Few people are actually getting this information. So... its not horrible press for them.
And if they say this. People would sue like MAD. Because it would be "RH didn't have enough money to trade on a thing they allow trading on. Therefore we missed out on potentially 5 million in profits when I was unable to trade ..." and so the lawsuits begin.
Oh, and I heard they were supposed to IPO this quarter and I can see this event single handedly completely derailing that with how many users they are going to lose.
Communications were undeniably terrible. That said, I imagine they have a limited number of people on staff with deep clearing knowledge, and those people were preoccupied. Aviate, Navigate, Communicate.
Since you just gave us the basics in like 5 minutes, is it too much to expect that people whose job it literally is know that too? Especially the ones doing communications.
No, I don't think so. I don't know when they drew on these lines of credit. Maybe that was still up in the air when the first announcement was made. No financial institution wants to say "we ran out of capital" during market hours.
It's very clear to me that insiders saw the how much hurt this short squeeze would bring the financial markets, and they all coordinated to relieve it. It's no coincidence so many hedge funds started degrossing, futures were down, and the VIX spiked to the moon exactly as $GME's price started accelerating...
...once brokerages bricked buying the VIX collapsed and markets rose.
Infinity squeeze averted and all's well in Wall Street. No big institution is likely at risk anymore and retail traders along with smaller funds will be the bagholders.
It would be quite odd to halt trading on a stock market-wide because a small number of brokers run out of collateral.
IB charges for orders and doesn’t sell order flow but also cut off GME. What’s the theory around that broker?
"... we are concerned about the financial viability of intermediaries and the clearing house."
https://www.russellclarkim.com/marketviews/russell-clark/201...
> There is no doubt that a default by a clearinghouse member is more likely when initial margins are low and may be caused by a sharp unexpected move in the underlying markets. In the event of a default by one member this could trigger a chain reaction. Firstly, initial margins will rise in an event of a default, which will restrict other trader’s ability to participate in the market possibly acerbating the move in the underlying markets. Secondly, if the defaulting member was a particularly large player in one asset (likely, as this would be the cause of the default), the members with opposite positions may not receive variation margin and hence will become unhedged at the very moment they need hedging. Thirdly, the clearinghouse may well have to recapitalise itself from the surviving members. Major clearinghouse members (including JP Morgan) appear to be seriously worried about a clearinghouse problem after the default by a member of Nasdaq Clearing AB ..."
Be careful out there. :-)
Maybe you are not aware but Melvin lost almost 3 billions and was bailed out by Citadel and Point72 and probably they will loose even more and go bankrupt if they don't stop people buying GME.
Do you think these guys want to leave all that cash on the table and play fair? If you look at Point72 owner(Cohen) you see some really "interesting" things.
Maybe. But if this is a trolly car problem it's clear they made the call to let the train run down the track with the retail investor when it should have been the track that eviscerated Citron and Melvin and all their backers.
Big institutions that made the bad trades should have been the bagholders.
I would not put a fintech in charge of said trolley.
Maybe we all should stop to consider whether free & frictionless are worthwhile aspirations. Ice has a lot less friction than concrete but I certainly don’t want to walk to work on it.
Maybe a little bit of friction in our news, investments, social media, communications, etc. is a good thing. Give our brains a chance to digest information and let the intelligent & cooler minds prevail rather than impulsively smashing the share or downvote button.
What WH has democratized is now giving retail investors the opportunity to also lose money with active trading.
I find it hard to believe that anybody would find it hard to empathize with the fact that your company failed to predict a wild meme craze leading to an overload of your systems.
Now that its said, it would have made more sense for Robinhood to just nuke its servers and return 500s to their users rather than deal with this whole mess.
Option 1: The public believes Robinhood is part of the larger finance industry cabal and will screw you over to protect their buddies.
Option 2: The public believes Robinhood is in over its head, it doesn't have the financial backing to do the job they are given, and it can go insolvent at any moment.
Considering the reputation and expectations for the finance industry, it might actually be better if the public believes option 1 even if option 2 is the real story.
As it is, their customers got so pissed at the option one assumed story that they had to put out another post saying it’s option two anyways. Now they probably have the worst of both worlds.
It's not a moral judgement. So to answer your question, hedge fund order flow is considered highly toxic. Which is why Citadel Securities pays to interact with non-toxic retail flow, instead of toxic hedge fund flow.
In this specific case, Robinhood often have worse price than NBBO, so they get to do liquidity arbitrage in addition to the less toxic retail orderflow.
The manipulation isn't different from insolvency
If they go insolvent, I still own the things I own, but if they're screwing me over, there's no point in owning thjngs
This is based on a lifetime of observations without a single counter example, so it is still anecdata but quite a bit of it.
They fucked up cookie management and pulled the trigger on it early this year, in the middle of a pandemic. specifically around iframes. I got stuck with the ass end of that at my company. We worked in education. There were many healthcare software people that were also pissed about that.
Sure fucked up cookie tracking for adds tho!
https://blog.robinhood.com/news/2021/1/28/an-update-on-marke...
But the conspiracy theories are more fun, so nobody really paid attention.
That post was at best misleading.
[1] https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
Why allow so many new users to buy those positions before they blocked buys if this was coming? I mean, the prices were elevated before it got to this. Seems like a situation of let's ride the free customer acquisition and figure it out later.
They happily took the huge influx of new users that had no knowledge of this. And many got screwed. They couldn't average down on their position. And a ton of buyers were removed. So the price got out of control. Many panicked because of it.
I'm not on RH but added more at 170 and it came with several partial fills of 1 and 2 stocks. That was RH users getting screwed as a ton of buyers were removed. Trading was not halted on the downward spiral.
They could have said - hey guess what - 750k RH users (whatever it is) that own GME cannot buy this stock, so consider this before you sell. Some kind of warning that passed the attorneys. How could they not see this coming?
Any way it went down - RH is done. I hope they "pivot" into a worse situation.
A company in panic fire extuingisher mode has to put out some type of announcement. RH did. Twice in one day. I can believe the first one was a canned response, and the second one looks like a more thoughtful letter.
But have you ever thought how much internal wrangling, or how many draft revisions even such a short piece has to go through? The company has to be very careful in what they say in their comms - plus even more cautious with their phrasing and wording used. These types of comms will be read by arms chair lawyers and real lawyers alike. The latter will look for opportunities.
The former will read it like they were the devil's advocate themselves.
Corporate comms teams have to put in a lot of effort, and go through numerous rapid iterations, to make sure their published material is factually accurate and anodyne. In a crisis situation, even more than usual.
As for conspiracy, I'd venture to guess that inconsistencies/hypocrisies and opacity turned people into cynics. I'm not saying RH is hypocritical, by the way. Instead, the hypocrisies of other platforms made people trust RH less. For instance, I saw numerous accusations that RH was helping wall street by limiting buying but not selling.
Plus, they never give a reason in this. They make vague references to things that could be a reason, but don't clearly state what the reason was. Leaving it unclear like this is horrible PR, and will continue to let the conspiracies spread.
They had a chance to educate people, but nah can't do that.
A well-known investor with integrity publicly mentioned personal issues with the co-founders' integrity in the past.
Your comment sounds similar to the explanation from the mouth of Interactive Brokers chairman and founder Thomas Peterffy [1]. His comments are based on a broader concern beyond just Robinhood.
I think a lot of people don't understand what I can only describe as the physics of the system. Like a utility, there is only so many electrons that can get pumped through the system from generators through the transmission system, through substation and distribution networks to your house. It is big and powerful, but if there is an unplanned for event that draws too much power it doesn't matter how much generation you have, the system just can't take it. Substation will pop, power will go out if not isolated.
Robinhood is small player that could never have planned for this type of event and likely doesn't want this. Most retail shops likely don't have the sophistication to handle an event like this.
I disagree. It wasn't that long ago that securities and cash from unsettled trades were unavailable to customers. The modern abstraction of frictionless trading is just that--an abstraction.
Adding "free" to the mix removes a balancing factor. (Less cash coming in at t=0.) Becoming a clearing broker removes another, though it adds control. There are vendors selling off-the-shelf systems to calculate clearing margin requirements and risks real time. I'm looking forward to hearing if Robinhood used one of those, or if they tried to roll their own.
Either way, it's not an excusable pain point to push to one's customers. Particularly not retail customers. Particularly not unsophisticated retail customers. These are complicated systems, far more than most professionals fully grasp. A simple back-up plan, like a fallback introducing broker arrangement, would have avoided this whole mess.
This would be really interesting to know. If you find out, please do post it.
Market microstructure is a term I've adopted when studying options and the circumstances where they influence the underlying market prices more than any other factor.
They do not. They settle trades in 2 business days like everyone else. Think about it: if you sell a share to a HFT, how could the HFT receive it immediately when you don't need to deliver it for two days?
However there is a process called CNS (Continuous Net Settlement) which means you generally only have to settle the net of your trades each day.
- How come a bunch of other brokers also stopped the trading in these assets? (Webull, Ameritrade, e-trade etc) did all of them end up in this state?
(I'm always worried questions like these in times like these are interpreted in bad faith, but this is an honest question, trying to understand the powers behind it)
In fact, we have seen things like that happen before. Forex broker FXCM blew up after their customers lost large amounts of money in the Swiss Franc in early 2015.
So the "default" RH experience is heavily based on margin but *not! in a transparent way. Deposits from banks are instant under a certain amount (10k for me but it varies) and no T+2
What mechanism are there in place to insure that ETF will not deviate from the underlying stocks it should represent?
I found it difficult to understand the intricacies related to this question.
Here is one example: Suppose I was holding ETF with GME stock in it, the ETF issuer might have decided he knows better and sell the stock expecting its price to drop in the future. Meanwhile the issue will attempt to "follow" the stock by other means. Ultimately is there a way to be sure the issuer will not fail, if GME beats all anticipated expectation the issue might fail to reflect the new GME price...
What mechanism are there in place to insure that ETF will not deviate from the underlying stock?
And let's not even begin talking about how they halted only buying and not selling. Or that they delisted the entire stock from their platform so you couldn't even search it.
https://www.acceleratedfi.com/real-world-options-example-how...
There are two classes of broker here -- brokers that are backed by Citadel, and Brokers that have a different market maker/clearing house and/or are not exposed to Citadel. The WeBull CEO did an interview mid-day and noted that certain market makers and institutions (i.e. citadel and/or Robinhood) were calling banks for bridge loans in the middle of the day. He also mentioned that Melvin Capital was bankrupt. I think Citron got out (that's a different story) a couple days ago or so.
TDA: https://www.tdameritrade.com/retail-en_us/resources/606_disc... from https://www.tdameritrade.com/disclosure.page
Webull: http://public.s3.com/rule606/webull/606-BULL-2019Q4.pdf from https://pic.webull.com/PDFs/Disclosure%20of%20Payment%20for%... / http://public.s3.com/rule606/webull/
Robinhood: https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2... from https://robinhood.com/us/en/about/legal/
Fidelity: https://clearingcustody.fidelity.com/app/literature/item/990... from https://clearingcustody.fidelity.com/app/item/RD_13569_21696...
It does not explain why Fidelity allowed purchasing the stock however though, which means I was likely wrong about the link altogether. Thanks for pointing that out.
[EDIT] - Is it reasonable to assume that maybe TD and Fidelity have a venue that the others do not have and that's the reason? When I compare RH, WeBull, Fidelity and TD I see UBS Securities, LLC as the standout difference.
Was UBS choosing to route the orders (I guess they have none of the shorts on their books? or they properly managed their risk?) while the others didn't touch it?
https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...
(I hold no shares of GME stock and never have. All these orders went in exactly as normal and I was able to cancel them several minutes later.)
I wasn’t in GME, but I want to know how my broker is handling unusual market conditions.
Even if I believed this excuse, then RH is still greedy for signing up users they don't have the finances to support. They could've closed signups.
This was a lose/lose for them, new signups won’t stick around anyway now and they’re going to absolutely bleed existing users.
The issue I have, is that I completely understand and expect this to happen, but not as laziee faire. FINRA should have been (also could have been, we don't know) up every orifice on every floor starting at $70+ a share for GME.
Also for as many many contracts to be written at insane IV, this isn't just RH who is at fault. This was literally thought to blow over and didn't -- that's not risk mitigation, that's laziness.
So the problem I have is that they didn't limit the margin requirements last week, got greedy on the potential 'gains' on the fees, and got slammed.
We will see if the 0-fee environment stays -- I hope it doesn't. It completely changes the risk profile of the individual trader were a $5 per trade fee on your one share only covers 1/2 of your fee.
But don't give 'solidity to pure wind' here[0] -- this was absolute negligence on multiple parties.
[0] https://www.orwellfoundation.com/the-orwell-foundation/orwel...
Edit: I've also always thought that the secondary market is a moral hazard. Primary Offerings are more pure in their 'economic productivity' than secondaries. Sure we can make long winded arguments that the stock price incentivizes executives to make long term decisions, secondary prices help your subsequent offerings, converts, etc... but the short of it is, at the time of a secondary transaction between Alice and Bob, $0 of effective capital is deployed to the actual investing machine... that's quite wild.
Edit x2: And the secondary moral hazard is compounded by this 'liquidity' boogyman that we must keep satisfied -- or else people will actually have to hold their positions until they get a good price.
Final edit: If you want another take, here's another view of the mechanics of it all, and again, it didn't start today... it was a boiling pot they thought wouldn't boil over:
https://mobile.twitter.com/KralcTrebor/status/13549526861652...
I have been studying Real-Time Gross Settlement systems for the past two months, including questions of liquidity in settlement systems. The question at the heart of the banking system is quite simple, if banks take capital from customers and use it to provide debt to others, then how much money should they keep on hand for their customers' withdrawals and transfers?
This question is hard to answer. As there is a conflict between what the bank does (i.e. provide debt), and how it is supposed to provide it (by taking savings etc.). Everything else, from central banks "offering cheap liquidity" is an add on. They are mechanisms that allow - for example, a bank to easily borrow this money so that they can cancel it out/repay it from transactions coming into their banks.
What makes it all borked is that you can't trust bankers with their grandmas. If there is a flaw, they will exploit it. Every major change has led to an exploit. E.g. In 1918, the American Government introduced the Leased Wire System that used the telegraphs and a network of 12 Reserves to allow banks to transct with each other across CONUS. It reduced the average time for cheques to be cashed in at banks across the country from 5.4 days in 1912 to just 2.4 days. Theoretically, this reduced the risk taken by banks when they transacted with unknown banks across the country, with the Government acting as the escrow. It catalysed innovation and led to an explosion of financial services across the young country.
The system was supposed to be foolproof by reducing the time "credit" was needed to make transactions. Essentially, until one bank sent the money and the other got it, they were operating on a system of credit. And they would "net" the books at the end of the day/week to physically transfer assets. FedWire (Leased Wire System) made everyone feel safe by sending notes of the transactions across great distances. But the netting still took time. All it took was one bank to fall behind on current obligations to other banks for all of the banks to collapse, leading to the Great Depression.
Important people got together and made rule changes to fix the problem. But then they innovated again. The Federal Reserve started making Automatic Clearing Houses (ACHs) and Remote Check Processing Centres (RCPCs) to make settlement faster, starting in the 60s and precipitating in 1972. This made settlement faster therefore safer. And it led to great financial innovation. The magic of computers and innovation meant that people could use these same systems to transact across the world!
Until in 1974, when the German lender Herstatt collapsed due foreign exchange investments based in the Dollar, which caused the bank to fail to meet its settlement obligations...
> That day, a number of banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt in exchange for US dollars (USD) that were to be delivered in New York. The bank was closed at 16:30 German time, which was 10:30 New York time. Because of time zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments
In response, important people got together and made rule changes and a new system called the Bank for International Settlements. Under the new systems, more computers were added and were linked together with the aim of reducing settlement time... You can see where this is going.
This is a simplified history. But the history of banking is the history of doing settlement while managing liquidity and counter-party risk.
Like it or not, we've hit a wall here because these systems were never designed for such circumstances. Perhaps it's time for the important people to get together again?
Further reading,
https://fraser.stlouisfed.org/blog/2020/09/check-processing-...
https://www.federalreserve.gov/newsevents/speech/bernanke201...
https://luizlaydner.substack.com/p/how-do-instant-payment-sy...
Funny fact, BIS private shareholders kept suing them for last 20 years for 2001 share withdrawal.
https://www.dtcc.com/~/media/Files/downloads/Thought-leaders... (pages 8 and 9)
These mechanisms have been evaluated, simulated, and tested by central banks at greater volumes than DTCC's system. The difference here is in orders of magnitude. The Feds handle $2+Tn./day. They handle $500Bn/day at most. If the Feds can introduce these systems and maintain liquidity, then what reasoning does DTCC have?
https://www.newyorkfed.org/medialibrary/media/research/epr/0...
I am loathe to cast aspersions, but the aspersion I'm casting here is that they're dragging their feet, as it would effectively end an entire sub-sector of the industry. Or, at the very least, substantially re-order it. This inefficiency is someone's margin and profit.
The lag for bank account transactions makes sense to wait to make sure money is there and no fraud. However, once money is in an account at an approved FDIC/SIPC insured (preferably both, Robinhood is only SIPC) brokerage it should be much faster, at least up to the FDIC/SIPC limits. There is really no reason why it shouldn't except to help market makers have the upper hand.
This could be the root of what may need to change or was desired to change with this black swan event.
At a high level, nobody really likes trades being broken, but it's kind of a necessary "evil" that helps stabilize the entire system.
Let's say settlement happens in one minute, one morning a pension fund fat-fingers a price and loses 10 million USD to some student in her dorm room. That afternoon, the student then donates 1 million USD to an orphanage, pays off her grandparents' mortgage, buys 1 million USD worth of municipal bonds to finance a new baseball stadium, and buys several million USD in long-dated ETF call options. Some market-maker delta-hedges those options by buying the ETF. In response to the price move generated in the ETF, a large institution buys a basket of stocks and participates in the creation process with the ETF's issuer.
Now, what happens when the fat-finger is discovered and disputed? Too many things have changed for the SEC to break all of the trades and other transactions after the settlement. The student no longer has enough money to make the pension fund whole (even if everyone involved could agree that the most fair thing to do would be to limit the student to 100k profit and transfer the rest back to the pension), so I guess they're stuck with the pensioners having to live with that 10 million USD loss. "Oops, next time, make sure your pension hires a more careful trader, I hope you've learned your lesson" isn't very helpful advice to a retiree who's now out on the street.
It's really not, isn't it? Almost like the dependency on human carefulness compromises the integrity of the whole system.
If we got rid of breaking trades, it would presumably force everyone to use carefully specified systems and use avionics-like development practices. Maybe we'd even see machine-checked proofs being compiled to programs and smart contracts via the Curry-Howard correspondence. Long-term, it would probably be good. In the shot term, lots of fallible counterparties going bankrupt would be very destabilizing to the system.
"make sure there is no fraud" takes a LOOOONG time.
It is the reason why a car bought from a dealer drives around without plates for a month. That's how long it takes the dealer to be totally sure the payment wasn't fraudulent.
https://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb...
While cash is the settlement vehicle of choice for dealer-less used car sales, certified checks (only legally issued by the federal bank) are preferred or even mandated for in-person government (surplus) auctions.
If you talk to the dealer in advance, to make sure they know about these certified checks, I'd expect them (over here, in DE) to hand you the title in direct exchange for the check, within an hour of you first setting foot on to the lot (assuming you called in advance so they have time for you and the car you want).
Our banking system here sucks ass.
What you say about certified checks is, in theory, possible here. In practice the sales drones who handle these transactions have never heard of this and will treat you like you're trying to scam them out of a car somehow.
Also the title is never physically at the location where the car is sold from; the processing of titles for dealers has been outsourced to a handful of large companies who effectively act as warehouses for the physical title documents. Even if the sales drone wanted to go along and had enough clout to make it happen, it would still take an overnight-shipping delay to get the title to the buyer.
I know, it's kinda sad, tbh. Get yourself a taste of SEPA to see what you could have/use instead of ACH.
Nice to hear. And yeah, that's why I mentioned needing to call ahead to make sure that someone who can legally sign the contract is gonna be there and has sufficient understanding of how these certified checks look like/work.
Fair. Is that only for new cars, or does that include (independent) used car dealerships?
Thanks! Replacing market makers seems difficult.
Edit: Why the downvotes? I'm quoting the article for easy access.
I don't see how this follows, if the trades are settled faster? Wouldn't you have to keep less capital on hand at any given time if you're settling trades faster? I'm clearly missing something, not sure what.
Here's the Fed's review, https://www.newyorkfed.org/medialibrary/media/research/epr/0...
DTCC doth protest too much.
If settlement was instantaneous then the market makers would have to already own a bunch of the stock in order to sell any. Owning stock requires capital. Similarly if they wanted to buy more stock they'd need cash on hand.
If settlement was instantaneous then to sell a stock on an exchange you'd have to have the stock. To buy you'd have to have cash.
Currently market makers don't have either.
Further down the road, more efficient data witnesses give another 10X. Also, the power of individual nodes affects both the number of shards and the capacity of individual shards, so future scaling is the square of whatever Moore's Law has left to give us.
In my view the clearing houses had liquidity issues while many of their clients likely had solvency issues which this brick on buying alleviated.
And the IBKR chairman admitted as much.
While that's not 100% accurate, it's in the general ballpark. And frustration with big financial players is high, and has been since 2008, for good reason.
You get what you pay for. That’s not a scandal. It’s common sense. It’d be like me complaining that it’s no fair that Google can afford better infrastructure than my startup search engine.
Day trading is not a human right. Anybody who wants trading infrastructure like Citadel is free to go out and spend the same hundreds of millions it took Citadel to build that infrastructure.
Regardless, that doesn't change the optics to an outsider - the rich guys (hedge funds) get to stop their losses, potentially screwing the little guy.
Well, no. Most people don't have that. "The rich get richer".
Citadel bailed out Melvin. Citadel is RH's biggest customer. RH chops off the retail traders, but only in the direction that favors Citadel (and Melvin).
Was RH just ensuring they comply with regulations? Probably. Does it look like RH is doing Citadel a solid at the expense of their users? Absolutely.
Policymakers care about outcomes.
Regulators care that you followed the rules to the letter.
You can't say, "Oh hi Mr SEC and Ms DOJ! I know I broke laws a,d, and j, but we had a good outcome so no worries!" You'll go to prison for that.
The portion about not having a plan for when market makers don't want their action -- and they have to instead pay to use exchanges -- seems like a pretty stupid problem they set themselves up for.
Do have this right?
If Robinhood cannot fulfill these trades on margins, that is totally fine, they can halt on the margin trades if there are "liquidation issues". For all-cash trade, there shouldn't be any liquidity issues otherwise it calls into question how they manage their deposit.
Or if you've seen/requested a stock certificate. It used to be fairly easy to get a paper certificate from a broker, for a fee on the order of $10. However I've read they charge as much as $500 now, in an effort to discourage ordinary people from doing it.
Sort of like travel agents and airfares?
Why is this a problem? The fact that the share trading market is keeping these middlemen in place is part of the exploitation of the process.
Market makers perform a useful function in terms of maintaining an orderly market. Brokers don't. Especially ones that offer credit to their customers, thus hiding the risk to the counterparties of a trade.
AU/CA/EU have instant settlement of cross-entity transfers now, but not sure what the underlying clearing/settlement is.
If the US had a modern ACH, I wonder how it would have affected this current situation?
But yes, they were able to buy & sell $GME.
However, anyone with a Fidelity account could also. Fidelity has the liquidity to handle a system shock, unlike Robinhood / Webull / various others.
However, Robinhood disabled the ability to buy, but not sell.
Why?
Why is this an issue? Shouldn't robinhood already have the cash, since the trader (who bought the stock) deposited the money into robinhood prior to his purchase?
The mountain of derivatives that they were one of the parties to netted out at zero, but in the process, a lot of people got burnt, including the ultimate mortgagees.
The share market and its derivatives net to zero. It's a mechanism for getting capital flowing between investors and producers.
I'm not even sure that's something to be ashamed of!
https://seekingalpha.com/news/3655987-robinhood-ceo-said-the...
Then you have to consider how they're getting these accounts which need credit histories and social security numbers.
Presuming an investment advisor pitching themselves as providing some kind of standalone, non-brokerage-affiliated "AI Investment-bot-as-a-Service" platform, the "bots" could be being operated in the name of their clients, acting upon said clients' brokerage accounts, with full explicit consent. (Like how Mint operated in its clients' names upon their online banking accounts, with full explicit consent.)
Ironically, I believe Robin Hood themselves offered a similar "AI Investment-bot-as-a-Service" system; though theirs was a much more mundane design, legally, in that it operated upon the clients' accounts within the Robin Hood brokerage, rather than upon the clients' accounts in external brokerages.
No.
Execution is matching a buyer and a seller. Settlement is handling payment. Clearing is re-assigning the securities. This isn't perfect, but it will do.
Exchanges deal with execution. (About a third of trading occurs away from exchanges [1].) The rule in America is you can't execute, on or off exchange, worse than the national best bid and offer [2]. That number aims to catalog all on-exchange quotes.
Once a trade is matched the exchange is done. Settlement is its own can of worms. This story is about clearing. The shares you bought need to get from their seller's account to yours. Then the shares you sold need to get from your account to their buyer's.
When you bought and sold the shares, the cash and shares "appeared" in your account. That's a convenient fiction. Cash doesn't move instantly. And securities settle over days. While all of that is happening, a complex web of credit arrangements keeps everything stitched together. Those arrangements have costs and risks. One of them is the requirement to post collateral as a safeguard against a broker breaking its word [3]. When those collateral costs get high, for example, because your customers are all trading risky things with high collateral requirements, it can create a cash crunch.
What's happening here has, to my knowledge, nothing to do with exchanges or execution.
[1] https://www.nasdaq.com/articles/slicing-the-liquidity-pie-20...
[2] https://en.wikipedia.org/wiki/National_best_bid_and_offer
[3] "But I don't trade on margin!" No, you don't. But you're still a borrower of sorts from your broker. When you buy a share at 11AM and then sell it at Noon, you've sold a share your broker may not yet own. That's the credit risk between you and your broker. If your broker bought that share at 11AM and sold it at Noon, it sold a share it did not yet own. That's the credit risk between the broker and the clearinghouse. Clearinghouses are nice. They usually say "give us 2% of yesterday's closing price in Treasuries. If you fail to deliver on a trade, we'll sell your Treasuries--maybe all of them, across all of your collateral with us--and make your counterparty whole." But when assets get volatile, the clearinghouse may want more than 2%. So it asks for that. Per its contract. But you don't have that money. And shit, Suzie just bought and sold the same shares thirty-six times in the last minute.
It does, ceteris paribus [1]. But blocking people from exiting a position you got them into, particularly something volatile and almost self-identifying as a bubble asset, is a lot more problematic than blocking people from opening new positions.
[1] The OCC (options) nets. If you have a large collateral requirement in a position and then reduce the size of that position with offsetting contracts, your collateral requirement goes down. I don't remember if the DTCC (stock and other things) does this.
Is there a saying akin to Hanlon's razor in this case, something like "Never ascribe to conspiracy that which is adequately explained by finite resources and inflexible rules/regulations"?
Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker.
There are rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If a broker falls down, the clearinghouse liquidates their collateral and makes their counterparty whole. More volatility means more chance the collateral will be insufficient.)
In this case, collateral requirements on GME went up. Because of its volatility. So while before Robinhood had to pony up collateral for a few shares of GME for every hundred it traded, it now had to, at close of business, pony up one hundred shares' worth of collateral for every hundred it traded. That creates a cash crunch. One that exacerbates itself with every additional trade in the security. If Robinhood fails to satisfy those collateral calls, they go out of business overnight. Into receivership. Done.
Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug.
[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
[2] https://www.dtcclearning.com/products-and-services/settlemen...