I doubt 99% of their users know the account is margin by default. Also on the surface looks like they disabled the option to 'downgrade' to a cash account.

It also seems pretty scummy to not make this very clear that they can sell without asking.

To a normal person this comes off really wrong (and really it is, let's be honest).

All brokers are mandated to provide the legal terms of the account and margin accounts include language concerning a) the risks and b) what options the broker has available should your account fall below their required margin (which might be higher than the regulatory minimum).

Brokerage accounts, mortgages, credit cards are not click-thru agreements. There is real money involved and real risk to both parties. Not reading the terms before signing and using is an unacceptable excuse for future loss or hardship.

So by that logic predatory lending is completely fine because they technically disclose their terms. Gotcha.

Just because something is in the fine print doesn't make it okay, especially if its marketing completely differently.

Completely agreed. Margin accounts are a strange, convoluted construct, and it was wrong for Robinhood to try and present them as easy or normal.

It’s really kind of ironic. People are knee-jerk blaming RH for closing margin positions because they didn’t fully understand how they work and the risks involved. Simultaneously, the same people are blaming RH for stepping in the way of what very certainly would have turned into a bad trade for a lot of people.

I don’t take RH’s side but it’s hard to see a winning play for them, it’s damned-if-you-do-damned-if-you-don’t.

>People are knee-jerk blaming RH for closing margin positions because they didn’t fully understand how they work

People are typically given a choice to sell other assets, deposit more or close in these situations rather than getting their stock sold at the brief lowest possible price driven by the very broker closing the position. Also, typically it's only a portion that gets liquidated rather than everything on margin.

People typically get a meal on an international flight, but not if they fly RyanAir.

If you run a super discount brokerage platform, you don’t have the luxury of reaching out to all your customers to find out what course of action they want to take.

I’m not sure if RH violated their own terms here, if they did then sure, they deserve a lawsuit. I suspect they didn’t, and this is just a case of people being in over their head.

That is not always the case, certainly not in modern times. If you have a full service broker and there appears to be sufficient time to contact you, they may do so and give you a chance to pick what to close out.

However, very few people use full service brokers. Everything is now automated. The best you can hope for is that the broker provides a mechanism prior to the need to close any position to signify which should be the last one hit to pay the margin loan. As a specific example, Interactive allows their clients to pre-select one holding as the absolute last one to close.

(edit spelling)

The lowest possible price is also the point where the value of your portfolio is lowest and the margin call is most severe. It is completely normal for brokers to immediately close positions when you are highly leveraged and the market is moving quickly on a direction which might leave your portfolio at a negative value - they don't want to be left holding the bag if you take too long to respond. Generally your broker will only give you time to correct things when volatility is low enough that things won't change over the next few hours.

Fair enough. If it was all margin calls from accounts bellow the limit that's acceptable but if they liquidated everything on margin that would still be pretty questionable.

Not that questionable when volatility is extreme. The risk that the price is dramatically lower when the market opens tomorrow may be too large, and they would rather not be stuck with their customers' debt when that happens.

I agree with you. In general I think poorly for RH in several major aspects, but I'm not sure if most of the complaints here understand how a margin account works, nor how a broker - order house relationship creates a liquid market. There's definitely shennigans going on here but it's not obvious they are illegal. Hate the game not the player.

The positions getting closed was a consequence of preventing people to buy id argue. They could have closed them anyway but probably at a higher price

I wasn't aware of that aspect and that does change things. It still can be pretty shady though depending on the total borrowed on margin versus the total value of the stock owned. If someone borrowed $1000 on margin and bought stock that is now worth $2000, I'm not sure why Robinhood would have justification to sell off everything.