I’d imagine option two is much better. I have a hard time blaming anyone for not expecting the chaos that has happened and I expect the PR narrative would go that way. Especially if robinhood had managed to stay on the side of the little guy in the public eye.

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.

Both can be true. Citadel, the hedge fund that bailed out Melvin Capital (the hedge fund that over shorted GME) is Robin Hood's largest client. So it could be there was incentive for Robin Hood to ban trading on behalf of Citadel and they also don't have money to pay back the trades they make.

If Citadel is a client of Robinhood, then they are are under no obligation to buy Robinhood's product. It's possible that Citadel stopped buying the order flow from Robinhood because they had exposure to clients who in turn had short exposure to the stocks in question. Even in the absence of such an ulterior motive, Citadel is a market maker and it would be foolish for any market maker to do huge amounts of market making on a stock that it's the headlines and is unpredictably skyrocketing. Ultimately Robinhood cannot continue to offer free orders on a stock if Robinhood's clients are not willing to buy a order flow on a specific stock from a specific client because that client's order flow is toxic and making the stock too volatile to make an orderly market in. Declining to accept toxic order flows and withdrawing liquidity from volatile stocks is a reasonable and accepted practice for market makers. Robinhood users pay zero dollars in commissions, and they get what they pay for.

Just so we’re clear, it’s toxic for a big fund to be short squeezed, but not toxic for those big funds to do anything that makes them a profit?

Toxicity is a well-defined technical term in market microstructure literature. It basically means whether the direction someone trades in predicts the short-term direction of the market.

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.

To understand toxic flow you have to know adverse selection. For example, you are asked to share a pizza with your brother. You are free to split it in half however you like, and your brother gets to pick which half to take. The most fair way is to split it in half otherwise he will select adversely. Market makers job is to quote the true price of an asset by offering to buy and sell at different prices without having one side picked off more than the other. So when adverse selection occurs too often over a period of time, they will simply throw in the towel and fold, regardless of whether their opponent is bluffing or not.

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.

Well, TIL... thanks.

Anything that is profitable is good yo. This is a site for making profits above anything else

Michael Burry disagrees with you: https://twitter.com/michaeljburry/status/1355184281367138304

The tweet is deleted, but Google's cache says: "No one mentioning that free trades and shares at #RobinHood were made possible by sales of the trade flow to Citadel and its ilk. Robinhood's customer is and has been CItadel, not its retail traders. Which makes what is happening this week all the more..." (It actually ends in "...".)

Option 2 looks like a huge legal liability - they effectively built a product that doesn't do what it says it does and it cost users real money.

Is that any different than any digital service with its 99.99% uptime? Robinhood will do everything it says it does except for the once in 30 years black swan meme event where 50% of their users try to invest their life savings at once

Option 1 has that same liability, doesn't it?

The manipulation isn't different from insolvency

I'd keep my account if it was 2, but I'm getting rid of it for 1.

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