actually important for someone getting started: ~free trades and fractional shares, but the app and website aren't as slick (though it does feel like a serious tool), and they make you go to more effort to get options trading or a margin account--I've never seen them actively promote either.


I switched to Vanguard. It seems to be fine to me.


crypto.


Anywhere but there. Who would seriously use them for their savings or investments after this? Who cares about their UI when they don’t have your best interests at heart.


That's kind of how markets work though - when things are going most in your favour it's hardest to capitalise on it as price going your way means few people want to take the other side. And there's more things going into a price than just forecast of future prices - there's also liquidity, credit risk, operational issues, etc.


They get a free pass from me. They behaved as expected (thus predictably), and saved their company. There has to be a feedback loop that limits Robinhood's (and any company's) abilities to handle meme trades. I didn't need any explanation from the CEO, because what was happening was obvious to me (and I know nothing about finance --- only that money isn't free and that there has to be a feedback loop).


What is a meme trade? How do you know?


It’s in Robinhood’s interest to speak in ways that indirectly support the conspiracy message.

They don’t get implicated in the conspiracy statements, but benefit from attention seekers like the Barstool guy screaming and hand waving. That distracts from the pretty obvious reasons why Robinhood is an awful and dangerous business and business model.

Now the mob is moving on to crypto and other scams, so the Robinhood PR strategy is perfectly executed and frankly, genius.


> Robinhood is an awful and dangerous business and business model.

That's why I scratch my head over this. It's not difficult to open a Vanguard or Fidelity account and be able to get better pricing on retail trades, even if you're paying a little up-front for certain trades. Nobody who's trying to invest in the stock market can sincerely believe the Robinhood trades are "free."

And Fidelity (for example) allows for other things that Robinhood can't. You can choose to lend your shares for shorts:

From https://www.investopedia.com/fidelity-vs-robinhood-4587945

> Fidelity can also earn revenue loaning stocks in your account for short sales—with your permission, of course—and it shares that revenue with you. Fidelity tells us that for two months of lending certain hard to borrow securities, 38% of accounts earn $100 or less, another 37% earn between $100 and $1,000 and the remaining 25% earn over $1,000. Robinhood retains all the income it generates from loaning out customer stock and does not share it with the client.


They are just another discount broker, except they attract unsophisticated newcomers with growth hacker bullshit, accomplished by offering margin trading their customers don’t understand.


>Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any new purchases using those proceeds are done on margin.

TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. And so, enshrined in law, we have this bolted-on system where you have to put up extra collateral just to be confident of something that shouldn't need said collateral.

There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.

In this case, they had to add that collateral, even when buying with money that pretty obviously was there (had been deposited years ago).

Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?

[1] https://yudkowsky.medium.com/r-wallstreetbets-is-trying-some...

[2] Incidentally, people like to ridicule Bitcoin for taking an hour to settle since you have to wait an hour to get six confirmations. But that's actually fast compared to this (centralized!) system, since you have to compare to the time after which you can "take the stock/cash and run".


> There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.

Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good. Imagine rebuilding ythe core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. You also need to meet heavy government regulation and comply with oversight.

There is a whole shit ton of reasons this process hasn't been updated to T+0. It was t+3, now t+2, and I've heard (from the CEO of Webull on bezinga power hour yesterday) wanting t+1 this year.

Edit - to be clear I'm not saying dropping the current system for a new one is the only option. I'm saying improving the system at all (or rebuilding it) is arguably one of the most challenging software tasks one could undertake and there are serious reasons financial markets are not anywhere near what is "technically possible".


When one realizes that in January 2021, some major financial institutions are still settling transactions via CSV files sent on basic FTP, the scope of the problem becomes clear!


<< laughs with tears and a devilish look in eyes >>

Regardless of the fact that most of the banking sector is still stuck on IBM mainframes from the 60s-80s running COBOL:

I have seen accountants who's only job it was to come in every day and do the same sums on Excel.

I've seen people insisting on a calculator and a printout so that they could sum up columns of an Excel table and send the results back via email.

There are valid reasons to move slowly. Transition costs to new systems are usually immense and the process is a nightmare for banks, but none of what I described fell into that category. It was just people refusing to change their ways. A report for treasury could've been instantaneous with a super simple live updating dashboard. But no. Instead, the CEO got an Excel file emailed to them every week that was put together by 40 people – many of whom entered the numbers manually.

In the industry we have come to call people involved in these tedious processes "hamsters", because they might as well be going up and down the escalator all day.

I don't think many people understand how excruciatingly slow banks move and how inefficient they are.

/cathartic rant over

Edit: (I should add for context that this was a fairly large bank in continental Europe)


Certainly, there are many inefficiencies in banking (and other industries that have been around forever). And the mismatch between trading and settlement here obviously caused some problems (note, though, only at the hip fintech brokers, not at the old fashioned brokers that insist that your trades in a cash account settle before you trade again).

However, may I suggest that the better solution to this mismatch is not to speed up the settlement infrastructure (well, that too, to an extent), but to slow down trading??

A couple of auctions every day instead of continuous limit order book trading and a Tobin Tax on trades would eliminate a lot of rent seeking, simplify lots of things, and hardly affect the fundamental functions of the capital markets at all (maybe improve them).


It's actually TSV via SFTP and well over 50% of American wealth operates this way.


I'm pretty sure we broke one of our bank client by telling them that data import will be exclusively with SFTP. We ended up allowing FTP (and thus our security certification was voided).

It was a Euro bank though, but it was barely two years ago.


SFTP if they're "compliant." FTP is still in the wild.


Tons of businesses exchange data like this (e.g. drop ship product availability, etc). Platform independent and easy to read over if things go wrong. I don't see the issue.


So they do move with times. /s


Actually a large part of financial operations goes through Excel sheets automated by mountains of VBA code.

Hilarious. It's definitely out of the if it works then don't touch it idiom.


I still use wooden sticks for roasting marshmallows. That tech stack is ancient! Can you elaborate on your objection to CSV for record transmission? What would you suggest as a replacement?


SFTP, I hope.


[flagged]


Could you please stop posting swipes and flamey comments to HN? You've been doing it a lot lately and it's not what this site is for, no matter how annoyed you may feel about some of what you see here.

https://news.ycombinator.com/newsguidelines.html


> Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good.

OP talked about how 'this is absolutely possible', but you're responding to him by saying "but we can't just drop everything and move to the new system".

You're right but that doesn't make OP's point any less correct. Generally in a legacy system we migrate by building all new features onto the new system. For instance, if the company wants to move their legacy jQuery based banking app to Vue.js, they can start by building a more orthogonal component in the new technology, so it doesn't affect the other thing. Eventually once enough things have migrated (possibly years later), the benefits of the new system justify the cost of migration even more.

Stock of an existing company like GE is different than a company which is yet to launch (say Coinbase). The best way (perhaps the only way) to migrate is to start launching new IPOs on this new system. We did migrate from being on paper to computers, I'm sure we can do it again (and hopefully with better technologies in the future...again).


What are the “whole shit ton of reasons” why shorter settlement periods are so difficult?

In particular, I’m curious why we didn’t jump straight from T+3 to T+1. Even if T+0 is especially challenging, what would make T+1 substantially harder than T+2?


As with all these changes, it's mostly about coordination and legacy systems.

Just as Y2K was a challenge and just as the 2038 date will be a challenge, it's all about pushing changes through legacy systems. ascii->unicode, ip4->ip6, python 2->3. We all know the drill. We've all lived through these things.

It's rarely a technical problem. It's about coordination across firms, domains, people, and systems that may not be known ... until they break.


Yes. I used to work at an investment bank. When the market moved from T+5 to T+3 it was a major project for all internal systems to be adjusted. It wasn't just a matter of changing a SETTLEMENT_DAYS macro in a header file. And even afterwards, it wasn't that, because there were different systems written in different eras and in different languages.

Multiply this by however many thousands of firms, all with their bespoke back-office systems. and it takes time.


What language was this written in? Did it stay in the same language? If it's say, FORTRAN, I wonder if there's value in learning it soon.


Back office system in the financial sector? You're probably looking at COBOL, although I know Caché gets used as well.


Coordination problems can become technical problems - or be caused by technical decisions.

Moving a system/network of actors from one system to a new, incompatible system? You need to coordinate the switch so it all happens at once. Can’t coordinate? Then you need a compatibility layer between the two systems.


My understanding is that the delay is due to humans in the loop. Most of the clearing is automated, but if the numbers don't add up, humans still intervene to figure out how to reconcile the differences.


Other comments have claimed that the humans in the loop are because people insist on hand calculating everything. Not for when it goes wrong, but in the first place.


I find that hard to believe, the sheer volume would overwhelm a human.


>Trillions of dollars are moved in these markets

...and they jammed when a single subreddit decided to buy GameStop shares. Just think about what that means.


The market was not jammed, only Robinhood was jammed. I could still buy GME on Schwab if I wanted


"GameStop and AMC trading restricted by TD Ameritrade, Schwab, Robinhood others "

https://www.msn.com/en-us/money/personalfinance/gamestop-and...

"Some users are experiencing issues with trading platforms Vanguard, TD Ameritrade, and Charles Schwab due to heavy volume"

https://www.businessinsider.in/tech/news/some-users-are-expe...

Not to mention that the market is made up of all platforms and several of them were downright prohibiting GME buying. Some are listed in the article. Robinhood alone has more than 13 million users.


The restrictions at Schwab (and I'm pretty sure TD) were different than Robinhood, they only restricted shorting, buying on margin, and selling naked options. Buying and selling GME/AMC with cash were available the entire time (I could do it).


... or Fidelity or Vanguard or Wells Fargo or Citibank or ...


I had heard that Schwab and TD Ameritrade suspended GME trades as well, was that not true?


They did not. They did introduce restrictions: https://www.tdameritrade.com/td-ameritrade-trading-restricti...


Theres a site for that: https://www.wherecanibuygme.com/


I was unable to look up the GME quote on TDA Thursday. In their UI, the quote is the place with the Buy button.


I used TDA via the ThinkorSwim app and it had no issues on Thursday. If you are at a PC and using the site, I'd suggest getting the TOS desktop app as it seems to be a lot more stable. It is NOT user friendly though so it may take a tad to get used to.


Related but separate. Robinhood has an internal clearinghouse which halted trading for Robinhood.

Apex is a large third-party clearinghouse used by M1 and others that restricted buys for all (most?) of its clients. TDA and Schwab both have their own internal clearinghouses so far as I know.


What? A few (new) trading platforms that are deliberately trying to shake up the market 'jammed'. The market itself was fine.


>Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good.

Which is why I didn't say anything like that. Just, that settlement time should have improved with our protocols for validating ownership, not been frozen in time.


It has. It used to be T+5 [business day] settlement until 2004, then T+3 until 2017, and is now T+2.


I meant, improved proportionally.


To be fair, That's nothing. High frequency traders have been on the order of microseconds for years. everyone trades under the assumption that the system is faster than it is. This is going to be an unpopulair opinion but wall street is esentially a government-like entity built by the elite. troughout history any scheme that destroyed market assumptions have been met by the SEC under the guise of protecting the fair, orderly and efficient market. No thought is given to actually fix design flaws in the open market. Just prosecute anyone who manipulates it incorrectly.


Russia called it a modernization when they moved off T+0 to T+2 because people wanted more slack to complete their payments.


To be fair - the issue with demanding immediate settlement is that fund transfer settlements aren't instantaneous.


I mean you can still offer credit in T+0 settlements but the real challenge (I think) is setting up an industry-standard margin pledge facility for trades to happen without immediate availability of liquidity.

Here's DTC's whitepaper from 2018 discussing some issues with real-time gross settlement: https://www.dtcc.com/~/media/Files/downloads/Thought-leaders...

TL;DR: Market makers using a netting mechanism to settle trades at the end of the day, and they often don't have the funds necessary to settle trades in real-time.


>>Imagine rebuilding the core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software.

That is a bad analogy, MS takes years to change the core because it require INSANE levels of backwards compatibility. Apps written for windows 2000 still work and need to work today...

This would not need to be the case with this type of system, there are a whole host of political reasons why the system is built the way it is, part of it is the desire to control it (and in this case the wrong people where doing things they were not suppose to)

I am sure you will call that "conspiracy", but the reality is that the investment system is setup to be slow and opaque not because of the need for backwards compatibility, or security it is that way so the "correct people" control it plain and simple


In fairness, stock exchanges care even more about backward compatibility and so it would be at least as much an issue for them.

Edit: Sorry, I say it way too much, but this merits a repeat of the one-liner: "The reason God was able to finish the earth in only six days is that He didn't have to worry about backward compatibility [or legacy system integration, or satisfying an installed userbase]."


Sure, but there's no real reason why ALL companies need to have their stocks compatible with each other on the same exchange.


> [T]here's no real reason why ALL companies need to have their stocks compatible

I think it would be way harder to trade a basket of stocks (e.g. pairs trading, going long one and short the other) if you had to worry about mismatched settlement dates across the different stocks; it would be like trading spot against a one-day forward.


You've just defined exactly what high frequency traders do to make money. They balance all stock exchanges in order to make tiny profits on the stock differences.


They don't, there are hundreds of exchanges and plenty of competitors for listings - CSDs & clearing are a pinch point.

But in some ways exchanges also function as a natural monopoly; especially for primary issuance. e.g. look at AMEX's IPO slate compared to the big two, where the market is right now - it's insignificant, and they are the #3 exchange in the US. People want to list to make money, and that means going where the liquidity is until there's a really good reason not to, like with NASDAQ's move to electronic trading in the '70s.


I think even Win95 apps work on Windows 10, not just Windows 2000 :-)

Think about all the flak they're getting for Settings/Control Panel. It's a multi-decade process to rewrite all of Control Panel, because Control Panel supports custom integrations plus it's such a central piece of software that looking at the code the wrong way probably breaks some client doing some crazy stuff with it :-)


> We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2].

We know who owns almost all the shares. It's Cede & Co. They own almost all the shares of all the publicly traded companies. But if you sell shares that aren't owned by Cede & Co, it takes longer to process them, because corporate transfer agents are sloooooow; supposed to deliver in T+2, but more like T+7.

My understanding is a brokerage is only allowed to lend your shares if you have a margin account; and possibly only if you have an open margin position. Of course, Robinhood pushes a margin account on everyone, and that turns purchases with unsettled cash into a margin position; apparently RH doesn't allow that in cash accounts, even though most established brokers do.

At this point, I'm not sure why anybody would choose RH as a brokerage. They seem less reliable, their UX is bamboozling, most established brokerages charge the same $0 comissions and give more of the payment for order flow to clients, established brokerages (tend to) have much more excess capital on hand to meet increased collateral requirements, established brokerages can enable settings to limit risky (to the brokerage) trades in volitale stocks without blocking all trades, and RH is decidedly non-transparent.


TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days.

It's worse in crypto. Try to get cash out of a crypto exchange by T+2.[1]

[1] https://news.bitcoin.com/coinbase-withdrawal-delays-leave-us...


Coinbase IBAN transfers go through in 5-10 minutes for me, even weekends. Faster than Bitcoin!


Crypto doesn’t have clearinghouses or the same notion of settlement. If you and I agreed to trade a Bitcoin, we could settle ~immediately by getting a transaction onto the blockchain. It’s not so straightforward with stock.


I use Gemini, which has been happy to wire me money that shows up the same day in the other bank’s checking account.


Again the problem is not in the crypto side but the cash (fiat) side


Nobody is really a fan of the SEC breaking trades, but many view it as a necessary evil to promote stability of the system in the face of fallible humans and potentially buggy systems.

Shortening settlement reduces the time window where the SEC can reliably intervene. Take the example I gave earlier[0] of a pension fund manager fat-fingering an order with a hypothetical 1-minute settlement window. With one-minute settlement, by the time anyone realizes the pension fund has made a 10 million USD mistake, that money may be spread across a charity, a new baseball stadium, and thousands of stock trades indirectly via an ETF arbitrageur indirectly via an options market maker's delta hedging. It's a fictional tale, but it's not far fetched in a world of rapid settlement.

Hopefully some day we have much more reliable automated systems and humans further from the loop, but until then, slow settlement increases the window to take corrective action.

[0] https://news.ycombinator.com/item?id=25953459


If you pay someone by mistake, there is already well established law for getting your money back.... And you can do it anytime within some number of years.

Theres no reason to slow the original payment down when there is a process for getting mistaken payments back.


With fat-finger trades, you're often dealing with huge amounts of money, and the counter parties are often shell corporations.

A friend of mine was actually one of the defense attorneys for a hedge fund that had the legal entity for one of its funds go bankrupt on some electricity trades where the clearinghouse's margin requirements weren't large enough. The clearing house tried to recoup its losses from a sister fund under the same hedge fund. If I recall correctly, the bankrupt fund actually lost a bunch of money to its sister fund. The clearing house ended up losing in court.

Another friend of mine runs an electricity trading fund, and was pretty upset at the ruling. After the court loss, the clearing house needed to recoup its losses by raising fees.

Once trades have actually cleared, the only recourse is often a messy court battle.


> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?

That is how short selling works and it is not a controversial process. It is normally transparent or invisible to the owner of the shares, eg you still get your dividends and can sell the shares at will. My understanding is that if the short seller goes bankrupt and cannot repurchase the shares, the brokerage provides the shares to the owner and takes the loss themselves.


> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?

That's how your "free" trading account is paid for. If you don't like it, fine! Just be prepared to pay per trade and per month.


Other brokers lend out your stuff too.

> TD Ameritrade earned about 4.1% and E*TRADE earned 3.5% from securities lending. Schwab’s is upper bounded at 2.2%. Interactive Brokers was an outlier at about 9.7%. (These are all net of payments to clients; Schwab, notably, passes the fee revenue for their mutual funds to the fund shareholders.)

https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

All RH did was figure out there’s enough money sloshing around to do away with commissions and disrupt them.

After RH, other brokers cancelled commissions without going bankrupt.

I’d be using RH if I could too. So many $s spent on commissions that were just a profitgrab.


But... 2-day latency for purchases of interest in companies sounds perfectly reasonable given the notional purpose of those transactions. Isn't the real scandal that we've built a huge trillion dollar industry around this idea of "trading" that has nothing to do with the asset being purchased?


We do know who owns the stock. That's how dividends are distributed.

The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; first you trade, then you settle the trade. It just works on a T+2 basis.

> people like to ridicule Bitcoin for taking an hour to settle

What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.


>The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well;

If what you were saying is true, we wouldn't be the problem under discussion. The fact that it's not true is why we do. If we could have such certainty in the moment over who owned what stock, then we wouldn't need to put up collateral to hedge against the possible failure-to-deliver.

>>people like to ridicule Bitcoin for taking an hour to settle

>What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.

The question is about latency, not throughput. That is, Nasdaq might throw up $300B/day worth of tentative transfers, but you still have to wait 2 days to "take the assets and run".

And two-day latency is still bad when, unlike Bitcoin, you can take advantage of centralization and lack of anonymity.


According to [0], Bitcoin has a volume of ~54B in the past 24 hours (from posting). So it’s not the same, but it’s a damn massive amount. It’s less than an order of magnitude.

[0]: https://coinmarketcap.com/currencies/bitcoin/


Fun fact; back when I worked in finance (2015-2017), forex trades including Bitcoin actually settled slower than anything else by about a day. Our pipelines had to detect crypto trades in order to fix the expected settlement date.


Why did they settle slower?


Not clear to me. I wasn’t involved in settlement; it was just my job to make sure the system reflected external reality. In the case of BTC trades we were just told what the system did, not why. It also was a relatively simple “crypto trades settle in 2 days” algorithm which didn’t require a lot of investigation on our part.

I will say that a lot of finance stuff is driven by norms and history, and it can be surprisingly hard to change things. My favorite example is the British “gilt” bond. Most government bonds have “coupon” days where interest is paid out, and obviously the traders of these bonds like to calculate the accrual of interest between them when trading. Gilt bonds, so named from the gilded edge the paper used to have, pays out the coupon to whoever has the bond a few days before coupon day because in the 1600s it took a lot of effort to figure out who actually had the physical bond paper. Back when I worked in finance they still had this system from nearly 400 years ago. Obviously the ability to sell a bond and still collect the coupon wreaks absolute havoc with the interest calculation.


> stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?

A great thing that helps keeping the fees down, and understood by everyone in the industry, and (thanks to elaborate and battle tested systems) hardly ever a problem. Just like overbooking on airplanes.

There are enough problems in the financial industry; this is not one of them.

Next, brokerages are not allowed to use customer money as collateral, that's why they don't use "money that pretty obviously was there (had been deposited years ago)."

Regarding "people like to ridicule Bitcoin": the equity markets have many orders of magnitude more transactions per day than crypto can handle.


Yes. DTCC and their T+2 settlement are the villains here. It's a ridiculous legacy system that needs to go.


DTCC is not a villian. You would have the same problems for any settlement greater than T+0 and in the limit T>0 the problem actually increases as you eliminate the possibility of netting positions.


How does the problem increase if settlement is measured in milliseconds instead of days? Retail brokerages could just wait for trades to settle instead of trying to maintain this fiction that trades are done before they settle.


What problem does moving from T+2 to T+0 solve exactly? Aren't the capital requirements the same, and hence the outcome would've been the same? I'm no expert on this topic so I could be wrong.


The entire point of collateral is to hedge against you not being able to provide the money in two days, when the share actually is exchanged for cash. If, instead of collateral, you got the cash, capital requirements would be reduced as you would get the money from sales immediately, and wouldn't need to keep a pile of money to collateralize buys while waiting on the income from your sales.


It (effectively) eliminates counterparty risk if you can move money & stocks fast enough. That (theoretically) drives capital requirements down to 0 to settle trades.


The absolute speed/latency of trading is not relevant; what is relevant is the speed of trading decision relative to the speed at which information propagates to all involved.


We're not talking about trade execution here. Trade execution is already fast. We're talking about settlement.


Their legacy system is kinda the villain though. It's optimized for large institutional clients who don't have immediate liquidity to settle trades.


Unlike Bitcoin, stock trading errors can be corrected. The review process isn't automatic.


I think ethereum showed us that the blockchain can be corrected when they screw up.

Just depends how important the people are that lost.

https://www.wired.com/2016/06/50-million-hack-just-showed-da...

If I fat finger something on TD Ameritrade, nobody is going to rescue me.


It seems they might under certain circumstances, but you need to ask for a correction within 30 minutes? I don't know how you'd do that on Ameritrade.

I'm guessing this isn't about the normal UI that most customers use, though. I imagine it's possible to submit bids and asks at any price, and someone could fat-finger that. So, someone who put in a bid at 222 for a stock that's trading around 22 might have a reasonable case that it's a typo for 22.2 and should be reversed.

https://www.investopedia.com/terms/e/erroneous-trade.asp



Wait until you find out that stock can be traded even though it doesn’t actually exist


The reason for this is the fact that large businesses profit from being the middle-man here. Moving towards automated settlement on a blockchain reduces cost and increases efficiency,it's a win-win for everybody except the middle-man


There's nothing in fast, cheap, automated settlement that requires a blockchain. A centralized system should cost less, at least compared to a proof of work blockchain, due to energy costs.

Also, stock markets are heavily regulated. In a centralized system, it is relatively easy to enforce regulations. How do you do that in a blockchain based system?


Blockchain is the biggest "solution looking for a problem" of our time and because it looks like we've entered the meme age, I'd not be surprised if everything was reimplemented with blockchain regardless of the fit.


There is a massive overlap between /r/wallstreetbets, Elon Musk fan-boys and crypto enthusiasts I bet, and this mess has something for all of them: gaming, FOMO, evil short-sellers, beating the system, lots of diagrams with arrows and an app that's easy to use and easier to blame.


Having the stock market emit 325.95 kg CO2 per transaction [1] is one of the few ways I've ever heard to make the stock market significantly worse for society -- irrespective of your current feelings about it.

[1] https://digiconomist.net/bitcoin-energy-consumption/


There’s more to crypto than Bitcoin.


Why would a blockchain be better than a traditional database for this? Making it decentralized is a non-goal, so what would the advantages be?

The real issue is not the specific technology, it's that it's an ancient hodge podge.


No. The issue is that you have no central ledger of ownership of stock, but instead many firms' individual ledgers. You also have various kinds of risk of fraud, etc.

T+2 is an atomic commitment algorithm that leaves enough time for humans to make phone calls and discuss the implications when there's going to be a failure to deliver or another anomaly from fraud or globally inconsistent state.


It's far more centralised than you think, dematerialization isn't 100% complete but Cede and Co. hold the ledger of who owns what - at least to the extent that is possible.

https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...

https://en.wikipedia.org/wiki/Cede_and_Company


Blockchains are about decentralisation and removing the need for trust. But neither is necessary in the case of stock settlement. If you accidentally have the DTC send someone a bunch of your shares, you politely ask that person for them back and you’ll likely get them. Try doing that with a blockchain (especially if you accidentally send them to a nonexistent address)


Blockchain does not do anything a database cannot. It's a pointless application of the technology.


Who do you think "the middle-man" is here, exactly?


I’m not very familiar with stock settlement, but I’m quite familiar with the settlement of some other, less regulated instruments. These often also have two-day settlement but seem less dysfunctional. So I’m not convinced that the T+2 settlement is the problem per se. To the contrary, T+2 settlement gives people a chance to correct errors, if any, before anyone takes the money and runs.

I can imagine a two-day settlement system that works better. Specifically, all parties would need to post cash with the clearinghouse before buying and to post stock before selling. Customer funds would be expected to be used for this purpose — no broker should ever go bust because their customers bought stock too fast. And, critically, unsettled receipts would be valid collateral, possibly with a small haircut. So, if you sell one stock, you can immediate use (most of) the proceeds to buy something else without needing to come up with additional collateral.

In effect, this would be immediate settlement plus two-day escrow.


That's literally exactly what currently happens. Every stock has a margin requirement, you post cash with the clearing house as a percentage of order flow. When a particular equity becomes highly volatile, the amount of margin you need to post goes up. In GME's case, to 100 percent. So when somebody on Robinhood uses instant deposit, Robinhood has no access to your funds for a couple days, but when you buy GME, they need to put up 100 percent collateral on your behalf when they submit your order request. They simply didn't have the liquidity to cover all of that.


As I understand it, Robinhood cannot use customer funds to satisfy their collateral requirement, nor can they use the proceeds from sales that have not settled. And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.

The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.

So no, I don’t think the market already works the way I proposed.


>Robinhood cannot use customer funds to satisfy their collateral requirement

Of course they can. That's literally what they're for. When I buy 100 shares of SPY, the brokerage requires that Robinhood attaches a percent of required margin to submit the order to the settlement clearing house. Ideally, that's a percentage of my money, or their money, or whatever.

>And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.

Naked shorting is illegal. You cannot sell shares you aren't able to locate and purchase. The GME clusterfuck happened because people bought GME and sold them short to somebody who turned around and sold those same shares short again.

>The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.

They need to come up with cash due to the fact that they don't require your funds to settle before you trade with them. Basically they're fronting the settlement fee for you assuming that your money will clear before the settlement clears. ACH takes 24 hours, trades settle in T+2, there's some time for it all to happen. When the clearinghouse required 100 percent margin, it meant that Robinhood needed to put up 100 percent of the cost of the share you purchased before they had a single penny of your money. It's not that they won't settle at some point, but RH has to float large sums of money for a few days in the interim.


It is not a conspiracy but the system is broken.

Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear.

The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread.

In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb.

Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them.

A lot of this is explained by the webull ceo in this video: https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be


Your argument relies on the assumption that hedge funds haven’t been margin called, and that they haven’t closed their early short positions. Many funds have claimed they closed early shorts.

The piece people seem to misunderstand the most is that total short interest won’t tell us if specific shorts were closed out. New shorts can replace old shorts at the higher price.

It’s like arguing that nobody could have lost their job or got a new job because the national unemployment rate was unchanged. Aggregate numbers don’t tell us about specific shorts.

Is it really so hard to believe that people would want to short the downside of an obvious short-term market bubble?


Yeah. I find it hard to believe that any serious money is shorting anything remotely close to a meme stock right now. Who the hell would want to risk their career on a trade with infinite downside when it seems like the prevailing market sentiment is crush the shorts?

Don’t forget that this is a market where most people believe TSLA is vastly overvalued.


I mean, I'm not willing to risk my money on a short (and I wouldn't recommend anyone else to either), but I would be intensely surprised if the stock is not below $50 at the end or February. If the current price is north of $300, and holding costs on a short for a month aren't too bad, there's like $200+ of movement there to capture. Pump and dump is going to dump at some point. The market can stay irrational for a long time etc, but I suspect that's less true when everyone knows it's being irrational.

I'll just leave everything in my three-fund portfolio though, cause boring is the right fit for me.


On the contrary, as the gap between the current price and the range everyone knows it will fall to eventually grows, the stock is becoming more and more attractive to short to people with "serious money" and a little appetite for risk.

Meme stock just makes it look more like a huge opportunity on both sides and in the long run everyone knows which direction it goes from here so the opportunity is clearly more on the short side if they size their position so they can hold it long term. Even if there is the chance for further squeeze, I'm sure enough people will still feel this is a huge shorting opportunity that short interest will not go down much from here, and the higher it goes the more people will feel that way.


The share capital of the company isn't fixed... The company could issue more shares, and invest the money raised, turning the business around.

That wasn't a possibility before, but it is now. Given that, I don't think "the range everyone knows it will fall to eventually" is a foregone conclusion.


They're not in a promising sector and there's nothing to suggest raising a bunch of money is going to allow them to turn into the kind of company a market cap of $20 billion suggests.


But if they could raise $1 Billion by selling 5% more shares, they could pivot into an entirely new sector using some of their existing assets.

For example, they could make an online gaming platform using their relationships with game studios, or they could move into 'gaming cafes' using their retail space, or start designing games themselves using their storefronts for marketing.


Sure that could happen, but it's just as likely as giving anyone a billion dollars and expecting them to become a company that justifies a $20 billion valuation very quickly. The timing is important too because at the end of a mania like this that is entirely based on a quickly rising price, as soon as enough people decide this isn't going to continue rocketing up, there will be a rush to take their profits or to stop their losses.


Considering how unpleasant it is to talk to a GameStop employee (they upsell you on like 5 different things a purchase), starting a business where people stay longer and talk to them more doesn’t sound appealing for the customer.


they could even become a hedge fund !


> The company could issue more shares

It could, and GME trying to capitalize based on insane stock performance would be a real test of nerve, because it's one thing that could focus the news off the WSB vs institutions narrative and back on the business fundamentals of business, which still suck.

Maybe it works, maybe it just collapses the whole house of cards.


> The company could issue more shares, and invest the money raised, turning the business around.

It’s a retailer that sells video games. They’re not going to turn it around while Steam, PlayStation store, Amazon, etc exist.


With enough capital, they could retool and and do something completely different, like setup a network of local-market-optimized ghost kitchens (or some other completely different business model responding to current opportunities that has nothing to do with what GME does today.) It’d be potentiallty more expensive than building a similar operation from scratch, but if them using the stock price to capitalize doesn't immediately collapse it instead of providing them money (which, to be fair, is far from guaranteed) it's free money that a new business trading on its business plan and not someone else's market manipulation games wouldn't have, so why not?


The game has gotten sufficiently big enough that long-sided whales haven entered and are snapping up shares and abosrbing short attacks. See the long buying at Friday market close, institutional volume aimed at boosting close price to inflict pain on short via higher maintenance margin.

The shorts are in a corner now, their positions are underwater on paper and long whales have an incentive to keep it there.


1. Even if some shorts are in trouble (you don't know whether or not it's the same people as at the beginning of the run), others are willing to take their places.

2. Long whales also have plenty of incentive to sell. Namely they can bank their profits on a stock that is likely to collapse quickly


There hasn't been enough volume for the shorts to be closed.


Why do you say that? The total free float is about 47M shares; I understand short interest was about 150% of float but volume on GME last week was over 500M, wasn't it?


Shorts covering is expected to move the price way more that it has. That 500m vol is people/algos trying to profit of intraday movements keeping the price relatively stable (for GME)


You have literally no way of knowing that.

A hedge fund covering a short pays exactly the same price in the market as a meme-following Redditor or an intraday trading algorithm.


A more succinct explanation:

Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back.

Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay.

DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund).

Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position.

Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!


That's a succinct but false explanation. DTCC does not care if a HF is about to lose a bunch of money and maybe even put a prime brokerage on the hook. Hedge funds make and lose hundreds of billions every week. No prime brokerage would let Melvin end up near insolvency before issuing liquidation margin call and even if there wasn't enough post-liquidation to cover losses, prime brokerages have a collective market cap of more $1 trillion and are easily able to absorb a several billion dollar shortfall. It's obvious to anyone who knows what they're talking about that you are a financial neophyte inventing nonsense conspiracies.


Can you explain why the collateral required is higher (if no one has any insolvency issues)?

If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic?

I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?


A lot of that crowd here, at least on wsb people don't take themselves so seriously!


>Meanwhile, they have no problem margin calling retail.

Presumably because hedge funds have more lenient margin agreements than retail. After all, it's easier to collect from a hedge fund with billions AUM compared to a bunch of millennials living paycheck to paycheck with $50k of student loans.


Yes this is true, and sometimes they don't even need to collect because they can write off the small loss (this is explained in the video from the webull ceo).

But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.


> The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay.

If anything wasn't the market worried that RH would go bankrupt (when the GME inevitably crashes)?

Unlike retail, hedge funds and market makers have risk modelling, and they got out of trades they can't afford (plus all the shorts had collateral, if they can't afford it the broker closed it).


> Keep in mind that Robinhood also gives everyone a margin account by default.

While this is technically true, it is not a typical margin account. People cannot invest more money than they put into their Robinhood account. In order to do that, they need to switch to RH Gold.

RH Basic: I put $100 into the account, I can buy $100 worth of stock before my funds clear. (Robinhood Instant)

RH Gold: I put $100 into the account, I can buy $200 worth of stock. (Actual effective margin)

While both of these are technically margin accounts, most people associate the term "margin investing" with the latter model which requires $2000 in the account and a deliberate choice to upgrade.


There’s a very specific legal definition of what a margin account is.

Robinhood accounts are Regulation T (aka Reg T) margin accounts by default. They have limits, yes, but they are very much margin accounts. That’s how they make their UX work.

The point is that typical user activity will be performed on margin, transparently. The flurry of synchronized activity caused a larger than normal draw on their margin, which further strained their working capital.


Yes, there is a specific legal definition (I did elude to that in the post you replied to).

Most people don't understand that definition and when they hear "Margin account" they assume people are making leveraged transactions which is not the case. Even Robinhood's FAQ and documentation uses the more commonly understood definition of margin. One of the primary "Features" of Robinhood gold is "Access to investing on margin". https://robinhood.com/us/en/support/articles/gold-overview/


This is getting a bit pedantic. The reason people are specifying that RH accounts are margin accounts by default is because it’s relevant to the financial situation. Functionally, they are margin accounts even if the end user isn’t entirely aware of it.


> Yes, there is a specific legal definition (I did elude to that in the post you replied to).

Allude, not elude. You indirectly drew attention to it, not let it get away :)


sure thanks for the explanation. at the end of the day the user is trading with borrowed money, which is the problem.


IMO the "problem" is that RH doesn't tell you that (or at least their marketing makes it confusing at minimum). The way they describe it as an "instant bank transfer", not "we give you margin until your transfer clears". The former gives you the impression that its your money that you're trading with, while the reality is it's a margin account.

That's why a lot of people were angry. They were forced to sell GME because they were technically using margin and it got called, but they thought it was their own money from their own bank account. The optics are that RH forced them to sell GME when they didn't want to.


Well someone took their own life because they showed him a real data for the moment and it was in red and it was all over news. Either way they target amateur market.


If you do any trading at all, you want a margin account so you don't have to wait for settling before making another purchase. While technically the money is borrowed for the 2 days to make your trade, I would never considered it borrowed in the typical use of the word margin.


Yeah, this is exactly my point. What Robinhood is doing isn't particularly uncommon in the industry.


i agree, but given the number of new users onboarding to robinhood, it's very possible that they don't have enough liquidity to cover the borrowed money, even if it is slated to be 100% by cash in 2 days


>Everyone assuming a conspiracy theory needs to read this.

I'm not sure of your point here. Anyone that assumed there's a conspiracy theory is pretty much right. Now, if you mean the 'Brokerage X is in cahoots with this particular hedge fund theory', then yes, it's fair to argue that's debunked.

But the overall conspiracy theory of "there are forces conspiring against the natural supply/demand market forces", well, they've pretty much all had the nerve to come out in the open and admit it.

It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events and instead of facing the music they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise and exposing themselves further.

To be clear, the rest of your comment seems that we're in agreement, expect that I would go further to call a spade a spade, it's absolutely a conspiracy.


It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events and instead of facing the music they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise and exposing themselves further.

The availability of liquidity in the market at any price & at any time is an illusion. It’s an illusion that holds most of the time, but nevertheless it isn’t real.

When the market is under stress, the illusion falters & the plumbing starts poking through the gaps. If you want to be able to buy and sell shares with very fast confirmation at the prices quoted in the market then you need intermediaries who can extend the credit that enables that transaction to happen. When the market is under stress, that credit becomes more expensive & liquidity falls away. This isn’t a conspiracy or the result of collusion, it’s a consequence of the structure of the market.


> it's absolutely a conspiracy

I think a "conspiracy" requires some sort of actual coordination. A bunch of actors doing the same thing for the same underlying reason isn't a conspiracy. Lots of people going to sleep when it gets dark isn't a conspiracy.


Who, specifically, do you claim is conspiring? And to what end?

These collateral requirements were implemented to reduce systemic risk of the system failing under extreme volatility. It was designed to prevent collapse, requiring government bailouts. It wasn’t designed to break a consumer-facing investment app that didn’t even exist yet.


>Who, specifically, do you claim is conspiring? And to what end?

I'm happy to retract the conspiracy definition on the basis that there isn't explicit coordination. If you'll allow me to move the goalposts a bit I'll settle on the fact that my frustration is in the excuse-making that these actions are just regular checks and balances, instead of being the nefarious acts they are, unfair interference in the markets to the detriment of retail investors.

When you have heads of brokerages coming on talk shows (my memory of who isn't great) recently claiming that they'll open things up "when things settle down", and actually claiming "this is a $17 stock" (nothing wrong with the opinion, it's just unfair for a marketplace to be wielding their influence like that), we're living in bizarro world when the media isn't calling them out on it.

Then you have the CEO of nasdaq saying they'll consider halting trading if they can match social media chatter to movements (as if it's possible to prove causation anyway) so that large institutions get time to adjust?? When does the retail investor with their pension on the line ever get time to adjust?

>extreme volatility.

It might be extreme but it's not unpredictable. The helpless "how could we have seen this coming?" from institutions rings hollower each time throughout the decades that it's used.

The answer here is to stop the interventionalism that tries to hide natural volatility. Do you think social media is causing volatility and leaving pump and dump bagholders? Fine, let it happen on the small scale more frequently and sooner or later people will learn through frequent exposure that you can lose your shirt.

However, if you constantly intervene? You're hiding the volatility until a large event is allowed to hide in plain sight and deliver a liquidity crisis for many.


All the people angry about this were delighted when Dodd-Frank passed promising to reduce volatility risk.


> It's not the stockholders fault that all these clearing intermediaries use shitty fragile risk models that haven't accounted for rare events

Those risk models were added into the system by law because the prior risk models said that there was no way anything could go wrong so that when things did go wrong during a "rare event," the entire financial system seized up practically overnight.

This time, the only people who are complaining are the people who think they're driving the people shorting Gamestop out of business, while the rest of the financial system and the greater economy looks on in merry amusement.


They did not follow the risk models required by law. They went beyond that and jacked up the collateral requirements on meme stocks to 100%.


My understanding is that the components on the model that caused the collateral requirements to jump are actually enacted by regulation.


No, the point is that while the model would have caused the collateral requirements to jump, that's not all the DTCC did - they enacted a 100% collateral requirement on specific stocks, which is not something the models required.


How do you know? Do you write the risk models? There aren't many stocks that swing from +100% to -3% in a day.


> they've artificially turned the marketplace for these stocks into sell-only in order to stop a further price rise

What's your basis for attributing this intent to the discount brokers? It may have that effect, but as explained in the article it's fully accounted for by their need to conserve capital.


I didn't. I said it was the clearing infrastructure. (Although it all flows down to the brokers as a consequence).


And also: it happened at nearly at the same time, in the middle of the week were volume was getting lower to the days before. The price crashed just after, and the next day we have news that a lot a short positions were closed[0].

[0] https://twitter.com/ihors3/status/1355234358194556928?s=21


The problem with this theory is that it wasn’t just Robinhood. There were literally like a dozen or so firms that halted buying. Some of which were well known long established firms (Merrill, etrade).

These firms should have had no problem continuing allowing purchasing.


> These firms should have had no problem continuing allowing purchasing.

Their costs increased 50x overnight - so they definitely should have had problems. DTC required a few percent collateral, and then overnight required 100% collateral on $GME. No business (well, fidelity and a few others weathered it) is able to increase short term liquidity 50x overnight.


Couldn't they just add a requirement that GME can only be purchased with settled funds? That seems like it would solve the issues mentioned above


Settled funds means two days that is longer than the whole situation. It was mainly new money anyway so the accusations and anger would be the same?


Their CEO went on CNN and stated there were no liquidity problems at RH.


He said they’d used their credit lines, just that there wasn’t enough of a liquidity problem to affect the rest of the business. And then they got another $1B the next day.


The article discusses this- excess buys and market volatility lead to increased capital requirements by clearing houses, so it wasn't necessarily specific to robinhood.


When powerful people need to bend the rules, they don't do it outright. They find cover. And if there's any discretion in how much liquidity clearinghouses require, that's what they'll modify.

You'll see similar things when influence is sold. Speakers are given huge fees for basic speeches and then they know what they should do. Nothing is spelled out, because that would be dumb.


If you gave me a lot of money, I wouldn’t need to do anything for you because I’ve already got your money ;)


Are you saying that influence either isn't sold or is spelled out in explicit terms when it is? Why do pharm reps take medical residents out to expensive dinners in nice parts of town (pre-covid), are they just nice people?


Giving someone a nice dinner isn’t giving them a lot of money, though. You get influence by not paying people enough that they can leave, but making it seem like you might in the future.

And yes, most marketing spending is pointless, and that’s just another kind of marketing.


> There were literally like a dozen or so firms that halted buying

My understanding is these firms halted buying on margin. Did anyone else halt for non-margin accounts?


They halted buy on stocks(no margin) on Interactive Brokers which powers most of the retail apps in Europe. I think the other brokers did the same. If you listen to this guy it's pretty clear he'a protecting the hedge funds.

"If our customers loose money we have to put ours" https://m.youtube.com/watch?v=7RH4XKP55fM


Looks more like he is trying to protect his company. ( If the Hedge fund or clearance house fails, the broker would loose a lot of money).


Yeah, better let the retailers loose..not market manipulation, just driving the stock to the right price where both the broker and the hedge wins. I wouldn't call this a free market.


Is your underlying theory that with no intervention the stock would have no choice but to go to the moon?

Seems pretty bogus to me, there's still liquidity (so that's nothing like VW squeeze, where 75% of the market was cornered by porsche and 20% was held by a german state, leaving only 5% available for shorts to rebuy). Also current shorts were likely made at a much higher level.

And GME could do like AMC and AAL and issue more stock (why wouldn't they, it's like free money).


>> Is your underlying theory that with no intervention the stock would have no choice but to go to the moon?

If the retailers hold the line they will squeeze the shorters. They already did it but the bulk of the juice is still there. VW is not the only example. Tesla is a more recent one. Of course GME could issue new stock. Many executives liquidated/sold their positions. AMC already issued new stock. These are different issues.

Restrict the buying of any given stock(i.e Tesla), halt it intermitently and then announce that you are banning it because it's too volatile and speculative.

What's the expected result? I could bet its goes down and that's the whole point I'm making: the brokers and hedge fund managers collude to the drive the price down. They decided what the stock is worth or better said what the price should be at the expense of the buy side/retail investors. This is a predatory environment not a free market. Imagine if the brokers would suddenly liquidate the hedge funds shorts due the volatility.


> If the retailers hold the line they will squeeze the shorters.

As long as there's liquidity (and it seems like there is, the entire float is trading every day), sure some short position might give up because they lost their bet (assuming they're not hedged anyway), but there's always going to be someone else shorting at a higher and higher level, and in the end the shorts will inevitably win.

Even without any trading halt, it would end up like all pump and dump, with a few winners (those who dump or short at the top).

And in any case there's probably only a handful of hedge funds playing (and some will lose, other will win), and those being neutral in it (eg market makers) will win as well with all the trades.


EToro in U.K. halted it - no margin account, we have instant transfers of cash.

Managed to buy $beermoney worth in the end to say I was there, although that was at 20% higher than I tried to (not that it matters)


They’re a cfd broker aren’t they?


No, I have no margin on my e-trade account and was abruptly blocked from all GME-related trades without warning on Thursday. Plain old cash buying.


> The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.

This was my impression too, especially from RH CEO’s interview on Chris Cuomo. He tried to communicate that they were effectively getting margin called, but without explicitly saying it, vaguely referring to SEC and exchange rules and regulations, hoping the audience would read between the lines. But not giving a straight answer just fed the conspiracy theories.

In hindsight, considering RH raised $1B additional capital a day or three later [1], it would have been better for him to have just been explicit about it.

“Yeah Chris, here’s the problem. As you know RH enables no-fee trading and instant trading the moment you join. We maintain margin accounts with our exchange partners to risk manage this.

However, the massive rapid influx of new users combined with the unplanned-for three-sigma increase in volatility in these stocks caused us to hit our margin limits with the exchanges. We’re getting margin called at unanticipated levels and just don’t have the capital buffer.

We’re raising additional capital as quickly as we can to fund our margin accounts and re-enable trading, but until that’s accomplished we have no choice but to disable buys on these high-vol stocks.

We disabled buys and not sells for two reasons: 1) only buys require margin in our system, and 2) if you think traders are angry when you disable buys, they get even angrier when you disable sells and lock them into a position that could suddenly go against them.

To our customers, we’re terribly sorry about this and are working overtime to solve the problem. We’re raising additional capital to increase our margins with our exchanges, and are updating our risk models to better accommodate such black swan events going forward. We’re listening to complaints and suggestions and evaluating additional ideas we hear to improve our service.”

Something like that I’m sure WSB would have bought, and eventually forgiven them for.

[1]:https://news.ycombinator.com/item?id=25954539


But even once they did they still lowered the limit to 5 shares, then 3, then 2 then just a single share.


I imagine they have some function determining this, that correlates number of shares available per user, number of users, and RH’s own capital buffer.

When combined with the massive influx of users all wanting to buy the same stocks, their newly raised $1B capital buffer is getting diluted across a larger and larger pool of traders.

/r/wallstreetbets jumped from 1.7 million users to 6 million users in just a few days. Some portion of those either joined RH to buy GME, or already had a RH account and started using it to buy GME.

https://www.reddit.com/r/wallstreetbets/comments/l7u8h5/remi...

And GME only has 65 million shares outstanding in the first place, so max available shares per WSB trader alone is ~11.5. Factor in the broader market and it's less.

https://www.reddit.com/r/wallstreetbets/comments/l83va0/gme_...


They also didn't just do it for high volatility stocks - they are doing it for "competitor" stocks as well. IPOE is limited to one share now, right after their merger with SoFi (a Robinhood competitor).


This may be a perfectly good explanation, but if this is the case, why doesn't the Robinhood people release a statement explaining this instead of the puff piece the CEO did for PR.



After the CEO got caught lying on TV, that's unacceptable.


The "lied" bit is debatable because there's multiple ways of interpreting his statement. It could be "there's no liquidity issue [and we could have let GME stock trade freely without running into liquidity issues]" but also "there's no liquidity issue [anymore, because we stopped GME from being traded]". The former clearly favors WSB's narrative, so that's what everyone there believed, even though it's reading too much into the CEO's statement.


WSB users are known to exploit Robinhood problems for fun. There was one case a few years back where they found a way to evade margin requirements and get arbitrarily high leverage, for example. If I were Vlad Tenev, I'd be seriously concerned that a detailed description of which kinds of trades cause problems for Robinhood would be used to collect WSB accolades by knocking the company over.


Quite a brush to put all wsb "accolades" in the same bucket. I could say some very nasty things about some ycombinator "accolades" as well.


> WSB users are known

That's a dubious way to refer to people. There are 7.5 million users in the sub at the moment.


Because they are better at growth hacking than providing a service


More to the point... why didn’t Robin Hood simply make the buys in those tickers REAL buys instead of margin buys and explain the situation?


Because that's not actually the problem. If it was just ACH deposit clearing time, I'm sure they could have found bridge money rather quickly for that as their ACH failure rate has to be tiny.

The problem was clearing house margins. It went from a few percentage points every buy of GME to 100%. You cannot use customer money for these deposits, it must come from the brokerage firm's funds itself.

I think it really needs to be discussed that there were multiple "liquidity" crunches for RH here, one far more significant than the other.

You could have had every single buyer of GME locked and loaded with $100k of cash in their account for a month, but if they all bought GME last week for cash RH would still have the same exact margin requirement problem they have now with their clearing house. That they still had hundreds of billions of their customer's capital on deposit would have been irrelevant.


Why can't you use my money as collateral on the securities I told you to buy for me? Is this a "funds transfers used to be very slow" thing between the broker and the clearinghouse?


This was the biggest issue of the article, if I buy a share with cash I already deposited with broker, the broker will use 100% of that cash to buy the share, whether as margin first or straight paying for the share. Can any explain to me why RH would need to put collateral/margin up for shares bought with successful customer deposits?

The other explanation is that they are running a b-book that is underwater due to the runaway success of GME and have big losses from that.


This has been difficult to find. It seemingly follows from Rule 15c3-3 . https://www.sec.gov/divisions/enforce/customer-protection-ru...

But that's something of a slog to read. The closest I've found is footnote 13 in this rule change, which notes that it was requested to change this requirement. I haven't found anything contradictory.

https://www.sec.gov/rules/sro/nscc/2013/34-69302.pdf


So the brokerage is always required to sit on the buyer’s money just in case they can’t readily get the securities or the collateral from the clearinghouse, and the buyer can’t even put up extra money to make sure the transaction can go through. Weird, but good find.


So much of Robinhood's product is built on the facade of a margin-account-not-being-a-margin-account that that would be impractical.

Doing so would have likely pissed people of more.

"New sign up to Robinhood? Just started a transfer? Awesome! I know all our marketting material says 'trade right away', but actually you have to wait 2 days right now."

"Just sell a bunch of other stock in order to buy GME? Well, unfortunately right now you can't use that money for 2 days. See you next week! Ps: thanks for the taxable event that you probably wouldn't have done if you understood that you'd have to wait!"


https://twitter.com/Camp4/status/1355701648182501378?s=19 presents an argument about how they should have and how it might've been done well


1) All accounts were banned from buying these shares, even ones whose accounts had cleared funds.

2) If margin requirements were the problem, why not inform the user that due to the unusual circumstances, the increased margin cost would be passed onto the buyer?


Margin is a red herring. Robinhood cannot use client money to meet its clearing fund deposit requirements. Whether the buys and sells came from margin or not doesn't matter.


And most importantly, why was only buying of meme stocks disabled? This argument doesnt hold up to any scrutiny


Because those are the ones that push up the required collateral with the settling firms. The meme stocks are buy-heavy and highly volatile. Stocks that are less volatile and have matched buy-sell rates don't. Halting buys of meme stocks meant that RH needs less collateral with settling firms. Halting other buys doesn't change a thing.


Robinhood has also halted 50 other stocks including arbitrary ones like AMD. https://investorplace.com/2021/01/robinhood-bans-reddit-stoc...

There must be more to their internal situation they aren’t telling us because they probably just imploded their IPO


The same outrage (or worse) would occur if they halted sells. Could you imagine if the price tanked and people couldn't exit their position? It is a lose-lose situation. And I think a lot of people would consider a full block to be worse.


Yeah I guess that makes sense. Maybe the takeaway is to not use meme brokers to buy meme stocks


They can’t halt sales because brokers aren’t allowed to halt sales.


And most importantly, why was only buying of meme stocks disabled?

You gave yourself the answer. The collateral is connected to the volatility. The meme stocks saw their price volatility increase massively, therefore the DTCC collateral demand was raised from 3% (low-volatility) to a whooping 100% collateral.


It does appeal to the "oh they're still a startup" mentality, perfect for the HN crowd


Giving people who don’t understand margin a margin account is the easiest way to have them blow themselves up financially. Most people think that this leverage is free, it’s not, and it multiplies your risk. If you are wrong you’ll be twice as wrong. If Robinhood should be criticized for anything it should be this.

There’s a reason people have to usually apply for a margin account separately. Automatically handing them out is a recipe for disaster.

I’m all for empowering folks to do what they want with their money but it should be pared with some sort of education.


You have to pay for "margin" in the sense that most traders think of it (for leveraged purchases). The automatic margin that RobinHood gives you is only equal to your purchasing power according to your recorded deposits and trades to speed trading velocity and gloss over the underlying slowness of the US banking system.


Could you explain how it multiplies your risk in the case of RH?


It's secured against assets that may not be worth tomorrow what they are today. Imagine if you stopped paying your mortgage, and the bank sells your house, but they only make 5% of what you paid for it because the price of houses in ubercow's neighbourhood happened to plummet recently. Now somebody else has your house, but you still owe the bank almost all the money.


But the assets are always sold before you are allowed to use the funds from those sales on RH. I don't think that analogy works. In the end, if your assets plummet in value, you don't owe RH all the money because you have already paid them it, through a bank transfer or stock stale which is already completed at a known price before you could spend those funds.

It's like a mortgage with a 100% deposit. You might technically owe money at some point, but you have already covered it completely. And the bank isn't going to sell your house because they know the full value of the mortgage in cash is already on the way to them.


[flagged]


But you're borrowing a fixed amount of money that has already been effectively taken from you. My understanding of RH (I am not a user) is that you are not allowed to spend above the amount that is already incoming to your account, via ACH transfer or via sold stock that hasn't yet settled. It wouldn't make sense for RH to margin call you because at any one time, whatever money they would ask for would already be incoming to your account. There would be no point in them liquidating your position because it would clear even later than the previous trades, which already cover any margin. And you can't sell options or anything.

Therefore I don't understand what the risk to the customer is over and above a cash-only account. I guess there's a risk that your bank transfer won't go through, or your stock sale will be withdrawn or not settle? Is that likely?


Wow, what a dick.


I stand by my comment.


>The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money.

IMO, this is why anyone wanting to "trade seriously" should NOT use Robinhood.

Robinhood is like the fast food of investing. It's designed for convenience, but makes you worse off in the end.

If you want a legit trading platform, then download Thinkorswim, Tastytrade, Schwab, Webull, Etrade, or Fidelity.

Any of the above will tell you way more information than Robinhood, give you significantly better charts, and various extras like News and Level II data for free (at least Thinkorswim does).

Honestly, just look around at the different offerings, maybe give them a test-drive, and choose whatever one suits you. Yes, you will probably have to learn the platforms, but that learning is valuable knowledge.


> Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?

I don't think anyone is discounting this. The problem is that after going through so many of these problems with various pre-IPO startups, we appear to have not learnt our lesson.

- Facebook made us think it was safe to publish our real names and pictures online, and attach them to a public profile. When cyber-stalking and cyber-bullying became a thing, they feigned shock & ignorance.

- Twitter used to suggest anonymity and low-intensity were the main goals of their product. Then they doubled the character limit just as doxing and other forms of real-life intimidation began picking up steam on this platform.

- YouTube used to portray itself as a free speech video platform, encouraging users to upload any and all videos that don't explicitly break the law. Now YouTube polices its content to such an extent, and with such murky and ever-changing policies, that speech which is perfectly legal and protected by federal law is banned without explanation. It now even inserts itself into the conversation with a degree of authority that pre-Google YouTube would never have dared attempt.


People create excuses all the time for everything. "You shouldn't hate Robinhood because they were new/incompetent/unprepared." Maybe. Maybe there's 10 different sources to they could have gotten the money from and they chose not to as well. Maybe there were actions they could have taken to solve the problem and chose not to because they were more aligned with the problem not being solved.

This is why I don't like this explanation. At face value it is a good excuse, but when you do an analysis from an ethics and alignment point of view:

  Citadel is in bed with Melvin.
  Robinhood is in bed with citadel
  Robinhood sells data to citadel (this almost certainly is at the direct cost of its users)
  Robinhood does transactions through citadel (skimming some of the money off of users transactions)
  *Robinhood is more aligned with citadel than retail*
The whole point of an excuse is to seem reasonable. Even if the excuse is true, the underlying relationships are very smelly. All of this from every side is speculation until discovery is done.

Counterpoint, trading firms across the board were asked to alter behavior: If "You wouldn’t believe the shit going on behind the scenes right now. 10 hedge funds have fallen, and our clearing firm emailed to block ALL trading platforms from $GME, $AMC, and the like." is true, then that is quite literally a conspiracy. https://www.reddit.com/r/IAmA/comments/l81l3g/dan_pipitone_c...


> Citadel is in bed with Melvin.

> Robinhood is in bed with citadel

The underlying relationships don’t exist because the two companies named “Citadel” here are different companies.


They have the same name because they have the same owner. Many in finance know the firewall/chinese wall is only pretense, information flows pretty freely obviosly with 0 paper trail


I definitely think I am under informed. Could you elaborate to help me understand?


Robinhood uses a company named Citadel Securities for some order flow, which is a spinoff of the other Citadel, but is a separate LLC and doesn't care what the other one does.

But it didn't matter even when they were the same company, because different departments of finance firms don't talk to each other by regulation ("Chinese walls").


As a skeptic, why should I believe the regulation is effective? (I am asking in good faith, not rhetorically)

Wouldn't one Citadel entity affect the other? In 2008 didn't we learn that some companies are too big to fail (and therefore also too big to effectively regulate)?


> As a skeptic, why should I believe the regulation is effective? (I am asking in good faith, not rhetorically)

It certainly isn't all the time. However, it does change over time and regulation right now is completely different from 2008 and a lot stricter. This situation where RH had to disable buys is actually caused by new regulations (some part of Dodd-Frank IIRC, and some private by DTCC but can't be arbitrarily changed) - as usual fighting the last battle causes new problems.

> Wouldn't one Citadel entity affect the other? In 2008 didn't we learn that some companies are too big to fail (and therefore also too big to effectively regulate)?

It's possible but their connection isn't that strong; we don't need to assume they'll affect each other just because they have the same name and some shared ownership. Their P&L isn't the same. Besides that, Citadel (the one loaning to Melvin) doesn't mind that Melvin lost a bunch of money, because it means they got to buy them at fire sale prices.

As for "too big to fail" it seems like a meme that prevents actual analysis of the situation. Big companies are actually easier to regulate than lots of small ones, and treat their workers better since small ones are exempt from discrimination laws and often pretty abusive. (This is Matt Bruenig theory.)


That's entirely possible and even likely, but that's still a huge market failure that should be corrected. You can't have a situation like this happening to some stocks exclusively.

Where were those increases in required DTC collaterals when TSLA/NIO/your favorite SPAC was going through the roof? The conspiracy just moves to whoever unilaterally decided to raise collateral requirements from 2% to 100% -- a 4900% increase, and nice and whole numbers that seem fully arbitrary. A situation in which people have settled in their accounts should not depend on some backdoor credit wizardry that ultimately damages retail investors.


Were those stocks moving +100%/-50% daily?


> The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.

All of the previous bits of your message don't matter because this right here killed any chance of "good faith" people might have in Robinhood. Even if there really is no conspiracy, I personally am moving 100% to Fidelity after this fiasco (in fact, I moved everything but my remaining GME that exists in Robinhood already). I honestly, at this point, have about 20% faith that Robinhood will allow me to liquidate that GME - instead they will probably remove the "sell" button at some point too.

I explicitly do not trust Robinhood anymore. It's one thing to say "we fucked up", or even "we can't handle this load anymore, we are going to need to remove the buy button". I'd be pissed but wouldn't want them scorched - at this point I hope the whole company goes bankrupt instead.


> The biggest problem is Robinhood's poor messaging. It's clear their highest priority was to avoid admission that they were running out of money. They didn't want to trigger a bank run or shake the confidence of their newly acquired users, so they tried to obscure the message as much as possible. As a result, the popular narrative assumed some sort of evil conspiracy theory.

What I don't get is, why is the fear of a bank run relevant? It's a startup and most people seems pretty YOLO about using it. I don't know anything about investor sentiment so I'm genuinely curious - I thought the SIPC covers the FDIC equivalent for RH accounts that show any semblance of trading.

In this frothy market where a bunch of investors barely do due diligence, having collateral problems from too many customers joining too fast sounds like one of those rare "great problems to have," as evidenced by the line of credit they just got extended. Even with the added risk, investors are probably lining up. I was surprised that the CEO didn't go down that line of reasoning for the marketing effect.


It might not be fear of a bank run, but of enforcement from the SEC or FINRA for not maintaining sufficient net capital.

If they did run afoul of these regulations, it's probably advisable to not admit it on televised interviews.

That would also explain why they accepted a $1 billion investment rather than expanding their credit lines, and continued to limit purchases of Gamestop stock.

Monday at open, when last week's option contracts are settled, is going to be interesting.


The problem is the CEO specifically said they did not have a liquidity issue. That means one way or another, he's a straight up liar.


Read between the lines. They didn't have a liquidity issue after they disallowed the buying of stocks that had the 100% capital requirement from the clearing houses; hence, they no _longer_ had a liquidity issue.


If your business can't function normally (i.e. you have to disallow the buying of stocks that should otherwise be purchasable) because you don't have enough money, that is a liquidity issue. This is costing them a huge amount of bad publicity and losing them a lot of customers, so it's clearly an issue. If that issue is because they do not have enough cash on hand for normal business functions, then it's a liquidity issue.


That is still lying by omission. I’m really curious what motivates you to defend these liars?


There is no conspiracy theory. Simply put both the hedge funds and the brokers have a common interest to ripoff the retailer. It's not like they are hiding, at least the guy from Interactive Brokers https://m.youtube.com/watch?v=7RH4XKP55fM


There's a little more depth to this. It's not just an influx of users or the margin they provide to fund accounts before user money arrives to RH's bank account.

Clearing houses, and clearing houses' clearing houses' have raised capital requirements for buying gme from 1%-2% to 100%. This has to be the brokers' capital. User capital doesn't count, so it doesn't matter that a user has fully paid for the share. This is unintuitive, but CEOs of several brokerages have confirmed.

That may let RH off the hook (even they they could have borrowed easily, to cover fully paid, unleveraged purchases), but it does push the "conspiracy" question downstream. Why did clearing houses make this call? After all, it's not RH's that's liable to be unable to pay. They've already paid.

At this point, there are enough credible reports confirming that clearing houses have been shutting down, or trying to, memestock buys at client brokerages. They probably do have market integrity reasons for doing so, but the specific mechanics are unclear.

Also regardless, this is a decision that changes the game/rules, affecting winners, losers, outcomes. Who was the power to make these calls. I guess it isn't a regulator.

Meanwhile, RH and other brokerages are responsible for whatever misunderstanding and conspiracies happened. "Because the stock is volatile and we're protecting our customers from volatility" is a naked lie. Start with a lie, and people will assume the worst.

FWIW, I think it's telling that the CEO of Robin Hood was willing to imply liquidity issues to avoid talking about market makers or clearing houses. I don't know what it tells, but I guess we'll find out in the coming weeks.

One thing that always comes out of these scandals is some insight into the wall street "infrastructure."


> Clearing houses, and clearing houses' clearing houses' have raised capital requirements for buying gme from 1%-2% to 100%.

Was the requirement raised 100% in the past for other stocks.


It’s based on preexisting rules involving the volatility of the stock and whether it’s the most traded stock that day.


I don't know.


What about funded accounts with no clearance in progress?

This explanation only makes sense if RH allowed the above situations to buy, yet it seems they restricted globally.


> What about funded accounts with no clearance in progress?

Other comments have already mentioned that they can't use customer funds for the deposit, so they need to pay it out-of-pocket or borrow it.


I think this is only the case when the customer has sold something and immediately buys before clearance. I'm speaking about the standard case where you purchase stocks with funds in your account -- does that also require a deposit from the broker?


The stock trade still takes two days to settle. Apparently this is to allow for correcting errors before it becomes irreversible.


You're expecting a basic level of competence and maturity that RH doesn't have as evidenced by past problems.


The logical fix would be don't allow people to buy on proceeds that haven't settled yet. Other brokerages do this regardless of the security. But instead they specifically limited buying only certain securities that their hedge fund affiliates happened to have shorts in, thereby eliminating buy volume entirely and causing the stock price to go down. It's too coincidental to ignore when there was clearly a more precedented alternative.


This is a portion of a message sent to all users that IB sent out Friday afternoon:

We are seeing unprecedented volatility in GME, AMC, BB, EXPR, KOSS and a small number of other U.S. securities that has forced us reduce the leverage previously offered to these securities and, in certain instances, limit trading to risk reducing transactions. IBKR currently has no restrictions on trading shares in those companies, and customers can open or close positions in those shares. Like many other brokers, IBKR placed options on certain of those stocks in closing only earlier this week. The plan is to lift those restrictions in an orderly manner while closely monitoring market conditions. To be clear, IBKR has not restricted clients’ ability to close existing positions in any of the U.S. securities subject to market volatility, and does not plan to do so.

The limits IBKR has placed have applied to all customers and were not limited to “retail clients” or any other group.


I wanted to disable my margin account on RH but I didn't find how... luckily I no longer do business with them.


For what it's worth, there seems to be a link in their docs to downgrade to a "Cash" account.

But with that you lose pretty much all the functionality (instant transfers, instant settlements, etc) that makes Robinhood any better than any other non-margin alternative. Unless you're a huge fan of confetti. I hear Cash accounts still get the confetti.


hahaha, I never noticed the confetti... maybe I blocked the javascript... but thanks.


Is there room for the argument that Robinhood should have seen this coming days, possibly weeks beforehand, and been raising capital preemptively?

In addition, DTCC raised collateral for specifics stocks from 2-3% to 100%, is there not room for investigation why aside from "volatility"?


It’s also worth noting that’s a different model than a lot of the big companies.

For example you don’t get margin on fidelity unless you apply for it and sign waivers and attest you can cover it.

And any intraday trades will garner warnings if you don’t have the cash in account to cover. After a couple they will axe the ability.

Robinhood intrinsically allows a lot more leverage and risk for their customers by default. And this isn’t their first snafu. They had people exploiting their margin defaults for basically infinite leverage a year ago, leverage these 20 somethings would never be able to cover.


And yet if I recall correctly, they were quite deceptive and cagey about simply telling everyone the truth upfront. Instead they said it was for everyone's own safety.


The biggest problem isn't poor messaging, it's biggest problem is that it's running too lean if it can't cover unanticipated calls for collateral. This is a game that requires some deep reserves. Hopefully when this settles down and they're able to reduce collateral requirements with the clearing house they'll keep the extra on hand.


I call BS. If margin were an issue, they could've easily paused that functionality. (just like how they magically paused trading on specific stocks)

I'll stick with Occam's razor here. They were trying to appease the hedge funds who pay them hundreds of millions of dollars a year.


>Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?

Why didn't the recent-ish pot stocks bubble or the dry shipping bubble cause the same restrictions?


It's not just RH that has disabled buying, other brokers have as well. Most notably IB and Trading 212 (which uses IB) with the IB CEO going on TV telling how that benefited them. There's clearly more going on than just some collateral bullshit that RH is spewing...


Isn't there also the related/same problem that WSB users on RH explicitely and intentionally want to ruin the short sellers which unavoidable would leave the middleman/RH holding the bag?

Suddenly your users, not customers those are the market makers, are your opponents.


> Is it really so hard to believe that such an unprecedented mass movement would break the underlying business assumptions of a pre-IPO startup that was heavily dependent on their credit lines?

This sounds more like an insurance issue which Robinhood didn't want to deal with.


I’m waiting for an explanation why Starbucks is on the restricted list. It’s not volatile.


The collateral requirements depend on net buys vs sells. I'm guessing RH was tapped to the limit, and the buy limits were applied to anything with unbalanced orders. That applied to a bunch of stocks then, some that were up, and some that were down and looked cheap. (SBUX and AMD were among those down after earnings last week.)


whatever the reason it’s clear they can’t handle whatever volume they are seeing right now. who would continue to use them at this point.

most momentum trades are crowded - this implies any new crowded trade will have to be restricted.


Keep in mind Robinhood could have just restricted said herd. If they did in fact have such huge liquidity issues, it's extremely irresponsible to allow tons more margin accounts to come online.


About a dozen brokers simultaneously halted buying, not just Robinhood.


Because the cost of collateral spiked in meme stocks in unison. They had to move money around to post the massively increased cost of collateral.

Everyone seems to be forgetting how fast this all happened.


They could have simply banned buying the stock using unsettled cash or margin. Instead they banned all buys and did a terrible job explaining their reasoning.


Great. Now care to explain how the same thing happened with TDA, IB and Schwab? All under-capitalized as well?


Why did this congresswoman, a champion of the marginalized and oppressed, call for a hearing? And why only for Robinhood, when several firms had the same policy? And why is the SEC not also the subject of her proposed "hearing?"

https://twitter.com/AOC/status/1354830697459032066


Because the people who feel robinhood wronged them are most likely to donate to her campaign. Not as many IBKR users in her fan base.


Less cynically, she may have heard from more constituents who were affected by the RH policy than other firms. Doesn't have to tie specifically do 'donations' or 'fans'.


It just seems odd to stand up for the rights of the oppressed to speculate on puts, shorts and covered calls.


The sentence right after that, in her first reply to herself:

> Inquiries into freezes should not be limited solely to Robinhood.


because it's mostly for show?


But... Wouldn't that mean they need to halt all buys? Why only the ones being targeted?


It sounds like the problem was sign-ups then, not trades.


There is no temporary lapse in Integrity.


prag you have been a warpath, I hope robinhood is paying you well for this


Lying (and hiding this type of information behind dodgy reasons is tantamount to lying) is illegal also.

Did they do a per-customer assessment?

Why did they not just close shop for the day? At least that would have been honest.


>Lying (and hiding this type of information behind dodgy reasons is tantamount to lying) is illegal also.

Were they lying? They made carefully crafted statements that were true, which wsb proceeded to extrapolate to fit their narrative that something nefarious is going on.

>Did they do a per-customer assessment?

The deposit requirements are not dependent on the customer's credit abilities (see also: they can't use customer funds), it's directly dependent on what stock they're buying.

>Why did they not just close shop for the day? At least that would have been honest.

"I wanted to cash out last week but robinhood shut down! Robinhood caused me to lose 80% of my investment!"


Did they release the true information?

No. Like Bill Clinton, “they did never have sex with that woman”, which in a way of understanding is technically true.

Either the market flows with honest information or it is being rigged.


>Did they release the true information?

I guess?

* Did they shut down trading because of volatility? Yeah technically because the volatility was what caused their deposit requirements to go up.

* Were they having liquidity issues? No, because they shut down trading before it became an issue.

>Either the market flows with honest information or it is being rigged.

I'm having trouble imaginging how him lying cause the game to be "rigged". Specifically, how him lying caused material harm to the robinhood users. People saw trading was restricted, so they jumped ship to other brokerages. They'd have done that regardless of whether it was caused by gremlins in the server room or liquidity issues.


So they should penalize all their other clients who are not involved in trading GME? Everyone else should pay the price because DTCC raised collateral requirements to settle GME trades?


I want to believe you but then I see how the short sellers think about these kinds of situations: https://www.youtube.com/watch?v=VMuEis3byY4


Its in poor taste to call it a "meme stock purchase" when it legitimately has a chance to make (and for many has already made) investors a lot of money. While there are memes around the stock purchase (no different than with TSLA) it is a very legit investment strategy and market opportunity.

This was not Robinhood denying a couple redditors some meme material - it was a company denying many regular americans a once-in-a-lifetime investment opportunity (and in itself the practice may have suppressed the power of that investment)


> Stock trades don't settle until T+2

This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba. They can do it in a matter of seconds. But the people up at the top of the stock market choose to not implement it. Why?

> on margin

What about high frequency trading instiutions on Wall Street? Who gives them their margins, and why is it that they are subject to much less interference than RobinHood users?


>Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba

But that's actually not true though, it takes days to settle those transactions, the payment processors just provide the illusion of instaneousness by smoothing it over with their own fungible cash reserves.


T+2 is an artifact from the days where there was paper trading and everything was done via open outcry. There's no technical reason it can't be done much faster. ATM transactions are atomic within 60 seconds. Credit cards are faster than that writing to their ledgers. And yes, while behind the scenes those transactions don't settle until next day via bank or credit card processor, there's no technical reason that they can't be done in near real-time.

In the US the reason we still have T+2 is that it benefits the financial institutions to do so at the expense of the individual. One of the many reasons I have zero empathy for the industry.


Howabout KYC,Security,fixing errors? You're really saying that there are no downsides in doing this faster?


1. KYC done ahead of time. 2. Security? How is doing it faster less secure? If anything it would be more secure because of the reduced threat area, right? 3. Errors should not happen in an electronic system. That's a bug, not an error with the parties involved. If we can do T+3 in an era with zero computing power, it's obvious we can do much faster in the year 2021.

Again, we do this in other areas where consumers demand it.

Yes, I'm really saying there are no downsides. Can you name one?


It may well be that it does take payment processors t+2 days but I think the point remains that it should not.


Even if trades settled at T+0 (overnight) there are still rules against good faith and free riding violations in addition to liquidation issues.


The reasons are a combination of human factors. Technologically it is possible for atomic transactions to be completed far earlier, but commerce is a web of interactions between mostly real humans.


> it takes days to settle those transactions

The question is: why? There's absolutely no technical (e.g. nightly batch processing) or process (e.g. physical cross-country mailiing of paper stocks) reason any more. It's 2021 not 1960, technology should have evolved over the last decades. To wait days for money and stock transfers is ridiculous


I have always been impressed at the speed of financial transactions in Europe. Since SMS became a thing, I have watched in amazement, how people have been buying cars, houses, other goods, transferring money, with their cell phones. It all happens 'instantly.' Meanwhile, when we send money from bank to bank, or to Europe, or UK, it takes 3 days, or more! Surely, it is set up by the system to collect interest during that time period? Multiply by thousands, millions transactions, that is a lot of interest collected.


Well... here in Europe the EU parliament passed laws that created the unified payment area (SEPA) as a first step and then forced the banks to offer overnight transfers. The current aim is instant payments, especially to reduce the dominance of Paypal.


you'd collect interest on money you loaned out. they'd have to be loaning out some amount of money, and even if it's just 'backed up' by all this 'inflight' money, that's not terribly safe. I think the majority of the slowness is just down to old/legacy systems, and the sheer volume of stuff that has to be touched to make upgrades. I'm not saying upgrades/changes never happen, but it's a big effort. Why do we still have relatively poor security around a lot of financial stuff? Because the cost of just writing off fraud is still usually much cheaper than the long-term effort of systemic upgrades.

Other countries didn't have as much infrastructure to upgrade, and have been able to leap frog the US in many ways.


>The question is: why?

legacy systems. Someone in another thread mentioned a lot systems still use the "move file to this ftp folder and we'll process it in the morning" method to process transactions.


Moving from T+3 to T+2 is estimated to have cost the industry over half a billion dollars in technology and process re-engineering.


Honestly, that's minuscule compared to the flows involved.


I think it is legacy thinking more than systems. If we wanted to we could have a system more like European one, but for whatever reasons we don't care enough. The behavioral side of this is far more interesting than the superficial technical issues.


If that's genuinely the case then it's no wonder people are angry. At the scale of money involved legacy tech just shouldn't be an acceptable excuse.


Maybe there are reasons other than technical ones.


> This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency.

The problem is, you have lots and lots of databases-- there's not one central ledger of every position. Settlement is effectively an atomic commitment protocol, so that if you are selling a stock you expect to receive from one firm to another, and someone else fails to deliver, you need to be able to unwind the downstream trades-- but also need all transactions to eventually become final.

The T+1, T+2, T+3 periods are convenient in human units, because sometimes it's desirable to have a human in the loop when unexpected things happen.


If only a public shared ledger was available for these institutions to settle trades on.

People love knocking Bitcoin here, but this is why the technology exists. No reason to continue letting these institutions run smoke-and-mirrors with everyone's money


Maybe eventually. Right now, there's a whole lot of problem with scaling for distributed ledgers. Big markets do 20M trades per day-- and that's just across the market itself.. This is like 50k TPS average (not peak) across a trading day; some distributed ledgers do better but compare to several transactions per second across Bitcoin and a few thousand TPS per second for most performance-oriented ledgers.

You might also not want to have a public ledger of all the ownership interests.

It also doesn't exactly solve the problem. You still have the prospect of double spend, etc, until commitment/ledger settlement. And for high stakes transaction you probably want humans in the loop talking about what to do when these things happen instead of some automated policy.


Don't get confused - other markets have end of day settlement, stocks are a different animal but its not because humans in NYC aren't familiar with databases and transaction processing.


That's the thing. If we were to start from scratch building a stock market or banking system today, we might take different approaches.

But there's a market that exists at substantial scale that was originally built around T+14 settlement (and then T+7, T+5, T+3, all the way down to T+2 which is really still brand new). And while there's substantial risks and costs that come from delayed settlement, there's also substantial benefits... and an entire global financial system that relies upon the properties we get from these settlement delays. Another equilibrium being perhaps slightly better overall doesn't necessarily justify reinventing the wheel.

I suspect we'll get to T+1 settlement for stocks and many banking transactions in a few more years (we're already there for options)... and then it may be time to discuss the benefits of various types of "instant" settlement for some subset of financial activity.


https://thismatter.com/money/stocks/settlement-and-clearing....

It’s shortened over time, but things across many parties still need to be sorted out, including buffets for fraud. Visa also doesn’t work the way you think it does, much like checks, ACH transfers, and wires also take days to clear.


T+2 is not a database limitation, it’s a deliberate decision by clearing houses to provide a window for cancelling a trade in case there are problems - fraud, etc.


Or breaks due to executions that are nonconforming


Whether or not it is fishy, it is the literally, honest-to-God truth. Not only that, it is well-known within the industry. People have floated replacing the system with something that settles faster, but they haven't.

There's a Wikipedia page on it (last edit December 2019): https://en.wikipedia.org/wiki/T%2B2


Stock trades can be corrected. I'm not sure when they will do it, but apparently you get 30 minutes to ask for a correction and they need longer to review it manually.

See: https://www.investopedia.com/terms/e/erroneous-trade.asp


> Why?

Because it allows for more internal netting, and more time to reconcile discrepancies with the tape.

If you're familiar with computers, it's the same kind of tradeoffs as doing lots of rpcs vs. batching.


Brokers! Provide short term funding. T+2 is a fact of life in North American equities trading.


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