The solution would be to disallow this feature, not to stop trading of certain tickets on all accounts, most of which are seasoned and funded
Full explanation with math here: https://twitter.com/kralctrebor/status/1354952686165225478?s...
Also, it’s not realistic to expect them to completely retool their entire app and infrastructure in a matter of hours to disallow margin-based trades of only certain securities. If this was a long-term concern I’m sure they’d do exactly what you suggested. However, this even ramped up in only a couple of days. Let’s be realistic about what they can re-engineer, test, and deploy to end users in that timeframe.
If I'm reading the Twitter thread right, what killed Robinhood was the component of ">30% of your flow is in one stock", which is something that I could absolutely see never having happened to Robinhood until now.
They do have the ability to change the margin requirements for a particular stock, as well as disable “instant deposits”. They don’t let you withdrawal money until it’s cleared so adding the ability to hold the funds in the account until they clear wouldn’t be hard if it’s not already there.
Margin investing is offered to eligible customers through Robinhood Gold, a suite of premium investing products including Nasdaq Level 2 market data and Morningstar Research Reports, for only $5 a month. The first $1,000 of margin is included in the $5 monthly fee. After that, customers pay a flat 2.5% yearly interest rate on any amount used above $1,000. Our pricing is straightforward and the same for every eligible customer, regardless of their account size.
https://blog.robinhood.com/news/2020/12/21/robinhood-lowers-...
"(4) equity of at least $2,000 except that cash need not be deposited in excess of the cost of any security purchased (this equity and cost of purchase provision shall not apply to "when distributed" securities in a cash account). The minimum equity requirement for a "pattern day trader" is $25,000 pursuant to paragraph (f)(8)(B)(iv)a. of this Rule.
Withdrawals of cash or securities may be made from any account which has a debit balance, "short" position or commitments, provided it is in compliance with Regulation T and Rules 400 through 406 of SEC Customer Margin Requirements for Security Futures and Rules 41.42 through 41.49 under the CEA, and after such withdrawal the equity in the account is at least the greater of $2,000 ($25,000 in the case of a "pattern day trader") or an amount sufficient to meet the maintenance margin requirements of this Rule."
https://www.finra.org/rules-guidance/rulebooks/finra-rules/4...
If a large percentage of their customers were new, young, fairly low income (and thus more likely to have their transactions bounce), and they all wanted to buy long positions in a stock that very likely could drop 90% in the next two days, the risk is far higher.
Then they can reduce the purchasing power for certain stocks to just the money already transferred.
This thread explains the math in detail: https://twitter.com/kralctrebor/status/1354952686165225478?s...
I know the popular narrative is that this was some sort of conspiracy, but the truth is likely far more banal. Unprecedented volatility and volume are exceeding the limits of these systems. No one budgeted for a single stock dominating news headlines and swinging wildly while millions of retail investors tried to enter at the exact same time.
Whatever changes they make, those changes need to enable them to not intervene in that manner ever again.
[1] https://www.joelonsoftware.com/2002/11/11/the-law-of-leaky-a...
"To let you trade instantly, we lend you money. Because lending is risky, we won't let you use it on high-volatility stocks like GME. We screwed up by applying the same restrictions to confirmed deposits, which no longer involve loan risks. Our team is working on a fix."
In the old days one would have to formally request margin. Then the broker would give you stern warnings, have you sign a form, mail you a nice booklet explaining margin, options and shorting. I assumed it was a legal requirement, but maybe not?
Well, kind of. If you use the proceeds to do another stock trade, that second trade also settles T+2, so it doesn't require RH to put any of its own capital up.
(Options settle T+1.)
They didn't announce anything to anyone until it went into effect, despite programming their systems in advance for the changes.
Every explanation they've provided has a million holes in it.
When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen.
Likewise, when you buy or sell a stock, the trade doesn’t settle for t+2 days. Robinhood again transparently loans you the money while waiting for the stock trade to settle.
If Robinhood exceeds the SEC-mandated limits for margin they can extend, or their creditors decide it’s too risky to continue loaning them the money, the whole show grinds to a halt. They chose to press the pause button on the primary meme stocks driving them toward this cliff. I imagine the only alternative was to hit the pause button on the entire platform until the credit issue was resolved, but it’s much harder to get additional credit when your service has ground to a halt.