>"If you wanna buy GME you gotta have the cash in your account to cover it".
That's great, but that isn't the only relationship in this agreement, RH has agreements with its brokers about capital requirements. It's fairly likely that the attitude of "You need to have cash on hand for everything" basically means "You're done". That's the entire point of these risk management strategies - you are covered for what might reasonably happen so that you're making efficient use of capital.
What you are saying amounts to "when long tail stuff happens," order flow agreements, credit lines and clearing agreements that break down."
This, very directly insulates them (Citadel, other contract originators, RH) from the actual risk they are supposedly being paid for. It's also ostensibly the reason why retail investors can't have access to the same vehicles as financial firms. Retail investors can't reliably back that long term risk. Here is yet another example of loss limits for insiders.
No one is saying that you are not right. You are. The contractual complex does melt down at this point. The rage is people who think this is not ok.
excuse me? what part of inflating GME to $400 is a deserved long term return?
this is effectively a pump and dump scheme, whether or not most of the participants think so. once the squeeze stops, no ones buying GME over $100 and everyone left holding shares better have bought two weeks ago or theyre gonna lose money.
Most of these people aren't holding any stocks. They're buying derivatives, so they technically have no stocks to dump. They will likely bet like crazy on the downward part too.
In other words, the situation is "too complicated," and the only solution is that the not-rich person should not do what they're doing with GME right now.
Got it.
1. https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
Any good lie is based on some truth. That veneer of plausibility makes everyone else carry your water for free.
What issues does it create if your whole client base suddenly want to buy GME?
I guess if volumes overall go up a lot, you might need to post more capital? But since your revenue should be up too, that's a good thing right? And its only for a while, I don't think anyone thinks this will go on for months do they?
And surely it's easier for your clearing house to clear 1 name than 10,000 names?
For no-frills, long, equity positions, it feels like it should be the easiest thing in the world to do. I'm happy to be corrected, I'm aware back office logistics is a dark art so maybe I and other readers can learn something?
Edit: I'm honestly not trying to be snarky here. I just don't get why it would be that big of a problem. I'd be happy to be rescued from my ignorance.
> Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days... our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation.
[0] https://finance.yahoo.com/video/heres-why-robinhood-restrict...
The exchange between A and B isn't direct, or instantaneous. The actual money transfer takes days, and there are parties in between that make it possible to pretend it's immediate - much like with insta-transfers of money between the banks. Apparently, these parties are on the hook for any money that is "in flight", so they need to have a substantial buffer.
Once you get this many people trading on a stock this volatile, apparently the buffer in the middle isn't sufficient to cover the risk, so the parties in the middle stop accepting these trades.
EDIT: 'imladyboy quotes the source from which I pieced most of the interpretation above. See also 'JumpCrisscross here: https://news.ycombinator.com/item?id=25951475.
All Robinhood accounts default to Reg T margin accounts.
The entire UX is built around this idea that the margin is transparent to end users. How many Robinhood users are aware that when they open an account, transfer money, and buy stocks all in the same day they're actually buying on margin? The cash isn't in their account until the bank transfer settles.
Likewise, when Robinhood users hit sell and then use the funds to re-buy another stock or back into the same stock, they're buying on margin. Technically the first sell doesn't clear for several days, so the subsequent purchase is made on margin.
This frenzy surely pushed the limits of Robinhood's available credit lines to support all of this margin activity.
Meanwhile, clearinghouses everywhere are increasing collateral requirements for stocks like GME. If Robinhood was struggling to secure additional credit while also facing increased fees for trading stocks like GME, they may have had no choice but to either pause the entire platform (to avoid running afoul of SEC-mandated margin requirements) or pausing meme stocks while they figured out another solution.
> Why in the world would you expect RH to act in the interest of their users
If the whole platform blows up because they go insolvent, that's even worse for the users.
Maybe I'm out of touch but I would guess the answer is "most". Having to wait a couple days for money to clear after being transfered to a financial institution is extremely common.
When I first deposited on RH and saw that the money was available for trading immediately my first thought wasn't "Oh the money cleared instantly", rather it was "Wow, I'm surprised they're willing to take on that risk with new accounts". Turns out, maybe RH should have given that risk a little more thought.
This seems like a key piece missing from lots of explanations I've read. Thanks.
They don't show any of the details on the main screens after that, though.
Normally, it doesn't matter because Robinhood eats the tiny margin cost for the customer. They make up for it by selling the order flow. This only works as long as interest rates are low and, importantly, they can get enough credit to cover it all.
In times of unprecedented volatility and unprecedented risky trading behavior, securing that debt becomes non-trivial. Robinhood's debtors have no desire to be left holding the bag if something blows up.
When you buy a call option from a market maker, they buy shares to cover the delta. When the delta changes, they need to adjust their shares to avoid exposure. Certainly a large part of the price action here is a gamma squeeze, where WSB folks buy tons of OTM calls, which Citadel buys shares to cover, which pushes the price up, which in turn requires them to buy more.
Should they no longer be able to buy or sell options to ensure the solvency of their sellers?
I mean, it's totally reasonable to tell them they shouldn't have taken on that level of risk haha.
In this case, the missing knowledge is that Robinhood is just another middleman: they're subject to margin calls and denials of credit just like Robinhood passed to you. Robinhood's credit facility was exceeded by the growth this week, and their credit provider was uncomfortable with "their" (really, Robinhood's clients) exposure if Gamestop collapsed.
> Our clearing firm gave us a call and said we're going to have to stop allowing new opening positions... > there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days... > our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation.
[0] https://finance.yahoo.com/video/heres-why-robinhood-restrict...
People are expecting more a scenario in which clients stocks are neatly divided in two piles based on an unrelated criteria, i.e. if they are attributable to margin, or whatever assets you have on deposit. Additionally, the process of having margin is itself like having a credit line - AmEx simply doesn't have the systems or procedure to lower your credit limit because Tickle Me Elmo speculation is at a all time high over the last 72 hours, and it sees you're purchasing tickle me elmos, getting assigned a credit limit is a function of your credit score, and amex isn't tracking line item level purchases
If this is about people trading on RH on margin, then just... stop allowing people to use margin to trade GME etc. "If you wanna buy GME you gotta have the cash in your account to cover it".
Problem solved and you don't need to prevent people from buying a stock they want to buy.
RH users are the product, not the customer. Why in the world would you expect RH to act in the interest of their users over the people that actually pay them, e.g. market makers like Citadel?