In this case, it has nothing to do with trading on margin and everything to do with Robin Hood having to cover 10% with the NSCC per the Dodd-Frank rule. [0]

[0]: https://www.zerohedge.com/markets/cash-strapped-robinhood-sc...

Apparently DTCC raised that to 100% for a few of the meme-stocks (GME).

Is that knowingly trading on margin, or just how it works behind the scenes? If the latter, why?

The financial system is slow. ACH can take days before you can be sure things won't be reversed, trades take two days to settle, there's various anti-money-laundering policies everywhere that generally take the form of holding on to money for a bit to make shady things easier to track and detect.

So, anyway, for lots of reasons, things that users think should be instant, aren't. And that's really bad UX, especially for a platform that depends so much on emotional stuff: "deposit $200 bucks and buy 3 shares of X, leaving you with a $30 cash deposit which RH can then earn interest on" is probably how a large amount of RH's balances come into being. That breaks if it's going to be a 1-day gap between someone depositing their money and then buying the shares.

So everyone papers over holes like this with margin.

It's amazing that we still accept financial transactions taking days to actually "clear." Surely there's a market opportunity for someone to invent a way to do these anti-money-laundering things without delaying transactions. It's astounding that in 2021, it takes multiple days to increment a number in one database whilst decrementing that number in another database.