Why would robinhood be any more liable than other online traders like Fidelity or etrade?
> What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.
How can you guarantee that? Robinhood likely routes most of it's trades through citadel, which has informed partners it will not be fulfilling GME or AMC or BB trades.
And it turns out Citadel is also a hedge fund that has massive short positions on GME.
Every brokerage house ultimately vouches for their clients.
Robinhood has extra exposure because clients could claim its interface induced them to overtrade.
> Robinhood likely routes most of it's trades through citadel
Do we have a source for this?
Also, Citadel just made money bailing out Melvin Capital. The short squeeze let them buy assets at dimes on the dollar. Assets which do not include GameStop shorts.
> which has informed partners it will not be fulfilling GME or AMC or BB trades
Former market maker. When trading got crazy we'd take profits. When it got inexplicable, we'd pull the plug. If we didn't, risk would. In this case, there is the additional factor of political risk--you don't want to be making millions of dollars off GameStop at its peak when that's going to cost you tens of millions of legal fees in front of Congress.
A simple explanation for Robinhood's behavior might be that their customers, the market makers, backed away from paying for this order flow.
All this said, I'd be highly pissed if my broker did this to me. But Robinhood customers have known since the beginning they weren't the customer.
>Do we have a source for this?
Yes.
https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2...
I find it nuts how this has transformed into a populist thing.
Normally, a market maker might then close it by buying a share from someone trying to sell. But in a massively one-way market like GME, it's quite likely that they build up a large enough unhedged massive short position that they say "no, we're not taking on any more risk" and communicate that to Robin Hood.
> they say "no, we're not taking on any more risk" and communicate that to Robin Hood.
Maybe, although they would probably do that when their ability to hedge started breaking down, not when they'd already acquired massive short positions.
More likely, to me, is that they would just increase the bid-ask price spread continuously as their ability to hedge degrades.
This assumes continuous liquidity. Dangerous assumption to make in choppy markets.
It is not uncommon for markets to gap up or down discontinuously. You look at the market and see bid 899 at 901, buy some shares for 898, offer them at 890 and find the market is now 125 at 901.
Corporate risk controls are also not a hard science, different risk teams can and do come to different conclusions on the same issue.
Not sure how you could possibly gaurantee that. Also given that Robinhood edit got a huge chunk of cash from a shorter makes that pretty weird to "guarantee"[1]
[1] https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2..., https://news.ycombinator.com/item?id=25945258
I'm seeing one tweet from Adam Hackney claiming this [1]. Do we have a real source?
[1] https://twitter.com/mindmeld_me/status/1354807424998281217
https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2...
But Citadel MM is more likely to pull the plug on making markets in a name for risk reasons than to benefit a hedge fund position. To say nothing of the fact that Citadel got to bail out Melvin Capital, which is traditionally a profitable trade.
In particular, I believe Citadel would gain more from continued trading on Robinhood than they would lose from their hedge fund positions.
Market makers always win.
Additionally, other retail brokers selling to Citadel Capital have done the exact same (Schwab comes to mind, but not only).
Other brokers however (fidelity), have not. If the short squeeze is to happen tomorrow, this seems an unlikely coincidence that those retail brokers affiliated with Citadel Capital tool positions that would ultimately deflate the stock.
I don't see how GP can assure that no short sellers is behind those moves.
FINRA arbitration, and the FINRA complaint process, is highly sympathetic to retail clients. When these clients lose money on GME et al, there will almost certainly be a class-action lawsuit for some fraction of their collective losses. And Robinhood's lawyers will almost certainly recommend they settle. That is the risk, beyond margin lending and options settlement, they are seeking to mitigate.
(Also, when that money is lost, there is a decent chance Robinhood will be fined by half the regulators on this planet for inducing people to overtrade through its gameified interface or something like that.)
If their customers - the firms that pay them, not app users - see the RH platform as a threat to their business they could pull the plug[0]. Or if this prompts regulators to examine RH and similar products.
The risk isn't in the outcomes of options/trades; its risk to their business model.
[0] RH's customer are actually market makers, who by and large will be profiting heavily off of this.
This point has been made repeatedly elsewhere but it bears repeating. Market makers are getting rich off this trading. Robinhood's customers are not hurting from this.
Still, as far as risk to RH is concerned - if this kicks off a change via their customers, regulators, or legal action the change is probably not in their favor.
On one hand, you could say RH shouldn't let people buy options if RH doesn't believe those people can pay up when the option expires. On the other hand, you have people buying options who maybe don't understand that you need cash to buy the shares if the option expires in the money.
There could is also the concern about new accounts trading in GME with funds that might be suspect. It's a risk you don't want to take if you don't know your customers and the bubble is ready to burst at any moment.
Interactive Brokers hiked the long margin to 100% (and short to 300%) which is a reasonable way for a broker to behave.
Killing the ability to buy is not.
The answer is no.
No, people / pundits / the media were widely proclaiming that the healthcare system would be overrun and the next great economic depression was upon us. Most people assumed the stock market would continue to fall.
This is a very tenuous argument. By law, options customers in the US have to receive an information packet and accept an Options Agreement, wherein it's clear that they could lose 100% of their premium outlay (or more). Options trading is approved based on levels; not every account can buy options, and not every options account can sell naked options.
If we are assuming good faith from RH, maybe they are trying to prevent margin-call suicides. But I don't assume good faith from RH.
Not to mention that they turned off all opening trades -- not just large trades, margin trades, or options trades.
I can assure you there are very few cattle, bison, or caribou near the exchange.
While writing, I was thinking of the thundering herd problem and imagined that individual users is more literal (than many processes), more like the thing for which the problem was named.
If I'm not not mistaken, I think you can also refer to a group of humans literally as a herd. But I very rarely think such prescriptivism (saying one should not use terms inappropriately) provides value, especially on a word that is so far past being used correctly with any consistency.
Market makers buy order flow. Hedge funds don't. The only major hedge fund affiliated with a market maker is Citadel.
Melvin and Citron placing shorting GME is an anomaly in the hedge fund world. Most institutional short views are expressed through options and structured products. (Market makers convert those options into shorts, the same way they convert calls into stock purchases.)
Market makers are making tonnes of money on this. It's the low-information non-directional trading their models are built for. (Source: former options market maker. My former colleagues are making annual targets in a week.)
Some hedge funds are getting screwed. But that is mostly over. Few funds' risk tolerances let them extend a 10x loss on an outright short. With respect to their puts, their maximum loss is the premium. That's generally baked into the risk model ex ante.
The only sophisticated parties holding the bag are brokers. Margin loans at risk. Uncovered options sales at risk. Most significantly, when the scheme inevitably crashes, almost-inevitable class-action lawsuits from clients claiming to have been misled by their interfaces.
Aren't these market makers sitting on a ton of stock to cover call positions?
They may have picked up a lot of pennies these last two weeks, but the bulldozer is getting bigger and faster. This is a truly unprecedented situation and I doubt they have confidence that their models can handle it.
> Aren't these market makers sitting on a ton of stock to cover call positions?
The whole purpose of delta hedging is to make them immune to the first-order effects of market moves. The first-order derivative of the value of everything they hold with respect to price moves in any one stock is constantly kept near zero.
In the old days, many options traders would put off hedging their books until near the closing bell. Smart equities traders would watch the options market to see which way the traders would be rushing to hedge in the cash equities market. These days, there are systems that automatically hedge out the positions throughout the day.
How many shares of Melvin Capital were bought by Citadel when they injected $2.75B? Is there a way to know how exposed they are?
Isn't there a conflict of interest in them floating a hedge fund losing money due to flow orders they are buying (or, potentially, not buying anymore)?
a) most of the platforms are doing the same
b) it's hard to imagine that with half of RH currently holding GME they're not going to come out of this having gained more in users than they lose over trust issues
Robinhood is a margin-lending options-trading broker. If a customer falls down on a trade, it is ultimately liable. If a retail customer loses money and makes a FINRA complaint that Robinhood induced them to buy through its gameified interface, it is liable. Risk and compliance likely made this call.
Also, Robinhood makes its revenue from market makers. They are the customers. Clients are not. So when trading these equities gets unprofitable, they will pull the plug. (Though anecdotally, everyone I know on the sell side in equities and equity derivatives is making a killing on this.)
What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.