>Robinhood users could not sell their GameStop positions while trading was frozen, a particularly difficult situation for those traders who borrowed money to purchase the stock.
This is false. You could close positions (ie. sell), just not open new positions.
Agreed. I think plenty of articles have covered what happened that day, and the conclusion is that the central clearing risk controls (which are designed to protect both traders as well as the system as a whole) kicked in appropriately to handle the skyrocketing single stock risk.
The big problem here IMO is Robinhood's messaging. What the heck was their PR department thinking? Why didn't they just come right out and say "hey look, we have legal requirements which we're unable to fulfill in the short term, here's an explanation of the risk controls we're unable to meet. We want to help you do these trades safely, we're working to put more capital on the table for you, our beloved users"? Why molly-coddle your user base with "uhh sorry can't, goodbye"?
You must be new to RH's PR team. This is the same company that tried to roll out a 3% savings account, but had to pull it back because they deceived the public about it actually being a true savings account[0].
But the best part of this campaign was they got to keep all of the customer acquisition (even if some churned) to people they could upsell into brokerage accounts. Legality and ethics aside, this probably netted them more customers/money than the perceived mishap of the rollout...win for the PR team.
My understanding was that Robinhood was basically out of money to put up as collateral. What happens when a bank or broker announces that they are out of money? Historically, there were runs on them as customers tried to pull their money out to prevent being left with a worthless IOU.
Now, that is now how things actually work, but I could easily see such an announcement causing that.
I agree and there are lots of potential reasons, some of them better than others.
1. PR people didn't really understand what was going on
2. Ppl at the company didn't expect retail traders to understanding what was going on.
3. They had trouble with regulation in the past and are trying to appear as a legit brokerage.
4. Maybe they figured that they could get enough capital quickly enough to open up trading again or they were in active negations with DTCC. (Which they sort of did.)
This makes sense. It’s easy to speculate on the right thing to have done, after the wrong thing has already been done. In the heat of the GME pump I’m sure things where 100% chaotic at robinhood HQ
The problem was even people with no leverage were able to purchase GameStop stock. Yes, people who were using (or had already taken) any credit were locked up due to their collateral being all screwy, but people with cash were only impacted because RobinHood didn't properly manage their reserves.
Robinhood, along with half a dozen other banks/brokers who were well capitalized all decided to restrict trading, and continued to do so until the price was 1/10th of the high. Just a little poor money management folks, nothing to see here!
>and continued to do so until the price was 1/10th of the high
Because the price isn't a relevant factor. GME being 1/10th the price just means that people would buy 10x more shares, leading to the same deposit requirements.
>>but people with cash were only impacted because RobinHood didn't properly manage their reserves.
>...because they failed to prepare for a 99 percentile event?
Because they used the funds that their clients had deposited to buy stocks with as cash to make their margin business work. At least that's how I understand it.
The big problem is a retail broker shutting down trading to protect hedge funds who were short. Confirmed in Congressional Testimony: "NSCC examined the market activity and clearing member margin requirements to consider
whether it would be appropriate to adjust or waive the capital premium charge, as permitted
under the applicable rule. NSCC determined that the spike in market volatility, particularly in
the so-called meme stocks, was a material contributor to elevated VaR charges for several
clearing members, including most of those subject to capital premium charges. NSCC
determined that it would be appropriate to waive the capital premium charge for all clearing
members, using the discretion provided in the rule to reduce or waive this charge.4 Just after 9
a.m., prior to the market opening at 9:30 a.m., updated daily margin statements reflecting the
waiver were released in NSCC’s portal and revised excess/deficiency notices were emailed to
clearing members. All clearing members timely satisfied their clearing fund requirements...NSCC’s role in the market is a neutral one. It does not impose trading restrictions upon its
clearing members or their customers, and it did not instruct any clearing member to impose
restrictions during the market volatility events of late January." - https://www.dtcc.com/-/media/Files/PDFs/DTCC-Statement-Febru...
There's no evidence at all that any retail broker --- many besides Robinhood applied the same restrictions --- did anything to protect "hedge funds that were short", and substantial countervailing evidence. People have weird ideas about how settlement works.
> People have weird ideas about how settlement works.
Just to be clear... I too am not aware of any evidence that this was the case. HOWEVER, there is a clear link of stakeholders between Citadel and Melvin Capital. Citadel provides the settlement for RH and it's entirely plausible that Ken Griffin reminded Robinhood who's paying their bills. RH had the shroud of legitimate direct financial reasons to stall order flow - so it was a win-win at the loss of PR/customer service.
>Just to be clear... I too am not aware of any evidence that this was the case. HOWEVER, there is a clear link of stakeholders between Citadel and Melvin Capital. Citadel provides the settlement for RH and it's entirely plausible that Ken Griffin reminded Robinhood who's paying their bills.
In other words, "there's no evidence that they did it, but they stood to benefit so they probably did it"?
I’m not even convinced there is evidence Citadel stood to gain from Melvin doing well.
The terms of their deal weren’t disclosed but a lot of the news stories suggested Citadel got a slice of Melvin for a line of credit. That’s a pretty good distressed asset price!
It's not plausible! Among many other problems, it effectively asserts that Griffin somehow muscled Charles Schwab at the same time as Robinhood. Citadel is a big company, but it's not that big. It's just a silly claim. People know one thing about this whole situation --- that Robinhood uses Citadel for execution --- and incessantly try to derive every other thing from first principles based on it.
- Citadel has $38 billion of assets under management as of March 2021
- On January 25, it was announced that Griffin's Citadel would invest $2 billion into Melvin Capital, which had suffered losses of more than 30% on account of its short positions, particularly on GameStop
- On January 28, Robinhood, an electronic trading platform favored by many traders involved in buying GameStop stock and options, abruptly announced that it would halt all purchases of GameStop securities except to cover shorts and would only allow these securities to be sold if already held (but not sold short); the price of GME stock declined steeply shortly thereafter.
It is entirely silly, as, for what it's worth, is Warren's letter. Virtu handles a comparable amount of stock trading in the US; maybe you think they can strong-arm Schwab, too? You can pretty easily pull up a list of firms ranked by their AUM to put that scary-sounding "$38 billion" in perspective, too.
You keep saying it's "silly" and provide no specifics (the one you did was incorrect) and keep saying things like "they aren't even that large" without provide comparable numbers.
> maybe you think they can strong-arm Schwab, too?
I never said that, did I? I think its well known that PFOF is a controversial business practice because it can create conflicts of interest. That's not a new thought.
So are S&P/Moody ratings yet those got us in trouble in 2008. Just because something is a universal practice in the financial industry doesn't absolve it from conflicts / potential legalities.
What's the point of this "fun fact"? I guess the implication you're trying to make is that PFOF is bad by association with maddoff. It's easy to see the flaw with this logic, eg. the autobahn was "pioneered" by hitler, therefore it's bad.
> I guess the implication you're trying to make is that PFOF is bad by association with maddoff.
Read the full article and maybe you'll understand better? If you're lazy here ya go:
> Call it shabby if you want. Payment for order flow was legal, and Madoff fought to keep it so. Under pressure from the SEC, the NASD, the securities industry's self-regulatory body, assembled a panel to study the issue in 1990. At the time, payment for order flow was highly controversial, and opposition was intense.
I don't understand why you guys are so hand-wavy about the the idea that PFOF introduces serious conflicts of interest, when it's been debated for decades (with serious thought, not just some random internet trolls). A bunch of reddit/RH users talking about the issues with PFOF isn't new - that's my point. You seem to suggest that just because they are the ones bringing light to it that it shouldn't be taken seriously. Weird.
>Read the full article and maybe you'll understand better? If you're lazy here ya go:
Well you just casually linked a 11k word article with little context. I'm not going to read that and then try to figure out whether that article was supposed to serve as an addition to your original argument, or merely a source to back up your claim about PFOF being pioneered by maddoff.
>At the time, payment for order flow was highly controversial, and opposition was intense.
In other words, PFOF is bad because Madoff fought for it and it was controversial? That's still guilt by association, and a terrible argument.
>I don't understand why you guys are so hand-wavy about the the idea that PFOF introduces serious conflicts of interest
Because they're already obligated by law to provide best execution. They're also obligated to provide reports on the quality of execution.
>You seem to suggest that just because they are the ones bringing light to it that it shouldn't be taken seriously. Weird.
You started off by insinuating that robinhood took orders from melvin/citadel to restrict trades. Insofar as that's concerned, it shouldn't be taken seriously because there's scarce evidence.
> In other words, PFOF is bad because Madoff fought for it and it was controversial? That's still guilt by association, and a terrible argument.
I guess the statement "At the time, payment for order flow was highly controversial, and opposition was intense." doesn't mean the same thing to you as it does to me. In other words it didn't say it was controversial because it was Madoff, it was controversial because of the nature of incentives. If you're not going to read the article or understanding why PFOF is controversial (sans Maddoff or Warren's involvement) then it's not worth discussing anything here. Thanks.
> Because they're already obligated by law to provide best execution. They're also obligated to provide reports on the quality of execution.
You mean the same law that...you guessed it Robinhood violated?!
I’ll note Elizabeth Warren has made it a particular point of her platform to beat on Wall Street. I largely don’t mind cause someone ought to. But she is far from an unbiased source.
> it effectively asserts that Griffin somehow muscled Charles Schwab at the same time as Robinhood
I didn't assert that. Any brokerage that uses a provider for settlement was taking on additional untold risk (including Schwab). Schwab, in theory, has enough assets to cover something of that size of trading GME introduced but their clientbase isn't the same as RH, so the reputational risk was much lower. It was a precautionary move, not a "our company might go under and we're gonna piss off our key partners" type of move.
See my other note - you're wrong about the nature of restrictions and level of impact on Schwab vs RH (and other brokerages for that matter).
I think you need to clean up your vocabulary. For instance Citadel doesn’t settle Robinhood trades. Further during this instance Robinhood cleared for themselves.
Providing payment for order flow neither means you are the settler or the clearer.
Effectively every entity that trades securities in the US has to be either a client of a member or a member of DTCC.
Nice try, but Citadel is the largest market maker and if it were an exchange (ostensibly, it might as well be one!) then it would be almost as large as the CBOE!
You can just look up the relative sizes of those firms, you know. It's funny that you came up with CBOE as your reference, because you can look up how big CBOE is, too.
He’s trying to say that cboe is a particularly funny reference as they process minuscule equity trades. Which makes sense given they are an options exchange…
There's a lot wrong with this argument, but one of the most obvious problems with it is that lots of brokerages imposed limits on GME trading, including Schwab.
Yes, but by doing so RH drastically lowered the value of their customer's assets. It's like your real estate agent knocking down a few walls of your home before selling it for half price.
That's untrue. The DTCC waived the additional capital clearing charges for all clearing members prior to market open on January 28th. All DTCC clearing members satisfied their requirements before the market opened.
EDIT: Updated with source. I'm curious about the downvotes.
This is a WSB conspiracy theory. What in fact seems to have happened (I'm going from a reported account in Fortune) is that the NSCC substantially waved a multi-billion-dollar collateral call that would have bankrupted Robinhood because they halted trading in the meme stocks at question. WSB has taken this to mean that NSCC was unconcerned with the collateral risk.
The article quotes a third party source who claims "According to the source close to the NSCC, the lower amount came about because of Robinhood’s decision to limit trading in GameStop and other meme shares." but then the article goes on to directly say "While Robinhood did speak with executives at NSCC, the conversation entailed confirming that limiting the stock sales would count toward reducing its $3 billion collateral demand—but did not result in the amount being reduced." I don't believe this is good counter evidence as mentioned in the above comment, it seems self contradictory if anything. How could it be conditional if there was no negotiations, yet the entire thing was waived on a discretional basis?
Rubbish. TD Ameritrade, WeBull and half a dozen other brokers with gigantic balance sheets also suspended trading. This was a rug pull executed by Robinhood on behalf of it's clients.
Robinhood was able to raise 1 billion dollars in capital within a very short time frame to cover any later requirements. It might be a stretch to say that it was easy, but since it is being used for collateral (very liquid), they would hypothetically have an easier proposition to raise that capital than if they were using it to grow their business.
Source: https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea56...
Excerpt: "Robinhood, the online brokerage at the centre of wild trading in equities this week, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position after a turbulent four days. The company has drawn down at least several hundred million dollars via a credit facility with banks led by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the move."
>Robinhood was able to raise 1 billion dollars in capital within a very short time frame to cover any later requirements
What's the implication here, that "they were able to raise capital within a very short time frame so they didn't have to restrict trading"? Of course we know after the fact that they were able to secure funding. What if by 1pm they ran out of money and didn't know whether the funding would be secured or not? Do they continue allow trades and hope that the funding will come through? Do they issue a hasty statement and halt all trading?
The implication here is that there were not any "extenuating circumstances," and by that I mean that the circumstances were artificial and were the result of a direct action made by Robinhood as a result of their own poor business practices. It is not an uncommon occurrence for a retail broker to deal in high-risk securities on their clients behalf, and for those high-risk securities to vary wildly in price and liquidity. Collateral requirements are posted to all clearing members every morning during pre-market hours, and they do increase and decrease with respect to the DTC/NSCC VaR (Value-at-Risk) models. Brokers and clearing institutions maintain cash reserves and additional avenues of funding for this very purpose and we can see that Robinhood had no trouble with that aspect of their business - just like every other broker.
Likewise, it is not unreasonable for investors to expect that a broker would actually possess the shares that the investor has purchased, and it is expected that the broker would make a timely effort to procure actual shares after acknowledging that an order was filled. It seems that perhaps this expectation was broken by Robinhood's bizarre book-keeping practices. The "extenuating circumstances" are simply a result of Robinhood deciding to play a game of brinkmanship, and rather than owning up to the problem and paying out of pocket for their mistake, they decided to hurt their own customers.
>The implication here is that there were not any "extenuating circumstances," and by that I mean that the circumstances were artificial and were the result of a direct action made by Robinhood as a result of their own poor business practices. It is not an uncommon occurrence for a retail broker to deal in high-risk securities on their clients behalf, and for those high-risk securities to vary wildly in price and liquidity.
People buying high risk securities isn't uncommon, but everyone piling on to the same high risk security at the volumes seen that week is uncommon.
>Likewise, it is not unreasonable for investors to expect that a broker would actually possess the shares that the investor has purchased, and it is expected that the broker would make a timely effort to procure actual shares after acknowledging that an order was filled.
Did robinhood fail to do deliver shares? Also keep in mind robinhood doesn't operate like amazon. They're not fulfilling orders from shares they have on hand. Them being able to deliver the shares is contingent on the clearinghouse being able to deliver the shares. Them not being able to because the clearinghouse and/or their counterparties weren't able to shouldn't really be blamed on robinhood themselves.
Obviously, Robinhood did have problems with this aspect of their business, because the collateral requirements they got that morning would have made them insolvent.
You can get angry at Robinhood for being a clownfire and I won't argue. But you're saying much more than that.
Posted collateral also isn't "very liquid"; the whole point of that money is that if shit goes sideways --- and everything was going sideways at Robinhood --- that money will get spent making counterparties whole. Robinhood couldn't just give the money back to its lenders.
I maintain that collateral is very liquid as it increases and decreases every single day and is a product of risk and volume. Collateral has two "outs" where one is simply reducing risk or waiting for risk to go away, and the other is to reduce the volume of the "hot" positions or liquidate those positions. Exchange-traded securities are categorically considered to be liquid, by themselves. Perhaps Robinhood's huge mistakes have made it more difficult for them to post collateral than if they had acted more trustworthy, but that doesn't change the situation surrounding collateral itself.
The $3B collateral call was withdrawn just as quickly as it had been made - even better, since they raised $1B against what seems to be no collateral call. Robinhood actually had two ways of resolving the situation. One was to admit fault and either liquidate the underlying securities or have a portion of their clearing position liquidated, which would have resulted in the ability to return collateral and to be on the hook for the losses they caused for their customers. The other, was to restrict purchases on securities that either were thought to contribute to the VaR collateral assessment, or for which Robinhood's bookkeeping did not match between investor accounts and actual cash/security holdings.
As it turns out, neither of these options was necessary according to the facts at hand - Robinhood's collateral call was withdrawn prior to Robinhood taking any action at all, and according to media sources in a Fortune article, no negotiation took place between the NSCC and Robinhood. So there must be another reason that Robinhood's books were not balanced. However, Robinhood used the second option anyway. This is the circumstance which has led to the WSB "conspiracy" theory that you discounted in other comments, which explores the idea that Robinhood is somehow involved, either willingly or not, in some type of market manipulation in conjunction with their payment-for-order-flow market maker, Citadel, who fills basically all of their orders for them. I'm not sure that "conspiracy" is the word to use when fines, penalties, and settlements for breaking securities law are commonplace among financial institutions, but that is just my opinion.
You've basically restated the argument you made earlier, and now added further innuendo like "payment-for-order-flow market maker", as if there was another kind (even IB uses PFOF execution services for their normal accounts).
Yes, and...? It seems worth clarifying. I am concerned that you are perceiving my comments as being fastidious or conspiratorial in attitude, that is definitely not my intention and I apologize if it sounded rude, I am just concerned with the details on "how it all went down" so-to-speak.
To address the matter of payment-for-order-flow, it's a practice that is currently banned in countries like Australia, Canada, and the UK, largely due to conflicts of interest. There is actually another way of brokering which these countries use instead - it's simply paying a fee to execute the trades, old-fashioned and usually minus the confetti. That said, market makers are often given a good chunk of direct order flow anyway, which tends to move the flow off-exchange even if they are not paying for the privilege of obtaining order flow.
1) The NSCC (DTCC) confirmed that all parties met their depository requirements.
Even if they had not met the requirements (again, which they did), a depository requirement change is not an extenuating circumstance in the least. That is part and parcel of this business.
Yes: Robinhood runs a casino dressed up as a brokerage, and packaged their offering as if settlement was instantaneous, rather than an efficient fiction built out of loans extended to everyone involved in settling a stock transaction. Brokerages put up substantial capital to insure themselves from each other based on how their customers are extending themselves; there are published formulas for how these capital calls work. Robinhood did their best to hide this reality from their customers, and got caught out.
Nobody should be defending Robinhood here. People are just wrong about what Robinhood did wrong.
There are actually supporting claims for this theory from investors on Reddit who transferred "meme stocks" out of Robinhood and noticed wildly incorrect cost basis reports on fractional shares, with some screenshots showing values into the thousands of dollars per share. These posts could be found on subreddits such as Wall Street Bets, Superstonk, etc., for example: https://www.reddit.com/r/Superstonk/comments/ngs81d/just_got...
"This theory" is the theory that "Robinhood runs a casino dressed up as a brokerage, and packaged their offering as if settlement was instantaneous, rather than an efficient fiction built out of loans extended to everyone involved in settling a stock transaction."
> 1) The NSCC (DTCC) confirmed that all parties met their depository requirements.
...the morning of. The deposit requirements will go up as customers place more trades.
>a depository requirement change is not an extenuating circumstance in the least. That is part and parcel of this business.
If it's a 99 percentile event that nobody could have saw coming happened, why shouldn't it be an extenuating circumstance? Keep in mind, they're a discount brokerage. It's like getting mad that your vps from a lowendbox provider had a few days of downtime because their raid6 had 2 disk failures.
I mixed up my frozen trading stories here. It was March 2020 where we saw fully frozen trades due to internal Robinhood infrastructure failures, unrelated to DTCC infrastructure and margin.
The gist of it is that RH was cheaper than other brokerages at the time for small trades, and more expensive for big trades (because it dropped the commission (independent of trade size), but offered a somewhat worse price improvement vis-a-vis the national best bid offer, pocketing the difference (proportional to trade size).
It's not especially heinous, but they were not very transparent about it (to be fair, it probably would have taken a bit to explain that they took a greater cut of the price improvement vs the legal benchmark).
Robinhood walks a really fine line between a reputable broker and legalized gambling. There isn't much difference between Robinhood app and a casino app. I'm surprised they have been allowed to turn stock trading into a game.
I had a margin account long before RH, back when I was living on a grad student's salary, along with options trading approval. Even the big brokerages with trillions in customer assets have been handing these things out like candy for a long time.
All RH did was substantially reduce fees and make trading a little more exciting for unsophisticated "investors."
>True but at least brokers didn't make it so easy to get margin or options
They did. I personally tried (in addition to RH) WeBull and Fidelity. Both allowed me to access margin and options just as easily. The only difficulty I had with Fidelity was their atrocious UX (not just for options, but in every single aspect).
>then have cute animations and other tech-inspired addictive features.
Tech-inspired addictive features? Like which ones? The only "addictive" feature that RH has over Fidelity is UX that doesn't suck massively. Had to help a friend recently with something as simple as closing out a trade on Fidelity, and we spent 10-15 mins trying to figure out how to do it. This is a disgrace, given how basic and fundamental of an operation closing a trade is.
Imagine if gmail has made it extremely difficult to reply to an email, by making you click through bajillion submenus and dropdowns to even get to the textbox. That's how bad it is.
The first version of Options for Dummies was published in 2008. Robinhood was founded in 2013. So options have been reasonably mainstream for well before Robinhood too.
So basically the thing left to blame them for is good UX.
> Robinhood walks a really fine line between a reputable broker and legalized gambling. There isn't much difference between Robinhood app and a casino app. I'm surprised they have been allowed to turn stock trading into a game.
Mostly because not everyone is bound by that distinction. Many people recognize that the need for there to be a difference between financial games is purely cultural or religious.
Even the delineation between positive expected value games (buy and hold investing) and negative expected value games (table games at casinos) is not so binary with derivatives.
The reason this discrepancy exists in the US is because states regulate casinos and property and the federal government regulates the subset of property that are deemed securities. But despite the supporting culture, the Federal government is actually quiet on gambling, except to maintain a prohibition on financial services helping transfer funds to online gambling, allowing states to maintain their monopolies.
For me, it doesn't matter, I like to know the rules or lack thereof for whatever game I happen to be playing. For me, energy is better spent towards fixing structural issues, such as DTCC and antiquated mandates on long settlement times, which should be much shorter.
That's half of it. The other half is that trading is "commission-free." While technically true, it belies the economics of payment for order flow which results in poor execution. Rather than pay in commissions, users pay in poor prices on the trade.
When I opened my robinhood account, etrade was charging 6.95 per trade. I'm reasonably certain the loss in improvement over best public offer I'm losing or whatever is less than that. It's not "free" but the cost is way, way lower.
>I'm reasonably certain the loss in improvement over best public offer I'm losing or whatever is less than that.
Actually your broker has to execute your order at a better or equal price than the NBBO. I'm presuming that's what you mean by "best public offer", because the price improvements that you get from market makers are definitely not public.
Yes. National Best Bid / Offer. Aka, a best offer made to the general public. The argument is roughly that we're losing out on the price improvements that could have been if Robinhood's fulfillment partner weren't kicking money back to robinhood. But it doesn't hold much water for retail investors -- how much money needs to be trading hands in a given before the delta there is greater than 6.95?
Ultimately isn't everyone trading stocks without insider information gambling? You might have a 'system' for your trading strategy, but so do most serious gamblers.
When someone buys shares of stock something real -- partial ownership of a company -- is being transferred from one person to another. Those shares mean something, and anyone can read the prospectus to see what exactly those shares mean. Companies pay dividends, buy back shares, and allow shareholders to vote on who will lead the company and what the company should do. When a company is bought by another company the shareholders are paid. In theory the shareholders might receive some proceedings from a bankruptcy proceeding (in practice this is uncommon since the creditors have to be paid first and usually bankruptcy happens when debts can no longer be paid in full).
There is more than just random numbers involved. Equity prices may have a tenuous connection to reality, but there is some real-world basis for stock, bonds, and derivatives. That is what separates financial markets from casino games (which are purely random number games).
gambling is strictly chance (with the exception of Poker). While there is chance involved in any company's success, they can heavily influence it with decisions along the way. Intelligent traders learn about these decisions and invest. Dumb traders don't. Sometimes life lessons are learned the hard way.
One reason why we made http://brokenbrokers.com/ is because brokers are so unreliable. Nearly once a week, outages prevent individuals from trading DURING TRADING HOURS.
In one poll conducted in the FinTwit community, about 70% of individuals said they could not trade because of an outage at some point. Wild.
We're hoping to bring light to this issue, and hold brokers responsible.
We're aware of this, and it is an easy fix that we have in place. However, we don't have tons of users at the moment, and we don't assume people are jack**es.
This is false. You could close positions (ie. sell), just not open new positions.
https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
>In light of recent volatility, we restricted transactions for certain securities to position closing only.